Let me spend a moment or two running through the clause. We are on a totally different topic. The Committee will be relieved that we have done automatic transfers and can now move on to some of the other important issues in the Bill.
Clause 30 would give a backstop legal power that we hope not to use. So keen are we not to use it or leave it lying around on the statute book, that its sunset is in clause 31. Clause 31 says that if we do not use clause 30 within seven years, it falls away. What is the power in clause 30? One of the first pension scandals that I came across as a Minister was enhanced transfer value exercises, or ETVs. A variant on ETVs is known in the jargon as PIEs, or pension increase exchanges. There is nothing inherently evil in an enhanced transfer value, in other words, swapping rights in one scheme for rights in another. There is nothing inherently evil in a pension increase exchange, that is, giving up inflation protection that is not statutory in return for perhaps a higher starting pension. There is nothing wrong with any of that, but how it was being done was very wrong.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East referred earlier today to pensions mis-selling. Many enhanced transfer value exercises were of a similar nature. A defined benefit pension scheme trying to reduce its costs and volatility would bring in consultants who would write to scheme members saying, “Would you like to transfer out some of your rights under this scheme in return for a big bung?” I do not think that “bung” was technically the word that they used, but a cash bung is what it was.
The scheme would say, “You’ve got these really rather valuable defined benefit pension rights. Give them up, and we’ll put some money into a defined contribution scheme for you.” The rules on valuation often meant that the cash value that people got was not as good as the value of the rights that they were giving up. They could not access their pension money early, but they could take a cash incentive in an incentivised transfer exercise. People were doing that, and firms were saying things like, “We’ll pay for independent financial advice, but it’s only free if you accept our offer.” If, after taking independent financial advice, people decided not to take the offer, they had to pay for the advice.
People were rung up late at night and told that, unless they replied by 9 o’clock the next morning, the offer would lapse, and so on. Vulnerable and elderly people were offered large amounts of cash to give up valuable pension rights. The question was always, “If it’s in the scheme member’s interest to take up the deal, why are they being offered it?” The answer was that in many cases, it was not remotely in their interest. I have seen examples regarded as good practice, astonishingly, in which the employer said, “Of the value of the rights you’re giving up, we’re taking 40% and you get 60%.” It’s the equivalent of writing a letter to somebody saying, “Dear Mr Smith, this morning you had £100 in your bank account. Would you like to sign this piece of paper, and we’ll give you £60 back?” That is the kind of thing that was going on.
We took the view that that was unacceptable. I tried to use my office and the power of moral persuasion to make that clear. I held up brochures for schemes at the annual conference of the hon. Gentleman’s favourite trade body, naming and shaming. The power of public opinion and good practice started to change behaviour in the market, and the frequency of such exercises started to drop, but they were still happening. When trying to estimate what seven years’ service in a final salary pension scheme 10 years ago was worth in cash, how were people expected to know what fair value was? They clearly were not getting fair value. We have taken the view and made it clear that that sort of thing—offering cash incentives to bribe people into giving up good-quality pension rights—is just not on. If people want to swap one sort of pension right for another and it is only pension-to-pension transfer, that is one thing, but cash incentives were off.
We decided to work with each of the people in the value chain, if that is the right phrase in the context. We worked with advisers, actuaries, accountants, employers, employer benefit consultants and so on. I am grateful to Margaret Snowdon, who chaired the group that brought together people who spent hours of their time working on a code of good practice. I have it in my hand: “Incentive Exercises for Pensions: A Code of Good Practice”, published in June 2012. Essentially, it was the industry saying, “We accept that we need to clean this up, and that there are things that shouldn’t be going on. We will sort out our own house.”
I am pleased to say that that is happening. The volume of the exercises has dropped dramatically. We worked with the then Financial Services Authority, which changed the rules and guidance about how the calculations had to be done. As a result, few such exercises now take place. The code of practice indicates that where any exercise of that sort is taking place, certain things should be done. There is a lot of detail here, for anyone interested, in terms of information for members, independent financial advice and so on.
We do not object to transferring one sort of pension right to another; what we object to is the use of cash bribes to get people to give up complex pension rights that they may not even understand. Clause 30 gives us the power, if we think that our code of practice is not working and we spot bad practice re-emerging, to use the force of law to stop it. As I said earlier, we do not want to use clause 30, and I would be as delighted as anyone if, under clause 31, clause 30 were to be sunset and never used. However, we thought that it was important, partly to underpin the work of the industry group, for the industry to know that if that practice continued, we would stop it.
In my many years working in the pension sector, that was one of the saddest things, and it was allowed to carry on for far too long. I welcome the measures, and I believe that many of my constituents who were unwise enough to accept cash incentives at a time when they appeared attractive will share my delight that the Minister has included the clause as an important part of the Pensions Bill.
As we have heard, my hon. Friend is chair of the all-party group on pensions and is knowledgeable about these matters, so I am grateful to him for his support.
I would be delighted. I am sure that the hon. Lady will study the record carefully to see the answer to her perfectly reasonable question, which was, as I recall: “You have these powers under clause 30 to ban these things, but how bad will things have to get before you ban them?” I paraphrase again, but only slightly. Let me clarify the situation; it was a perfectly fair question. As well as the code of good practice, we have an incentive exercises monitoring board. This is not a quango; it is the Government working together with the industry and stakeholders—those people coming together to evaluate the effectiveness of the code. The board will report back to Ministers three years after the publication of the code, which was in June 2012. It will advise on the extent to which the code has been followed. We are not constraining the way in which it does that work. If it advises that the code is not being followed and that people are losing out in an inappropriate way, we will use the powers under clause 30. I hope that that answers the hon. Lady’s question. With that, I commend clause 30 to the Committee.
Speaking for myself, I am delighted that the windows have been opened and sunlight is flooding into the room. With clause 30, the Minister is giving himself the powers to deal with, in law, a familiar refrain—the issue of pension liberation schemes, enhanced transfer values, PIEs and the like. He is right to do so, of course. I have just a couple of observations and perhaps one or two questions.
First, I do not want to misrepresent the Minister’s position, but he said that the Government try very hard to explain to savers that these schemes generally are not in their interest, yet the schemes keep proliferating, which takes us back to the issue of engagement and an informed consumer. It is worth reflecting on the fact that, generally, these kinds of scheme are not in the long-term interest of the saver, yet there is evidence that savers keep accepting these kinds of offer. That makes the point that Labour Members have been trying to make, to some degree, that often when it comes to pensions, it does not operate like a normal market and one cannot assume that the saver will always make a rational decision. That is worth putting on the record, because the continuing growth of pension liberation schemes and the like speaks to the issue of whether or not there is an informed consumer. That is point one; I think that it is a point worth making.
I read recently an argument from someone in the pensions space about the role of Her Majesty’s Revenue and Customs in all this. The Minister has picked up on that, but certainly the argument that I read—I am not clear on whether it is correct—is that HMRC has a role to play in all this, that HMRC enables these schemes to be registered—
To clarify, we are not talking under clause 30 about pension liberation at all. That is something completely different. This is about mainstream, blue chip companies offering their scheme members cash equivalents, plus a bonus to give up their rights under the scheme, to move them into another legitimate scheme. We are not talking about pension liberation fraud here.
It sounds like I am jumping the gun and so keen to see reform of the pensions system that I am bringing it into clauses where it does not belong. I take the Minister’s point and thank him for his guidance. He has given a precise explanation of what the clause deals with. The general view is, as you, Mrs Main, and the Minister will be aware, that dealing with such schemes is important, but we do not intend to divide the Committee on it.