I welcome this opportunity to introduce to the debate the need for personal pensions and how that fits in with the whole picture of personal pension misselling. The Ross report, which was commissioned by the Labour Government, makes it clear that there is a future for personal pensions, and recognises that it will always be true that personal pensions are not suitable for everyone and that the state continues to have a role. It recognises the continuing need for private-public partnerships in this sector, but also makes it clear that we must learn from the past; we must learn from the mistakes.
I tried to make the point in an intervention that what the previous Government had done to SERPS made it clear that some Government provisions were not free from Government interference. Therefore, if we want to encourage the public at large to provide for their retirement with confidence, we need far more robust vehicles in its place.
Pensions mis-selling—how did it come about? It started with encouraging people to opt out of SERPS. With hindsight, and in the light of actuarial assessment, the previous Government were somewhat too generous, certainly in the first 10 years, in the SERPS opt-out arrangements, which may have encouraged people to opt out who should not have opted out.
Similarly, when, in 1988, it was no longer compulsory to be part of an occupational pension scheme, that in many ways opened the floodgates for personal pension mis-selling. There was an argument that early leavers from occupational pensions paid too heavily, so that option should have been given, but the situation has been remedied to quite an extent.
What have we now? If my information is right, and I have no reason to doubt it, in this quarter, for the first time, the number of personal pensions being taken out has dipped, which is serious. Some people say that it is a sort of planning blight. Individuals are looking at where the Government are going with individual savings accounts and therefore holding back, but it shows a serious crisis of confidence in the insurance industry's performance.
Whose fault is mis-selling? It is interesting that the debate goes from greedy salesmen to insufficiently trained salesmen to the previous Government's hasty push of people into personal pensions, but no one suggests that it is the fault of policyholders; yet, when we look at who should pay for it, we ask the policyholders of the large companies to do so. The people who have the least fault in this fiasco are being asked to pay the bill. It is somewhat bizarre.
If an insurance company is owned by its shareholders, it is clear that, provided there is no with-profits policy in the company, the shareholders are involved in this. With mutuals, of course, it is the policyholders who have to pick up the whole bill, but one company is in a difficult position: the Prudential. It is a company with shareholders which also issues with-profit policies. That means that the return depends to some extent on the profits that are made by the company.
The Prudential is also the worst offender in terms of pension mis-selling. Last July, it had to increase its estimate of the cost of mis-selling from £450 million to £1.1 billion. It was suggested that, in the light of the whole size of the pension industry, that was not significant. I still suggest that for one company to run up a liability from mis-selling of £1.1 billion is extraordinary. Sir Peter Davis told the Treasury Select Committee that the mis-selling bill would be set against an estimated £12 billion surplus capital on its long-term life insurance fund. Of that £12 billion, about half is needed to meet policyholders' reasonable expectations.
In my innocence, I used to assume that, if I took out a with-profits policy with an insurance company, I got the profits made by that company. In fact, I get what that company's actuary deems to have been my reasonable expectation. It is a case of losing every which way. The figure involved for the Prudential was £12 billion. If one argues how much of that does not have to be met by reasonable expectations, the agreed figure is probably about £7 billion.
All that is rather quaintly called orphan assets. It is not clear who owns the orphan assets. This is beginning to remind me of a debate that was held in the late 1980s and early 1990s about who owned the surplus in occupational pension funds. It was the issue of the surplus in occupational pension funds that got me into politics, and I am beginning to suspect that orphan funds will keep me here.
Who owns the assets? The Consumers Association argues that the assets should be treated as an exercise of demutualisation, and that they should be paid out to the current shareholders or policyholders. I am reluctant to do that, because the orphan funds have been built up over generations, and they would be paid out over only one generation of fundholders.
There is a strong argument for the shareholders having access to the orphan funds. I understand that the Department of Trade and Industry is currently holding discussions with companies about what should be done with the funds. Alternatively, it could be left to the courts. It was ultimately the courts that decided that the surplus in occupational pensions should be seen as deferred pay. In that way, the matter was resolved.
What could companies do with the extra assets? They could pay extra dividends, help to fund acquisitions or help to expand the business. What is unacceptable is that the funds have been used to pay for pensions mis-selling. We are again asking those who have no responsibility to foot the bill.
I saw another problem when reading a press release from the Prudential insurance company. It refers to the company's appointed actuary. I understand that the duty of a company actuary is to represent the interests of the policyholders. The current Prudential actuary, Peter Nowell, has significant shareholdings and share options with the company. I believe that, even if declared, his interest as a shareholder is contrary to the interests of the policyholders. I ask the Institute of Actuaries to look at that because it is unsatisfactory.
Where do we go now? One of the largest and most respected companies is and continues to be one of the worst offenders. We have the unresolved situation of orphan funds being used to pay for the mis-selling, which is inappropriate. It is obvious that we need better and clearer information. We can look for benchmarking. If we look to see whether the insurance industry has learnt anything, the evidence is not encouraging.
A total of 1 million free-standing additional voluntary contributions have been sold, with an investment of about £4.5 billion. Recent newspaper reports suggest that we may be looking at compensation claims of up to £675 million, affecting some 50,000 to 70,000 people. How did free-standing AVCs come about? There were people in occupational pension schemes who could have paid AVCs into their own schemes, but who were encouraged to look at free-standing ones. It was argued that free-standing AVCs were preferable to company AVCs because of their portability, wide investment choices and privacy. They were also said to be convenient for people who move jobs.
In October 1998, Bacon and Woodrow said that the advantages of free-standing AVCs over in-house AVCs were "largely illusory". Something that was never mentioned on free-standing AVCs was that the salesman received commission. That was an unmentioned major advantage.
The major players in the selling of free-standing AVCs were Allied Dunbar, Pearl and Prudential. It was said earlier that companies making home visits may be thought to give better and more appropriate advice. That fact does not seem to be borne out if we look at the companies involved in free-standing AVCs. The companies that may be most implicated in selling inappropriate free-standing AVCs may be some of those companies making home visits.
Free-standing AVCs are not suitable for many people. For example, schemes such as those for the armed forces have high accrual rates, and those in the pension schemes quickly run up against Treasury limits. The industry feels that the area where one might find most mis-selling is where the trustees of a pension scheme have arrangements with a company to supply AVCs on special terms but the salesman does not pass on those special terms. The individual involved may have heard the name of a company and thought that it was a good deal without looking at the small print. I am not suggesting that the inappropriate sale of free-standing AVCs in any way comes close to pension mis-selling, but it is a clear indicator that the industry is not listening or learning.
The average return on an in-house AVC is 10 to 15 per cent. higher than for a free-standing AVC. Over 10 years, we could be talking about the equivalent of one year's premiums. So not only are the theoretical advantages largely illusory, but the financial returns do not come up to scratch. Any person considering free-standing AVCs in the future should be provided with clear information about how they compare with in-house AVCs. The trustees of occupational pension schemes could pay more attention to that issue, and provide clearer advice.
We are told that the industry is learning, that it is becoming more transparent and open. That has to happen if it is to deal with this. However, this week I saw a statement on personal pension PEPs from NPI. I compared it with a statement issued six months ago. The earlier statement was clear—it showed what was paid in, the current value and how the investment was performing. In fact, the returns on the policy involved meant that it was now worth less than the amount that had been paid in over 18 months.
Surprise, surprise, over the six months, the statement format had been changed. The categories and boxes had changed, and it took a great deal of leafing through to work out that the value had dropped. If we want to educate people so that they can make informed choices, we must be up front.
One of the biggest illusions about pensions is that there is a risk-free pension investment. Whether it is the Government, private industry or whatever, pensions involve risk. Unless we give people appropriate information, which we are not doing now, they cannot make choices on risk. The industry is still hiding facts from policyholders.
The Association of British Insurers came to talk to a group of Members of Parliament on occupational pension schemes. I questioned one of the representatives about the Which? report which had been published a week before. That report looked at 80 personal pensions, but found none of them satisfactory and would not recommend any of them. I asked the insurance industry for its response. I was told that the Which? criteria are phoney, and that the report made bizarre statements, such as that pensions would be a bad buy if. cashed in within three years. I became angry, because it was on the very day that the Financial Times had run a huge article stating that 60 per cent. of personal pensions are cashed in within the first three years. Industry representatives therefore came to Parliament to talk to hon. Members about occupational pensions, and thought either that we do not read newspapers or that, if we do read them, we cannot match what we read with what we are being told. It shows the industry's unwillingness to be honest. Unless and until the industry is honest, there will be no faith in it.
Some pension companies have a worse track record than others in the number of policies issued for which payments are not up to date. Although I should not say that there is a direct relationship between track records on payments and the quality of advice given, it is interesting to note that Britannic Assurance, Old Mutual, Royal and Sun Alliance, Albany Life and United Assurance have a particularly high withdrawal rate in the first few years, because people stop paying in. Perhaps such high rates show that personal pensions were not the right policies for those people.
I very much hope that the Government's individual savings accounts will be a vehicle that allows people to build up assets. It has been interesting to see Opposition Members shake their heads and reject ISAs before the public have had a chance to give their verdict on them. Nevertheless, Radio 4 is running a wonderful competition to find a slogan to sell ISAs, and I should tell the House that the slogan "There is nothing nicer than a Government ISA" has been banned.
Where do we go from here? I think that it will increasingly be recognised that there will continue to be a public-private relationship in pension provision, and that the insurance industry has a significant part to play in it. It is no good the insurance industry continually assuring us that people trust their personal adviser but mistrust the industry. Such a statement tells me only that personal advisers individually are doing a good selling job. I think that people are right to mistrust the insurance industry.
There must be accountability and openness for people trying to build a personal pension. There must be a stage at which people of any age can ask, "How much have I built up? Will it pay for my old age? What are the likely returns?"
People must also be aware that investments are never safe, and that we take risks. However, the current system does not allow us to take risks. As there is an interesting selection of trustees of the parliamentary pension fund in the Chamber, I shall use myself as an example. Before deciding whether I should put everything into the parliamentary pension fund, I should know whether I will be re-elected. Therefore, in about three years, I will know what I should have done—which is clearly an unsatisfactory situation.
I welcome the Government's continued insistence on dealing with pensions mis-selling. However, some of the industry is still in denial and is not recognising its responsibility. Moreover, as events of the past few years have shown, the industry tries always to be one step ahead and just that little bit cleverer than everyone else. It must realise that it has to work within a very robust framework, which I hope the Government will create.