I tabled new clauses 6 and 10 because they deal with fees and charges and protection of pensions and pension schemes. My aim is to ensure that any scheme to which an employee is automatically enrolled is fit for purpose and of a high quality. Employers can choose from a range of schemes, including NEST. As we have heard today, those of us who have visited NEST are quite impressed—it is easy to run, easy to access and value for money—but there is nothing to stop an employer choosing an inappropriate pension scheme, unsuitable for their employees.
New clause 6 is designed to provoke a debate on the charging structure for workplace pension schemes. Consumer groups such as Which? are particularly concerned about the increase in charges levied by some insurance companies for people who change jobs. Which? research has found that some companies are charging 0.5% to 0.7% in annual management charges to active members but, once the person leaves, the charges can then double to 1.2% to 1.5%. Many people move jobs from time to time, and around 60% of people who start contributing to group personal pensions have stopped contributions after four years. A substantial proportion of people will end up paying higher charges, far exceeding the charges that they would be paying were they involved in NEST. Such high charges could have a big impact on the pension received by the consumer, and would be counterproductive to what we are trying to achieve, which is renewed confidence in pension schemes. Insurance companies that operate the practice call it an active member discount, but a more appropriate name would be a deferred member penalty. Whether the change needed is regulatory or legislative, the Government need to address the fact that no one seems to be looking after the interests of past employees, or deferred members. Varying annual management charges through the introduction of extra charges for deferred members is a transfer penalty, penalising people who switch from job to job.
I thank my hon. Friend for tabling the two new clauses. She talks about the extra charges levied on people who leave a job. Given that more people are doing part-time work or working in temporary jobs, which we have been discussing today, once automatic enrolment is rolled out, is her expectation that even more deferred members, if not in NEST, will potentially incur such surcharges?
That is my concern. We have two ends of the spectrum: NEST, as far as we can see, which will be well run, value for money and easy to understand; and the top-end company pension schemes. The problem might lie in between.
I am also concerned about the Financial Services Authority’s proposals to allow employers to negotiate consultancy charges with their advisers, to be deducted from the employee pension pots. There should be more highly specified quality requirements, or employers must receive better advice where advisers are required to benchmark the charges against those in NEST to ensure that the workplace personal pension provides good value for money.
“if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a charge cap for qualifying schemes and auto-enrolment schemes.”—[Official Report, House of Lords, 3 March 2011; Vol. 725, c. GC249.]
Research by Which? on deferred member penalties demonstrated that charges are already high in comparison with NEST, and I would like to know precisely at what point the Government might step in. Will the Minister clarify the governance and regulation around these issues, so that we can work together to find a solution that is best for employees and supports employers?
On new clause 10, it is important that automatic enrolment increases access to good value pension schemes for all employees. As we have heard during our discussions, too many employees have no pension cover at all. There must be no reduction in consumer protection, and the experience of stakeholder pensions shows that the best way of ensuring that is through product regulation. Consumer groups such as Which? have pointed out that most consumers find pension charges difficult to understand and would find it difficult to know whether their pension scheme offers a good deal. The new clause would require all qualifying schemes to meet existing stakeholder standards. That would help ensure that all pensions sold to employers as qualifying schemes would meet certain basic standards, including a charge cap of 1.5% a year for the first 10 years and 1% thereafter. There would also be restrictions on transfer penalties to avoid pension companies using hidden or complex charging structures to lock employees into poor value pensions.
The introduction of stakeholder pensions was successful in preventing the mis-selling of poor value pensions and charges were brought down. One impressive thing about NEST is its ability to talk in plain English. Its leaflets and the information that will go out to employees mentions high risk rather than high return. People might think that high return sounds like a good thing, but they may actually be looking at a high risk. NEST will not use the words “low risk” when describing pension funds because, as it says, no investment is completely low risk or has no risk. Instead of low risk, NEST will talk about low return, and the use of language that is clear and readily understood is a welcome initiative.
No members of the Committee, and especially the Minister, would want a situation in which pensions are mis-sold. Often, however, mis-selling takes many years to come to light. Bearing in mind the resistance that business has to further regulation, will the Minister assure the Committee that there will be sufficient regulation to ensure that inappropriate pensions are not sold in the first place, rather than regulations being introduced after the event?
The new clauses are important and raise the issue of the charging structure for workplace personal pensions. I thank my hon. Friend the Member for Erith and Thamesmead for tabling them. The new clauses seek to ensure that the scheme into which an employee is automatically enrolled is fit for purpose and high quality. Employers can choose from a range of schemes including NEST, but there is nothing to stop a disengaged employer from choosing an inappropriate pension scheme that is unsuitable for their employees. The new clauses seek to address that risk.
Some groups are concerned that without some form of regulation, the programme of automatic enrolment could be undermined. The Royal Society of Arts recently stated that
“the view that less regulation is required, is deeply dangerous for the success of pension auto-enrolment. Further, the view that action can be taken if it seems pensions are mis-sold, forgets that if these pensions are found to have been mis-sold, this will result in individuals withdrawing from pension provision. But much of the mis-selling may not come to light, because, as with endowments, it can take many years, if ever, for such mis-selling to become apparent. If we know what constitutes an inappropriate pension, this should be regulated against before it is sold, not after the mischief has taken place.”
Therefore, new clauses 6 and 10 seek to introduce some form of regulation to make automatic enrolment work for both employees and employers, who have to choose the pension scheme that they will automatically enrol their employees into.
The starting point, as it has been for all other amendments, is the Turner report. It recommended on page 306 that auto-enrolment into a defined contribution scheme should be permitted only if
“the combined employer and employee contribution exceeds the combined level in the NPSS”,
which is the precursor to NEST,
“(taking into account the level of charges)”.
The Committee consensus is that NEST is doing a good job and is a suitable pension scheme, particularly for small businesses. NEST fees have been set at 0.3%, although with a 1.8% contribution levy at the start to cover costs, levelling out to 0.48% overall, which will decrease in 20 years once the loan has been paid off. The 0.48% level is comparable to the 0.4% to 0.6% annual management charges that can be expected, excluding commission. However, there are some serious worries about how other schemes will be regulated and the fees that they will be allowed to charge.
“we know of no reliable source to back up the government statement that a majority of DC pension schemes have charges of less than 1%. Default funds typically have charges of 0.4 to 0.6%. These figures have been provided to the DWP by pension providers in qualitative studies, they have not been evidenced, and in any case refer to current large employers, not to those small employers who will typically be affected by auto-enrolment.”
That is because they do not currently have pension schemes. The report continues:
“The most comprehensive attempt to work out pensions costs, amongst smaller funds, such as those to whom auto-enrolment will apply, is a quantitative study for the DWP, which reveals an average cost of 1.53%. This means that, over a pension lifetime, an average saver is losing 40% of their possible pension on fees. Many are losing much more. The study also reveals that existing employers do not understand pensions charges. Many for example do not realise that the costs are charged on the outstanding balance, rather than the contribution made”.
The report also repeatedly demonstrated that small changes in charges can seem, at face value, insignificant, but,
“over the lifetime of their pension, a 1% charge will reduce the potential pension payout by 25%. A 2% charge will reduce it by 50%”,
if it is on the full balance. The report continues:
“Further there are hidden charges, beyond those declared, which even sophisticated purchasers find it difficult to untangle.”
More generally, fees and charges are central to trust and predictability, which are important in long-term financial planning, and therefore particularly for pensions. The fact that someone who has saved throughout their employment stands to lose a potentially substantial proportion of their income as a result of hidden fees and charges erodes trust in savings. It also damages the predictability of retirement income, and therefore erodes the likelihood of getting people into the habit of saving and to trust that those savings will result in a decent pension income in retirement. Predictability and trust must play a part in ensuring that people have adequate pensions savings.
In the world of the stakeholder pension, there are some safeguards for the employee about the level of fees and charges that can be expected. Those safeguards do not, however, carry across to the automatic enrolment schemes outside of NEST. New clause 10 explores the possibility of encouraging the employer to take safeguards into account when choosing a scheme. It is important to consider the proposal, because automatic enrolment changes the nature of employers who are providing a pension. Neither the employers nor the employees are necessarily sophisticated consumers. Many of them will have little experience of pensions, yet they are being asked to make big decisions that might result in accusations of mis-selling later down the line.
Even larger employer schemes have been involved in mis-selling scandals that have eroded trust and confidence in savings. Many employers will make a positive contribution and will search for the best options for their employees because they recognise the value of giving them proper and decent workplace pensions. However, small businesses are worried about the regulatory burden. Limited capacity might frustrate the best intentions and some employers might not act in their employees’ best interests. The biggest concern, however, is the information available to employers and the regulation of the schemes that they have the opportunity of choosing.
Many of the reforms are designed to allow for the practicalities of a small business, which is welcome, and they are supported by employer groups. When the measure was mooted and then presented in the Bill, it became clear that employers were not necessarily in the best position from which to protect their employees from hidden fees and charges. We must ensure that protection applies in relation to the level of fees and charges that an employee can expect. Again, drawing on the evidence of the RSA, studies have revealed an average cost of 1.53% in smaller funds, which equates to up to 40% of the possible pension value over its lifetime being consumed in fees and charges. Clearly, when neither employer nor employee understands pension charges, dangers to the consumer are increased. If people find that their savings are whittled away by excessive charges because of the options selected by their employer, the very aims of automatic enrolment might be threatened.
I thank my hon. Friend the Member for Erith and Thamesmead for tabling new clause 6, which addresses particular concern about the increase in charges levied by some companies when people change jobs. The new clause calls for employers to be required to take into account the level of such fees and charges when deciding their contributions level. My hon. Friend referred to Which?research, which has found that some companies charge an annual management fee of between 0.5% and 0.7% for active members. When a member leaves, however, the charges might double to between 1.2% and 1.5%. According to Which?, given that 60% of people who start contributing to group personal pensions stop doing so after four years, mainly due to job changes, a substantial proportion of people might end up paying those higher charges, which would far exceed the charges that they would have been paid in to NEST, which applies no higher charges for non-active members.
Such high charges might have a big impact on the pension received by consumers, which might have reduced at their retirement by approximately 25%. The insurance companies that operate the practice call it an active member discount, but Which?, my hon. Friend and I agree that the more appropriate title would be a deferred member penalty. Does the Minister accept that whether the change is regulatory or legislative change, the Financial Services Authority and the Government must address the genuine concern that no one is looking after the interests of past employees or deferred members? Does he accept that such extra charges are currently penalising people who regularly switch employer?
There is also serious concern about the FSA’s proposals to allow employers to negotiate consultancy charges with their advisers, which would be deducted from their employees’ pension pots. There is a clear risk that excessive deductions might be negotiated with the employer to the detriment of the employee—the future retiree. The FSA has confirmed that it has no problem with deductions being made of up to 35% of the first year’s group personal pension contributions. Does the Minister agree that either there must be more highly specified quality requirements, or employers must receive better advice, with advisers being required to benchmark charges against those in NEST, which are much lower, to ensure that the workplace personal pension provides good value for money?
During the debate in the other place, the Minister with responsibility for welfare reform said that
“if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a…cap for qualifying schemes and auto-enrolment schemes.”—[Official Report, House of Lords, 3 March 2011; Vol. 725, c. GC249.]
In the light of those comments, will the Minister explain what steps he is taking to research the level of charges and fees in qualifying schemes and auto-enrolment schemes? Will they be actively monitored and, if necessary, acted on in advance of the review in 2017? Will the Minister explain at what point he would deem it necessary and appropriate for the Government to regulate under the 2008 Act if excessive charges are applied by automatic enrolment schemes outside NEST?
The new clauses would be important to ensuring the success of auto-enrolment, and I welcome our discussion on Thursday. I hope that the Minister agrees that if we want automatic enrolment to succeed, we must also ensure that the scheme into which an employee is automatically enrolled is fit for purpose, of high quality and transparent. We must also ensure that it is not exposed to excessive fees or charges that might erode the value of the pension and undermine trust in pensions. That will be important if automatic enrolment is to work and to carry the confidence of both the people who are most likely to benefit from it and the employers, who have to make important decisions for their employees without always having the necessary expertise and experience that larger firms have.
The issue of charges is very important. It has been raised very helpfully, and I want to respond constructively.
However, I want to apologise to the Committee that during the scramble of the last seven or eight clauses, I moved Government amendment 9 to clause 10, but because I spoke about clause 10, I did not correctly describe new clause 2, which we were also discussing. I had already written to the Committee to explain what it does, but I want to read into the record that the purpose of new clause 2 is to give employers offering pension schemes, such as money purchase ones, where the scheme has its main administration in a member state of the European economic area, the option of self-certifying that their scheme meets the relevant quality requirement. To clarify, the purpose of the new clause, about which I had already written to the Committee, is to give the small number of schemes in the EEA the power to self-certify. I apologise for any confusion that I may have created. I am sure that other members of the Committee had spotted my mistake, and I wanted to correct the record.