Alan Rubenstein: Good morning. I am Alan Rubenstein. I am the chief executive of the Pension Protection Fund, which was set up by Parliament under the Pensions Act 2004 to look after the pensions of those whose employers become insolvent and whose defined-benefit promise cannot be met from the scheme.
May I ask first a question of the FCA? This is going to create significant challenges for regulators. What, in the FCA’s view, are the key structural and behavioural barriers preventing individuals from obtaining the best retirement income for themselves?
David Geale: As you know, we have carried out a market study looking at the annuities market. The difficulty for many people is their level of financial capability—understanding the options that are available to them and then navigating their way through the fact that they might be able to achieve something different with a different provider, whereas perhaps the default is to go to the provider you have saved with throughout your working life.
David Geale: Obviously, we are very interested in value for money. That was part of the reason for carrying out the market study in the first place, so we are looking at retirement options available to pension savers both now and post the Budget reforms coming into effect. It is something we will be monitoring over a period of time. There are also a number of steps that we are taking to ensure value for money, and that the Government are taking, as you know, in terms of the pot that is being saved up to reach that point. It is an ongoing story because there will be a number of changes as a result of these reforms: more people using draw-down, more people choosing alternative options. That is something we will have to keep a very close eye on, and we are doing that.
May I ask finally, for the moment, a broader question about the FCA? It strikes me that the FCA and its predecessor, the Financial Services Authority, were and are focused on banks and financial services. Certainly my sense is that, in the past at least, the FSA was much less focused on pensions than on those other important areas. Can we be confident that the FCA has sufficient capacity and expertise in pensions to do the job it has been asked to do? Going on to the wider job around collective risk sharing, if the FCA has a significant role in that—perhaps you have a view on that role—can we be confident that the FCA has the capacity and expertise to deliver in those areas?
Christopher Woolard: I believe that it can. We can look at the early work the FCA has done in terms of, for example, our market study work, which is where we look at the operation of markets and whether they are working well. We have certainly launched work that is related to banking and to things such as cash savings. One of our very earliest pieces of work is about retirement income—how retirement products are working and the sales processes around that. We are covering quite a broad waterfront. We are covering a range of products that interrelate and sometimes substitute for each other as well—so where people have long-term savings but not in a pension wrapper—and I think we have the coverage to do that. It is certainly within our planning to cover that waterfront.
David Geale: If I may add to that, in terms of our regulation, of course we do not just look at the pension provider; we look at the fund managers. We regulate, supervise and authorise the fund managers, whom those pension savings are being invested with. We also regulate the advisers, who are giving advice to individuals on what to do with their pension savings and how to build up their pension savings in the first place. As Chris said, we have quite a broad waterfront, but it is right through the value chain.
To follow on from the shadow Minister’s question, I think what you are describing is the organisational task for you and you have made the point about your current regulation of fund managers. You will be responsible for setting the standards and regulating the guidance guarantee. Can you give us a feel for your approach to what the key things are for you in setting those standards and your approach to regulation of that guidance?
David Geale: As you know, we have consulted on some standards for the guidance guarantee. I think the key thing is that it is a robust framework that gives people the information they need. It is also intended to be guidance, so it needs to be guidance that helps people to understand their options and the implications of those options, and not regulated advice; but one key thing coming out of that is that people need to walk away from that conversation knowing where to go next and what to do next. For some people, that will be to seek regulated advice, whereas some people will know that they want to take the money, and others will know where to look in terms of comparing different options on annuities, draw-down or whatever it may be. Our focus was really to make sure that that process is able to be designed within a robust framework that delivery partners can use.
And to enjoy it to the full. Picking up on Stephen’s questions about guidance and advice, I want to ask our colleagues from the FCA about two scenarios. First, where someone accesses guidance, there is an argument, in terms of regulated financial advice, that there is all-singing, all-dancing, customised, regulated, tailored, expensive stuff, and there is nothing in the middle—there is no cheap and cheerful advice. Could you give us your thoughts on whether that is wrong, and whether there is something that looks a bit like that already, or whether you are trying to foster that? Is there advice for people who have perhaps got a taste, following guidance, who would not necessarily pay the full cost of a full-blown advice session? Is there something in the middle?
David Geale: I think that at the moment, it is fair to say there is not a lot in the middle, but there is something there. There are firms who will give advice on a more focused set of needs for a reasonable cost, so that advice is available, but it is not widely used, I would suggest, either by firms or by people seeking advice. We have put out a consultation on some guidance aimed at helping firms to understand what they can do between execution only and full advice, because there are a whole range of options open to something more limited and more focused—so actually enabling firms to give something more cost-effective, in terms of people saying, “I just want to have a discussion about how to spend my pension pot.” There are a number of firms and trade or professional bodies interested in looking at this sort of advice—there are suggestions, for example, of fixed-fee advice purely on your decumulation options. “Watch this space” would be my take. We are doing what we can to help firms understand the options available to them and we will be finalising our guidance on that very shortly.
Christopher Woolard: If you look at the independent financial adviser community, it is not one mass. There are different business models out there and a number of advisers who are saying that they would serve a market for people who have relatively low pension pots to invest, and they would be interested in that as a viable business model, so it is not a single picture and we have to be careful about that.
On that point, before I come to the second question, do you think the regulatory framework needs to change at all to foster more of that something-in-the-middle type of advice, or do you think the rules are all there and we just need a market to develop?
David Geale: That is exactly what we have asked the industry through our consultation. I would suggest that the framework is flexible enough to allow that sort of advice, now, but that is what we have asked the industry. Do they understand that? Is there something that does need to change to enable that to happen within European constraints?
Our advice standards are largely driven by Europe, but actually our interpretation is that the firms can do these things; but if there is more we need to do to help them understand what is possible, then we will do that.
The alternative scenario is someone does not access the guidance at all. So take-up will not be 100%; there will be a set of people who do not access it because they know what they are doing, but there will be some people, for whatever reason, who do not take it up. What thoughts have you had on safeguards? My provider does their bit, tells me that guidance is available, I do not take it up, and I then make a retirement choice. Do you think there is a need for any second defence—that I have to sign something that says, “I am married, and I realise my widow will get nothing.” Do you think you need any safeguards?
David Geale: I think that is something we can look at as the guidance guarantee develops. If we take it as a set of building blocks, people making their own decisions now do not have that safeguard. They do not have the guidance guarantee. The guidance guarantee is giving them something extra and an opportunity to go and seek that. What we would expect is that the providers are very clear with people as to what this guidance guarantee service is, that they are being offered—that it is separate, impartial and free—to encourage take-up. Also, I do not think anybody is suggesting that providers cannot talk to their own customers through that process, provided they do so in a way that is consistent with not detracting from the guidance guarantee; and of course people can still take advice.
So there is a question, I guess, about how far we want to take people who have made a decision not to take the help that is available, and about saying “Are you really, really sure you did not want to take that help, since it is available?” That is a question that I think we will need to look at as the guidance guarantee comes into place, when we see how many people take it up, and what the decisions are that they are making. What we can and will track is those decisions that people are making, and the pattern of retirement options being taken up.
David Geale: Our role has been to set the standards, so we are consulting on the standards now. We have had around 150 responses to that consultation, and we will publish the final standards later this year. Our role then will be to make sure that firms of delivery partners stick to the framework of the guidance guarantee; so they stick within that framework of just explaining to people the options available to them and the potential implications of those options, referring them to advice where needed—not straying into “Actually, this is what you should do,” or “This is what I would suggest you do,” and so on, which we would consider to be advice.
Then our role is to monitor that, so we are developing our monitoring strategy for how we will work with the delivery partners to ensure compliance with those standards and that they do not stray into advice. Where that does happen we have the power to make recommendations to the delivery partners to change their process and/or to the Treasury, to take action as necessary.
David Geale: The implementation of the guarantee is in the Treasury’s hands. Our role is to make sure that providers give people the right information at the right times in the way they can access it, to understand their option to take up the guidance guarantee. It is also to ensure that through our monitoring the guidance guarantee process is robust—and, therefore, the quality of what people are receiving. It is really important, I think, just as much as the actual numbers of people going for it. I think if we look at the research, there is conflicting research in the market in terms of what the take-up will be, so Legal & General’s pilot shows very low figures; Chartered Insurance Institute research shows very high figures. It is incumbent on all of us to help people understand what they are getting; but take-up will be a matter for public choice.
Correct me if I am wrong, but the optimists suggest 20% to 30% take-up; the pessimists think it will be less than 10%. Would you disagree with that? How do we ensure that we get to the top end rather than the bottom end, for those who take up the guidance guarantee?
In the annuities market, the number of people taking up the option of looking across the market at the best annuity is very low. Based on your experience, would you say the optimists are being far too optimistic?
Christopher Woolard: There are a number of variable factors in this mix. The first is the communications coming from the existing provider—we will obviously have a view on that—that encourage people to access the guidance guarantee and understand exactly what it is. There will be lots of other things that sit within the Treasury’s control in terms of running this process, the level of good public understanding, if the guidance guarantee is properly marketed and other questions that will affect the variability. In a world where there are not those kinds of prompts, we would expect a pretty high degree of inertia based on our experience elsewhere. Equally, with the right prompts in place, we will see quite a high level of consumer engagement. That is possible, but there are a lot of variables.
My question follows the Minister’s earlier one. What you said about the circumstances in which you would provide additional advice or guarantees seemed a little vague. Using the Minister’s example—if we had nothing to suggest that someone had signed away their rights and decided to go against it, based on advice—can you be more specific about those circumstances? How many people would have to go through that for you to be concerned?
David Geale: There are a number of options within the framework of advice. People can use an execution-only route, where they seek no advice and take responsibility for the decision they make. They can also seek full advice, where someone does a proper review of their full financial circumstances and produces a set of recommendations based on that full review. In the middle, there is a range of options available to firms to focus on a particular need, where that is what the customer wants. A good example is someone saying, “I just want to use this year’s ISA allowance. I want to know where to invest. I don’t want to talk about any of my other investments.” That is a limited service. It provides people with a limited amount of advice and could ignore some very important needs but, if that is the service they want and the service they have agreed to take from the financial adviser, that is possible. Where that service is clearly defined and people can reasonably understand what they are getting and its limitations, I do not have concerns. That is a valuable thing for people in the market; it is an element of choice.
I would be more concerned if advisers narrowed that service without the customer understanding it, by just ticking a box that says, “Did not want to discuss this or that.” That is a very different service. It is about the diversity of the advice services and providing people with a range of options. A lot of people do not want to go and spend three, four or five hours with a financial adviser. They want something specific for a particular need. Some people have very simple needs and others have more complex needs. It is about choice.
If, after a year, 50% of the people have signed away their rights and then die, leaving their widows without any pensions, is that the stage at which you would think there was an issue? I am trying to pin down the circumstances in which you would want to take further action.
David Geale: Less than 50% of people currently take advice on their retirement options. The guidance guarantee will not necessarily help those people who take advice, beyond giving them a bit more help with the questions they should ask their adviser, because they are already seeking advice. The remaining 55% who are not taking advice are currently getting nothing; they are not getting anything that helps them to understand that they should be thinking about how their retirement income will help to support their dependants in the event of their death. It is an additional step. I do not have a number for a sensible take-up in terms of the point at which we would get concerned, but this is not just about the numbers; it is about the quality of the service. If the quality is good and if the marketing—for want of a better word—from Government, regulators, firms and the delivery partners is good, we would hope to see significant take-up, but I do not have a number to put on that.
In relation to the FCA responsibility for setting standards and guidance, would that include the requirement to advise on comparable administration costs and charges?
David Geale: What I would expect the guidance guarantee to do is help people to understand their options and that they might get a better deal by shopping around. It will not actually go to the point of saying “Here’s a product” and it would not be saying, “This product with this provider is cheaper than that one.” What it should do is help people to understand the things they should look at when they are comparing different products.
David Geale: It depends on what sort of service they are actually getting. With something like an annuity what matters to you is what you are going to get back. If you are into drawdown-type contracts then yes, absolutely; different providers offer different services that charge differently. It is also about the service levels; it is not just about cost. I would expect the guidance guarantee to help people understand the questions they should be asking to make the right decision for them.
May we move now to the Pension Protection Fund? Alan, can you first confirm that the PPF will take on the liabilities of, effectively, any guaranteed element of shared-risk schemes, including collective DC? Have you the right resources to be able to assess the risks, and therefore the levies, of the guaranteed elements of shared-risk schemes that will come up? Overall, is it your assessment that this will increase the potential liabilities of the PPF or that the new shared-risk schemes will mostly be sourced by people exiting from currently open DB schemes, in which case your total liabilities will reduce?
Alan Rubenstein: Gosh, there is a lot in that. First, to the extent that there is a promise that is effectively a defined benefit promise, yes, those schemes will be covered. We have obviously yet to see how they all develop in that mid-ground. Currently, until we see how it develops, we believe we are adequately resourced, but we have obviously yet to see what the take-up is as we would have to reassess that if things moved sharply differently. In terms of levies, the work that we have done so far suggests that there would not be a major impact on our levy setting because it would be shifting from one form of provision, as you suggest, to another.
The PPF has been, in any fair observer’s opinion, a success in providing an insurance policy for scheme members in schemes that could possibly go under. PPF has been a success in that respect.
Alan, can you reflect on how you believe this potential move to risk-sharing pensions will impact upon the PPF’s role? Do you hope that in the long term it might reduce the pressures on the PPF to pay significant numbers of pensions?
Alan Rubenstein: Well, I think we have to remember that we are dealing with an established back book, as the insurers would call it, of around 12 million people who are covered by defined benefit schemes. I do not expect that to reduce very sharply in the short term.
In terms of the impact on the PPF, I am fairly comfortable that greater choice is going to be a benefit. It is clear that, if there is greater provision, the chances of people falling back on the PPF ought, in principle, to be reduced. However, it depends, where that happens, as Mr Graham suggests, on a large shift out of DB schemes to DC schemes. In that case, there would certainly be a reduced call on the PPF. But I think that we have to wait to see at what pace that takes.
May I move on to ask the questions that I was encouraged to ask by hearing the FCA representative’s previous answers? David mentioned that the FCA has sight throughout the pensions chain. What are the transaction costs? In particular, we know that in the 2014 Pensions Bill, the 2000 Act was amended so that the FCA now has the ability to set general rules around the disclosure of transaction costs. Where are you in that process? Are you able to say at this stage what those roles will be and when they will be enforced?
David Geale: We are doing quite a lot of work at the moment looking at transaction costs, both in terms of what they are and what should fall within the definition of transaction costs. We are also looking at what and when should be disclosed and how. The two key deadlines are: April 2015, when the independent governance committees will need to be able to make an assessment of value for money and will need information on transaction costs, in order to be able to do that, and April 2016, by which point the intention is to have a standardised disclosure of those transaction costs.
We have done a lot of work with the DWP, the Pensions Regulator, and representatives of industry and consumer groups looking at what should fall into the category of transaction costs. Our intention is to publish a document in the first quarter of next year looking at what should be in that category for standardised disclosure. There will be a requirement for firms within the chain to report to IGCs in terms of what those costs are from April 2015, which is when they will be in a standardised format.
Thank you. On a related point, you mentioned the independent governance committees—I know that your consultation has just closed on those. In the FCA’s opinion, are there any potential conflicts of interest in the independent governance committees?
David Geale: The intention is that they will be independent of the firm, reporting to the firm’s board on what they have found around value for money. In terms of the responses, some of the issues that have been identified are around the proposal that some of the executives from the firm could be members of an IGC, albeit that the chair and the majority would be independent.
The potential for a conflict there has come out of the responses and is something that we are aware of. We think that that conflict is manageable. Equally, there is a role for us in ensuring that the IGC has an appropriate voice and when it makes a recommendation to the board, the board acts on it. We propose some mechanisms through which that can be escalated if the board does not act.
As envisaged, if, despite those forms of discussion, negotiation and mediation, it remains the case that the IGC and the insurer continue to disagree, will the IGC be able to continue to impose its view in the public interest?
David Geale: The IGC as proposed would have the option to publish its report and make public its concerns. They would also have the ability to report the fact that the board was not taking account of their concerns to the FCA. From our perspective, if there is a governance structure within the firm and it raises concerns that the board is not addressing in some way, we would obviously have concerns that we would have to take action with the individual firm.
Just to observe finally, the notion of governance goes into some tension there, because it does not seem from the FCA’s answer that the governance committee is able to govern in a very critical sense.
David Geale: There is an interesting thing around the terminology. The IGCs do not have power to act and make changes within the firm. They would make reports to the board, in terms of the changes they expect to be made and the issues they found around value for money. You are right—the committee is not a governance feature within a firm because it cannot physically make the changes; it would be asking the board to do it. If the board is not making those changes, it would be making that public or asking the FCA to take action with the firm. I see no reason why the assessment of value for money that they have been set up to do should not be effective. Whether it should be called a governance committee—I take the point.
David Geale: I take the point. That is effectively what it is doing—giving advice to the firm. However, the firm has to take account of that advice and would be expected to take some form of action as a result of it. It is not a decision-making body in terms of requiring the firm to do something different.
May I go back to the previous questions on the PPF? On shared risk schemes, is it possible that in some cases only part of the scheme could fall under the ambit of the PPF? If that was the case, how easy would it be for savers and trustees to understand?
Alan Rubenstein: My expectation is that if there is a combination of benefits, but those benefits are a part of the benefit that is included in, for example, a pure DC—a money purchase—element, the expectation would be that that element would be bought out directly and the rest of the defined benefit scheme would be protected by the PPF.
May I go back to the FCA and the issue of product regulation? Quite why I am doing this, I am not sure, but I am playing devil’s advocate. Next April we may get new products—flexible drawdowny-type things; we do not know what they will look like yet. The FCA does not pre-approve products, so someone could try to sell a slight flaky drawdown product, things could go wrong and then you would clear up the mess. What pre-emptive things can you do to stop people being sold unsuitable, bad value for money products and so on? What are your product regulation powers and how far can you use them in advance of things going wrong?
Christopher Woolard: In general, we do not pre-approve products, as you said. We have a range of product intervention powers that allow us to take quite early action when we believe something is going wrong. That could mean moving to an immediate ban of the marketing or the complete sale of a particular product. We can do that on a permanent basis, and now, under the latest legislation, we have the ability to take a temporary banning power, which we can impose for up to a year while we work out whether something really has gone wrong and what the proportionate course of action would be.
David Geale: In addition, our supervision team is working with insurance companies now, looking at their post-April strategies and the products they are thinking of developing. We have a series of rules and expectations around product design and so on. I suspect it is not the larger firms in which we are going to see the problem in this instance; some of the smaller, more esoteric investments are probably the more scary things, but we have taken quite a range of action in that area already.
Obviously, you cannot reveal the details of your conversations with providers but, based on those conversations in general, do you think we are going to see substantial product innovation on day one or will that evolve?
David Geale: My feeling is probably not on day one. At the moment, we are seeing that they are looking more to plug gaps in their own ranges. That is not to say that somebody will not stick their head above the parapet with something new and different, but we are certainly hearing a lot of talk about people considering different types of products. Obviously, there is an interaction with things such as long-term care and a whole range of opportunities, potentially, for new and different products to emerge.
If there are no further questions from Members, I thank the witnesses for their evidence and we will move on to the next panel. Thank you very much. We will suspend the Committee.