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‘Schedule [Work-based schemes: power to restrict charges or impose requirements] permits the Secretary of State to make regulations—
(a) restricting the charges that may be imposed on members of certain work-based pension schemes;
(b) imposing requirements relating to administration or governance that must be satisfied in relation to certain work-based pension schemes.’.—(Steve Webb.)
Brought up, and read the First time.
With this it will be convenient to discuss the following:
‘(2) In this section—
(a) “charges”; and
(b) “transaction costs” shall be defined in regulations by the Secretary of State.
(3) Before making regulations under subsection (2), the Secretary of State must undertake a public consultation, which must include the views of—
(a) the Financial Conduct Authority; and
(b) the Pensions Regulator.
(4) With reference to paragraph (2)(a), any public consultation must consider the different elements which comprise charges and not just the annual management charge.
(5) Such charges, together with any transaction costs incurred by the funds in which qualifying schemes are invested, shall be declared on an annual basis to the Pensions Regulator, which shall maintain a public register thereof.
(6) The Secretary of State shall by regulations set the standards by which pension schemes must declare charges and transaction costs for the purposes of the register and for declaration to their members and their members’ employers.
(7) The standards set out in regulations under subsection (6) shall be reviewed every three years.
(8) The Secretary of State shall have power to make regulations ordering other disclosure arrangements on administration charges.
(9) Regulations under this section may not be made unless a draft has been laid before and approved by resolution of both Houses of Parliament.’.
New clause 7—Railways pension scheme—
‘(1) The Railways Act 1993 is amended as follows.
(2) In Schedule 11 (Pensions), after paragraph 11 there is inserted—
11A (1) This paragraph applies if an insolvency event occurs in relation to the employer or former employer of a protected person.
(2) Where this paragraph applies the Secretary of State shall become liable to discharge any liabilities in respect of relevant pension rights, to the extent that they are not discharged by the trustees of a new scheme in which the employer was a participating employer.
(3) For the purposes of this paragraph—
(a) “insolvency event” has the meaning set out in section 121 of the Pensions Act 2004;
(b) “relevant pension rights” means the relevant pension rights referred to in paragraph 6(3) above.
11B The duty referred to in paragraph 11A also applies if an insolvency event has occurred in relation to the employer or former employer of a protected person on or after
New clause 9—Fiduciary duty of independent trustees—
‘(1) The Secretary of State may by regulations—
(a) require any pension scheme, which is not already overseen by independent trustees, to appoint a board of independent trustees; and
(b) set out the powers and duties of a board appointed under paragraph (1)(a).
(2) Regulations under this section—
(a) shall be made by statutory instrument; and
(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.
(3) The board of independent trustees shall have a fiduciary duty towards members of the scheme overseen by them.
(4) The fiduciary duty set out in subsection (3) shall take precedence over any duty to—
(a) the shareholders in, or
(b) other owners of, the operators of the scheme.
(5) In relation to any matters of member interest, decisions of the board of independent trustees shall be binding on the board of directors or other analogous management board of any undertaking operating a pension scheme.’.
New clause 10—Promotion of good value in scheme size—
‘(1) The fiduciary duty of pension scheme trustees shall include a duty to consider whether the scheme has sufficient scale to deliver good value for members.
(2) Where trustees take the view that the scheme has insufficient scale, they must consider whether merger with another scheme would be in the members’ interests.
(3) The Pensions Regulator shall have power to direct merger of pensions schemes where it would be in the interests of the members of each of the relevant schemes for merger to take place.
(4) The Pensions Regulator shall exercise this power in accordance with a methodology on which it has publicly consulted and which has been agreed with the Secretary of State.
(5) The methodology set out in subsection (4) shall be kept under regular review and revised when necessary, subject to further consultation and agreement from the Secretary of State.’.
New clause 11—Decumulation—
‘(1) Any qualifying money purchase scheme must direct its savers to an independent annuity brokerage service or offer such a brokerage service itself.
(2) Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing members with—
(a) an assisted path through the annuity process;
(b) ensuring access to most annuity providers; and
(c) minimising costs.
(3) The standards meeting best practice on decumulation shall be defined by the Pensions Regulator after public consultation.
(4) The standards set out in subsection (3) shall be reviewed every three years and, if required, updated.’.
New clause 12—Sustainability of private pensions: review of implications of climate change and natural resource constraints—
‘(1) The Secretary of State shall commission an independent review of the implications of climate change and natural resource constraints for the sustainability of private pensions.
(2) In particular, the review must consider the implications for long-term investment outcomes for members of work-based pension schemes of potential—
(a) systemic risks posed by high levels of exposure to fossil fuels and other carbon-intensive assets;
(b) economic and physical impacts of climate change under various climate mitigation scenarios; and
(c) constraints on the availability of non-renewable resources.
(3) In subsection (2)(c), “non-renewable resources” includes food, water, land and energy resources.
(4) A report of the review’s findings, including recommendations to government, must be laid before Parliament no later than
(5) The government must lay before Parliament its response to the review’s recommendations no later than
Government new schedule 1—‘Work-based schemes: power to restrict charges or impose requirements.
Amendment 38, in clause 29, page 15, line 24, leave out from ‘scheme’ to end of line.
Government amendments 5 to 10.
Amendment 53, in clause 34, page 18, line 22, at end insert—
‘(5) Regulations under this section shall not exempt entire classes of business or businesses, such as small and medium-sized businesses, from automatic enrolment.’.
Government amendment 11.
Amendment 54, in clause 42, page 23, line 7, at end add—
‘“(czb) to promote, and to improve understanding of long-term and sustainable investment amongst work-based pension schemes,”.’.
Amendment 39, in schedule 16, page 84, line 37, leave out from ‘of’ to ‘transfer’ in line 1 on page 85, and insert
‘a transferable benefits scheme, the cash equivalent of the transferable benefits—
‘(a) is transferred to a nominated’.
Amendment 40, page 85, line 3, leave out ‘automatic transfer’ and insert ‘transferable benefits’.
Amendment 41, page 85, line 8, leave out from ‘an’ to end of line 9, and insert
‘a transferable benefits scheme, means a member of the scheme who is no longer having contributions made to their benefits.’.
Amendment 42, page 85, line 22, leave out sub-paragraph (5) and insert—
‘(5) In this Schedule “nominated transfer scheme” means—
(b) a scheme in which the qualifying member is a member, or that has been nominated by the member or the transferable benefits scheme for the purposes of transferring pots;
(c) a pension scheme which meets quality standards as set out by the Secretary of State;
(d) a pension scheme that meets any other requirements set out in regulations.’.
Amendment 43, page 85, line 38, leave out from beginning to end of line 29 on page 87, and insert—
‘Transferable benefits scheme to transfer to nominated transfer scheme
2 (1) The regulations must require the trustees or managers of a transferable benefits scheme to establish an agreement with a nominated transfer scheme to make provision—
(a) for the transfer of qualifying members’ benefits to the nominated transfer scheme; and
(b) describing how and when steps are to be taken in order to effect the transfer.
(2) The regulations may make provision for a protocol through which a transferable benefits scheme may establish an agreement with a nominated transfer scheme.
(3) The regulations must ensure that where the duty to transfer qualifying members’ benefits to a nominated transfer scheme, has arisen, the member may opt out of the transfer or identify an alternative nominated transfer scheme to which the members’ benefits will be transferred.’.
Amendment 44, page 88, line 25, at end insert—
‘Nominated transfer schemes: quality requirements and administration charges
10A (1) The regulations may impose requirements that must be satisfied by any nominated transfer scheme.
(2) The requirements may in particular relate to—
(a) the governance of the scheme;
(b) the administration of the scheme; and
(c) the certification of the scheme by the Regulator.
(3) The regulations may make provision limiting or prohibiting any administration charge that may otherwise be imposed on a member of an automatic transfer scheme.
(4) Regulations made because of sub-paragraph (3)—
(a) may make provision for the manner of, and criteria for, determining whether an administration charge exceeds any limit or is prohibited; and
(b) may provide for the determination to be made in accordance with guidance issued from time to time by the Secretary of State.
(5) The requirements that may be imposed, and the charges that may be limited or prohibited, because of this paragraph need not relate to things done under the regulations.’.
Amendment 45, page 88, line 27, leave out paragraphs 11 and 12.
Government amendment 28.
Amendment 55, page 88, line 38, at end insert—
‘(c) the ability of the scheme to generate sustainable investment returns.’.
Amendment 46, page 89, line 39, leave out ‘an automatic’ and insert ‘a nominated’.
Amendment 47, page 90, line 1, leave out ‘current’.
Amendment 48, page 90, line 2, after ‘member’, insert ‘in a nominated transfer scheme’.
Amendment 49, page 90, line 3, leave out sub-paragraph (2).
Government amendment 29.
Amendment 50, page 91, leave out line 11.
Amendment 51, page 91, line 21, at end insert
‘“nominated transfer scheme” has the meaning given by sub-paragraph 1(5);’.
Amendment 52, page 91, leave out lines 36 and 37.
Government amendments 30, 31 and 12.
This group of amendments contains a long list of disparate topics. To give the House a feel for what we are discussing, it includes an attempt to limit the scope of automatic enrolment, the transfer of small pension pots, short service refunds, the vexed issue of pension scheme charges, issues with governance and administration, the decumulation of pension pots, the specific issue of rail pensions and the pension protection fund compensation cap. I shall do my best to whizz through all those issues to minimise or obviate as far as is possible the need for me to return to the Dispatch Box on this group.
I should start on a note of consensus. This part of the Bill deals with private pensions and I think that the House would agree that the process of automatic enrolment into workplace pensions is going exceptionally well. The process started a year ago. British industry has automatically enrolled about 1.7 million employees into workplace pensions. The rate of not opting out, or of staying in, has been far better than anybody predicted. Our survey evidence suggests that of the order of nine in 10 workers have chosen to remain in their workplace pensions. That is something that we should all welcome.
The Bill is designed to improve that situation further and to deal with some unfinished business. Although the principle of automatic enrolment was legislated for in the previous Parliament, many issues were not dealt with. If those are not dealt with, it will undermine the success of automatic enrolment.
Amendment 53 relates to the scope of automatic enrolment. Clause 34 gives the Government the power to exclude some people from the employer duty for automatic enrolment. I will give the House a flavour of the sorts of people that we might be talking about. In automatic enrolment, we have sought to strike a balance between setting out the rules at the start and giving employers and the industry certainty, and learning and listening and then changing the rules when we have got something wrong or when something needs to be refined or streamlined. We could have changed the rules and constantly tweaked things, or we could have said at the start, “These are the rules for the next five or six years until everybody’s in. Go and deal with it”, but we tried to strike a balance.
As we have learned, the rules require employers to put a certain set of people into workplace pensions who may immediately opt out. For example, people with what is called enhanced or fixed tax protection status—high net wealth individuals—could face a tax surcharge if their pension pot exceeds the lifetime allowance. In general, such individuals will want to opt straight back out of the scheme, and their employers have said, “Why are you making us put these people into pension schemes? We all know they are going to opt out, and indeed they will be cross with us if they fail to opt out and later face a tax penalty.” At the moment, the Government do not have the power to enable firms not to enrol those people, so clause 34 provides the power to exempt them from enrolment.
The second example concerns those who have already given notice. Someone may have given a month’s notice, but in the middle of that period the Government require the employer to put them in a pension scheme. As Members will understand, that is silly, because that person will probably opt out immediately. In any case, asking firms to enrol people who have already given notice does not do much for our relations with the CBI. Those are examples of where we have given employers a comprehensive, rigid legal duty that creates perverse outcomes. Clause 34 therefore allows employers to exempt certain categories of workers, and I have mentioned the sorts of examples it would cover.
Amendment 53 says, “That’s all very well, but we don’t want you using the power to exempt categories of business such as small and medium-sized firms.” Leaving aside the fact that the amendment does not define an SME and it is not clear who would be covered, and that any amendment with “such as” suggests it is a bit vague to begin with, in responding to the spirit of the amendment I assure Gregg McClymont and the House that the Government have no intention of using the power to exclude small and medium-sixed firms. That is not what this is about.
Amendment 53 is otiose, because if we were the evil Government that the hon. Gentleman thinks we are and wanted to exclude small and medium-sized firms, we could do that anyway. The staging schedule is set in statutory instrument, subject to negative procedure. Therefore, if we wanted to exclude Britain’s small firms, we would have only to produce a statutory instrument that would say that small firms will be required to stage in 2099. That would not even be subject to a vote in the House. If the amendment seeks to stop the Government doing something that, in any case, we do not want to do, it would not work; we could still do it even if the amendment were successful. I hope I have reassured the House that amendment 53 is unnecessary, because we do not plan to do such a thing. Secondly, the amendment is not well drafted because it is not clear who it means. Thirdly, even if passed, it would not achieve the desired objective. An unnecessary, poorly drafted amendment that does not work should probably not be approved by the House.
Amendments 38 to 52 concern what happens to small pension pots—an issue that was not addressed when the original legislation for automatic enrolment was drawn up. People change jobs perhaps 10 or 11 times in their working life, and they leave behind small pension pots. From the Australian experience, we know that can mean lots of people losing track of their pension pots and not engaging with pension saving because they have large numbers of small, silly pension pots all over the place.
Australia is often mentioned as having one of the world’s best pension systems, and the Australians say that the one thing they wish they had addressed at the start was small dormant pension pots. The Australian Government have been going at this for longer than we have, and they estimate that they have 5 million lost pension accounts containing 20 billion Australian dollars. It is a serious issue. Clause 29 in schedule 16 sets out the Government’s response to the issue, which is what we call pot follows member. When someone moves from an auto-enrolment defined contribution pot to another one, their pot—as long as it is below a £10,000 threshold—automatically follows them unless they opt for that not to be the case.
“It’s the only practical way. It’s better off”— because the money is in the worker’s last account—
“which is why I think it’s the only practical solution”.
We are delighted to have Nick Sherry’s support for our approach, as well as that of the Association of British Insurers. In the briefing sent to hon. Members the ABI welcomes the fact that the Bill includes provisions for the automatic transfer of small pension pots, which will lead to greater engagement and help people make savings decisions that are right for them and should lead to greater income in retirement. That is a welcome level of support for the proposition.
The Opposition amendments suggest a different route and would mean that when someone changes job, the dormant pension pot is automatically transferred to a third-party pension scheme called an aggregator. As I understand it, there would not be just one aggregator but multiple aggregators, and I have multiple concerns about that. First, such a policy would clearly lead to greater fragmentation of pension saving—it must do. Let us imagine the simplest example in which someone moves from firm A to firm B, and works only for two firms in their working life. In our model, the small dormant pension pot follows them from firm A to firm B—or scheme A to scheme B—and they end up with a single pension pot. In the model suggested by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East, the dormant pension pot gets shunted off to some third-party provider with whom the employee has never engaged. They therefore have a pot with the current employer and with the third-party provider.
We are trying not just to hoover up small pension pots but to get people engaged in pension saving. The problem with someone shunting their money off to a third-party provider, perhaps one they did not choose—there is not much detail in the hon. Gentleman’s model, but I do not think it involves a person choosing a third-party provider, although perhaps it does—is that they get a letter from a pension company they have never heard of saying, “Guess what, we’ve got your dormant pension pot.” It is not exactly a ransom note, but it might be the first that someone knows about it, and that will not lead them to become engaged.
Under our model, someone’s pension savings are with their current employer. That is what they are interested in and where workplace pension engagement takes place. We therefore believe that our model provides better consolidation of pension saving and better engagement. Our model also saves on the cost of running pension schemes, compared with the model set out in the amendments. With a pot size limit of £10,000—obviously our published research relates to the £2,000 pot size limit on the aggregator model—which is the same across the two systems, we still estimate that the aggregate approach will achieve only half the cumulative administrative savings by 2050 of our pot follows member system. While aggregators are worth a look—we considered that option—it is clear that pot follows member is the best solution.
There is an issue of what happens if money is automatically transferred from a “good” scheme to a “bad” scheme, and I accept that point. That is why we are regulating for scheme quality. It should not just be a worry that someone’s small pension pot gets auto-transferred to a bad scheme; it should be a worry that an entire work force have been auto-enrolled into a bad scheme. We should not have bad schemes and must deal with that. That is why we are tackling pension scheme quality, which includes a range of issues such as governance, investment, costs and charges. In a few moments I will have news for my hon. Friends and the House about what action we are taking on charges. For those reasons, we are not convinced by the multiple aggregator model, as it is catchily known. We believe that the someone changing job and their money following them is a simple, attractive notion that I commend to the House. I therefore ask the House to reject amendments 38 to 52.
Amendments 5 to 10 are largely technical and deal with short service refunds. There is a category of money purchase pension schemes through which someone who has worked for a firm for under two years can have their money back when they leave. That is not in the spirit of what we are trying to achieve through our pension reforms. We want people, even those who put in relatively small amounts of pension savings, to accumulate that, build up what I call a big fat pot, and have a decent retirement. Short service refunds fly in the face of the view that even modest pension savings are worth having, and we therefore propose to eliminate them. The danger with the current legislation is that although someone joined to a pension scheme through a contract has 30 days to opt out, under the Bill they would be in the scheme on day one, and a day’s or month’s worth of pension contribution would be lodged. On purely pragmatic grounds we took that view that we ought to apply the same 30-day rule to short service refunds. Clause 32 abolishes short service refunds, and technical amendments 5 to 10 deliver a 30-day breathing space so that someone who is a member of a scheme for fewer than 30 days can receive a refund of what are essentially nominal contributions. I hope that amendments 5 to 10 will be welcomed across the House.
One central issue in the debate on this group of amendments is pension scheme charges. The charge quoted on a pension scheme might be 1%, which sounds pretty innocent, because if 99p in the pound of a person’s money goes into their pension, the chances are that they will believe they are getting a good deal. However, pension scheme charges are compounded, so 1% of the fund is taken out in the first year, 1% of what is there is taken out in the second year, and so on. The Government estimate that the cumulative impact of charges can be very substantial, despite apparently innocuous, low-sounding charges.
Some attempts have been made to tackle charges. The previous Government set a charge cap on stakeholder pensions at what now looks like an astonishingly high level. To remind the House, someone who takes out a stakeholder pension can be within the previous Government’s caps if they pay a charge of 1.5% for 10 years followed by 1% thereafter. That is acceptable and regarded as qualifying for the stakeholder stamp. The then Government said, “That’s great. As long as your pension scheme is charging you less than 1.5% for the first 10 years and 1% thereafter, the box is ticked and it is a good pension scheme.” I do not regard charges of 1.5% for 10 years and 1% for the rest as good value for money. This Government can and will do better.
Why is 1% significant? Suppose you save, through your working life, £100 a month into a pension—I am not posing this question to you directly, Mr Speaker, but rhetorically—how much of your pension pot will have gone compared with the situation for a pension that has no charges? If the charge is 1% of £100 a month, the total charge for a year will be £12 or something, which does not sound like very much. However, it accumulates to more than £160,000—the difference between no charges and a 1% charge on savings of £100 a month is £160,000, which comes out of the pension pot. That is why I regard the charge caps that the previous Government sought to apply to stakeholder pensions—they applied no charge cap whatever for automatic enrolment—as alarmingly high and alarmingly gentle on the pensions industry.
I believe this Government can do better than that. I am therefore pleased to say that tomorrow we will publish a consultation document on charges in automatic enrolment pension schemes. We have waited to do that because we wanted to see the Office of Fair Trading report, which was published in September. It looked at the market and found that the demand side of the workplace pensions market was one of the worst it had ever encountered—that is almost verbatim what it said.
We do not regulate the price of baked beans because the market works. People shop around and buy a product they want, and they can choose a different one if they do not like it. The market for workplace pensions is not like that. The demand side of the model is very weak, because the people who pay the charges, the scheme members, are not the same as the people who choose the pension—the employer chooses the pension, but the member pays the charges. Even though the employee has an incentive to want a low-charge pension scheme, they are not the consumer. The employer is the consumer. Employers might be oblivious to charges, they might not care, or they might want to get rid of the hassle of choosing a pension scheme and therefore choose what they are offered. In that situation, the employee has a binary choice: stay in or get out. They cannot shop around or negotiate the charges down. It is a take-it-or-leave-it situation.
It is worse. Not only are employees automatically enrolled, and therefore in by default, but their money is invested by default into a default fund. Overwhelmingly, the money of the people I am talking about ends up in default funds. They are double-defaulted—they are defaulted into pension saving and the money is defaulted into default investment funds. We absolutely must protect the consumer interests of those individuals. Therefore, the consultation that opens tomorrow will consider how far we can get with disclosure.
Some of the amendments tabled by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East suggest that we need tens of thousands of pension funds telling the pension regulator what their charges are. That would not be great. If I am a scheme member who has just been auto-enrolled or who has fairly passively remained in my scheme, I will be passively put into a default pension fund, but somebody somewhere—Brighton, for example—has a website with a charge figure on it. That is not great and does not really help. We need something better and tougher than that.
We are therefore proposing a range of options on how far we can get with better disclosure and transparency, and on an absolute charge cap. I can tell the House that we will include in our consultation the option of a 0.75% charge cap on workplace pension schemes. That is a tougher charge cap than the Opposition have called for—they chose 1%. Their suggestion of a 1% cap was either based on an exhaustive investigation of the evidence and the data, or chosen because it was a nice round number. It was one or the other. The Government believe we should consider going further. We know that not enough people are saving for their retirement, and therefore that every penny they get into their pension has to turn into as much pension as possible. That is why we will consult on tough action on charges.
I thank the Minister very much for the announcement that he will consider a 0.75% cap in the consultation. Will he ensure that, in the consultation, there is clarity about what the 0.75% includes? As he is aware, there are an awful lot of different interpretations of costs by different people. That is part of the problem.
My hon. Friend is right. The consultation document discusses what should be included in the charge cap. My instinct is to prefer a comprehensive definition of charges. Clearly, we do not want to cap annual management charges and find out that the industry has cunningly managed to get its money back by some other route or a disguised charge. We therefore discuss what should be included.
My instinct is to go for a broad measure. There is an issue with transaction costs—we clearly want to know about them. Including transaction costs in the cap could lead to a slightly odd situation. Towards the end of the financial year, the fund and the trustees might believe that conducting a transaction is the right thing to do for the benefit of the pension fund. However, they might be unable to do that because the transaction costs would take them over the annual limit. We would be grateful for feedback on that and need to address those issues. One reason why we are having a consultation rather than laying down a definite answer is that we want insight on the fine detail, as my hon. Friend says. The basic principle is that we are looking at ensuring that 99p-plus of every £1 put into a pension goes into a pension. I am grateful for his comments.
I should add that there has been a suite of activity on charges. To remind the House, we announced a ban on consultancy charges earlier in the year. Government new schedule 1 and Government new clause 1 give us the power to put a set of powers to cap and regulate charges and quality all in one place. That includes automatic enrolment schemes, qualifying schemes and closed schemes. Lots of people have lots of money tied up in closed schemes. Without those measures, we would not necessarily have the powers we need to regulate the charges they pay. In some ways, the charges that people in closed schemes are paying—they are often old, high-charge schemes—are worrying, because people are often not engaged with their pension saving in a closed pension scheme.
Prompted by the OFT and working with the ABI, we are looking at legacy schemes—schemes introduced before 2001. The average charges in legacy schemes are 26% higher than charges in schemes sold after 2001. This is a full-frontal assault on pension scheme charges. We have banned consultancy charges; we are taking powers in the Bill to go further for auto-enrolment schemes; and we are looking at legacy schemes, charges and charge caps. We are taking effective action on issues that previous Governments have only dabbled with. That is why I urge my hon. Friends to support our new clause and our other proposals. They deliver, whereas the Opposition’s proposals mess about around the edges.
On governance and administration—in the context of new clauses 9, 10, 11 and 12, and amendments 54 and 55—quality in pension saving is not only about charges. How well schemes are governed and administered is important. Interesting issues are raised by the Opposition’s proposals—obviously, they are flawed, but I acknowledge that they raise important issues. New clause 9 would impose a trust-based structure for all pension schemes, with independent trustees across the board. But interestingly, the Office of Fair Trading’s project leader on the workplace pensions report that has just been published was recently quoted as saying that although trusts feel like an intuitively better way of looking after people’s pensions, that
“is largely dependent on the quality of the trustees.”
Given the many pension schemes we have at the moment, including many defined-benefit schemes, a requirement for every scheme to have a particular sort of trustee could be a real challenge, especially for smaller DB schemes.
Some of the Opposition’s suggestions may not be in the interests of members of schemes. I think the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East was at the recent conference of the National Association of Pension Funds, where he would have heard Fiona Reynolds, the chief of the Australian Institute of Superannuation Trustees—our friends the Australians again—commenting on his suggestion. She said:
“Looking at the Australian system, we conducted a lot of research into whether there should be more independent trustees but in actual fact we found there was a greater alignment of interest within trust based schemes, and these schemes outperformed other schemes where independent directors were present.”
In other words, these are interesting ideas, but they have been tried elsewhere and they are not a panacea or golden bullet.
If that is the case for Australia—and I looked very closely at Ms Reynolds’ comments—why are the Australian Government giving the regulator and trustees a duty to consider how to improve the Australian pension system in the future?
I do not see any incompatibility. The specific finding in Australia that independent trustees are not a magic bullet is not inconsistent with requiring schemes to ensure they are doing a good job. We will require schemes to meet quality standards that we will set out shortly.
Our call for evidence earlier this year sought views on provider-level governance structures, and the OFT has announced that the Association of British Insurers will work on independent governance committees for the big insurance-based schemes. We welcome that development and will consider our own proposals in detail in our response to the call for evidence.
The second set of governance issues relates to fiduciary duty and sustainability, addressed in new clause 12, tabled by Caroline Lucas and amendments 54 and 55. By happy coincidence, I took part in a conference this morning organised by ShareAction. The hon. Lady was on the attendance list—perhaps she was sitting at the back heckling, but I did not see her there. The conference was to launch ShareAction’s green light project, which aims to get pension funds to take sustainability and climate change seriously. I was delighted to take part in that conference and I am very supportive of that agenda.
Clearly, the duty of trustees to their members is a cornerstone of trust-based governance, but we are looking at whether we have got the definition of fiduciary duty right. I welcome the fact that the Law Commission has consulted on this. Its interim conclusion is that fiduciaries should look at longer-term issues, and it is legitimate for them to look at environmental, social and governance—ESG—issues. The Government are therefore considering what the fiduciary duty on trustees means and how far we can deal with it through a better understanding of that work.
One of the issues that came out of the conference this morning—I shall try not to deviate too much from the new clauses, Mr Speaker—was that the trustee toolkit that the Pensions Regulator provides could be amended to take account of some of these concerns. One of the challenges is to try to ensure that the trustees do their job properly and have a broad understanding of what it entails. As I say, the Law Commission’s interim conclusion was that trustees should—note “should”, not just “may”—consider
“in general terms, whether their policy will be to take account of ESG factors in their decision-making”.
I do not have any problem with the spirit of the new clause and amendments, but we are trying to consider this issue across Government. One of the funny things about being the pensions Minister is that if I go to a conference on pension funds and climate change, I have to get briefed by the Department for Business, Innovation and Skills because it does fiduciary stuff, and by the Department of Energy and Climate Change because it does climate change. Rather than amend pension legislation to deal with this little bit of the picture, we are trying to take an holistic view. As the hon. Member for Brighton, Pavilion knows, we have had the Kay review of fiduciary duty and long-termism, and we have the Law Commission review. We are trying to be as careful and as cross-departmental as we can, so we want to look at the whole investment chain and at how corporate governance, the law of the land and pensions will be affected, to make change in an integrated and connected way.
I am grateful to the Minister for his positive comments. I take the point that the pension aspect is not the full picture, but it is a big part of it. If we want to make quicker progress on this issue, can he advise where we should best table our next amendments?
In someone else’s legislation—[Laughter.] Just between ourselves, I encourage the hon. Lady to keep up the pressure across Government, including at Business, Innovation and Skills questions, Energy and Climate Change questions and Work and Pensions questions. To be frank, this issue is not always at the top of the pension agenda, so I welcome the amendments for that reason. I am reluctant, however, to amend the Bill in a piecemeal fashion, when I hope that we can have a more overarching framework affecting company law, business regulation and the duties of trustees not only in pensions but beyond. I am sympathetic to what she is trying to achieve, but we want to do it in a systematic, cross-Government way rather than dealing with just a bit of the issue. I look forward to hearing what she has to say, but I hope that she will withdraw new clause 12.
Scale is important. I do not think anyone doubts that, on average, bigger schemes produce better outcomes than smaller schemes, in the sense that, typically, bigger schemes have lower costs; they have the potential to diversify and pool risk; they have access to investment vehicles that smaller schemes perhaps do not; they have access to better quality investment advice; and they have more experienced trustees. We can see why, on average, a big scheme will probably do better than a small scheme. Just as the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East is searching for golden bullets on independent trustees—
Apparently he is searching for silver bullets. In any case, we are already seeing consolidation. To give the House a sense of scale, let us consider small and medium occupational defined-contribution schemes for between 12 and 1,000 members. The number of such schemes fell by more than a third in three years—a dramatic fall—from 3,300 to 2,110. The number of micro-schemes, with between two and 11 members, fell by a fifth over the same period, from some 45,000 to 36,000. In a sense, the Opposition amendments seek to force the pace on scale, but it is already happening quite quickly. That is a welcome development, and once we implement our measures on scheme quality—which, subject to consultation, may include tough action on charges—there will be a seismic effect on the pensions industry.
If a scheme cannot be used for auto-enrolment unless it delivers seriously low charges, many small, sub-scale schemes will fall by the wayside. The trends are already in that direction, and the measures we shall implement will substantively accelerate that. Rather than presume that scale is the right answer, we have to regulate the quality. If a small scheme can demonstrate that it is, for example, tailored to the characteristics of its membership and is delivering for them, great.
We do not want to kill good-quality small pension schemes, which is what the Opposition’s slightly bureaucratic amendment could do. Instead, we will say, “This is what we think good looks like. If you, as a big or small scheme, can deliver that, we will not tell you what to do. We will set parameters for what good looks like and you have to deliver.” Consolidation is already happening, and the quality requirements we are putting in place will deliver the outcomes that the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East wants.
Moving on—I apologise for the jargon—to decumulation, or “turning pension pots into retirement income,” as I think I am required to call it, new clause 11 suggests that it should be a requirement on schemes to feed in an annuity broker at the end. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East touches on an important issue, albeit again in an overly rigid way. Getting pension pots into a good profile of retirement income is crucial, which is why we at the Department for Work and Pensions are working with our colleagues at the Treasury on annuities and decumulation. Decumulation is about more than annuities. That is not a snappy soundbite, but in other words, turning a pension pot into a retirement income has to be about the whole process of retirement, not just a single event on a single day that fixes one’s retirement income for perhaps 30 years.
The danger with the rigidity of new clause 11 is that it presumes a backward-looking annuity model. Annuities in their current form were designed for a world where people lived for 10 years with pensions and then died. We now have a world where people might annuitise in their early 60s, or want to stop contributing to their pension pot in their early 60s, and live into their 90s. There are serious questions about the suitability of annuities for everybody. For example, people with big pension pots might want to look at a mixture of draw-down. They might want to look at alternatives, deferral or a range of options. It would be a backward step to hardwire into primary legislation that the only good thing that can be done with a pension is to annuitise through this particular model. We should give people new options at decumulation, not hardwire them into the annuity model. Of course, even an annuity broker may not necessarily guarantee that someone will get, for example, an impaired life annuity or enhanced annuity for disability or low life expectancy.
There is a lot that needs looking at in this section of the market. The initiatives that the industry has already taken—for example, the ABI code that came into practice earlier this year—are welcome, but we need to go further. We need a creative approach to turning pension pots into pension income, not a single product hardwired into a primary legislation model. I understand where the hon. Gentleman is coming from and I believe that the annuity market is in need of further reform, but hardwiring into primary legislation does not seem to us to be the way to go.
The House will be pleased to know that there are two final sections left, both of which are brief. John McDonnell, who does not appear to be in his place, tabled new clause 7, on rail pensions. The new clause relates to whether the Government should underwrite the shortfalls in the pension funds of employees who worked for the nationalised rail industry, which was then privatised, and where some companies, such as Jarvis Facilities, Relayfast and Fastline, went to the wall. We sympathise with any worker whose firm goes to the wall, but I say to the hon. Gentleman in absentia that the notion of protected persons in this case was simply that the terms of the pension scheme of the private employer would be as good as in the public sector. It was never a guarantee against the insolvency of the sponsoring employer. All private sector employees are covered by the Pension Protection Fund, provided that their firm pays the PPF levy. That is how these workers will get all or most, depending on their circumstances, of the pensions they were expecting. It would be wrong to give special treatment to that group when many other people work for firms that went to the wall and will not get that treatment.
Does the hon. Gentleman not accept that to enable privatisations to go ahead—we are not just talking about the railways; the electricity sector and the miners were affected in similar ways—promises were made that people’s pensions would not suffer any detriment as a result of privatisation? Our experience is that privatised companies go bust more often than others. Surely we are reneging on those promises?
Just to be clear, new clause 7 makes a specific suggestion regarding a private sector employer going to the wall. The promise was never, “You’ll get absolutely everything, even if your firm goes bankrupt;” it was that the terms of the pension would be as good as in the public sector. Clearly, in this case people are working for a private sector firm and could, if they wish, transfer their pension rights to somewhere else. They chose to keep them with the sponsoring employer.
Bear in mind that the money to pay for any shortfall in those pensions will come from the general taxpayer. Somebody is paying for that shortfall and many general taxpayers have no pension provision at all. If a private company knows that the pension fund is completely insured by the Government, that may influence its behaviour in a way we would not want. If feels unfair to say, “If your private employer used to be nationalised not only do you still have access to a very good pension scheme, but it is absolutely protected, whereas if you worked for any other private firm you are not protected.” I can understand why the hon. Member for Hayes and Harlington, given his trade union links, supports the railway workers—that is fair enough—but it seems like special pleading for that industry and I think there are many others who might make the same argument.
I am sorry to take my hon. Friend back to annuities, but I have been reflecting on his remarks. I agree with the need for us to be more creative in that interface as annuities are taken out, and he is right to say that the annuity broker is overly prescriptive. However, it is also true, as I think he said, that there are market abuses in the annuity system. Is there any more we can do with the consultation to look at the transition from pension fund to annuity and ensure that, for example, the Association of British Insurers code of conduct is more rigorously applied than it has been? It has not been very successful up till now.
Although the ABI code, for example, no longer requires the providers to send the application form with the wake-up letter, I gather the early evidence is that it has not substantially changed the proportion of people who shop around and then move to a new provider. I agree with my hon. Friend that there is a big agenda on decumulation—I apologise again for the word. It is not just about annuities. The new clause is too narrow and too prescriptive, but I assure my hon. Friend that we do not regard decumulation as a job done—on the contrary.
I have been contacted by a number of constituents who are in difficulties because of the current regime. The Minister clearly accepts that there is a need for change. When will he come forward with proposals? He has been in post for a number of years and is clearly on top of his brief. We need the Government to act. When will they do so?
My particular responsibility is automatic enrolment. We are about to put 10 million people into mainly defined-contribution pensions, the vast majority of whom, all things being equal, will then buy an annuity at the end. For understandable reasons, our focus in the past few years has been to get the infrastructure in place to get those 10 million people into pension saving and building up pension pots. Then, when they have a pension pot, we will ensure that they receive good value at the other end. There will be a set of people who will be auto-enrolled today and will retire tomorrow, but they are a minority. We need to get to grips with this issue. Annuity policy is led by our colleagues in the Treasury, which is why we are working closely with them. We hope to make further announcements soon.
Government amendment 31 relates to the Pension Protection Fund compensation cap. In Committee, we amended the Bill so that workers entering the PPF would have a more generous cap if they had been long-serving employees. The amendment applies the same provisions to people who are already in the PPF. We will not go back years and increase pensions retrospectively, but once the Bill and secondary legislation is passed we will increase their pensions going forward in line with the provisions we have already made for new employees going into the PPF.
I am grateful to the Chair of the Select Committee. As she knows, the PPF scheme is funded by the PPF levy, and the financial assistance scheme is funded directly by the taxpayer. I think the FAS will be moving next year to the Department’s annually managed expenditure budget, so we will then have to find taxpayers’ money to make a parallel change to the FAS. We are continuing to reflect on whether we should do so. No final decision has been made, but I understand the case for some matching change.
To conclude, the change to the compensation cap will mean that relatively small numbers of people—who, having worked for their firm all their life, should have got a good pension, but on whom the cap was biting particularly harshly—will now get a fairer pension, which has been widely welcomed by those affected.
In summary, this section of the Bill deals with making automatic enrolment and private pensions work. Automatic enrolment has been a great success so far, but there have always been a lot more aspects to sort out, small pension pots being one in particular, scheme quality another. I am delighted to say, therefore, that this is the week we finally tackle the scourge of excessive pension charges, and I commend the Government amendments to the House.
I have listened closely to the Minister. When one listens to him, particularly on pension charges, one has to listen very closely, because—how shall I put this politely?—there is a gap between the rhetoric and the reality. I will analyse the extent to which there remains a gap. In one sense, he has caught up with the questions that need to be asked about pension charges, but from the detail—or lack of detail—in his announcements, it seems we are still a long way from getting answers.
On other matters first, however, the Minister says that auto-enrolment is going “exceptionally well”. I think that that is accurate, but I am sure he would agree that we have to be cautious, given that it is very large employers that have enrolled and that the percentage of savers’ income going into the new pension schemes is very small—in many cases, it is hard to notice. We welcome the developments, however, and pay tribute to him for taking forward the previous Labour Government’s auto-enrolment scheme; there is consensus, I think, on both sides of the House that auto-enrolment has to work effectively. It is crucial that every single one of the 10 million people being auto-enrolled between 2012 and 2017 can be sure of getting value for money from that pension scheme. The necessity of value for money for all auto-enrolment schemes is what drives my amendments.
I wish to say a little about why that matters so much and how the Minister’s wind-up of the state pension interacts crucially with auto-enrolment. Essentially, he has gone for a hard and fast wind-up of the second state pension. No doubt, he will justify that move, and there are reasons to think it is sensible, but if we are to have a quick wind-up of the second state pension and a fast move to a flat-rate state pension, the biggest losers from that switch—this might be defensible, because there are always winners and losers—are likely to be lower-paid workers in the private sector who did well out of the redistribution accrual mechanism in the second state pension. If someone was low paid in the private sector, they accrued in a way that brought them closer to those on higher incomes. In many cases, therefore, the same people now being auto-enrolled will be the same people losing out from the hard and fast wind-up of the second state pension, or losing out in the longer term. That makes getting auto-enrolment right all the more important. The first thing he should have done when he took office—I know he will have an enormous in-tray—was work out how to ensure that every one of the 10 million people enrolled got value for money. That is the context of this debate.
The Minister says that the Bill will further improve the situation, so let me pursue some of his comments and then turn to Labour’s vision for private pensions. Amendments 5 to 10 to clause 32, on short service refunds, are more or less uncontroversial. On clause 34 and exemptions from auto-enrolment, he referred to our amendment 53 and said that I saw this as an “evil Government”.
That is a lesson in not posing a rhetorical question. Whatever my hon. Friend believes, I do not see this as an evil Government—in particular, no one doubts the Minister’s good intentions—but our amendment must be understood in the context of the Beecroft report.
As you will remember, Mr Speaker, Adrian Beecroft is a Tory donor who has produced a report in the last 18 months arguing that red tape and bureaucracy on small businesses are far too heavy and that micro-employers should be removed from auto-enrolment. I know the Minister does not support that and said the Government had no intention of doing it—no one is suggesting he would do such an awful thing—but he will not be there for eternity. Given his recent comments about God being a liberal, perhaps he does intend to be around for eternity, but for those of us of a more sceptical temper, I think we can say he will not be around for ever, so it would be sensible to constrain a future Government, or even this Government—anything could happen—who might be under pressure from the Beecrofts of this world, in a way that is consonant with the best objectives of public policy.
The Minister said that amendment 53 did not even define a small and medium-sized enterprise, but he will know that the Companies Act 2006 clearly defines an SME as an enterprise with 50 or fewer employees. That is a common definition of an SME. The broader point, however, is exactly the one I have already expressed: we are trying to do him a favour by protecting him from those within the coalition Government who take a less enlightened view of the benefits of auto-enrolment. We tabled the amendment in that spirit.
On clause 29 and the debate around schedule 16, the Minister raised the Australian example. I was at the National Association of Pension Funds last week, and I have even watched him in the video—I was hoping he would entertain us with the song from “Les Misérables”, but I will come to that when I deal with costs and charges. He said that Australia is doing pot follows member—the inference is that I often point to the benefits of the Australian system—but that is not surprising, because Australia has several hundred schemes, whereas we have 200,000, and that is not including personal private pensions. To compare a system so scaled with our system is to let one’s a priori views of the world get in advance of the evidence, or to put it more simply: he is comparing apples and pears. Australia has several hundred pension schemes; we have 200,000, and that is a fundamental problem with comparing our system. Australia is in a much better place in terms of scale.
The Minister says that pot follows member will be simple and effective and that we will regulate for quality, by which he means there will be minimum standards—or at least he tells us there will be minimum standards, but, guess what, that is also currently part of a consultation. There is a broader theme to which I shall return; when the Minister feels under pressure from the Labour agenda on private pensions, he calls for consultation. He says that this and that will happen but when we study the detail, we see that what he has called for is a consultation. That is not the same as decisive action.
On pot follows member, the problem is that the UK has a fragmented pensions system; we have 200,000 pension schemes. We have—to put it in a simple fashion—great variations in quality. The Minister is being asked repeatedly by the pensions world how pot follows member will work in those circumstances. It is again worth listening closely to what he says, because he has not yet explained how it will work. He has set out his plan and objective to get to pot follows member but not how the mechanism will work. One of the reasons for that is that it is very difficult to do. To go back to the Australian point, pot follows member would be a sensible approach if we started from a very different place, but we do not. We start from a very fragmented private pensions system with a massive variation in quality.
On costs and charges, the Minister does not actually know what is going on in the pensions world. We had a very interesting conversation, or debate on this in
Committee. In arguing a point with me, he pointed to DWP evidence. It turned out that the way in which he quoted that evidence was not appropriate, but my point is not to criticise him for making a mistake, which does happen; it is much broader. The DWP is forced to take surveys of employers to try to find out what pension providers are charging them. The Minister talks about evidence. Would not a much more effective way to approach things be to have the costs and charges laid out for everyone to see in the first place? Why has he not got on with ensuring that costs and charges are disclosed? Instead, the DWP has to take surveys of employers who, in many cases—as his own survey evidenced—are not aware of what they are buying in terms of a pension scheme.
That brings us to the broader issue of who buys pensions. The Minister wants to move to pot follows member and says that there will be quality criteria; these will be minimum quality criteria. But, as things stand, he could not explain to the House all the costs and charges that exist in a pension scheme. Neither the Government nor the regulator gathers that evidence. That is a fundamental point about the pensions market today.
Similarities are often drawn between energy and pensions. One way in which they are similar is that the vertical integration of pension providers—the same as with energy companies—means that it is very hard to crack where the costs and charges lie. I put that point on the table. The Minister wants to move to pot follows member but has not set out in detail the mechanism and the IT by which he would do this. More widely, he is not able to say at this stage what the costs and charges are in pension schemes. So how can he be sure that no one will move from a superior to an inferior scheme? He will say, and has said, that he will ensure that this happens. Again, I do not doubt his good intentions, but he has not so far delivered on costs and charges. More widely, if he does deliver—as I am sure he has every intention of doing—the amount of regulation that it will take to make a pot follows member pension automatic transfer system work is enormous. That is why so many stakeholders in pensions do not think it is a feasible way to proceed. The Minister said that the Association of British Insurers supports it. That is hardly surprising, because this is a system that will have the least detriment to the ABI’s members.
The Minister feels that he is now catching up with the pension charges debate; that is evident from his language and from the extent to which he talks about the Labour agenda, which is quite striking for the Report stage of a Bill. But he is still caught in the mindset of “If only I can get the industry round the table, it will deliver.” There is no evidence of delivery so far and no evidence therefore that that will happen. The reason that there is no evidence relates to a point made by my right hon. Friend the Leader of the Opposition in his powerful 2013 conference speech, which still reverberates around British politics. He asked, rightly, why would one expect an industry to take the decisions necessary to reform a market when it is not in its interests to do so. Why, indeed? I say to the Minister that, on pot follows member, he has to look beyond the ABI’s interests and look to the interests of the wider pensions community and of the most important people, savers.
The Minister mentioned the National Association of Pension Funds conference, where he mentioned pot follows member. I am sure that he got a very warm reception, because the national association is very clear not only that pot follows member is not the best way to proceed, but that there is a serious possibility of significant consumer detriment, which, in everyday language, means rip-offs. The national association, which the Minister so eloquently addressed the other week, is very clear on that. Not only is the association clear that we should have no truck with pot follows member, but it supports—the House will be surprised to learn—aggregators.
The Minister sets out my approach to aggregators as being, “Labour wants several aggregators, but how would they work?” He said that aggregators stop individuals engaging with their pension, or make that engagement impossible. He knows very well that the whole logic of auto-enrolment, which Labour began and which he has followed through, is that we have to use the power of inertia in pensions, because all the evidence is that many people will find it difficult to engage with pensions whatever the circumstances, given their complexity. Also, as he must be all too aware, auto-enrolment involves employers buying pensions, not the saver.
A criticism that I would make more widely of the Minister is that he approaches the pensions market as if it were a functioning market; functioning in the sense that we can and do have a consumer who is engaged, informed and sovereign, and a seller. The Minister knows that that is not the basis on which auto-enrolment proceeds because it is the employer who buys the pension. In other spheres, he has shown that he is fully aware that there is a big problem in the pensions market, which develops from the fact that the saver in many cases cannot be the sovereign—the person who makes the decisions—first, because the employer buys the pension and, secondly, because the pensions are so complex and their annual statements so opaque.
In those circumstances and with the Minister being aware of that, to claim that the aggregators should be excluded and rejected on the basis that they do not allow consumer engagement is a bit of a straw man. Let me say a little about why I think aggregators are so important. This relates to my other new clauses and I should iterate at this stage that these new clauses must, if we are to develop a serious policy to improve auto-enrolment outcomes, go together. For example, the Minister talked about trustees and said that the OFT says that the key is the quality of the trustees. He is of course right. My view, and that of the Labour party, is that trustees, in scaling up the pensions system, and aggregators go together to try to make a significant difference to the 10 million people being automatically enrolled in pensions.
My hon. Friend is making an excellent speech. I recognise that the Minister is sincere in his intention to improve pensions but, in relation to costs and charges, does my hon. Friend think that the inertia might be a result of the Government not wanting to challenge the vested interests of the big pension providers in order to stand up for ordinary, hard-working people?
I thank my hon. Friend for her shrewd intervention.
The Minister has been slow to understand the depth of the problems in the pensions market, and the House does not have to take my word for that. Earlier this week, I wrote to the Conservative MPs in the 40 most marginal Conservative seats, who have recently published a manifesto-cum-policy document. The language therein is—how shall I put this?—tougher on the private pensions market even than mine. The document, “40 Policy Ideas from the 40”, describes it as a failed market. It also states:
“Pension providers still refuse to clearly identify hidden charges such as churn and related fees…91% of retirees buy their pension annuity from their fund manager without checking other market options…the problem is that the private pensions market in the UK is a failed industry with higher charges than in any other country.”
That was not written by the Labour party. It was written by the Conservative MPs in the 40 most marginal constituencies. It seems a bit odd that they should take a tougher line on the pensions market than the Liberal Democrat Pensions Minister.
The way to explain that conundrum—I will not call it a paradox—is to say that anyone who believes in markets and thinks that they should work properly will support Labour’s proposals on reforming the private pensions industry. We want to reform it to ensure that the 10 million new savers going into automatically enrolled pensions get a fair deal. This pertains in particular to clause 29 and schedule 16, and the amendments thereto. It comes down to whether we believe that the pensions market is ready and able to proceed with pot follows member, given its fragmentation. The evidence shows that it clearly is not. Again, Members need not take my word for that. The National Association of Pension Funds has made it clear that we need to move to an aggregator system.
Given that the Minister was kind enough to spend a considerable period of time talking about the Labour amendments, I will do the same. I want to say a little about why aggregators are important. When the Minister addressed the NAPF, he gave a lucid, walk-around-the-stage performance that I enjoyed very much. He referred to two songs from “Les Misérables”. It would be unfair of me to sing either of those songs to him now. I have to confess that I am not a musicals man, although I suspect that the Minister might be a man for musicals—
It seems that he is, and that is fair enough. I myself am not. Musicals are not my thing. He quoted from the innkeeper’s song, which I am certainly not going to sing. For one thing, I do not know the words. He used the song as a basis to talk about 2% here, 3% there and charges everywhere, and presented that as the problem in the UK pensions market. That is very different from what he was saying not long ago. It is just over a year since he accused Labour of scaremongering about pension charges, but he has moved a long way since then—rhetorically, if not perhaps substantially. He talked about that ditty and made it clear that there was a problem, but he still does not grasp the fact that pot follows member is impossible because of the fragmentation in the pensions market.
Labour’s new clauses would enable the restructuring of the UK pensions market so that savers’ interests would be appropriately represented. The Minister referred to our new clause 9, which deals with trustees, and he quoted the OFT’s view that the trustees would have to be good ones. He also quoted someone from Australia who is over here at the moment, who had said that in some cases trustees were not the answer.
Our proposals involve having trustees in every scheme, the scaling up of the UK pensions industry to reduce the fragmentation born of 200,000 different schemes—it is the most fragmented private pension system in the world—and the reform of the annuities market. Our amendment (a) to new clause 1 proposes that all costs and charges should be disclosed. Those measures need to be taken together as a package, as a Labour Government would do, and they would provide a starting point for tackling the fundamental problem in the UK pensions industry.
Our proposals would deal with the first problem, the system’s fragmentation. Secondly, they would deal with the problem that, as history tells us, pension savers are not the same engaged, informed consumers as those who buy tins of beans. The Minister seems to have undergone a damascene conversion on the merits and demerits of comparing the pensions market to the tin of beans market, and I will come back to that point. Savers are not informed and engaged in that way.
Buying a pension is not like buying a tin of beans. The consumer does not exert the same pressure. Someone buying a tin of beans might be given a choice of five different kinds. With pensions, such a choice would not be available to the saver anyway, because the employer buys the product. But let us use the Minister’s metaphor and compare the pensions market with the tin of beans market. First, if there were a pensions market in a supermarket, the saver would not choose the pension themselves; their employer would do so. That would be an odd arrangement in the tin of beans market. Secondly, the buyer of beans can taste the various kinds, from the cheaper ones to the more expensive, and come to a judgment based on taste relative to cost. It would be difficult for them to make a similar comparison with pensions; historically, it has never happened. Thirdly, I return to the point that it is the employer who makes the purchase of a pension.
The Minister has done something significant in the state pension sphere. He and I have been exchanging views across the Dispatch Box for almost two years now, and I say to him gently that he is still approaching the private pensions market on the basis that it has the ability to function like other markets, including the market for beans, even though, as he looks at it more closely, he can see that there are big problems. It cannot function like that. If we are to make it work properly, we have to ensure that the people acting in the pension saver’s interests are muscled, scaled and resourced.
That is what our new clauses would achieve. They would enable the scaling up of the pensions system, so that schemes would be able to get an effective deal from providers. Let us be clear: the providers in the pensions market have scale. In that sense, it is a bit like the energy market. They are large-scale, efficient organisations. It is the people saving into pensions who do not have scale, and that is because there are 200,000 pension schemes. They do not have the necessary representation because the smaller employers, in particular, who are auto-enrolling their employees are not pension experts. I know that the Minister is aware of those facts—we have discussed them a number of times—and I urge him to think about how all that relates to restructuring the private pensions system so that it takes cognisance of that reality. It is in that area that he is not taking on what the Opposition are saying.
We are clear that we need to move to an aggregator system, because otherwise pot follows member will not work and because if we enable the creation of aggregators, we have a chance to bring down charges in the auto-enrolment market. We know that there are millions of stranded pension pots, and the Minister rightly and repeatedly talks about them. How do we use the stranded pots issue to generate some change in the interests of pension savers, particularly the 10 million new savers automatically being enrolled in pensions for the first time? How do we do that? That is what our new clauses wink towards.
One way of doing that is to use the power of the stranded pots as a lure and say to providers, “If you want access to the new market and to the billions of pounds locked in stranded pots, you can do so as long as you meet quality, costs and charges standards as set down by the Government and the regulator.” We could say to pension providers in the AE market, “Yes, you can be approved as an automatic transfer scheme aggregator, but only if you charge 50 basis points, and fully disclose your transaction costs,” thus meeting the criteria of the Labour new clauses dealing with independent trustees and other requirements. That shows how to use the stranded pots in the interests of the 10 million people who are being enrolled into these pensions for the first time. The ABI does not agree with that, and it is faithful to its position as an important industry interest, but it represents big pension companies, whereas I think the job of this House is to represent pension savers. That sets out the rationale for our amendments and new clauses.
The hon. Gentleman is making a thoughtful contribution, but what he seems to be saying is that if I have a small amount of money, I can have a 50 basis points pension fund, but his proposal for the charge cap for active members is 100 basis points or 1%. If I have a lot of money in pensions, I have to pay 1%, but if I go off to an aggregator, it is 0.5%. Why is that a good deal?
I thank the Minister for that thoughtful intervention. I am coming on to the issue of the charge cap and the rate at which it will be set, so I shall take up the point when I discuss our amendment (a) to new clause 1. He refers to small pots, but that takes us into territory we have previously discussed about getting aggregators to take them on. Why does he believe that only small pots that are stranded should automatically be transferred? My view is that all stranded pots should be liable for automatic transfer. I am grateful for his intervention, because it reminds me of something I intended to say. The Government’s position on the pot follows member system appears to be supported only by the Government, the Minister and the ABI. First, the only pots liable for automatic transfer will be those for less than £10,000, and secondly no pots that are stranded before the date on which the legislation takes effect will count as stranded pots. [Interruption.] The Minister shakes his head. I will give way to him if I am wrong on that point. He does not want to intervene, so I shall continue on the basis that what I am saying is correct.
This is an important issue, because I am building a case that the Minister does not realise how substantial the problems in the private pensions market are. He continues to think it can be treated like better functioning or well functioning dynamic markets. Actually, the market is more like the one in energy. I say that because when, under the Minister’s leadership, the Department for Work and Pensions looked at how to consolidate pots, it gave as a reason against aggregators the fact that they would disrupt the current market structure.
The Minister talks about new clause 1 and the need to take very strong action. Implicit but also explicit in what he says is that there are really serious problems with this market. If that was not explicit in what he said today, it was certainly explicit in his “Les Miserables” ditty at the NAPF. He knows about these problems, and he knows that we need significant change. We are going to be in a position, however, whereby all currently stranded pots will continue to be stranded.The Minister is shaking his head again. Does he want to tell me that I am wrong? I am happy to accept it if I am wrong, but on the basis of our Committee debates, I do not think that I am. Am I wrong? The Minister will not stand up to say so, so I shall assume that I am not and that he wants to keep the currently stranded pots still stranded and will not take action to deal with the problem. He also sets a £10,000 limit. Why? The answer is that he continues to be unprepared to stand up to the vested interests in the pensions market.
The Minister said several times that the ABI is doing this, and the ABI is doing that. That is welcome; we like to see the industry engaged. However, a time must come—and it is now—when the Government must get on and make the changes necessary to reform the pensions system. I put that on the record, and if he wishes to correct me, he can. As I say, currently stranded pots will not be encompassed by clause 29 and schedule 16, and no pot above £10,000 will be considered to be a pot eligible for automatic transfer. I think that says something significant—that he does not understand the necessity for significant change in this market.
It is not just me referring to private pensions as a failed industry. As I said, the group of 40 Tory MPs in the most marginal constituencies have done so too. They do so because they understand that if 10 million people are to be automatically enrolled into the new workplace pensions, every scheme must provide value for money. The Minister needs to take the necessary action and accept that.
I have just come back into the Chamber, but since the hon. Gentleman mentions the 40 Tory Members, I want to put on record the fact that as one of those 40, I was extremely happy to hear what the Minister said about the consultation, the 0.75% cap and his cognisance of the issues surrounding it. I shall therefore support the Government in any Divisions on these new clauses and amendments. [Interruption.]
My letter has not had the desired effect. I thought that Madam Deputy Speaker called me “Greg Mulholland” there. I was processing that, rather than being shocked at the fact that the Treasury Parliamentary Private Secretary is going to vote with the Government. Believe it or not, that did not come as much of a surprise to me.
I want to pay tribute to David Mowat, one of the group of 40, as a doughty campaigner on behalf of those who wish to see radical reform of the pensions market. I do not know whether he had left his place when I quoted from the “40 Policy Ideas from the 40” and the description of the private pensions market as “failed”. I noted that the language used by those 40 MPs was stronger than anything I had used about the private pension market, and suggested that it is a little odd that Conservative MPs take a tougher line on the industry than the Liberal Democrat Minister. Perhaps it is not odd, however, because those who believe in free markets will want the pensions market to work effectively. [Interruption.] I did not catch what was said by Richard Graham, but I invite him to intervene if he wishes to do so.
Mr Speaker—[Laughter]—I am sorry, Madam Deputy Speaker. You are not the only one who can make a verbal slip!
I was struck by what the Minister said about decumulation. It proved my point about his ability to talk but not necessarily to take any action, or enough action. New clause 11 calls for an independent brokerage service to guide those who annuitise on retirement through the process. Its aim is to deal with the lack of competition which, according to the NAPF and others, causes people to receive an average of 20% less in their annuities than they would have received had they shopped around. That returns me to a point with which I have been trying to persuade the Minister to engage. Buying an annuity involves a huge decision which a person will make only once in a lifetime, and which will affect the rest of that person’s life. However, the process is complicated, and because they find it hard to understand what they are being told, most people currently default to the annuities that they are being offered by their existing pension providers.
I am glad that my hon. Friend is speaking up for savers. He is raising issues that have already been raised with me by a number of my constituents. When I told the Minister that we were waiting to hear proposals from the Government, he said that we would hear something very soon. Has my hon. Friend been given any indication of when that might happen?
My hon. Friend made a very good point. I think she, and indeed everyone who listened to the Minister’s response to new clause 11, will be wondering what he proposes in lieu of the new clause. “Nothing” is an honest and fair assessment—or, at least, “Nothing concrete or substantive.” Referring to decumulation, the Minister said, “An awful lot needs to be looked at. We need to go further, but we need a creative approach rather than merely focusing on annuities.” I understand what he meant, because there is an ongoing debate about annuities as a product, but people out there, including our constituents, are annuitising every day. I do not think that saying to those people, “We are going to think about some creative solutions, we cannot tell you what they are, and because we are going to do something creative, we should not at this stage do something specific and concrete in order to improve outcomes,” stands the test. How long will it be before the Minister deals with this problem?
We know that annuities are a huge issue and that plenty of ideas are flying around, but ours is a concrete, practical proposal to improve annuity outcomes as things stand. I do not deny that the Minister has done something pretty significant in respect of state pensions, and I know that he must maintain a balance between pension schemes, but is it really good enough for him to respond to us by saying, “We need to do something—we need to go further—but we need a creative approach rather than your approach, which is focused on annuities”?
Annuities are the product that most people have to buy, and I think it unfair of the Minister to reject our new clause on the grounds that he prefers a more creative approach without explaining what that creative approach will be. I know that he has a great deal on his plate with state pension reform—winding up the state second pension as quickly as he intends to wind it up constitutes an incredibly big reform—but I ask him to reflect on whether it is good enough to say to people who have saved throughout their lives, and who are now receiving much less than they could have received had they shopped around, “We cannot support the Opposition’s new clause because although an awful lot needs to be done and we need to go further, we need a more creative approach.” I do not believe that anyone will be convinced by that.
The fact that people do not shop around for annuities is not the industry’s problem. Where there are shareholders, the industry exists to deliver shareholder value. If individuals choose to remain with their existing provider, the industry can encourage them to shop around—as it is currently doing by means of the open market option—but at some stage the industry will rightly say, “We have made efforts, but people are still not shopping around.” The Government must take action to ensure that people are given independent advice that will enable them to secure the best possible deal. That is in all our interests, because the more retirement income our constituents have, the more decent, enjoyable and, hopefully, long retirement they will experience.
New clause 11 eliminates the gap between the Minister’s rhetoric about the tough action that he will take to deal with problems in the pension market and the reality. At present, he is saying, “We will not do what you suggest, but I have nothing to propose myself.” This is, after all, the Pensions Bill. If reform is not proposed in the Pensions Bill, where will it be proposed?
The hon. Gentleman’s central thesis seems to be that he should claim credit for Labour’s 2008 auto-enrolment legislation. He likes to say that auto-enrolment is a Labour thing. However, he has spent the last three quarters of an hour telling us how fatally flawed that legislation was. It contains no standards relating to quality or to annuities. I would have asked myself on day one, “How can we get value for money?” Why did Labour think that it was good enough to legislate for auto-enrolment without addressing any of those issues?
The Minister took a similar approach when he talked about stakeholders. I shall say more about the stakeholder issue later, but let me first make clear to him that I have never claimed that all the credit for auto-enrolment should go to Labour; in fact, I have said a number of times that the Minister and the Government deserve credit for taking it on. The Minister is simply wrong to say that that is my “thesis”, as he put it. My thesis is that the Minister has underestimated the scale of the problems in the private pension market, and that the Bill and his comments on our new clauses suggest that he continues to do so. He says that Labour should have done this and should have done that, but I assure him that had I been pensions Minister in 2010, the first task on which a Labour Government would have focused would have been making the changes to auto-enrolment that were necessary to ensure that every saver was given value for money. [Interruption.] The new Whip, Gavin Barwell, of whom I am extremely fond, has just said something that I could not hear because I was talking at the same time as he was mumbling, but I am sure that it was shrewd and thoughtful.
The Minister talks of views. This is the Opposition’s critique. He has announced, “I want to carry out a radical reform of the state pension. I want to move from a very slow merging of the state second pension and the flat rate state pension to a hard and fast wind-up.” That is a complicated process that will take up a great deal of time. Meanwhile, he has been focusing on another issue, that of “defined ambition”. He spoke about that to the NAPF as well.
My specific critique of the Minister’s approach is to do with sequencing. Given his intentions and actions in respect of the state second pension, he should have made sure that there is nothing in the auto-enrolment market that could end up with any of the 10 million savers who are going to be automatically enrolled getting less than value for money. At one level the Minister does not disagree with that, because he told the NAPF that we will look back at this period as either one when something happened that was for the long-term good or as one when the problems in the private pension market were not dealt with. The Minister has been too slow to get on to this and, based on what he has said today, he is still not taking the necessary action. He is saying he might take action, but his words, which I will examine shortly, reveal it is in fact the appearance of action without the reality of action.
Let me develop that argument with reference to new clause 1 and our amendment (a). The Minister announced that there will be a consultation on a possible charge cap. We all knew that was coming: the Minister trailed it extensively. What did the Minister say about this consultation? First, it is important to note that it is a consultation, which, of course, does not commit the Government to doing anything. A consultation is not the same as legislation. The Minister became more engaged as he was speaking, and he finished by saying that this is a full-frontal assault on pension charges. The problem is he also said, “We will look at how far we can get.” A whole range of activity on charges has been undertaken, but, when he lists them, it is clear that they are mostly consultations. I give him credit on consultancy charges. The Minister acted decisively on that, but he needs to take similarly decisive action on the wider pension charges problem.
The Minister’s language was instructive. He wanted to dress up a consultation as action, but it is not action. He floated the possibility that one consultation option will be a cap of 75 basis points, but he did not say what the other options would be. Given my knowledge over two years of the way the Minister proceeds, I doubt that this will be a consultation with only one option, so will he tell us what the various options for a charge cap will be? He is probably giving the House only partial information by noting there will be one option of 75 basis points.
So the Minister announces a consultation, cherry-picks, for the benefit of his statement this afternoon, some of the things that will be in it, but no one in the House has yet seen the consultation and been able to examine it. That suggests the Pensions Minister is under pressure to get going on reforming the private pensions market, specifically in terms of costs and charges. That was what one felt when listening to the Minister. Not only did he spend a lot of time rebutting Labour’s vision for private pensions, but he felt the need to oversell what the Government are doing. I would say he felt that need because he feels under pressure on this issue. [Interruption.] The Minister suggests I am psychoanalysing him. As a historian rather than a psychoanalyst by trade, I will now present some evidence to support this view of the Minister.
Just over a year ago, when Labour pointed out the problems with charges, the Minister said we were scaremongering. However—to take us back to the issue of the tin of beans, as I promised—the Minister said in his statement that the pensions market is not like a tin of beans and that is why we have to look at a charge cap, but he also said in January this year, “I’m not sure a charge cap’s the way to go because the pensions market is like a tin of beans.” First, that suggests an obsession with tins of beans, which one would never have expected of the Minister, but it also suggests a little confusion in the Minister’s mind about what kind of market the pensions market is.
The Minister now says categorically, “The pension market is not like a tin of beans, so a charge cap has to be consulted upon”, but in January 2014 the Minister is quoted by AOL Money UK as saying there is no case for a pension charges cap and
“he is not yet persuaded that the Government should cap pension charges.”
The Minister can say he has changed his mind. I have absolutely no problem with that. He says he was not persuaded and now he is persuaded. That is a perfectly defensible position, but it gives credence to the Opposition argument that the Minister has been slow to realise just how dysfunctional this market is. The Minister said in January:
“Why does the Government not set a price cap on a tin of baked beans? We do not need to because there is a vibrant market; people have lots of choice”.
Yet today the Minister used the baked beans example himself and said categorically that the market is not like a tin of beans. That suggests the Minister has moved on this issue, which we welcome, but it raises this question: if he did not get it nine months ago, does he get it now? The way to test that is to look at what he said about charges, disclosure and caps in respect of new clause 1.
The Minister made it clear that the consultation is happening and it is important, and he pointed back to stakeholder pensions and said, “The Labour Government brought in stakeholder pensions in 2001, but look at how high the charges were capped.” I think the Minister will agree that he and this Government, by taking on the Turner consensus developed by the last Government, are grappling with fundamental legacies of pension policy decisions made by previous Conservative Governments in particular. [Interruption.] The Minister says Labour ones, too, but let me develop this argument.
The Thatcher Government did—I am sure for the best of intentions—a couple of things, one of which was breaking the link between earnings and the state pension, but we can come on to that when we talk about state pensions later. Specifically pertinent to the clauses and amendments currently under discussion, however, the Thatcher Government decided to encourage the taking out of personal private pensions and thereby encouraged—I will put it no stronger than that—5 million people to leave the state earnings-related pension scheme and/or occupational schemes. The Minister knows about pension pillars. The state pension is one pillar, and additional pension saving is another. What the Minister is trying to do in this Bill is reform the first pillar radically and make sure the additional pillar delivers effectively. That was the approach the Turner commission set out, and I am pleased to see the Minister nodding in agreement. The Turner commission reached that conclusion because it recognised that both pillars had to be rebuilt after the policy mistakes of the 1980s.
I assume the hon. Gentleman is referring to the decision to remove the dividend—[Interruption.] I say to him, first, that I do not know where he gets that figure from. I have heard it from Conservative MPs, in particular, but I would be delighted if he explained where he got it from. I would be interested, because anyone who has looked at the matter closely would say that the figure had been plucked out of nowhere. Pensions are a long-term business, and I am not suggesting that the only Governments who ever made a mistake were previous Conservative Governments. However, the fundamental policy decisions that set the UK on a slippery slope regarding additional pension savings were the mistakes the Thatcher Government made through the enormous encouragement given to personal private pensions.
The hon. Gentleman might remember, or might have read about, the way in which an army of pension salesmen was unleashed to persuade people that they should leave high-quality occupational schemes or the high-quality second state pension—the state earnings-related pension scheme—and go into personal pensions. They were offered enormous lump sums, not realising that such sums, up front, actually came out of their pension savings. They were promised enormous returns, and they were promised that they could pay less into a pension and get a much better retirement income. Where did that lead? It led directly to the private pension mis-selling scandals, whose legacy of public mistrust of pensions we all live with today.
That relates back to my point about the Minister’s approach. He is trying to build back up and deliver, or try to deliver on, a consensus around the Turner proposals—that is the right thing to do. However, if he is going for a hard, fast wind-up of the second state pension, with the losers being low-paid private sector workers, he has to be clear and convinced that every auto-enrolment scheme—10 million people are going into these schemes—delivers value for money. That is where my view, and that of Opposition Members, that he has not moved fast enough comes from, and it is evident in his change in view that I have cited. His view on the private pensions market has evolved. We welcome his movement, but we say to him that he has to move faster, and that leads me to amendment (a).
We have to draw a distinction between costs and charges. Our amendment would, in particular, make possible the disclosure of all transaction costs. The Minister alluded to that, saying, rightly, that we cannot have transaction costs in the cap. I absolutely agree with that; I do not know anyone who would say that transaction costs could be included in the cap. However, we need to ensure that the transaction costs are disclosed to employees and employers. He suggested that it was odd that the Opposition would want there to be a statutory record of costs and charges, but that is not odd; it is central to reforming the private pensions market.
A few minutes ago, the hon. Gentleman rebuked me for saying that engagement was important, because for most people this is all about inertia, but he is now saying that employees are going to go to the pensions regulator’s website to look at transaction cost charges on their pension. Those two things cannot both be right.
That is not what I was saying, and I will explain why. I am not surprised by the Minister’s response, because it probably explains why he was reported as saying at the NAPF conference that transparency “gets you virtually nowhere”. I assume the basis for that view, which at first glance appears odd, is that he takes the point that I have been making throughout this debate that seeing the pensions market as one where the saver is always is in charge or can always be in charge is simply wrong. I just put that on the record, but now let me deal with his point directly.
First, I do not see any basis on which one can be against the full disclosure of everything that has an impact on pensions, including transaction costs. Secondly, if we had the disclosure of transaction costs, that would enable everyone with an interest in ensuring good pension outcomes, including the Government, to have the evidence at their fingertips to say to interested parties, stakeholders and, in particular, pension companies and fund managers, “That’s what you are charging? That’s not on.” How can the Minister not want to have all the evidence at his fingertips? He is taking a strange position. He says that he is carrying out a consultation on charges. We know that is a shift in his position, for the reasons I have set out and given his previous comments, but he is still behind the curve because he does not support the full disclosure of transaction costs—he certainly will not support our amendment (a), which will make such disclosure a reality.
Let us be clear about this: we simply do not know what happens on costs when pension moneys are put into the “investment chain”. That seems an obscure term, but I am talking about where someone saves into a pension, their pension provider passes the pension savings to fund managers—they are often in the same organisation, because, as with the energy sector, there is a lot of vertical integration—and then the savings are invested. There is no comprehensive disclosure of all the costs that accrue in that process, and that cannot stand for much longer in the 21st century.
The Minister was quoted as saying at the NAPF conference—if he has been quoted unfairly, I urge him to intervene to say so—not only that transparency “gets you virtually nowhere”, but that one had to strike a “balance” between the public’s right to know about transaction charges and the costs to fund managers of disclosure. We hear that argument a lot across political debate. It is not a foolish argument in some cases, but it is in this case, because fund management is such an opaque business and, according to the things we hear—without access to the facts we cannot know for sure—the costs can be significant. Hon. Members should not take my word for it. The Secretary of State for Business, Innovation and Skills commissioned the Kay report on equity markets and “long-termism”, and Professor Kay made it clear that all transaction costs should be disclosed.
Professor Kay was clear about that, on behalf of the Government—or, certainly, at the behest of the Minister’s Liberal Democrat colleague the Business Secretary—because of the evidence he had gathered that fund managers can over-churn pension fund savings. What do I mean by “over-churn”? The incentives lie in commissions for trading, and so rather than hold on to assets for the long-term—what one might call the “Warren Buffett” approach, which is a very successful long-term approach to investing and is consonant with the long-term nature of pensions—fund managers have a big interest in constantly trading, because that generates commissions. That might be the case, or it might not. We simply do not know, because those things are not disclosed. The Minister trumpets new clause 1, but it does not include any disclosure of transaction costs. If we want to move to an auto-enrolment system and have in mind the 10 million people who will be automatically enrolled, as a sine qua non of reform we must ensure that the transaction costs are disclosed.
I am not sure whether you are aware, Madam Deputy Speaker, but just over a year ago the Royal Society of Arts investigated what pension providers understand by “the costs and charges” of a pension. It contacted
25 big providers and the vast majority told it that the full costs and charges of a pension scheme were simply the annual management charge, not the total expenses ratio and not transaction costs. Our argument is that the Minister has been too slow to recognise how dysfunctional the private pension market remains. We welcome the fact that he is moving, but he is doing so far too slowly. As evidence of that, we cite the fact that he will not commit the Government today to the provision on the disclosure of transaction costs. Our amendment (a) to new clause 1 would ensure the disclosure of transaction costs.
Our other amendments, as they pertain to the scale and value of pension schemes, to trustees and to annuities, would make a significant difference in the market. They would start to make the changes that are necessary to ensure that everybody gets value for money.
Does my hon. Friend make a distinction between a scheme with trustees and one under which the member must look after their own interests as it has no provision for a set of trustees to oversee it?
My hon. Friend makes a very good point. The logic of moving to a system in which every scheme has independent trustees flows from the fact that in the pensions market as it stands the consumer who is a member of a scheme without trustees cannot have their voice heard. What happens then? The interests of shareholders over-dominate. In a market that functions effectively, of course, the consumer can shop around, compare prices and if they buy something that they do not like they can even buy something else. None of that is true of the pensions market and that is why, in our view and given the options available, reaching a situation in which every scheme has trustees is the best way to try to ensure proper representation of saver interests. My hon. Friend is absolutely right.
I am listening to the hon. Gentleman’s argument, and it seems to me that all his points should be input into the consultation the Minister announced earlier. The Minister made it quite clear that one issue that would be consulted on was a cap of 0.75%, and that among the issues to be resolved was what factors would be included—for example, total expense ratios, annual management charges or any other kind of charge. Those are all legitimate topics for consultation. I welcome the discussion, as it is surely the right thing.
I do not disagree with any of that, apart from the fact that the chance to take the necessary steps has today been laid in front of the Government and the Minister. We must concede that auto-enrolment is already well under way, but at what stage will we see the action that is necessary? We will be in 2017 before we know it, when everyone will be auto-enrolled, and if the Minister has continued to consult rather than act we will be no further forward. The Minister has taken action on consultancy charges—he can do it—and I give him credit for that. He is undertaking a significant reform of the state pension, which we will discuss later, and he has many things to deal with, but the Government must act faster on these issues.
Let me deal with the point made by David Mowat. If the Government were to accept our amendment (a), there would be full disclosure of transaction charges. It would not have to be put out to consultation. The Minister says that one must weigh the costs to the fund management industry against the benefits to savers, but my view is that that balance means that we must have full disclosure. I think that message from the Opposition is clear.
Finally, let me put this in context. The Minister has proposed new clause 1 as the framework around which we will discuss private pensions today. He referred to the fact that he has for some time had the powers to cap charges, but has not used them. One suspects that new clause 1 is a way for the Minister—and I do not complain about this—to promote and publicise his desire to be seen to take decisive action on pension charges. It is worth pointing out, however, as the Minister has pointed out to me several times, that he already has powers to cap charges. I tell the hon. Member for Warrington South, whom I greatly respect on these issues, that those powers have been in place for some time—
Order. I appreciate that the hon. Gentleman is addressing a great many issues in this group of clauses and amendments, but, having heard his arguments several times, I trust that he will soon be drawing his remarks to a conclusion.
Thank you for that wise advice, Madam Deputy Speaker. I was somewhat sidetracked by the excellent intervention—[Interruption.] That is another intervention from the Parliamentary Private Secretary. If Members want to stand up and say something, I am happy to take an intervention. If they want to heckle from the back row, I will continue to respond to those heckles.
Where are we? The Minister wants to be seen to be taking decisive action on pension charges but today he has called for yet another consultation. He has moved on during the past year, as he had said that Labour was scaremongering and he could see no need for a cap. The consultation is a development, but we need action now. Our amendment (a) to new clause 1 would ensure full disclosure of all costs and charges and our other proposals would ensure a private pension system that would mean that everyone who was auto-enrolled would get value for money. The Minister is right that auto-enrolment started well, but he knows as well as I do that the key is the smaller employers. We are determined that everyone should get a good deal from auto-enrolment and I therefore commend our new clauses and amendments to the House.
This is the first time I have made a speech while you have been in the Chair, Madam Deputy Speaker, so let me add my warm congratulations to the many that you have already been given.
Our debate today has been a pretty specialist affair so far, in a different language from that which many of our constituents speak. It has no doubt been a struggle for many in the Public Gallery to remain awake throughout. As we dive into the detail, let us not forget the goal: the Bill’s aims are simplicity, clarity, a reduction in the flaws in means-testing and, above all, to ensure that it always pays to save. Some of that was rather lost in the 85 minutes for which the shadow Minister, Gregg McClymont spoke, so let me try to bring us swiftly back to the main points of detail.
Earlier we tackled auto-enrolment, small pots, aggregators, charges, scale and annuities. No doubt that would be enough to put many people off listening to any more, but let me add my thoughts briefly on each in turn. First, on auto-enrolment, the Minister outlined the success so far—1.7 million people already enrolled and 90% of them staying in. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said that he was cautious and that that percentage might not be sustainable as we started enrolling those in smaller firms across the country. He may well be right about that. The Minister will be acutely aware of that, which is why he is right to tackle some of the detail now, ahead of the smallest companies enrolling.
The important thing in the section on auto-enrolment was the changes outlined today—two opt-outs, for those who have already given notice of leaving their employer and for those who would suffer negative tax penalties because they had already accumulated more than the maximum allowed for tax-free savings. The Minister confirmed that there is absolutely no intention of excluding small and medium-sized enterprises, the lifeblood of every Member’s constituency. That is important, and he rightly summarised Labour’s amendment 53 as unnecessary, unclear and ineffectual.
The discussion on small pots, importantly, covered the differences between the pot follows member approach recommended by the coalition Government and the aggregator approach proposed by the Opposition. The precedent of Australia is relevant. Those 5 million lost accounts worth some 20 billion Australian dollars are not a small matter. Millions of our constituents are affected. Those of us who have accumulated small pots at different periods in our life know that it is extremely hard to keep track of them and to have any idea of what our savings really are. The whole business of pensions is ultimately about savings. It is about accumulating a pot of money which will see us safely through retirement, ensuring that we can live after retirement without having to fall back on savings.
The hon. Gentleman is right in the sense that all savings are ultimately deferred income. If he is trying to differentiate capital and income from investments, which I do not think he is, that is a separate issue. I accept his point that ultimately everything is deferred income, though I would prefer the word “savings”, as we will all need savings at some point. There is no significant difference between us on that.
The Opposition approach is towards an aggregator, which is an uncomfortable world where there is no choice and our savings pot is shunted off in a Thomas the tank engine-like way to God knows where. We will not get into allusions from the names of the engines in “Thomas the Tank Engine”. That would be unfortunate and arguably inappropriate. The important thing, as the
Minister rightly said, is that we must not have small pots that follow the member into a bad scheme. We must focus on all schemes being good. That is why it is important to legislate for quality schemes, as the coalition Government are doing.
I welcome the amendment that the Minister mentioned whereby those who have been in a scheme for less than 30 days will get a refund, but it is important that the practice which has grown up over time of people being in schemes for less than two years and being bought out for a not very significant sum comes to an end. I welcome that, as will many people across the land.
After small pots and aggregators, we come to the rub of the issue—charges. The Minister rightly observed that 1% compounded over time amounts to a huge amount of money paid out in charges to fund managers and administrators, and that it is important to follow the recommendations of the Office of Fair Trading report, which noted that pension savings is one of the worst sectors for charges, that the demand side is weak and that there is the contradiction of the employer choosing the manager, but the member effectively paying for that choice.
I welcome, and many Members across the House and others outside this place should welcome, the opportunity to look objectively and constructively at the issue of charges through a consultation. The option of 0.7% is no doubt at the lower end of options out there. That gives this Government and Members a chance to see what might be the most practical options, bearing in mind always that we do not want to limit the management of those funds to a handful of very large providers—the equivalent of supermarkets in a world where sometimes a delicatessen tailoring their investment to what members need can be an attractive and practical option.
The process of a consultation on charges clearly needs to include a definition of those charges. I was disappointed to hear so little of substance from the shadow Minister on the subject of charges. He did not even mention total expense ratio or any of the other aspects and acronyms that comprise charges, which are beloved of my hon. Friend David Mowat and others of us who have previously worked in the sector. There was no detail at all from the Opposition spokesman and, at the end of his 85 minutes of speaking, I am none the wiser about the charge that the Opposition are recommending
On charges generally, I think I can summarise the shadow Minister’s speech for Members and especially for those in the Gallery, whose concentration may understandably have wandered during those 85 minutes. There were four messages that he wanted to get out: first, highlight the fact that the coalition will do nothing for living standards; secondly, accuse the Government of sticking up for big business, not small pensioners; thirdly, sound as if the Opposition are offering an energy price freeze; and fourthly, do not give a precise figure. The approach behind all that is not to let the facts get in the way of the narrative. That, in about 12 seconds, broadly covers what the shadow Minister said in 85 minutes on the issue of charges.
The approach of the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East to the Government’s recommendation of a consultation amounted to a simple slogan: consultation, not action. This, I thought, was a curious approach by the shadow Minister. He earlier intimated that he is very cautious about the implementation of auto-enrolment—the results might not be as good as they have started out to be and it was too early to celebrate. He gave the impression of being a very cautious driver, one who was unwilling to take unnecessary risks and who wanted the Minister to make sure that he keeps the car on the road.
Such analogies were built into the hon. Gentleman’s approach, but caution is precisely why, after 13 years of the previous Government, auto-enrolment had not been implemented. It is precisely why they did not pursue universal credit. As the former Chancellor of the Exchequer, Mr Darling, admitted, it was too difficult. It is precisely why the previous Government were unable to make decisions—no nuclear power stations, no changes to the schools funding formula, no privatisation of Royal Mail, too little stimulus to apprenticeships, very little impact on manufacturing. It was all too difficult.
The approach of the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East today is to try to take credit for his party for the idea of auto-enrolment, and then to snipe at the detail offered by the Minister. The hon. Gentleman coupled that with something close to an apology for the previous Government not having done enough in the world of pensions, but it was a little like the policemen on Plebgate recently—it was not a wholehearted apology, but rather a nudge towards an apology. That was disappointing, because the central issue of charges is precisely what the debate is likely to focus on.
The shadow Minister alluded seven times, I think—I tried to keep count—to what he called the policy paper, “40 Policy Ideas from the 40”. He wrote me a charming letter about it:
‘Dear Richard… The policy paper entitled “40 ideas from the 40”, to which you were a contributor’—
I was not a contributor. I fear that he might not have read it in sufficient detail to understand who was and who was not a contributor. However, he was absolutely right that my hon. Friend the Member for Warrington South was a contributor and that he mentioned the lack of transparency in costs and charges in almost exactly the same language, as he confirmed today, as the Minister used when he called for the consultation on charges, which I think we all welcome and look forward to.
I have now covered the issue of charges, which leaves me with scale and annuities. Had Mr Speaker still been here, I would have said on the issue of scale that both he and I could arguably be accused of self-interest in making the point that size is not everything.
There is a joke in that somewhere, but I will not go there. I was just struck that the hon. Gentleman—we have debated this in Committee—said that he was not a member of the Forty Group. I have in front of me a copy of “40 Policy Ideas from the 40”, which states that the group
“consists of the forty most marginal Conservative seats”,
and he is one of the Members listed.
‘“40 ideas from the 40”, to which you were a contributor’ but I did not contribute. When I have good ideas, which is rarely, I either keep them to myself or share them with colleagues verbally. I do not put them down on pieces of paper for him to read, or not read as the case may be. I hope that he will take on board that correction. I am a member of the Forty Group, but I was not a contributor, and there is a difference.
This is all very curious, because the front cover of the document refers to “40 Policy Ideas from the 40”, and its states:
“The Forty Group consists of the forty most marginal Conservative seats”.
One of the MPs listed is the hon. Gentleman—
Order. We are straying somewhat from the amendments and new clauses before us. If there is a difference of opinion, it will have to remain as such. I urge hon. Gentlemen on both sides of the Chamber please to stick to the points before us on private pensions.
I welcome your advice, Madam Deputy Speaker.
Before the shadow Minister intervened, I had been referring to scale. I touched briefly on the fact that size is not everything when it comes to the management of pension funds, as with so much else in life, Madam Deputy Speaker. In order not to delay you further on that point, I will move swiftly on to annuities.
Annuities matter. We are in a new world, as the Minister said, because we are living longer and we need more options. There is more to annuities than simply a need for more competition, choice and help, although that is important and the code of conduct from the Association of British Insurers is a promising start. I agree with the Minister, though, that we should go further. At the heart of the matter is transferability—being able to trade annuities at different periods of life when different circumstances crop up and when there is different pricing in the marketplace. What we certainly do not want is a single product solution. I was lobbied heavily at the Conservative party conference by an annuity provider who was keen to impress on me the importance and relevance of their single product solution, but my instinct—I hope that the Minister is with me on this—is that such solutions are precisely what we do not need in the world of annuities.
Those were the six main points I wanted to cover—auto-enrolment, small pots, aggregators, charges, scale and annuities—and I have done so in about seven minutes. There is no need to go on for much longer, but I will try to bring my speech to some sort of rounded conclusion by asking the Minister to note three queries that constituents have raised with me.
The first query, which I think is important for Members across the House, relates to bereavement support payment. It is clearly an emotional issue, as all families who have had to deal with tragedy will understand, particularly when it comes to bereaved children. Winston’s Wish is a charity headquartered in the constituency of Martin Horwood, but it has a significant presence in mine. It has made a number of points, not all of which I agree with, but one is that the tax status of bereavement support payment is slightly unclear. I would be grateful if the Minister could say more about that and whether it will be tax-free, because that would be hugely appreciated. Given that the trend of his proposals on bereavement support payment is effectively to increase the amount of money but have it paid for a shorter time, having that payment tax-free would be hugely helpful for families affected. There is a second point from Winston’s Wish that I want to raise with the Minister. I understand that unmarried partners are currently ineligible for BSP, so perhaps he will confirm whether people in civil partnerships are eligible.
The second query from a constituent relates to changes to occupational schemes, which my constituent believes can be done under the Bill without agreement from either members or trustees; currently trustees would have to approve it. My instinct is that long-standing defined benefit schemes, such as that of the major nuclear power operator headquartered in Barnwood in my constituency—formerly British Energy but now EDF Energy—are most unlikely to close without any form of consultation or discussion with members or trustees, but I would be grateful if the Minister would comment on that.
It might benefit the House to know that the measure in the Bill to which my hon. Friend refers is the statutory override, which simply allows employers to recoup the loss of national insurance rebate. The state pension changes imply a change to the national insurance regime, so his constituency employer would lose some money. The Bill simply allows them to recoup that cash and nothing else, for example by changing the accrual rates in the scheme. It is designed to help employers cushion the blow of the loss of the rebates.
Like the hon. Gentleman, I have nuclear power stations in my constituency—Hunterston A, which is currently being decommissioned, and Hunterston B. Has he, like me, been contacted by numerous employees who are incredibly concerned about the protections that will be taken away from them by this legislation?
That is an interesting point. The answer is yes, but they are not in the hundreds. They come in two types. One type number those who are either still working there and are concerned about possible changes to the defined benefit scheme and exactly the issue I have just gone through with the Minister. I hope that that will be reassuring to the hon. Lady’s constituents as well as to mine.
The second type of person who has been in touch relates to the third constituency query I was going to raise: those members who are covered by the Electricity (Protected Persons) (England and Wales) Pension Regulations 1990. I see Katy Clark nodding and suspect that she has been contacted by people in a similar situation. The issue is that their pensions might be affected by changes to their pension schemes to reflect these higher national insurance costs. I understand that the Government have still not responded to their own consultation on whether to exempt protected persons from these changes. The Minister might care to comment on that later. It might be something that the Treasury is involved in, alongside the Department for Work and Pensions, but I think that it would be right to express concern on behalf of some of the pensioners involved. However, I understand that there is an argument that both existing pensioners and current members of a pension scheme should be treated with consistency on that. I raise the issue so that the Minister can respond. Those were the three queries on bereavement, change of occupational schemes—which has been answered—and the protected persons scheme.
In conclusion, what the Government are proposing in the Pensions Bill is important and will make a difference. The changes will enable people to save and that saving will pay. The technical details, which the Minister covered earlier, are important for smoothing out some of the small but niggly details that will affect our constituents in due course.
At the risk of repeating myself, I am disappointed by the approach taken by the shadow Minister, the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East. For him and his party to fall back on a slogan of “consultation not action” really was disappointing; after 86 minutes we would have hoped for a great deal more clarity on his precise proposals. What exactly does he intend to do on charges? In the absence of such clarity, I hope that he and Members from all parties will make substantive contributions to the consultation so that we can agree on the charges, make changes to the annuity details and say with pride to all our constituents that this Pensions Bill will make a difference to all our lives in retirement.
I have tabled new clause 12 and amendments 54 and 55 in order to highlight the need for the Department for Work and Pensions to address the systemic risks posed by climate change and natural resource depletion to pension schemes as a whole, and to suggest some positive solutions.
The Minister has already mentioned the report launched today as part of the new green light campaign by ShareAction, in partnership with the trade unions and environmental groups, which highlights the urgent need for reforms to the pension industry to ensure that it takes greater account of climate and environmental risks. I am glad that the Minister was able to be present to launch it.
Obviously, pension funds use the money paid into them every month to make investments in shares of companies, bonds, properties and other assets, which makes them enormously powerful players in shaping the economy, especially as they have significant investments in fossil fuel companies. However, if we want to keep climate change below dangerous levels, we need pension funds to fund and support a low-carbon economy by, for example, investing in clean technologies and low-carbon infrastructure projects. Moreover, today’s report shows that the UK pension funds have £3 trillion at risk from so-called unusable fossil fuel investments—fossil fuels which, if we are serious about keeping to our climate change commitments, we simply cannot afford to burn. That is a huge threat to the incomes of future pensioners.
In the UK an increasing number of voices are speaking out about the need for pension funds and others to divest themselves of fossil fuel assets. Operation Noah has launched “Bright Now”, a church divestment campaign whose first success came early this month when Quakers in Britain announced that they will disinvest from companies engaged in extracting fossil fuels, which made them the first UK Christian denomination to do so.
UK university students are increasingly engaged in divestment campaigns, as evidenced by the work undertaken by People & Planet. To date, there are 19 active divestment campaigns across the UK, including universities with large endowments: Cambridge, Oxford and Edinburgh.
Looking further afield, 70 of the largest pension funds in the US and the world issued a statement last week setting out their view that major fossil fuel companies may not be as profitable in the future, precisely because of efforts to limit climate change. They are asking for details on how the firms will manage a long-term shift to cleaner energy sources.
Here at Westminster, the recent Business, Innovation and Skills Committee report on the Kay review of the UK equity market and long-term decision making, which was produced earlier this year, recommended that the stewardship code should do more to address environmental, social and governance factors and systemic financial risks, as well as calling for more robust reporting on conflicts of interest.
I agree with the Minister’s comments this morning about the need for fiduciary duty to consider climate and environmental risks to our pension system and for this to be in the mainstream, first, because that is important to reduce the risks to pension holders themselves, and secondly, in order to harness the huge contribution that pension funds can make to the massive investment that we need in clean energy infrastructure. New clause 12 and amendments 54 and 55 make modest proposals of ways in which the Department could make that happen.
New clause 12 would require the Secretary of State to
“commission an independent review of the implications of climate change and natural resource constraints for the sustainability of private pensions.”
The review should
“consider the implications for long-term investment outcomes for members of work-based pension schemes of potential…systemic risks posed by high levels of exposure to fossil fuels and other carbon-intensive assets…economic and physical impacts of climate change under various climate mitigation scenarios; and…constraints on the availability of non-renewable resources”,
such as food, land and water resources.
That proposal builds on a landmark paper by the actuarial profession that modelled the implication of resource constraints for private pensions and found that, even in the best-case scenario, pension outcomes are likely to be worse than currently predicted because the industry is not factoring in risks associated with those constraints on food, water and land. In the worst-case scenario, savers in the model of a defined-contribution pension scheme were only half as well off, while the defined-benefit pension scheme became insolvent. The new clause also builds on work by Carbon Tracker on unburnable carbon, which shows that if the aim is to secure long-term returns, divesting from fossil fuel assets would be a pretty sensible thing to do.
That divestment has started. Nordic life and pensions company Storebrand, which has more than 450 billion kroner of assets under management, excluded 19 fossil fuel companies from its investment line-up in July. That exclusion was based on concerns about the long-term financial risks of remaining invested in carbon dioxide-intensive companies.
Amendment 54 relates to the objectives of the Pensions Regulator. Clause 42 gives the regulator a new objective to
“minimise any adverse impact on the sustainable growth of an employer,” which is pretty controversial, because it is based on the view that servicing pension deficits is hampering the ability of business to invest. My amendment would insert a new objective requiring the regulator also to
“promote, and to improve understanding of long-term and sustainable investment” by pension schemes.
The current regulatory regime is fragmented: both the Pensions Regulator and the Financial Conduct Authority have some responsibility for work-based pensions. The regulator, however, has historically been reluctant to look under the bonnet of schemes’ investment strategies, focusing instead on governance and administration. The FCA has also paid little attention to the matter, seeing it as the regulator’s responsibility. Both treat sustainability as at best a sideshow and at worst an irrelevance. The amendment would specifically mandate the regulator to pay attention to the issues.
Finally, amendment 55 would amend schedule 16, which gives the Government powers to introduce new quality standards for automatic enrolment schemes through regulations. Consumer groups have rightly argued that Government have a responsibility to make sure that people’s pensions cannot be transferred out of a good scheme into a bad scheme. The Bill as drafted provides that the new quality standards may in particular relate to governance and administration, which is welcome, but it is equally important for policy makers to look under the bonnet of schemes’ investment strategies, if they are to operate in the best interests of pensioners. The amendment would, therefore, add a third leg to the quality standards relating to the ability of the scheme to generate sustainable investment returns. The detail of any such standards could include reference to a scheme’s policy and practice on things such as climate change risks, including natural resource depletion.
I welcome the fact that in his opening comments the Minister spoke pretty favourably about that agenda and my amendments, and I understand his point that he needs to take a cross-Government, integrated approach to what fiduciary duty really involves. I do not, however, see that as an argument against my amendments—at least not all of them.
I draw the Minister’s attention to new clause 12 in particular. It is specific to the pensions field and is about finding the evidence that will help feed into precisely the cross-Government approach he advocates. I ask him again to accept the new clause, which would at least give us some comfort and reassurance that he is serious about delivering on his warm words this morning. The new clause is not just about fiduciary duty; it is about gathering data on the impact of climate change and natural resource constraints for the sustainability of private pensions and for a better understanding of the systemic risks posed by high levels of exposure to fossil fuels and other carbon-intensive assets. To my mind, that is a prerequisite for any future integration across Government of this kind of concern. I see it as an issue not of moving ahead of the rest of the Government, but of gathering information that will be very useful to Government. I ask the Minister again to consider accepting new clause 12.
The Minister, with all due respect, engaged in diversionary tactics when dealing with the Opposition proposal. He talked about other things that people might do when they are reaching retirement age and planning for their retirement. He spoke about other draw-down opportunities that might be better for them and said that people should get as much advice as possible. He failed to deal with the specific proposal.
It is not good enough simply to say that it would be good for people to have many different opportunities and a lot of advice. It is important to ensure that when people are deciding whether to annuitise, which they will ultimately have to do, they know all the options. It is not necessary for everyone to annuitise as soon as they reach retirement age; that decision can be postponed. The question is who should advise people about this matter and how we can ensure that people know all the options. The variety in the kinds of annuity that are offered and the deals that people can get is considerable.
Annuities are an important element in creating a retirement income that is adequate for people to live on. I urge the Minister to change his view and to accept that the arrangements that the Opposition are proposing do not fly in the face of his desire to explain other options to people and to give people those options. Many of the people who fare the worst do not have such substantial pension pots that they have a wide range of options and they cannot necessarily afford to postpone annuitisation, because they do not have much other income.
As ever, it is the role of Parliament and of Government to protect those who are in the weakest position. We must always have those people in mind. Those who have lots of options probably receive good advice anyway or could afford to pay for good advice. For many people, the whole matter of pensions is entirely baffling. Those people tend to go with the easiest or most obvious option.
The 20 to 30 years over which people—even those on relatively low incomes—have increasingly been expected to source their own pension provision and to take up pension options, such as the many money purchase or defined-contribution schemes that have been offered, have resulted in many people having very poor pension outcomes. One reason for that has been the charges and costs, which greatly reduce the pension pot that people end up with.
As the Minister has said, transparency is not enough. Transparency goes a long way, but action needs to be taken beyond that. I acknowledge that it is a step forward that on Report, although not before, we have a provision on capping charges. It would be better to be more specific about that and not to wait too long for a consultation process that could have been started a considerable time ago.
I know that other hon. Members want to contribute to the debate, but I want to say a little about the view expressed by Richard Graham, who did not accept my intervention, that the last Government did not do much for pensioners. The subtext seemed to be that all our views and proposals could therefore be discounted. Hundreds of thousands of pensioners saw a substantial increase in their income, and therefore in their well-being and health, because of provisions such as pension credit that were introduced by the last Government. That is not to say that there were not problems with those provisions, or that they would have been needed in an ideal world.
Much of the debate at that time focused on restoring the earnings link because, unlike now, earnings were outstripping prices. Everybody who was campaigning on the issue focused on that. However, restoring the earnings link and letting things move up gradually would not have helped the many pensioners who had a very quick increase in their income and well-being. Many of those people were women, because women often end up being the poorest in retirement. Those people would tell us very clearly how important that was for them. It is not fair—indeed, it is quite wrong—to rewrite history and suggest that it was not helpful.
As I have said in previous debates, the fact that that expenditure was in place made the job of introducing the single-tier pension easier for the Minister. We will discuss the single-tier pension in due course. That expenditure is one of the underpinnings that has allowed him to introduce the single-tier pension, apparently without increasing the overall expenditure on state pensions. Indeed, it is predicted that the overall expenditure will decrease in the long term. I hope that everyone will accept that the Labour Government did a great amount of thinking and work on pensions.
We must remember that many people were paying into pension schemes of various kinds long before auto-enrolment, perhaps with the assistance of an employer or perhaps because they chose to do so themselves. We must ensure that we protect those people; otherwise they will lose out. The same is true of how we carry forward small pots for different individuals. There are still serious concerns among people who are knowledgeable about the industry that the Minister’s pot follows member proposal may lead to some people having to transfer savings that they already have into a scheme that has higher charges and, therefore, a less good outcome for them than the scheme that the savings are currently in or a scheme that they would have chosen to transfer their pension into.
I must respond to the general comments made by the hon. Member for Gloucester, who is no longer in his place, about the previous Government wanting to introduce change or reform. He referred specifically to pension credit and, inadvertently perhaps, he misquoted my right hon. Friend Mr Darling—he is my parliamentary neighbour; our constituencies touch at one point within Edinburgh—who said not only that the previous Government looked at the possibility of a system like universal credit, but that the overwhelming advice was that it was too difficult and would be extremely expensive to implement. The cost-effectiveness of such a system, and its benefit to claimants, was therefore put in some doubt.
It ill befits anyone to suggest that the current Government have solved the problem of universal credit. As we are seeing at the moment, all the predictions made by those who have previous experience suggest that such a system is proving extremely difficult, extremely slow, and no doubt extremely expensive. Whether it will benefit people receiving benefits we have yet to see. One must therefore be cautious in suggesting that the previous Government were wrong in not going ahead with such a scheme. We will see what transpires over the next few years although experience to date has not been all that healthy. I urge the Minister to consider annuities in a great deal more detail, as they are crucial for people’s retirement income and well-being during those years of retirement.
I will keep my remarks brief. Other Members wish to speak to amendments, so I will ensure I give them time to do so. I will start with a few introductory comments because I am aware that, with today’s short time scale, it is unlikely that I will be able to make them on Third Reading. I pay tribute to and praise the role played by my hon. Friend the Minister. He has done an incredible job in taking through this hugely important, historic and complex Bill on an issue that we all agree is of utmost importance to our constituents and society. We can agree across the House that there is no one more capable, knowledgeable or expert in taking through this Bill, and as a Liberal Democrat I am proud that he has played that role and that the Bill will receive its Third Reading today.
Equally, I pay tribute to the expert and intelligent contributions made by Members from across the House in Committee. This complicated matter requires particular scrutiny, which it has received, and contributions from right hon. and hon. Members have rightly reflected that. Having said that, there is a need to redress the balance. Although scrutiny is important, so far this section of today’s proceedings has missed the point that this is an incredibly positive piece of legislation that will make a huge difference to people who are looking forward to retirement, and give them certainty about the level of income they can expect. The Bill builds on things that the Government have already established, including restoring the earnings link to the basic state pension and introducing the triple lock guarantee. That guarantee has helped increase the state pension by £12.50 a week since 2010, and delivered the biggest increase in the state pension in 2010.
As a whole, this historic and important Bill will deliver the single-tier pension to give a clearer, fairer pension to all and, crucially, a better pension to women and the self-employed. In the context of the amendments, it is equally important, as I sure the Minister would be first to agree, to take forward the challenge of auto-enrolment and ensure that private and occupational pensions are built in alongside the historic and positive changes to the state pension.
I say gently that, after the earlier mix up, I am sure that Gregg McClymont and I would agree that we want as many “Gregg Ms” in Parliament debating these issues as possible. To refer back to something he said, however, I think he has been one of “Les Misérables” today. He has not found a single thing to praise—certainly not with a smile on his face or any enthusiasm—while doing his job, as an Opposition spokesman, which I acknowledge he has to do, of scrutinising. The fact that the Bill is a huge improvement on what the previous Government, whom he served, introduced, has not come across. They introduced auto-enrolment, which was welcome, but the Bill is a huge step in taking it forward.
I had the great pleasure of living in Scotland for three years—two years in Glasgow. When I moved up there, I was more able to understand French than a broad Glaswegian accent, but I rectified that. He will be pleased that I know how to pronounce the name of his constituency in its entirety—[Interruption.] Gloaming—the word he utters from his seat on the Front Bench—is an excellent Scottish word.
Thank you, Mr Deputy Speaker. May I remind the House what the improvements to auto-enrolment will do, which has not come out in the debate? Let us look at the figures. Some 1.6 million people have signed up for auto-enrolment. Of course, the ability to opt out remains, but rather than the expected one in three opting out, the figure is only 10%. Many millions of people are not currently saving for their retirement, but auto-enrolment will lead to between 6 million and 9 million people saving for the first time by 2018. That is crucial.
It is important to remember—this, too, has not been mentioned in the debate—that, as well as employee contributions, there will be support from employers and the Government. People aged 22 or over who are earning more than £9,440 a year will be automatically put into the pension scheme. Individuals who choose to save 4% of their income will benefit from an employer contribution of 3% and tax relief of 1%. It is important to welcome and emphasise that—it should be welcomed and emphasised by all hon. Members.
The key debate is on charging. The Minister referred to the OFT report that raised concerns about standards, particularly in legacy schemes. The Government have rightly amended the Bill to take that into account. I warmly welcome amendment 30 and his announcement of the consultation. I believe the consultation should be welcomed and not criticised.
I should gently make one point to my namesake, the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East. He gave the impression that he was critical of the Government’s approach on consultation, but in amendment (a), which he has tabled, proposed new subsection (3) to Government new clause 1 states:
“Before making regulations under subsection (2), the Secretary of State must undertake a public consultation”.
It is odd that he is critical of the Government’s approach while calling for the very same consultation in black and white.
The hon. Gentleman was slightly wrong, or he misplaced his emphasis, in his suggestion that the Government are consulting rather than taking action. He knows—his proposal shows this—that consultation is a necessary precursor to legislation. It is important in getting legislation right. Without daring to put words into the mouth of the Minister, I think it is important to say that the intention is clear—that there should be a charge cap and that one will be introduced. The point of the consultation is not whether to introduce one: it is to find out the best way to do so. We should be clear about the subject of the consultation.
I have one question for the Minister, which he may be able to answer. The announcement on the consultation is imminent, although it is not happening as part of the Bill, so will we see him back at the Dispatch Box soon to make it? He is clearly the right and proper person to make the announcement, given his involvement in the Bill. I hope that he will be back, perhaps even in the next 24 or 48 hours, to announce it, and I and others look forward to welcoming that and the details that I am sure he will wish to lay out.
Despite this being a complicated subject in terms of the figures, the construct of the Bill and the pension sector as a whole, we all know that in the end this is about people’s future incomes and ensuring that they have a reasonable standard of living in their retirement, as well as more certainty in their retirement. The figures that the Minister provided about the current impact of the 1.5% and 1% charges were startling in showing just how much money people lose over the course of saving for their pensions. That is why a cap is right.
I say gently to the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East that in his 78-minute speech—at least, I made it 78 minutes, not 86 minutes—[Interruption.] I am being generous: perhaps Richard Graham thought that it felt like 86 minutes. In any case, the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East showed his knowledge of his brief, and I commend him for that, but it is slightly strange to hear his many recommendations for auto-enrolment when the previous Government would not even countenance those suggestions at the time of introduction. Nor did he acknowledge the problems with the 1% and 1.5% charges.
This has been a long and challenging process. Hon. Members on both sides of the House have made contributions that have been listened to and addressed. I look forward to the consultation. All of us with an interest in this issue should watch it closely and take part in it. We should also encourage others to take part. I shall end by congratulating the Minister, his team and his colleagues on what they have done to get this important Bill to this stage. It will lead to more certainty and fairer retirement incomes for the people of this country.
In the short time available to me, I wish to focus on the issue of protected persons, which was raised in the debate by Richard Graham, who also has many constituents employed in the nuclear industry. The electricity sector will be affected, as well as many other sectors. My hon. Friend John McDonnell has tabled new clause 7 to address those affected in the railway industry, who are protected persons as a result of a privatisation that happened 20 years ago. Other industries affected include energy, water and mining. It is believed that some 52,000 people in this position will probably be affected by the Bill.
Many of my constituents have been in touch with me on the issue. They tell me that the Government have still not responded to the consultation on whether to exempt protected persons from changes to their pension schemes to reflect higher employer national insurance costs from April 2016. I will focus not so much on the detail of new clause 7, which would help those in the railway industry, or new clause 37, which would help those in other sectors, but on the principle they both address.
This is not a historic issue relating to 52,000 individuals. As parliamentarians, we need to ensure that we maintain the promises made, but we need to address, too, privatisations that are taking place now. For example, the privatisation of Royal Mail took place only this month; indeed, there is an active industrial dispute in that sector relating to pensions, as well as pay and conditions. The Government need to be absolutely clear about this principle. As parliamentarians, we have been here time and again, trying to protect the interests of those affected by privatisations and to obtain assurances, from Governments across the political spectrum, on individuals’ contractual rights at the time of privatisation.
The Government’s proposals will tear up promises made to individuals and we need to think carefully about what that means. In the railways pensions scheme, we already have individuals—for example, Jarvis Facilities workers—for whom the insolvency of privatised companies has meant that they are suffering detriment. Jarvis went into administration in 2010 and my hon. Friend the Member for Hayes and Harlington has been actively involved in making representations on behalf of individuals affected. That is the type of scenario we are dealing with. A number of private railway companies—whether in the railways themselves or London underground—have become insolvent and gone back to the public sector. It is easy to see many scenarios in which work forces will be placed in a situation where there is an insolvency or something similar, and their pension may suffer detriment.
We have promised individuals that protection will be given to them. Those assurances were backed up by statutory provision when the railways were privatised 20 years ago, and when the energy sector and other sectors were privatised. We promised—this Parliament promised and Governments promised—that those individuals’ pension rights would be no worse under privatisation. They trusted those Governments and the promises they made. There was much negotiation at the time about the detail of the legislation. MPs representing their constituents were concerned that the law being put before them was not strong enough to give them the protection they were being promised.
The reality is that Governments made promises to individuals. The Minister should give an undertaking, on behalf of this Government, to stick by them and not renege on those promises, and to ensure that those who rely on the protections offered are able to continue to feel satisfied that, if things were to go wrong, the provisions will be there and those individuals will not suffer detriment. I therefore ask the Minister to look seriously at new clause 7 and new clause 37, which we will be considering later, to ensure that protections remain in place.
My hon. Friend Katy Clark has addressed the spirit of new clause 7, which stands in my name. It may well be that we are not able to discuss amendment 37, but she has addressed the core principle behind the new clause.
Parliament has a moral responsibility that is separate from government. When Governments give promises to people, Parliament has a role in ensuring that they are adhered to. That is what new clause 7 is all about. As my hon. Friend said, on privatisation, the principle should apply across the piece.
We have discussed the background to new clause 7 before in a wider debate about what happened to the Jarvis workers when Network Rail withdrew its contracts and the company collapsed. As many involved in that debate know, the Jarvis workers, many of whom were not transferred to successor companies, suffered greatly: they lost their jobs and could not find alternative employment, and some have become nomads, circling the country trying to pick up work to bring in at least some income. In addition, they lost their pension protection, and that is what the new clause deals with.
As my hon. Friend mentioned, section 134 of, and schedule 11 to, the Railways Act 1993 enabled the Secretary of State to create a new pension scheme for the railways industry, to transfer the assets and liabilities of the old British Rail pension scheme to the new scheme and, above all, to protect the rights of members of the scheme once they became members of the new scheme. The debate was extensive. Few Members now were in the House then, but as Hansard shows, there were extremely heated, but detailed debates about the principle and detail of the legislation, particularly the protections of individual workers.
Three orders were introduced. First, the Railways Pension Scheme Order 1994 created the railways pension scheme, set out its rules and designated it as the successor industry-wide scheme replacing the British Rail pension scheme. Secondly, the Railway Pensions (Transfer and Miscellaneous Provisions) Order 1994 transferred the assets and liabilities of the British Rail pension scheme to the new railways pension scheme. Thirdly, the Railway Pensions (Protection and Designation of Schemes) Order 1994 set out the protection to be afforded to members of the British Rail pension scheme who transferred involuntarily to the railways pension scheme.
After months of debate in the House and negotiations between the Government and the sector unions, members of the British Rail pension scheme who were already pensioners or deferred pensioners were transferred to a special pensions section and had their rights guaranteed by the Crown. Their rights have never been put at risk and are not at risk, but that is not true for members still employed in the industry who were contributing at the point of privatisation. Their accrued rights were transferred to the section of the railways pension scheme applicable to their new employer, and a matching share of the assets from the British Rail pension scheme was also transferred to the relevant section, but nothing was done in those debates and negotiations, and eventually the orders, to protect their transferred rights in the event of their new employer becoming insolvent.
The actively contributing members were also given the right to participate in the new railways pension scheme on a basis that entitled them to accrued rights for future service and which was no less favourable than the basis of the former British Rail pension scheme. They have to contribute to the scheme to accrue their rights, and so must their employer, in the normal way. Active members are also protected if they move involuntarily between railway employers. In law, they must be permitted to transfer their accrued rights to their new employer’s section of the railways pension scheme and be permitted to accrue future pension rights on the same basis as before.
That also applies to involuntary transfers. As one franchise moves between companies, so do the pensions and the pension rights and responsibilities. A member who moves employer of his or her own volition retains the right to be a member of the pension scheme, but the right to accrue future service rights on the same basis is lost. So those protections were thought to be relatively robust at the time; transferring from the old British Rail pension scheme into the new scheme, and then, as the franchises moved and new employers took over the staff, their rights would transfer as well.
When a railways employer enters into administration, its undertaking—the franchise—is usually transferred to another employer and, again, what happens is that the employees working for that employer are generally protected. Even when a company becomes insolvent and employees are transferred to a new company, if there are sufficient assets those are transferred and the employees are protected again. The problem we now face as a result of the Jarvis incident is what happens when an employer becomes insolvent and there are insufficient assets. That is what happened with the Jarvis workers, who were transferred to Babcock Rail or Volker Rail. Because the Jarvis section of the railways pension scheme is not in a position to transfer the accrued rights on a fully funded basis—because Jarvis never had the assets—a pension transfer could not be made at all. Instead, what the Jarvis workers now have to rely on is the pension protection fund, which does not provide what they would have gained as members of the full pension scheme.
This group of workers accepted the assurance of the Government on privatisation that their pensions would be fully protected. They have entered employment with a new employer and have paid their contributions, and they expect the same pension as every other worker around them in the industry. They are now faced with a pension that is significantly less. I think that that is grotesquely unfair. It certainly flies in the face of the promises that were given on the Floor of the House to railway workers when privatisation was being advocated and when legislation was going through the House.
The hon. Gentleman is obviously very knowledgeable about the history of the matter. Can he point to a specific assurance that was given about what would happen in the event of the insolvency of the private employer?
Let me deal with that. Incidents such as insolvency are often not predicted by Government. So what happens when a policy is advocated that involves a very straightforward commitment given by Ministers? Let me, if I may, read out a statement made by the then Secretary of State for Transport John MacGregor in May 1993 at the time of the debates on the privatisation of British Rail in response to a specific discussion on the British Rail pension scheme and its future. The Secretary of State said:
“My objective remains to preserve the security of rights enjoyed by pensioners and members while adopting arrangements to suit the new structure of the privatised industry. The proposals I am announcing today meet this objective.
I have decided that there should be set up, under the powers granted in the Railways Bill, a joint industry pension scheme for the railways. This will be broadly on the basis set out in the consultation paper ‘Railway Pensions After Privatisation’ issued in January. The governance and administration of the joint industry scheme will continue to involve both the employers and employees in the industry. We shall be discussing the detailed arrangements with interested parties…Existing employees’ rights will be protected by statutory orders made under the Railways Bill. The benefits offered to employees must be no less favourable than those in the existing scheme. There will be no penalties for involuntary breaks in employment. The present schemes under which the employer matches additional voluntary contributions made by employees…will continue subject to the existing right of the employer to withdraw matching for new or increased contributions.
Employees should be reassured by the statutory protection of these benefits…It is both natural and right that pensioners, pension scheme members and trustees should express their concerns and seek reassurance about pension arrangements in the privatised railway. The consultation document gave them the opportunity to do so: these decisions address those concerns and provide that reassurance.”—[Hansard, 20 May 1993; Vol. 225, c. 236W.]
John MacGregor was an honourable man who believed that he was giving every possible assurance that the existing pensions arrangements would be protected. Are we now saying that, just because there is no specific reference to insolvency in that statement, no such assurance was given in relation to those rights? If we did that outside this place, we would be accused of mis-selling a scheme.
The employees opposed rail privatisation tooth and nail, but they were reassured by the Government that their pensions would be protected and, although they did not support the policy, they went away confident that at least their pensions would be protected. What has happened now? I think that a lot of the responsibility lies with Network Rail over how it treated Jarvis, but that is a debate for another time. It has been demonstrated that the statutory protection that workers in the railway industry thought would guarantee their pensions has proved to be illusory in the event of an employer’s insolvency. That is what the Jarvis case has demonstrated.
New clause 7 would simply restore the protection in the specific case of insolvency. It would add a new paragraph to schedule 11 of the 1993 Act, which would apply only to an “insolvency event” within the meaning of the Pensions Act 2004. It would protect only “relevant pension rights”—namely, the rights that the member had accrued in the British Rail pension scheme and the rights that he or she had accrued as an employee of a successor employer, post-privatisation, but only to the extent that he or she had had no choice as to the section of the railways pension scheme in which they were accrued. If a member moves voluntarily from one employer to another, the rights accrued after that move are not protected. This relates to the involuntary movement of people when franchises are shifted and new contracts are issued.
Obviously, we have to address the practical question of who would pay, given that the former employer would not be in a position to do so. Promises were made by the Government, and they should have been enshrined in the three orders to which I have referred. They were made to convince people that privatisation could work, and to convince employees that there would be a smooth privatisation process in which their pension rights would be protected. Having made those promises, the Government should honour them. It is the role of Parliament to hold the Government to account and to ensure that they keep their word to the electorate. This was a special commitment that was given to that group of workers during the privatisation of the rail industry.
I do not necessarily think that the measure should be paid for by the taxpayer. The Government might think it appropriate to require all the railway employers to meet the cost of providing the protection by creating a mini-pension protection fund scheme, alongside the national scheme. Such a scheme could be funded by a levy paid only by railway employers. They have made the profits from privatisation, and they should share the liabilities that arise. The legislation passed at the time of privatisation gives the Secretary of State powers that are wide enough to enable this to happen.
The new clause stands in its own right. It is a relatively minor amendment to the legislation, and I should like to hear a positive response from the Government. When privatisation took place, there was immense opposition to it, and immense fear among the work force about what would happen to their jobs, their conditions of work and their rates of pay. Pensions are also a critical issue for workers. Some people have referred to them as deferred pay. That is true, but they also represent a deferred sense of security in retirement and old age, and Members should not underestimate the strength of feeling among people who wish to protect their pensions. When privatisation was debated, it was understandable that Ministers seeking a smooth passage for their legislation wanted to reassure the workers in the industry that their pensions would be protected. That is why such categorical assurances were given at the time.
Perhaps people did not think there would ever be an insolvency in the railway industry so it may not have been spelt out in the detail of the assurances the Secretary of State gave. What was certainly understood by everyone in this House listening, and by every railway worker out there, was that, no matter what happened under privatisation, at least people’s pensions would be protected.
I believe that this House should ensure that the Government honour their commitments. I know that one Government cannot bind another and that we cannot introduce retrospective legislation—or, at least, it is frowned on—but there is a moral duty to the people who worked within the industry. Some have suffered badly enough as it is. As I said, they have been laid off and, as a result of intervention by Network Rail, put in contracts with Jarvis—we have called for an inquiry into that. Some people lost employment for a long period, had to scour the country to pick up work and now their pensions are affected as well.
I urge the Government to look sympathetically on my new clause—not to look for some loophole or lack of clarity in previous debates, but to recognise that people are suffering as a result of commitments and previous Government promises not being adhered to. I do not think that is too much to ask. I also believe that we are advocating a cost-free approach. Employers in the industry would have to rise to their responsibility to protect the workers’ future pensions, and I think that would provide a morale boost to people working within the industry. As my hon. Friend the Member for North Ayrshire and Arran said, it would send out a message that, whatever happens—whether it be Government policy, privatisation, bringing services back in house or whatever—we could at least protect people’s pensions, if nothing else.
I am grateful for the chance to respond to the debate. I hope the House will forgive me if I focus my response to the shadow Minister on only the first hour of his speech, as I believe everything that followed had already been covered.
The gist of the remarks by Gregg McClymont was: when I was appointed in 2010, I should have looked at my in-tray, cleared it out and said, “It is essential we ensure value for money in workplace pensions.” By implication, action was needed because the previous Government, after 13 years, had not put pension savers in a position in which they would get value for money in workplace saving. Indeed, the hon. Gentleman suggested in his narrative that all the evils of pensions happened in the preceding 18 years of the Conservative Government. Again, by implication, Labour comes to power in 1997 ready to put right the failures of the previous Government; they have 13 years to have a go at it, yet the first job of a new Liberal Democrat Minister appointed in 2010 is to sort out the mess in pensions. There is, I think, a bit of a logical flaw in that argument.
I enjoyed the hon. Gentleman’s psychoanalysis of me—it is cheaper than therapy, that is for sure. He said, “We do not want consultation; we want action”. That was powerful, emotional and gut-wrenching stuff, except when we look at his amendment (a) we realise that, as my hon. Friend Greg Mulholland pointed out, in the midst of a clarion-call for action, it provides that, before action, or
“Before making regulations under subsection (2), the Secretary of State must undertake a public consultation”.
When the Government do it, then, public consultation is a substitute for action, but when the Opposition call for it, it means dynamism and standing up for the consumer. I do not know whether the hon. Gentleman will be a Minister one day, but he will know that Governments are required to consult before they legislate.
That is what we are doing, and he can be assured, as my hon. Friend the Member for Leeds North West said, that consultation is a precursor to action.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said that pot follows member was not a good idea here because whereas there are not many pension schemes in Australia this country has very large numbers of them. He massively understates, however, the extent of concentration and consolidation in the pensions markets. The Office of Fair Trading has said that the four largest providers hold the majority of schemes, assets and members. The four largest providers on their own have 68% of the assets, 76% of the schemes and 61% of the members. The hon. Gentleman believes that the vast number of schemes means that pot follows member cannot possibly work because everybody is in a small pension scheme; actually, the opposite is true. Most people are in big pension schemes, which is why pot follows member works perfectly well. Consolidation is already happening—I mentioned the fall of a third in the number of medium-sized pension schemes—and, moreover, when we implement measures on scheme quality, which will include action on charges, that will trigger substantially more consolidation. So the hon. Gentleman is, in a sense, being backward-looking in referring to the large number of tiny pension schemes.
I thank the Minister for giving way to me again: he is being very generous with his time. Is he not conflating providers with schemes? Is he not really saying that there are big pension providers, rather than schemes, in the United Kingdom? Big pension providers may service 200,000 schemes, but there will be many different schemes within their overall provision .
That was powerfully put, if I may say so. However, the hon. Gentleman is trying to portray a workplace pensions sector that is ludicrously fragmented and all over the place, and in which most people are in tiny schemes. In fact, most people are in big schemes. The number of medium-sized schemes is falling, and the quality standards that we are introducing will accelerate an existing trend. Pot follows member will be even more fitting as time goes by, because we are overseeing and hastening a process of consolidation in the pensions industry.
I will not say too much about baked beans, with which the hon. Gentleman seems to be even more obsessed than I am, but the point of the baked beans analogy is that the baked beans market works. As the hon. Gentleman said, in the pensions market the demand side is weak, and leaving everything to market forces is not the answer.
The model that the hon. Gentleman has embodied in his amendments and new clauses is a very confused one. He seems to be suggesting that small pension pots will go off to the new aggregator schemes, which are really good, so a silly little amount of money will automatically go to a really good scheme, whereas in the case of large amounts, the quality standard will be more relaxed. I understand that his party advocates a 1% charge cap, but he wants a 0.5% charge cap for the aggregator. That would bring about bizarre circumstances in which people with serious amounts of pensions money could pay
1% charges, but people with small amounts in a scheme that they never chose pay 0.5%. How is that coherent? I am happy to give way to the hon. Gentleman, but he cannot explain how it is coherent because it ain’t.
We need to ensure that high quality standards apply not just to small pension pots in an aggregator, but across the board, so that when people’s pots follow them from scheme to scheme, they move from a good-quality scheme to another good-quality scheme. The hon. Gentleman quoted the National Association of Pension Funds. The association is, of course, right. If we were simply going to allow money to be transferred automatically from a good scheme to a bad scheme, we would have a problem, but because we will regulate for quality, no bad pension schemes will be used for the purpose of automatic enrolment.
The hon. Gentleman said that nothing was happening about annuities. In fact, the Financial Conduct Authority is reviewing them. It has already surveyed the rates offered to existing customers and those offered to customers accessing rates through the open market option, and is trying to establish whether profits in the internal annuities market are too high because too few people are exercising that option. Action on annuities is not just about what my Department does; the FCA is considering the issue actively, and we are working with our colleagues in the Treasury.
New clause 11 requires savers people to consult an annuity broker. Sheila Gilmore, who is no longer in the Chamber, said that that would mean that people were given advice, but annuity brokers do not give regulated advice; people must pay for that. The broker will no doubt charge a fee, and those who want advice will either have to consult someone else or pay again for the broker’s advice.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East wants to require those in charge of auto-enrolment schemes to send people to brokers who may charge, so those people may have to go elsewhere for advice. He says that that must happen in order for a scheme to qualify as an auto-enrolment scheme. We consider his to be a backward-looking and restrictive model. Let me give an example. What about pension schemes that annuitise internally—which, in other words, provide the annuity themselves? They may provide a guaranteed annuity rate, but in the hon. Gentleman’s world people will still have to go off to an annuity broker and shop around, rather than taking advantage of the product that is in the scheme already. That is an example of where he is trying to be over-prescriptive. [Interruption.] He says it is all in my head; I am not quite sure what he is talking about. The point is that we are trying to provide forward-looking provision for decumulation. Annuities is one model, with deferring taking a pension, for example, or draw-down, or enabling people to swap their annuities around, as my hon. Friend Richard Graham said. We need to be examining all these things, but the hon. Gentleman wants to hard-wire into primary legislation a single model for a single product, which is not the future of decumulation.
Another aspect of the lack of coherence in the hon. Gentleman’s model of aggregators is that if he envisages an average transfer of £5,000, we estimate that per year the amount going to aggregators would be between £7 billion and £10 billion. Over five years, therefore, between £35 billion to £50 billion will go to these schemes. How does that affect the market? What is his model? We have a small number of what will become vast aggregator schemes. How does that relate to the active schemes that people are members of? He is taking money out of active schemes and putting it in aggregators; what does that do to the cost structure for the people who are left behind? Bizarrely, active members of a company pension will find that their costs go up if all the deferred members move out and take their money with them. The hon. Gentleman does not want to regulate the costs for the active members as hard as he does for the aggregators. I simply do not understand what his model is.
I will certainly give way to the hon. Gentleman, but will he just clarify this? He mentioned in his speech a 0.5% cap for the aggregator and said, “There won’t be many of these. We can control them. We can guarantee quality. Quality equals 0.5%.” Then he says—he has said this publicly before—“The Labour party favours a 1% charge cap for schemes people are members of.” So why does he want to have half the charging level for people’s small amounts of money in an aggregator than for people’s active pension funds?
I cannot respond at length as this is an intervention, but the Minister continues not to understand our proposal on aggregators. [Interruption.] He says, “It’s funny, that is”, but he just does not get it and I will discuss it with him further. We are very pleased the Minister takes Labour’s proposals so seriously that he is spending so much time and effort responding to them, but the aggregators would not only deal with the stranded pots. Pension providers can become aggregators if they meet governance, quality and charge standards, so it would not be deferred members from small pots alone who would be in these schemes as there would be larger schemes than that.
I would love to say that clarified matters. Let me put this challenge to the hon. Gentleman. He says we do not understand his proposals, but I have not seen his proposals. He has not set out specifically his alternative proposals, and I am spending time on this is because no one is arguing about the Government amendments; it is the Opposition amendments that we are arguing about.
I challenge the hon. Gentleman to set down in some measure of detail what exactly he is proposing and what kind of pensions market he envisages, because one of the confusing features of his vision—as it were—is that it is something like the energy market. He seems to envisage a small number of very large regulated providers who presumably get together with each other and maybe do not always have the consumer interest at heart. That is what the energy market that his party leader oversaw has delivered for consumers. I do not want to see the same thing in the pensions market.
The Minister says he wants to take great action through a cap on charges, but after three years all he can do is introduce a consultation whose findings he will publish at some stage in the future. That is not a Government taking action, and he is doing that from the position of having all the powers of government at his disposal. I do not think we should take any lessons from a Government who are acting so sluggishly in sorting out the problems in the private pensions market.
When the hon. Gentleman says we will publish that at some point in the future and he knows we are publishing tomorrow, we can understand why he feels vulnerable on this issue. I am simply suggesting that his reluctance to set out an alternative model shows the paucity of alternatives being offered to us.
On a specific point, the hon. Gentleman suggested we could deal with only small pots created after Royal Assent. That is not correct. We have the power to specify a prescribed date, and that date would in the first instance be likely to be the point at which auto-enrolment began. So in the first instance automatic enrolment pots from when this began, rather than when we secured Royal Assent, would be within the scope of pot follows member. I just want to put him straight on that.
Again, the Minister says he has a power but does not tell us how he is going to use it; that is common throughout the Bill. Will he categorically state that all pots stranded since auto-enrolment will be included within the Bill?
I thought that was what I just said. Let me be clear: we want to get this thing going. The hon. Gentleman raised the issue of the £10,000 pot size limit. Clearly I would like to go further, and we look at a £20,000 pot size limit in our consultation document, but we have to get the thing going. May I tell hon. Members who were not here at the start of the debate that he said he had sat and watched a video of a speech of mine? I commend him for that, as watching videos of me speaking shows real devotion to the world of pensions. In my speech last week, I made it clear that we see this as the beginning of a process. The pot size limit could go up and the scope of “pot follows member” could be increased, but we envisage beginning with auto-enrolment pots. I am clear about that, and there is no ambiguity: we are beginning with auto-enrolment pots.
Caroline Lucas, who is not in her place, asked when further action would be taken on fiduciary duties. For the record, in case she should happen to read it later—or watch a video—I can confirm that the Law Commission’s final report on the issue will be published in June 2014. Obviously, further debate will take place at that point.
I wish to respond to the related issues raised by the hon. Members for Hayes and Harlington (John McDonnell) and for North Ayrshire and Arran (Katy Clark). The hon. Lady asked about the important issue of the position of protected persons, on which we have consulted and on which I hope we will shortly reach a conclusion. We think that slightly more workers are involved than she suggested, but certainly tens of thousands of workers are affected. One challenge we face is that this is not just a matter for our Department. For example, if we place a cost on the energy employers through the abolition of the national insurance rebate and if we exclude their employees because they are protected persons, that has the potential to feed its way into energy bills. Her party leader has a view on energy bills, as do we, but the knock-on effect of a decision we take on energy bills has to be thought through. The same applies in the transport sector, to which the hon. Member for Hayes and Harlington referred. If railway and other employers cannot pass on through the pension scheme the costs we are imposing on them through the ending of the rebate, that will find its way through into fare increases and to consumers. So we have to think through a wide range of consequences of these decisions. That is why this is taking a while, but I appreciate the need to get on with it.
The hon. Gentleman said that there was a special case for the railway industry. His new clause 7 does not provide any protection in respect of any of the other privatised utilities; there is no suggestion that if any of those employers went to the wall pension protection should apply—it would just apply to the rail industry. If he feels so strongly about the justice of this issue for rail workers, why does his new clause not say that any protected person should be protected if the sponsoring employer goes bankrupt? I know his affiliation, and I have spoken to him in his role as leader of the group on rail workers, but if Parliament were to accept his new clause, we would have to deal with the question about why we did not do this for everybody else, too.
I have a lot of time for the hon. Gentleman, but I find that beneath him. He knows that I have been involved in this campaign for a number of years, since Jarvis went into administration as a result of the network intervention. We faced a specific issue that could be dealt with very speedily; it does not have to await further consultation with other industries. That does not mean that I do not concern myself about other industries and other workers, but this particular campaign is related to my constituents and to a specific industry in which I have taken an interest over time.
I know that the hon. Gentleman has taken a particular interest over time in this industry. My point is that his argument about justice—his argument that pension protection should mean not just the same terms and conditions, which was what it did mean, but protection against insolvency—should apply equally across other industries, and should not just apply to the rail industry, if that is what he believes. When John MacGregor made the promises that the hon. Gentleman quoted, he was saying that the terms and conditions of the pension scheme would be the same with the privatised employer as they were with the state employer. Subsequently, a pension protection fund was created. Jarvis paid pension protection fund levies and that is why the employees are in the pension protection fund. The three privatised railway firms paid—
On a point of order, Mr Deputy Speaker. There comes a time when accuracy is important in this House. John MacGregor, as Secretary of State, gave assurances that when British Rail was privatised pensions would be protected. He said not that they would have the same protections as private companies but that pensions would be protected. There is a point of accuracy, so that Ministers do not attempt to mislead this House.
I am sure that nobody would deliberately mislead this House—let us clear that one up. That is not a point of order but it has certainly been corrected for the record, which will be read tomorrow.
I did not say that. I also said that the first point was not a point of order, and neither is the Minister’s.
Jarvis, as an employer, was paying an insurance policy. It was paying into a fund so that if it became insolvent its employers would get the payout, and that is exactly what has happened.
The pension protection fund was created nearly a decade ago and every year Jarvis paid in on behalf of their employees so that in the event of insolvency those employees, and those of the other two former nationalised rail industry firms who were spun off, would get protection. That is exactly what has happened. In other words, to come along in 2013 and say, “Oh no, we did not expect this to happen. We should get special treatment and we should get 100% protection,” when other people who work for private firms do not get that when they pay the protection fund levy and get a payout—[Interruption.]
Other people who work for private firms get a payout according to how the pension protection fund works.
The hon. Member for Edinburgh East, who is not in her place, talked about annuities. She seemed to think that requiring people to go to an annuity broker was the answer to the problems and I think she missed the point. We want to see a much wider range of options for people when they want to turn their pension pot into a pension income. Rather than putting into primary legislation a single model for a single product, we must ensure that people have choices so that they can choose an annuity, consider draw-down products or consider deferring and so that they can try to ensure that they get the best value for money. I certainly accept that the annuity market is not working as well as it should.
This debate has gone on for the best part of four hours and the recurrent theme has been that when the coalition Government took power in 2010, there was a huge amount of unfinished business on automatic enrolment. What happened with small pots, charge caps, decumulation and governance had not been dealt with. The Opposition have spent the past however many hours asking how we could possibly not have acted on all the issues they failed to address in 13 years, but we are addressing them. We have taken effective action and tomorrow we will take a further step when, for the first time, we consider capping the charges on automatic enrolment pension schemes. This Parliament will be seen to implement vital pension reform in the state and private sectors and to be doing the job properly and I commend our amendments to the House.
Question put and agreed to.
Clause read a Second time.
Amendment proposed to new clause 1: (a), at end add—
‘(2) In this section—
(a) “charges”; and
(b) “transaction costs” shall be defined in regulations by the Secretary of State.
(3) Before making regulations under subsection (2), the Secretary of State must undertake a public consultation, which must include the views of—
(a) the Financial Conduct Authority; and
(b) the Pensions Regulator.
(4) With reference to paragraph (2)(a), any public consultation must consider the different elements which comprise charges and not just the annual management charge.
(5) Such charges, together with any transaction costs incurred by the funds in which qualifying schemes are invested, shall be declared on an annual basis to the Pensions Regulator, which shall maintain a public register thereof.
(6) The Secretary of State shall by regulations set the standards by which pension schemes must declare charges and transaction costs for the purposes of the register and for declaration to their members and their members’ employers.
(7) The standards set out in regulations under subsection (6) shall be reviewed every three years.
(8) The Secretary of State shall have power to make regulations ordering other disclosure arrangements on administration charges.
(9) Regulations under this section may not be made unless a draft has been laid before and approved by resolution of both Houses of Parliament.’.—(Gregg McClymont.)
Question put, That the amendment be made.