Amendment proposed (this day): 18, in clause 35, page 18, line 42, at end insert—
‘(3A) In this section “administration charges” shall be defined in regulations by the Secretary of State after public consultation and taking advice from the Financial Conduct Authority and the Pensions Regulator to ensure that the definition takes into consideration the Financial Conduct Authority’s definition of “ongoing charges”, and shall include annual management charges, legal fees, administrative fees, audit fees, marketing fees, directors’ fees, regulatory fees and other expenses.
(3B) Such charges, together with any transaction charges incurred by the funds in which qualifying schemes are invested, shall be declared to the Pensions Regulator, which shall maintain a public register thereof. The Secretary of State shall define “transaction costs” in regulations after public consultation and taking advice from the Financial Conduct Authority and the Pensions Regulator. The Secretary of State shall by regulation 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. The standard shall be reviewed every three years. In addition, the Secretary of State shall have power to make regulations ordering other disclosure arrangements on charges.
(3C) Regulations under this section shall be laid down and approved by resolution of both Houses of Parliament.’.—(Gregg McClymont.)
Good afternoon, Mrs Main. Welcome back to our proceedings. You may be slightly startled to realise that, following the time your co-Chair spent with us this morning, we are back where we started. Ninety minutes with no progress reminds me of the English bowling attack trying to take the last Australian wicket, although I gather that that has now been achieved, so perhaps we will now make some progress.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East brought to our attention something called the doughnut of charges. Unfortunately, a bit like a doughnut, his argument had a big hole in the middle—that is what we get when we have an hour at lunchtime to think about such things. I want to explain to the Committee why the hon. Gentleman was building a whole edifice on a false premise. He was so far up the moral high ground that he was barely visible at some points.
The hon. Gentleman seemed to contend that, although between 1997 and 2010 the previous Government did little or nothing on charges, for the present Government to point that out misses the point. His line is, essentially, “I wasn’t there, it wasn’t me, and we didn’t get everything right”, which is an understatement. He seems to contend that since 2010, nothing much has happened on charges and that the only trigger for any action was when the leader of the Labour party—whom I think was in the previous Government’s Cabinet—discovered pension charges last year and shared his insights with a grateful nation, since when things have started to happen. I do not recall that that is what actually happened. I hope to clarify the action the Government are taking on pension scheme charges and why amendment 18 is both ineffective and unnecessary.
The amendment would define something called administration charges after consultation, which is always good; there is a review coming later. The Secretary of State would consult and take advice—always good things to do—and listen to various public bodies and then define administration charges. Then there is a list of things that would be counted, and there is an “and other” on the end of the list. The hon. Gentleman shared with us the doughnut of charges, which had a litany of pension scheme charges: the ways in which money can be taken out of people’s pension schemes.
I agree with the hon. Gentleman that the industry can be very creative when it comes to finding ways to get money out of people’s pension schemes. I entirely accept that point, and that is precisely why we need flexibility to act and to define charges broadly, rather than having half-lists. Legislation that is full of half-lists does not achieve its stated purpose. He mentioned a whole set of charges that are not in his amendment, and then said, “Not to worry—they are in ‘and other’”. It seems odd to say that these things should count and then—I paraphrase his amendment only slightly—“anything else we haven’t thought of”. That is an odd way to make law. There is either the purpose of being specific or being broad, but we should not try to be both in the same amendment, which is what his amendment does.
To be clear, our existing powers give us greater flexibility than those proposed in the hon. Gentleman’s amendment. I am sure he will be familiar with section 16(4) of the Pensions Act 2008, which effectively sets out that an administration charge—the phrase he uses in his amendment—is due whenever any payments are made to the scheme and any investment returns or the value of any rights under the scheme are used in any way that does not result in the provision of pension benefits, including in defraying administrative expenses and paying commission. So we already have a broad, general power to define charges. Amendment 18 is less flexible. It tries to put some things in, misses other things out and says, “Not to worry, we will just call them ‘other’”. It does not achieve what the hon. Gentleman set out.
So the existing power we have in section 16(4) of the 2008 Act—together with the powers in section 144 of that Act—to make different provision for different cases gives us wide flexibility to provide for different types of charges, including those listed in the amendment. The first part of the hon. Gentleman’s amendment is a noble stab at thinking off the top of his head of some things that might count, but as soon as we start listing these things in legislation, there is always a danger that someone will invent a new way of taking money out of schemes, and what we need is a general power. The good news is, we already have a general power in the way that I have described, so his amendment does not really seem to help us very much.
The Minister has ably dismissed the key substance of the amendment. Could he address one point which came up earlier: fees for stock lending? They are a revenue to the fund, rather than an expense, and the fund managers are using members’ assets. Are scheme members given proper account for those fees?
I am grateful to my hon. Friend and I commend the assiduousness with which he has followed these proceedings, both at Second Reading and in Committee. He may be interested to know that the Kay review on equity markets had a specific recommendation on stock lending. Interestingly, recommendation 10 was:
“All income from stock lending should be disclosed and rebated to investors.”
The Government’s response said:
“The Government agree that stock lending activities should not bring about misaligned incentives for asset managers or other intermediaries, and therefore supports this recommendation.”
I will not read out the whole response, but the Government go on to say:
“We believe that the best way to address these problems is for asset managers and other intermediaries undertaking stock lending to disclose separately both the total income generated for their client from stock lending and any costs associated with undertaking the activity.”
That recommendation is reflected in the good practice statement for asset managers, which signals Professor Kay’s intention to improve behaviour through the development of industry good practice.
One issue that has come up is the extent to which one uses good practice guides, codes of practice and the like, or the letter of the law. We have tried to strike a balance between firm regulatory action where that was necessary and urgent—such as banning consultancy charges, as we have done—and legal frameworks that allow us to react to a constantly evolving market. Here, the Kay review has identified an important issue, as have my hon. Friend the Member for Rochester and Strood and others. The review has indicated that action is needed, and the Government have responded positively.
On the point made by the hon. Member for Rochester and Strood, did the Minister say that there is now a good practice code but no teeth to stop such stock lending taking place?
If I may refer the hon. Gentleman back to Tuesday’s discussion about the code of practice on incentivised transfer exercises, that has been an example of getting the industry together to sort its act out. It has been highly effective and has delivered the goods. Although we have taken reserve powers in the Bill to make sure that it happens, we anticipate not needing to use them because the industry has bought into the need for it to sort things out. Clearly, if the industry fails to do so, despite these issues being highlighted, we have the ability to take further action.
To spare the hon. Gentleman, I did not read the whole of the Government response, but it continues:
“The Government’s progress report in Summer 2014 will assess to what extent the investment industry has responded to this recommendation and what further action might be appropriate in the context of relevant EU policy developments in this area.”
I mention that because we are not legislating in a vacuum but in the context of an EU-wide single financial market. Again, it makes a great headline to say, “Ban this, cap this, regulate that”, but we are significantly constrained in that regard. Therefore, we are taking this measured approach, getting the industry on board and getting the code of practice in place, but monitoring carefully, willing to take further action should that prove necessary. We could keep the House sitting through this and every summer, and Christmas and Easter—there is always something else you can ban, cap, regulate or legislate for. The challenge is to strike the right balance between ensuring that people sort things out for themselves and make progress, and where that is not possible, legislating and regulating.
Just to be clear, the sort of situation the hon. Gentleman has been describing has been a feature of the industry from—to pick a random period—1997 to 2010. We are tackling these concerns systematically, wherever possible working jointly with providers, the industry and the trade bodies of whom I know he is a fan to try to ensure that good practice becomes the norm, while keeping the regulatory and legislative approach available. Indeed, we have used it quite promptly, as in the case of consultancy charges. I think he will see that I am not, as it were, a one-stick golfer, as the phrase used to have it. We will legislate where that is the quickest and best thing to do, as we have done, and work with the industry and monitor its performance where that is the best thing to do.
The Minister is absolutely right. The truth about stock lending and the reason why the Government’s response to the Kay review is appropriate is that it was not actually a cost to anyone in a pension fund; it was an additional source of revenue for the asset manager. If, therefore, the Government’s response is effectively saying, “Should you generate any revenue from your stock lending, that revenue must be accredited to the holders of the units within the fund”, and if, for example, it was a unit trust, that removes a large part of the incentive for the asset manager to do the practice in the first place.
There is, of course, a risk to stock lending. It is not an enormous risk for much of the time, but in 2008, when credit lines suddenly dried up and one found that Lehman Brothers had ownership of the stock, there was potential risk and there would be no incentive for the asset manager to take that risk now if they are not going to generate the revenue themselves.
I am grateful to my hon. Friend, who speaks from great knowledge of these dubious financial practices—from his study of them, I should say. He is quite right: stock lending is not just a pension fund issue but a wider investment issue, especially relating to hedge funds. We have to look at these things in the round and not just in the narrow pensions context.
May I challenge the assumption that there would be no incentive for the fund manager to undertake the dubious practice described if they were not allowed to rake off a bit of money for themselves? Surely some of these fund managers seek to operate in the interests of their clients, and in some cases there may be a duty of care or fiduciary duty. Even where there is not, surely at least some will want to act in the best interests of the members.
Yes; just to be clear, my reference to dubiousness was, first of all, not to my hon. Friend the Member for Gloucester, nor necessarily to stock lending. We are not proposing to ban stock lending, but the process should be transparent and the right person should benefit from it. My point was that the Kay review was concerned about a mismatch of incentives.
The first part of amendment 18 gives us this half-list of things that we can cap or ban, but we can already do all these things, so it does not really add anything. The second part says that the charges should be declared to the Pensions Regulator and that there should be a public register of these things. We should bear it in mind that a few sittings ago, the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East told us that there are 40,000 of this sort of pension fund and 40,000 of that sort of pension fund, so I assume he is talking about a register of tens of thousands of schemes.
Okay; I am not entirely sure I follow the hon. Gentleman. Clearly, a substantial register is proposed that will presumably have to be routinely updated. Therefore, whenever the charges change or the way the scheme covers its costs changes, someone has to report to the Pensions Regulator. I do not know how often these things happen, but presumably there is a kind of constant reporting duty going on here, which seems a bit strange. It would have to be up to date; otherwise, people would not be able to rely on the register for an up-to-date assessment of their pension scheme. There is a pretty heavy reporting requirement.
The hon. Gentleman suggests in his amendment that the Secretary of State shall set regulations for standards for declaring charges and transaction costs—and then there is a three-yearly review of all of that. My hon. Friend the Member for Gloucester was right to highlight that three years seems a pretty arbitrary period. The risk with this sort of process is that the cycle is simply too slow. We have observed that the pensions industry moves quickly and adopts new structures, so just to have a look every three years to make sure it is all ticking over is behind the curve. The hon. Gentleman suggested that we were somehow running to catch up. However, a rigid, primarily legislative structure—rather than the ability to move fleet of foot, as the Government do, to tackle issues and regulate where necessary—has got to be slower. His whole approach is very bureaucratic, rigid and stuck in primary legislation, which does not seem to us to be the right way forward.
I am sorry to stop the Minister in full flow. Will he comment on why the Office of Fair Trading is undertaking its inquiry into the pensions market? Is that not evidence that the Government have had three years to sort things out and have not done anything? Maybe that is the best argument for three-year reviews. The Government have had three years and they have not tackled the problem.
As I shall demonstrate, the suggestion that we have done nothing on charges in three years is an extraordinary mischaracterisation of what has been going on. I gently point out to the hon. Gentleman that what has changed in the recent past is automatic enrolment. We had the status quo, as it were, the stock of workplace pension provision which has been in long-term decline. The big change was eight months ago and the early signs are that people are, in general, being automatically enrolled into high-quality pension schemes.
The challenge for us first and foremost is to make sure that people are automatically enrolled in quality pension schemes—we are publicly consulting on that as we speak—and then to make sure that those standards are spread beyond automatic enrolment into qualifying schemes. The concept of qualifying schemes was invented before this Government came to office, but with staggeringly little quality standard. The last Government should be ashamed of setting up a system whereby employers put 10 million people into a pension scheme with almost no minimum quality standards.
If one were to take together all the amendments that the hon. Gentleman has tabled, it would be a litany, an apologia, a list of things that the last Government failed to do and things that we are now condemned for allegedly not having done in three years that they did not do in 13. A little humility on that point would not go amiss.
Absolutely not and I shall run the Committee through a good deal of what has happened over that period. Going back to the point in amendment 18 on the three-yearly review, we clearly need to move faster than that. It is no good saying that we will have another look in 2016 or whenever. Proposed new subsection (3C) in amendment 18 refers to regulations being approved by a resolution of both Houses. Again, that gives the impression of scrutiny and rigour, but it is essentially process. What the hon. Gentleman lays down for us is that every time we want to extend the list of what counts as a charge, we would need a 90-minute debate just to get Parliament to say that it was okay. This is not fleet-of-foot, lightning-fast reaction to new trends in the pensions industry. This is bureaucratic plodding, primary legislation driven, three-year reviews—the absolute opposite of what the hon. Gentleman urges us to do.
The hon. Gentleman’s lack of experience in government shows ever so much. Coming up with affirmative regulations takes a teensy bit more than 90 minutes, I can assure him of that.
The amendment does not seem to add anything. It does not give us powers that we do not already have, and actually creates a half list, raising issues about why things are or are not on it. It requires a bureaucratic structure to allow a future Government to put new things on the list of charges that can be capped or regulated, which seems bizarre to us. It then has a rigid renewal structure.
The Minister has emphasised the amount of time that it takes—which he knows as a Minister—for the regulations to go through the positive resolution procedure. Is he suggesting that when they are by the negative resolution less time and attention is put into drafting them?
It is more a matter of parliamentary procedure. Clearly we are meticulous in our drafting of regulations, whether they are affirmative or negative, as I am sure my hon. Friend would expect. I do not know the exact number of statutory instruments produced every year—I might be about to, but I do not know currently—but I suspect it runs into four figures. I imagine it is of that order. Only a tiny fraction of those are subject to the affirmative procedure, because they are the ones that really need a good looking over and that sort of scrutiny. The idea that adding a type of charge to a list of charges that we regulate needs the full-blown scrutiny of Parliament seems an absurdity.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East asks what we are doing. We already have powers on disclosure, which are mentioned in the amendment. For example, section 60 of the Pensions Act 2004 gives us the power to make administrative charges registrable to the Pensions Regulator if we wish. Section 61 of the same Act gives us the power to make regulations to prescribe to whom that information may be provided. Section 113 of the Pension Schemes Act 1993 gives us the power to prescribe that information on charges be made available to scheme members or employers. The hon. Gentleman would reinvent statutory powers that are already there.
The hon. Gentleman mentioned various industry groups, including the National Association of Pension Funds, the Association of British Insurers, the Investment Management Association and others, which have worked together. I shall clarify for the Committee where we are on the matter. In January this year, the ABI launched an agreement on the disclosure of costs and charges to members of work-based defined contribution pension schemes; to date, 14 major providers have signed the agreement. What have they committed to do? They have committed to disclosing all charges and costs in a consistent way to members, not only at the outset, but annually—drawing on the work of the Investment Management Association—to ensure the disclosure of costs. Crucially, a common definition of all the charges that need to be disclosed at the outset to members of pension schemes will be developed over the first half of this year.
There is a huge amount going on. The January agreement did not get written over Christmas; it followed an awful lot of pressure, including pressure from the Government. It has led us to the point where now the trade bodies are almost outdoing each other in trying to improve clarity and practice on charges. I regard that development as entirely welcome.
We will look carefully at how far that commitment is delivering the sort of transparency and clarity we want. At the Office of Fair Trading, our colleagues—they are independent, obviously, of the Department for Work and Pensions—are working on the DC market. I point out that the Office of Fair Trading did not look into these matters under the previous Government; it is investigating them under this Government. The hon. Gentleman would be the first to accept that concerns about charges did not start in 2010; there have been perhaps even bigger concerns about what he calls legacy charges for a very long period, but it is this Government who are overseeing an OFT inquiry. I will tell the Committee a bit more about where the OFT has said it is in that inquiry.
That was a very prescient intervention, because I was about to tell the hon. Gentleman about the OFT inquiry. The OFT has put a notice on its website today, updating the public about where it is in its investigation. It is highlighting a number of issues about the DC workplace pensions market as being of concern; those concerns very much chime with the ones that I and other people have been raising.
The first thing the OFT mentions is governance, where there are clearly issues. The Department published its own consultation on quality in DC pension provision, and we are already consulting on governance. The OFT also raised the issue of active member discounts, a subject that I am certainly concerned about and that I know the hon. Gentleman is too.
That seems a natural point to pause and deal with the issue of active member discounts. In an exchange on Tuesday, the hon. Gentleman said that the use of active member discounts was typical. I intervened to give him some information from the DWP’s survey of charges, which indicated that it was far from typical. He replied, “Ah, but the DWP’s survey asked employers, and lots of employers don’t know what the charges are.” I entirely agree: it does and they do not. As it happens, our survey of charges is probably one of the best out there, and is run by an independent research organisation. We do not just talk to the employers; we also talk to the providers. We gather supplementary information, and not just from the schemes: we do research with leading pension providers, to provide context and deeper understanding of charging levels based on data for new schemes sold in the previous 12 months.
If we were to rely on the employers who said that they did not know what the charges were and just guessed at them, the hon. Gentleman would be the first to condemn us for using slightly dodgy data, so of course we only published data from people who said that they knew what was going on. I do not dispute the fact that not enough employers know what the charges are in a scheme; that is not what is at issue between us.
It is not just our own survey. On one occasion, the hon. Gentleman tells me off for not using what he calls our survey, and then on another he tells me off for using our survey. To give him further evidence, an independent survey undertaken by Towers Watson this year on the FTSE 100 companies’ defined contribution pension schemes found that fewer than one in five employers operates a different charging structure for deferred members.
I have a couple of points. First, the FTSE 100 employers are the biggest in the UK, but most people would agree that the big problem with charging is with smaller employers. Therefore, I am not sure whether that survey is convincing on the use of active member discounts. The Minister needs to consider that.
The Minister says that I was telling him off, I would never do that. I am not saying that he should look at one DWP survey and not another; I merely pointed out that the way he portrayed the statistics from the 2012 report could inadvertently give a misleading impression of the situation in terms of what employers know. I am delighted that the DWP undertakes those surveys, but as he recognises, until employers know what they are being charged, surveys will always come up against that problem.
I do not think that there is a huge difference between us. The point I was trying to make by citing statistics from the survey—I accept that the survey is limited, as all surveys are—was that the hon. Gentleman’s assertion that active member discounts are typical is not correct; I do not think that there is any evidence for that.
To be clear, the Towers Watson survey was on the 100 biggest employers in the land and they cover a significant proportion of the work force. The hon. Gentleman may say that there are lots of small schemes, but the vast majority of people work for larger employers, not small employers. Therefore, by covering the largest schemes, we get a good picture from Towers Watson. The DWP survey, however, is more comprehensive; it covers the range of the market.
Just to clarify, it is the case that most firms are small; we know from automatic enrolment that there are in the order of 1 million small firms. However, there is quite a gap between the FTSE 100 firms and micro-businesses. I am not saying that everybody works for a FTSE 100 company.
The hon. Gentleman should bear in mind that many people who work for small firms have no pension provision at all; that is important. A third of the private sector work force are in workplace pension schemes; two thirds are not in schemes at all. Overwhelmingly, people who are in pension schemes work for bigger firms. Therefore, if we cover the biggest firms, we get a full picture of what is going on, so he should not make such assertions when he has no evidence for them.
However, that raises a wider point. Occasionally, Oppositions are accused of talking down the economy, but in this case there is a danger that the Opposition are talking down workplace pension provision. From long and bitter years in opposition, I know that it is ever so easy to get a headline by saying something extreme and outrageous—things such as “shocked” and “appalled”—about pensions and workplace pensions. However, every time another of those stories appears in the newspapers, someone decides to opt out of automatic enrolment because they hear people saying that such schemes are all a bit rubbish.
I encourage the hon. Gentleman, and, through him, the leader of his party, to focus on the real issues and to use real evidence and not take an extreme example, as his leader did, of a scheme that was wholly unrepresentative and would never be used for automatic enrolment.
I have not quite finished the sermon.
There is a real danger that what could be a success story—getting millions of people into quality workplace pensions—will be undermined if the reputation of workplace pension provision is sullied. That does not serve the public good. I simply urge the hon. Gentleman to be fact-based, rather than asserting that such charges are typical, for which he has no evidence, and to be measured about the scale of the issue. It is clear that charges are coming down. He suggested that only annual management charges were coming down, but it stands to reason that a major employer negotiating with alternative pension providers for automatic enrolment is not doing its job properly if it cannot drive a better deal for a much bigger work force.
I will give way to the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East first, but I am happy then to give way to the hon. Lady.
I caution the hon. Gentleman. I know that his heart is in the right place and that he wants what is in the public interest, but I ask him, before he presses send on his next press release, to ensure that he is assisting the public good.
To be fair to the Minister, he shows great self-knowledge because his speech did become a bit of a sermon.
The problem for the Minister is that it is not just the Labour party saying such things, but a wide range of organisations and people, including members of the governing party and Mrs Thatcher’s favourite think-tank. That is the problem for the Minister. If it were just me, he would have more credibility and could traduce me to his heart’s content, but it is not just me. I am simply one person in a crowd of organisations who recognise that the market does not work effectively.
I very much welcome the scrutiny from the Work and Pensions Committee, which was right to highlight concerns about pension scheme charges.
I was describing the things that the OFT has flagged in its note today. I have had a couple of meetings with its representatives just to touch base on how their work is going and I welcome the fact that they are flagging active member discounts. In a sense, I am not arguing to the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East that active member discounts are not a problem that I suspect we need to address, but rather I am arguing about the assertion that they are one of several typical issues. We have to get it right. It is ever so easy just to say that we should ban active member discounts, but we should always ask ourselves what is next. This is money that schemes are currently recovering from people who are not active members of the scheme. If we ban that, what will the schemes do? Will they simply recover the money from every member of the scheme? Will it just lead to a levelling of charges, with charges going up for active members and down for deferreds, as a result of which there will be no extra pension income at all? It might be that that is exactly what will happen and that might be fairer and right, but we need to think through the consequences.
That is why amendments, such as amendment 18, that risk pre-empting what the OFT is likely to conclude are premature. A respected organisation like the OFT is looking in detail and gathering just the sort of evidence that the hon. Gentleman says that we do not appear to have enough of, but he wants to pre-empt its findings. He says we should have done this stuff and that it all would have been done if he were the Minister. On the basis of what evidence that would have been done, I have no idea. The OFT is reporting later this year and we will take seriously what it has to say.
I have mentioned governance and active member discounts. The OFT is also concerned about the use of adviser commissions, which may not offer the best value for money in some auto-enrolment schemes. There is an issue of scale, which we raised in the consultation document that we have already published. The OFT also raised the presentation of charges, the need for comparability there and the issue of legacy schemes. We have raised a number of concerns and I am pleased to see that the OFT shares them and we look forward to its findings. My key point, in reference to amendment 18, is that we do not want to pre-empt those findings; we want to act on them. That is the difference. The hon. Gentleman wants a quick headline, but we want measured policy making that responds to evidence.
To clarify the point about where most people’s pension scheme membership is, the majority of people in a private sector DC pension scheme, which is what we have been talking about, are in ones with over 10,000 members, which is what as classed as a large scheme. Amendment 18 would not achieve what the hon. Gentleman claims, as it would tie our hands. We already have the powers that he wants us to have.
Let me end on a note of relative consensus. We all want pension scheme charges to operate transparently. We want them to be reduced. The hon. Gentleman suggested that we have not been quick enough and that, had we been faster, the policy would have been better. I shared a platform with his favourite trade body, the National Association of Pension Funds, the chief executive of which is Joanne Segars, for whom I have the highest regard. More than a year ago, she said that pension scheme charges were hard to understand, and that we needed charges in “pounds and pence”. Her key message was pounds and pence, not percentages and basis points. The NAPF could not do that. It worked with the industry and tried to find ways in which to present charges that were simply in pounds and pence, but such a process defeated the best brains in the pensions industry.
When someone who is very knowledgeable tries with good will to do the right thing when it comes to pension scheme charges and transparency, but is then unable to do so, that illustrates that such action is far from a trivial task. Tempting though it always is to ask why the changes were not done quicker, our key priority is to ensure that people who are being automatically enrolled, a process based on inertia, receive good-value pensions. That must be the priority. The whole process would fall into disrepute if we do not do that. That is why we have focused on automatic enrolment and timing.
Automatic enrolment did not start in earnest until October last year. We are still in its first year. There is no significant evidence from large firms that people are getting bad value for money, although there is the potential for that to happen. We are, therefore, consulting on quality indications. We will learn from the OFT’s evidence-gathering and produce further proposals later this year. There is a hive of activity on pension scheme charges. Far from the suggestion that we are somehow asleep on the wheel, we are, in fact, ahead of the game and are making sure that, by the time we get to the smaller firms where the risks are greater, an effective regulatory regime is in place—something that the previous Government did not leave us.
It is a pleasure to serve under your chairmanship, Mrs Main.
I listened closely to what the Minister said, and I found it to be one of his less convincing explanations of the Government’s position. Amendment 18 calls for transparency and disclosure of pension charges. In an intervention, the hon. Member for South Derbyshire endorsed full disclosure, but the hon. Gentleman said that such policy would tie the Government’s hands. He said that it was bureaucratic and restrictive. We must ensure, however, that Parliament keeps its eye on the ball. No one can doubt that this is an issue when Parliament needs to keep its eye on the ball.
The Minister described his contribution as a sermon, and I take what he said seriously except that it is not only me—the shadow Minister—and the Labour party who are so keen on full disclosure, but an enormous range of organisations, including those on the Conservative side of politics. They recognise that there is a real issue. I did not count the number of times during his response that the hon. Gentleman said “consultation” or “consulting”. That is fine, but consultation and consulting are not substitutes for action, and that is what we need on cost and charges.
The Minister has been in post for three years. He has made progress in other areas but, although he defended the progress that the Government have made on the cost and charges issue, it is not one of those policies on which the necessary progress has been made. That is why The Daily Telegraph, the Daily Mail, members of his own governing party and those from the Centre for Policy Studies have all outlined what measures should be place. In the end, we must remember that we are concerned with the saver. If savers do not know what they will be charged, how will they have confidence in the system going forward?
The Minister referred to headlines and press releases. We could have a cheap, political discussion about who said what—when, why and how? I am not interested in that in this context. He said that auto-enrolment was under way, and that we cannot have 10 million people being enrolled into schemes that are not high quality. I absolutely agree. However, the Minister could have taken action when he came into Government to ensure that the quality criteria were in place before auto-enrolment began. He has been in post three years, and he has not done enough on this.
I would like to take the Minister up on another important point. A thread throughout these discussions has been the difference between large and small employers. Large employers will get a better deal. They have the muscle, the resources, the expertise and the bargaining power to get an excellent deal. The Minister referred to the FTSE 100 survey and said that only one fifth of FTSE 100 companies with a DB or DC scheme have active member discounts. First, that is a fifth; a fifth cannot be dismissed. [Interruption.] The Minister says that is not typical, but that is the FTSE 100. How many employers are there in the UK?
The Minister gave us figures in a previous sitting on the applicability of the active member discounts, which we consider misnamed. I think the figures he gave were rather higher than this 80%. That might suggest that this would go the other way and that FTSE companies on average might be getting a slightly less good deal on that aspect.
The hon. Gentleman is right that it is clear in the DWP survey the Minister referred to only 140 out of more than 500 employers were aware that there were any charges as a percentage of the fund. Therefore, it is very hard to work out how many active member discounts have been practised when most employers do not appear to be aware that there are any charges as a percentage of the fund. My point is not to go back and have a go at the Minister. The point I keep reiterating is that in this field is a market where we do not know what is going on. We actually do not know what is going on. That is an extraordinary situation. That is why there is a broad mass of opinion saying that the Government need to get cracking on it. For those reasons, I will press for a vote.
This is an extraordinary situation. The shadow Minister has spent nearly three hours so far today saying that not enough has been done on pension charges. I can appreciate that he is striving to position himself as the people’s champion on the issue. However, his position is deeply undermined by the fact that he has consistently confused charges with costs with additional revenue. His list in the amendment is not comprehensive and almost certainly inaccurate. What we have seen in his revised clause 35 is yet another call for a triennial review of which there are at least 19 so far. That is not the way to go forward and help the people.
‘(3A) For the purposes of section 16, the definition of qualifying schemes shall include schemes in relation to which at the date of Royal Assent there are “deferred members” meaning members that have accrued rights in the scheme, but whose contributions are no longer being paid into by them or on their behalf, and who have not yet begun to draw pension benefits from the scheme.’.
The hon. Member for Gloucester, who is leaving the room, will be delighted to know that this does not involve a review. [Interruption.]Ah, he has popped his head back to celebrate that fact.
The justification for the amendment is that, as drafted, the powers in the clause to cap charges do not appear to apply to current stranded pots and schemes with active members, or to pots in closed-book schemes in which all the pots are stranded. Our amendment would bring in both groups.
As the Bill stands, any cap would not apply to current stranded pots and schemes that are qualifying schemes because they have other active members. Under the Government proposals, the cap will only apply to pots that become stranded after Royal Assent. That oversight should be corrected. It is particularly necessary for savers that it is corrected, because DWP publications on pot follows member indicate that the Government intends that current stranded pots should be exempt from automatic transfer rules, which we discussed at length the other day. Stranded pots are often subject to particularly high charges, which brings us back to the point about deferred member penalties, although the issue is not just about deferred member penalties.
We know the Which? evidence about the impact that active member discounts can have on stranded pots, but the problem is not just with active member discounts. There is a tendency for the AMC— vis-à-vis the active member discount—to double for someone whose pot is stranded. We know that because of the power of compound interest, over a 40-year period that can really eat into somebody’s pension pot. We have had surveys from the TUC, Which?, NAPF and others that say that up to a quarter of a pension pot can be eaten up if the AMC doubles. I would like the Government to consider bringing current stranded pots into the Bill in this way, so that the cap that the Government might or might not put on could apply.
The second group is closed-book schemes with only deferred members. There are no official figures of the number of people with pots in schemes in which all the pots are stranded. Specialist pensions press estimates that the number of people in such schemes is between 2 million and 6 million. That aspect raises again the issue that we just reflected on: in this market it is often unclear what is going on. Generally, it is not clear how many people are in closed-book schemes—by “closed-book”, I mean schemes that are not open to new members; they are closed book and do not take on any more members. We actually do not know the number, which says something about the opacity in the market more generally. To the extent that one is given, the justification for very high charges in those closed-book schemes—again, we do not know precisely, but throughout the pension market it is widely understood that there can be very high charges in the schemes—is that members benefit from guarantees. For example, closed-book schemes might have very high charges, but there is a guarantee of how much the pension must pay out. As one comes to retirement, there might be a guarantee about the level of annuity that one has to take out, which is not the case under most current annuity offers. However, we do not know. We hear that; I hear that and I am sure that the Minister hears that. The Minister might have more information than me, but we simply do not know precisely what is going on. We need to find it out very quickly. What we do know is that the highest percentage that any provider has claimed for the number of such people on guarantees is around 20% of its members.
There is a big issue with closed-book schemes. This amendment would bring current stranded pots, active schemes and pots in closed-book schemes in which all the pots are stranded inside the power to cap charges. I commend the amendment to the Committee.
Clearly, the hon. Gentleman is right to be concerned about the position of people whose money is in a scheme that they are not a member of anymore, or a scheme that is closed or frozen in some way. However, his amendment will not achieve what he wants it to achieve. Just to be clear, we agree entirely that deferred members should be protected from high or unreasonable charges in the same way as active members.
That is why the Government took a power in the Pensions Act 2011, which the hon. Gentleman’s predecessor shadowed, to cap charges for deferred as well as active members. We have, again, filled a gap in the powers that the previous Government had in place, and so used the 2011 Act that this Government brought in to give us the power to cap charges for deferred as well as active members. Clause 35, to which this is an amendment, will cover deferred members too whatever the circumstances of their deferral.
The problem with the hon. Gentleman’s amendment is that it does not have any specific legal effect. The definition of a qualifying scheme is not in any case confined to schemes with active members only, and so adding this does not help because we do not define qualifying schemes as only those with active members. Instead it creates some confusion. Qualifying schemes are defined in section 16 of the 2008 Act, but the hon. Gentleman is trying to put something into what I hope will be the 2014 Act. This creates both confusion and complexity because someone who wanted to understand what a qualifying scheme was would expect the 2008 Act to deal with it, but there would be some other bit stuck into the 2014 Act that had no cross-reference. Accepting his amendment would not help the clarity of the law and would not have any direct effect.
To clarify the substance of the issue that the hon. Gentleman raises about a scheme that does not have any active members, the provisions in clause 29 and schedule 16 allow for deferred members to be protected where the scheme is required to be an automatic transfer scheme. A scheme that has received or may receive an automatic transfer will need to meet the requirements of being an automatic transfer scheme. That helps us to deal with that issue under those powers. In particular, the existing drafting of the current section 16 of the 2008 Act already enables deferred members to be protected in qualifying schemes—those were our 2011 changes. The changes proposed in clause 35, as unamended, also enable deferred members to be protected in qualifying schemes. Clause 35 removes the specific reference to “former active members” and replaces it with “other prescribed persons”. This broader definition that we are proposing includes former active members, but it could go wider if necessary.
In short, we accept that there are issues about people who are no longer members of schemes and about frozen and dormant pots and so on. However, the way the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East proposes to address this is, we believe, deficient. We have powers to address the position of deferred members and to use the automatic transfer powers and that gives us the powers that we need, so we do not believe that amendment 19 is required.
The key thing in what the Minister said was that he considers our amendment deficient, but in defending the Government’s drafting he said it could go wider if necessary. This is about the Opposition wishing to clarify, and to place the Government in a position where they must do certain things, and the Minster wanting to leave his options open. We think it is so important that these two categories of pension pot must be brought into the Bill.
The hon. Gentleman says “This matters so we’ll have a vote anyway.” But surely he is not content to try to insert deficient amendments into the Bill when I have explained why it does not actually do what he wants? He is welcome to assert that this is an important group, but then to try to put an amendment that is deficient into the Bill just because it makes a political point does not seem a good way to scrutinise legislation.
We have covered a lot of this territory in amendments 18 and 19, but I take this the opportunity to clarify for the benefit of the Committee what the clause does as unamended. Clause 35 extends the existing power in the Pensions Act 2008 to cap administration charges in qualifying schemes used to fulfil an employer’s duties under part 1 of the Pensions Act 2008, which is the Act that paved the way for automatic enrolment. However, it broadens the existing power in the Pensions Act 2008, giving greater flexibility to allow the nature of any limitations on charges to be set out in regulations. Flexibility is an important word; I know the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East opposite wants to constrain us, but we want flexibility.
The clause permits the Secretary of State to restrict the kinds of charges that may be made by qualifying schemes, and it also enables the details of how any restrictions and limits would work in practice to be set out in statutory guidance. Again, we have another tier here. There is very rigid primary legislation, which comes once every few years at most. Then we have regulations with varying degrees of scrutiny and then statutory guidance, because we need to be able to issue guidance with statute behind it that would enable us to respond quickly where we identify that there are problems.
Why is clause 35 necessary? Obviously, automatic enrolment makes it all the more important for us to ensure that people are enrolled into schemes which offer charges that are both transparent and good value for money. The scope of charges covered by the existing power is very broad, but only enables charges to be capped at an amount to be proscribed in regulations. This clause ensures that we are able to regulate effectively to cover different types of charge structure, for example if we decided to implement a cap. It also enables us to prevent particular types of charges altogether. I cannot help observing in passing that the hon. Gentleman accused us of inactivity on charges. It is less than eight weeks since we banned consultancy charges. All right, it is a fair cop: it is eight weeks since I banned anything. I plead guilty to that. However, I think we have taken some pretty strong and effective action where necessary.
The point about clause 35 is that it allows us fully to protect members of qualifying pensions schemes from excessive charges, whilst responding effectively to market developments. We have already announced our intention to use our existing powers in section 17 of the Pensions Act 2008 to lay before Parliament regulations banning consultancy charges in automatic enrolment schemes. This power allows us to lay regulations banning consultancy charges in all qualifying schemes. This is an important point, which is relevant to what the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East was saying a moment ago.
There is a danger that, if we regulate only for automatic enrolment schemes, there will be an awful lot of legacy. There is the use of existing qualifying schemes so that people do not have to be auto-enrolled, because they are already in a qualifying scheme. If we do not apply the standards to qualifying schemes but only to automatic enrolment schemes, there is a set of people who are not covered. Clause 35 allows us to legislate for these quality standards, for example by banning consultancy charges, in all qualifying schemes. Obviously, as we said earlier, we will consult on options for taking action on charges, including the possibility of a charge cap on default funds in qualifying DC schemes in the autumn.
I hope that the Committee will agree that it is this Government who have enhanced their legal power to take action on charges, through this legislation and through the 2011 Act, and that we have already used those powers effectively as recently as about eight weeks ago. This is an effective and substantive response to the issue of charges, filling gaps in the very holey legislative regime that we inherited. I commend clause 35 to the Committee.
When the Minister mentioned “holey”; I thought he was going to give us another sermon. One can feel the Minister’s desire for the approbation of the Committee. He said that it is a fair cop and that he has banned consultancy charges, and isn’t that a good thing? Yes, it is. I congratulate the Minister on doing that. However, I think the Minister was struggling to find any other example where he has taken legal action on charges. He refers to giving themselves the powers. We on this side would like to see him use those powers more effectively. I thank the Minister for his explanation of the clause. We will not divide on clause stand part.