First, may I declare two interests? One is that although I neither look nor feel like a pensioner, I am actually in receipt of a modest pension. Secondly, I am chair of the all-party group on pensions, which is sponsored by the Association of Chartered Actuaries—the ACA.
Martin Lowes: I am Martin Lowes, an actuary with Aon Hewitt. I am a scheme actuary, which means I have the practising certificate to advise trustees of pension schemes as scheme actuary. I also advise employers on their pension arrangements. In a professional capacity, I am also a member of the Institute and Faculty of Actuaries pensions board.
Jim Bligh: I am Jim Bligh, head of public services and pensions at the CBI. I lead a team on pensions that lobbies the Government, the Opposition and others to create a pensions framework that benefits everybody in the UK. I am sure you all know what the CBI is: we represent 190,000 businesses of all sizes and sectors around the UK.
May I begin by asking you this, Sue, in your role in simplifying financial products: how do you think we are all getting on collectively on simplifying pensions?
Sue Lewis: On the way in, it looks quite easy, because you have auto-enrolment, and I think people are understanding auto-enrolment, so that is all good. On the way out, it is now starting to look really complicated. People are trundling along in their pensions. They reach an age where they have a pot of money and have lots of other things too, and are suddenly faced with overwhelming and very complex choices about what to do with that pot of money. Chances are it is going to be a relatively small pot of money; if it is a slightly larger pot, there is a big choice between annuities and all sorts of products that we probably have not even seen yet and that are quite risky. I would say that it is looking very complicated from the point of view of the ordinary consumer. The guidance guarantee is going to be vital, but I am sure we will get on to that.
To elaborate on that point, and to put this question to all three of you, are there lessons to be learnt from auto-enrolment? Sue is saying that it is pretty straightforward, and of course auto-enrolment was developed as a way to ensure that people were not discouraged from pension saving because of complexity and a lack of information. Should lessons be being learnt for the “turning your pension into an income” phase?
Martin Lowes: I would say that it is not as simple as auto-enrolment. Some of the things that went with auto-enrolment were the default investment choices. Before, people had lots of choice when they came in and they almost did not know what contribution to pay, and they did not know how to invest it. The easiest decision to make was to have nothing to do with it. Auto-enrolment was not just a case of putting people in and they have to opt out. With it, importantly, was the default investment choice that they could run with if they did not want to get more involved.
At the other end, we have seen some lessons in that, despite everything that is said to them, an awfully high proportion of people, when they come to retirement with the DC pot, have gone with the insurer’s own annuity, rather than going for the open-market choice, which often gives them much better value. Again, we see that where people had a difficult choice to make, they made the easy one, which was not to get involved and to go with the default annuity.
What we are doing now is replacing a system with a default choice of sorts with something that does not have a default choice, but where the easy choice is to take the money out of the pension scheme and spend it, because anything else means a lot of difficult decisions. I would say that one lesson we should learn is that putting in a default option, which might not be ideal for everybody but should not be too bad, has been quite important in where we have got to on the way through—I agree with Sue—and I think we should be thinking about that on the way out as well. Unless we have some reasonable default options on the way out, we will end up with people taking the easy choice, which might not be the sensible one.
Jim Bligh: From a slightly different perspective—purely from the employer’s perspective—auto-enrolment is not simple; it is quite complicated. If you are a small business that has never used a pension scheme before, or has very infrequently done so, complying with the rules, many of which are quite complicated, is difficult and takes a lot of time and investment, often from the people who are running the business. That is something that we always knew, from when the Pensions Act 2008 was going through, through to the simplifications that this Government brought in earlier in this Parliament. We always knew that it would be complicated, and necessarily so, but a lesson from this is that when we are trying new, big, complicated initiatives, let us try and communicate as simply as we can.
Something that pensions and the pensions community more generally do really quite badly is use simple, clear, plain English, whereas that is something that the National Employment Savings Trust does very well—I declare an interest, in the sense that I am on the NEST employer panel, which advises the trustees of employers. For me, words such as decumulation, which I am not convinced is actually a real word, are not helpful to people’s understanding, particularly when they have not dealt with pensions before.
Sue Lewis: I would add that it is important that people engage with their pensions, and the risk with auto-enrolment is that a lot of people choose the default, which is sort of fine, but we did have stakeholder pensions before, which, of course, were a fairly straightforward, simple vehicle for people. Again, it is about explaining to people really simply and really clearly what it is that they have got themselves into, and I agree that NEST is brilliant at doing that. I am not sure about default options on the way out, I must say.
Sue Lewis: Again, it is whether people are getting, by using the default, the best thing for them. As we saw with annuities, people often went with the option because the whole market was just so complicated. We did a bit of work last year that showed that people shopped and stopped, as we put it, because the effort just became too much. They were not clear what they were being sold or whether it was a good deal or not, so a default has to be designed so carefully. Somehow, in the way that you decumulate—sorry to use that word—there are more things to take into account. You may have other assets. You may be married. You may have other dependants. Accumulation is about getting the best you can for the money you are putting in. Decumulation is much more about your personal circumstances. I think it is harder to look at defaults in that area, for that reason.
With the introduction of shared-risk schemes to the already wide selection of types of pension scheme, how will employers, large organisations—presumably they will not be running more than one type of pension scheme in one organisation—choose which is the most beneficial type of pension scheme for their employees? They may already have a defined-benefits scheme going on. Will they have to consult the work force and ask them to choose which sort of scheme they want, or will they have individual employees transferring from one scheme to another?
Jim Bligh: There is a range of issues there. First, most large employers will already offer pensions in one form or another, and many will offer DB, whether or not that is legacy closed DB, which is closed to either accrual or new membership. That is probably quite likely with the larger employers that offer DB. Almost all will offer some form of DC benefit.
There are added complexities when you have work force agreements and relationships with trade unions that require negotiations on any change. If you did want to move to a different type of scheme, you would have to go through quite a process to make sure people were bought into it, and that would be complex.
Employers I talk to—finance directors, pensions directors, HR directors and chief execs—say that they would choose their scheme on the basis of the risk that the company can absorb. There is quite a strong view from the businesses that I talk to that they are not in the market for more pensions risk in addition to the risks they are already carrying, particularly through those legacy DB schemes that I have touched on, so they will be looking at how they can create the reward package that is right from the HR perspective to get the talent they need, but also how they can create the risk package that works for their balance sheet. That more often than not leads to defined contribution as the standard for both auto-enrolment and other types of pension.
May I put a question to each of you? To take you up on that last point, Jim, what has happened to the sense of responsibility of British employers? There was a time when everyone recognised that you had to look after people who worked for you not just while they were working for you, but afterwards. It has been suggested by an earlier speaker that there will be employers out there who will want to try to ensure that their employees, after retirement, have an income to live off and that will be one of the attractions of the new risk-sharing arrangements. Are you implying that this will simply be a quick fix for the remaining DB providers among your scheme members, or do you see anyone having a longer-term interest in their employees’ interests?
Jim Bligh: The CBI-Standard Life pensions survey, which we released at the end of last year, shows that about 90% of employers think they have a duty to provide a good pension to their employees. I think that sense of paternalism, as it has been described before, has not gone. Employers still want to provide people with a decent retirement afterwards. I do not think there is any employer I talk to who does not have that view, across a range of different sectors and services.
Jim Bligh: The majority of our members do not, but I think this is an important point. They are not prepared to take any more risk when deficits are already at such a level that they have to repay them at such a level that it costs them the ability to invest in jobs and therefore growth. That is their No. 1 consideration, I think, when it comes to choosing a pension scheme.
When it comes to thinking about collective DC and shared-risk schemes more broadly, I think employers want to provide as good a pension as they can within the risk margins that they have, but they are also concerned about what CDC and shared risk looks like in the future.
Jim Bligh: I am not. I think it is fair to say that there is not a significant interest among employers that we are talking to, and there are two reasons for that. The first is the risk point that I have mentioned. We know now that the legislation as drafted has a lot that is left to regulations and a lot that is left to future Governments in terms of deciding on change. To a lot of our members, this feels a lot like the defined-benefits legislation of a few decades ago, and they are worried about DB creep. The second issue that they will think about is employee relations, and they will look to the Netherlands and see that when pensions in payment are being cut that is an extremely unpalatable situation, and it is not culturally aligned with where we are. They will also look to companies that had to make changes to indexation a few years ago, when the Government changed from RPI to CPI. In one case, that of a very large airline, there were very large protests outside its office.
Okay, Jim, that is fine. We have got the general picture.
If I may, I have a quick question for Sue. I was a bit nervous when Martin was talking about creating another default; it seems that that is what large consultants like doing. They like to have control, so they say, “Let’s create default schemes where everything can be run by a few people at the top.” However, you made the point—absolutely rightly—that that will not necessarily be the right solution for many people. Also, presumably there is a risk later on of mis-selling, if everybody is shepherded into some form of default. Would you like to comment on that?
Yes. Martin, surely the answer to your point about the default option being the way to avoid a large spending spree is that the default position in today’s world—after the new changes—is just to let your DC pension carry on. You have got your investments there; they roll on. Why does there have to be a great big spending spree?
Martin Lowes: I think people will come to retirement age and get communication from their pension scheme, saying, “You are coming up to retirement age. What do you want to do with your money?” At that point, they are faced with a choice, and even the choice of leaving it to run is a difficult choice, especially when they are at retirement age. They have retired and they need an income of sorts. That will be the default, whether we like it or not, if we do not put in place something that will work against it.
Martin Lowes: Not when you have not got an income any more because you have left employment, and you have a communication from your pension scheme telling you, “You are reaching retirement age. What do you want to do with your money?” However, I agree that we need to ensure that any default that gets put in place needs to leave flexibility for someone to do something else, and not just end. The default would have to be carefully chosen not to tie people into something that was inappropriate, which will be a big ask. I agree that it will be a big ask, but the default would have to allow subsequent positive choices.
May we look a little at what is going to underpin these schemes, in terms of the benefit outcome, which is obviously not just a contribution rate, but the products? I have several basic questions. I think there is probably a pretty obvious answer to the first one, which is, with the collective benefit schemes, will not new products develop in some areas to underpin those schemes? Presumably, a lot of the products might just be a larger extension of the individual DC schemes, or money purchase schemes as they are now. In some of the reading, it has been suggested that collective benefit schemes require closer supervision of investment strategies. I am not clear why that should necessarily be, because presumably you want the investment strategy to produce the most benefit within agreed risk criteria.
The final point is, how will you—particularly you, Martin—advise your clients if there is closer supervision about, first, what that supervision might do to outcomes and, secondly, the capability of the Pensions Regulator to undertake that role?
Martin Lowes: I see the need not so much as being closer regulation as more disclosure and communication. If you compare it with, for example, a final salary scheme, the member does not really need to know what the investments are, because the promise is the promise, and it is the employer’s problem, or the trustee’s problem and then the employer’s problem, if the investments do not perform. By contrast, in a defined-contribution scheme, or a collective DC scheme, what is going on is important to the member. That is where I see it as being not so much about more regulation or oversight, except that the regulator will want to ensure that there is proper communication, so it is a monitoring of disclosure rather than actually a deep involvement.
I take that point, but, first, is there anything in the current arrangements—perhaps in the guarantee of guidance—that will give that extra transparency, and if not, how should that be written into the protective process? Secondly, it presupposes, therefore, that if it is a collective scheme, it will be about the quality of the trustees as well, so that the employee has confidence.
Mr Lowes, may we return to default schemes? There is some intrigue in the new landscape about how you have a default scheme, not just at the time you come to start decumulating but when you are accumulating. If you take the hypothesis that at the moment you have risky investments till you are 10 years from retirement, then you de-risk, so that when you get to your retirement age your pot is not destroyed by a stock market crash at the last minute, that assumes that you are going to buy an annuity at that day of retirement. If, as I think, most people will keep at least some of their pot and spend some of it, you do not really want that de-risking 10 years out. How do you design a default scheme at all in such circumstances?
Martin Lowes: One of the big questions that trustees are wrestling with at the moment is, how do you define a default still in an accumulation phase but running up toward retirement? Yes, it will be more difficult to design sensible defaults under the new regime, because you will not have the same clarity as to what members are going to do at retirement. We have always had the problem that you do not know when they are going to do it, so you plan for their normal retirement age, but actually they could go earlier or later and your de-risking will never be right. It is just that there are more options for them and more things that you might be aiming for with your default, so you will have to take into account what you expect your members to do at retirement and plan towards that and then do a lot of communication saying, “This is what our default does and what it will steer you into a sensible place towards, and if that is not what your plan is to do at retirement, this default might not work for you.” That will create the need for a lot more communication than there has been until now, even for the people who are in the default, because the accumulation of default will be inappropriate for more people than it was in the past.
Martin Lowes: I think that it would work better if there was also a default decumulation, which might be a very simplified, standardised draw-down vehicle of some sort. You would know that that is what most people will go into, because that is what your default is for them to go into, then you can work back from that to what your default would be in the accumulation phase running up to retirement. Whereas, if you do not have any kind of default at retirement, you are in quite a difficult position planning what to do as a default before retirement.
I suppose the whole idea is that more choice will lead to more products, or more options. How do we get more confidence that the industry will be responsible in the way it sells these things and communicates? Is that a hope that will never come to fulfilment, or is there more that we, in the legislation, or the regulator could do to make sure that selling is done properly?
Martin Lowes: I work on the consultancy side, rather than the provider side, so that is probably not my area, but I think that people having the ability to walk away from the product, by taking their money, will actually make it more difficult for providers to mis-sell. They will have to work harder to sell. Therefore, they will have to communicate more.
Sue Lewis: We think that it is a huge risk. If you look back at the Social Security Act 1986, which introduced personal pensions, that was followed by massive mis-selling and compensation of £12 billion. Why should it be any different now? Well, we have a better regulator that will be on the lookout for products that are being sold to the wrong people, but it will require a lot of vigilance, because draw-down products are intrinsically more expensive as someone has actively to manage that fund and somebody has to ensure that the person is getting the best income from it. For small pots, the overhead costs of draw-down start to look expensive, and then you wonder what other products will emerge with draw-down-like features that might just not be very good value or the right product. For many people, an annuity may still be the right product. We need to bear that in mind. We are rather anticipating a lot of toxic products emerging.
Martin Lowes: If you put the onus on the trustees of the pension scheme to look for a suitable draw-down route on a wholesale basis, rather than leaving it to individual members to look for draw-down or whatever-route vehicles on a retail basis, it helps to protect members against that. I am not disagreeing with Sue, however. There are great risks out there.
Jim Bligh: Possibly. There may be some, particularly in the smaller schemes, who might find it their job.
To win back the public’s confidence in providers, we need to think about transparency and disclosure and how meaningful the content that people are receiving from their provider is. Choice will have an impact. As Martin said, if there are more products out there, there will be greater tension in the market to create something that works, but it is also about effective regulation, as Sue said. In the past, we did not have the strongest regulation that was probing into exactly the right areas. That is changing and there is much greater awareness among regulators of the need to look into potentially dubious schemes.
Can you hazard a guess as to the type of employer—I appreciate that not all CDC schemes will be employer based—in terms of size and industry that may be more inclined to promote or want to take up a CDC type of scheme?
Jim Bligh: It is difficult to know for sure. I would suggest that large employers who already provide really good pension benefits might be interested in looking at this as another option to add to their portfolio of pension provision. In terms of sectors, it is interesting that in different countries that have CDC there is quite a strong history of sectors working together on a whole range of issues, including pensions. There probably are some sectors in the UK that work in a similar way to those in the Netherlands, Germany and other places, but I cannot think what they might be off the top of my head. I do not think that there will be huge sectoral demand without a strong sector body that is prepared to tie everything together. There is also an issue with section 75 debt in that if employers leave and only one remains at the end, that employer would be liable for all the debt. For a small or medium-sized business, that might not be very appealing, so they would be reluctant to go into sector-wider arrangements on that basis.
Does that have implications for the inequalities we discussed with the previous panel, such as intergenerational inequality? Would there be implications from having different sectors and different sizes of employers in terms of less beneficial pension schemes?
Jim Bligh: It is important that DC, which is the default for almost everybody, is well-monitored, transparent, good quality and has good-quality contributions through the auto-enrolment period. That should help to ensure that those who are not saving, who are very often the employees of smaller businesses—the bulk of businesses—and who are just starting to come into the auto-enrolment phase, start saving more. That should be the first step and the priority until auto-enrolment is completely rolled out. Beyond that, if people can afford to go above and beyond the minimum, that is brilliant and we should encourage them to do so.
May I ask a few questions about the guidance guarantee and your views on that? Some of you have already mentioned your concerns about how it might operate. What are the pros and cons?
Martin Lowes: It is a brilliant concept. It will happen 10 years too late, because you need to work out what you are doing with your investments as you approach retirement, rather than at retirement. By the time you have got to retirement, you are 10 years too late to work out your de-risking strategy. You need to have worked out 10 years before you get there what you are going to do at retirement, so you can plan what you are going to fade into. So it has come 10 years too late. It is far better than having nothing, but it is telling you what is available. It is not actually holding your hand and telling you what you should do, and I think a lot of people will want it to do that extra step, which is not possible. It is too big an ask. Unfortunately, the framework post-retirement will be a very complicated framework, and it will be a big ask for the people providing the guidance guarantee to cover off everything they need to cover off that might be relevant to individual savers.
Sue Lewis: Yes, I agree with that. We think the guidance should be holistic. We have literally had five minutes to look at the draft clauses, but it looks as though the guidance is restricted to the pot, rather than the wider assets that somebody might own. If the median pension pot is £18,000, a lot of people will have a home worth more than that—£100,000 and so on. So we think that their decumulation strategy—I keep using the word—needs to be considered with all the assets that they have.
The second point is about the standards. The FCA has issued standards that we think are too principles-based. The experience needs to be exactly the same whether you ring up the Pensions Advisory Service or whether you go into a citizens advice bureau in Worcester. That experience has to be consistent. I know this is not regulated, but the fact find, if I can use those words, should be consistent across channels. We think the people doing it should be qualified. They do not necessarily have to be level 4, like an independent financial adviser, but they should have qualifications, and they need to be trained.
We have a big worry about delivery. We are six months away, and organisations, including TPAS, will have to do a lot of recruiting and training between now and then, so there is a big delivery challenge. But we are most concerned about the consistency of standards, the independence, and making sure that everybody has that opportunity. I take the point about 10 years too late. People may want more than one conversation, but, in a sense, if I can go back to the Money Advice Service, that was set up for exactly that kind of conversation. There is nothing to stop the Money Advice Service providing the conversation that you need when you are 40 or 55 and perhaps starting to think about retirement. Those things are not mutually exclusive.
Sue Lewis: I would be a lot more specific about the questions that need to be covered in the conversation and about ensuring there is a framework of consistency across, so that if you make a phone call or go into a CAB, you have the same experience and you get the same output from it, which is about your next options. That may well be regulated advice, of course, and some people will choose that option. Other people will perhaps pay off debts or a mortgage, and that might be best for them. It depends.
A question for Sue, if I may, about defaults, and then one for Jim about risk sharing. On defaults, say I am a member of an individual DC scheme. I reach the pension age that I flag to them many years ago, potentially, and I do nothing—I get the pack and put it in the “too difficult” pile. Will providers think that at any point the consumer could just take the cash—have it on demand, not invest it at all but just take the cash? Is there a consumer detriment for not having a default of investment? How do you view that issue?
Sue Lewis: Yes, I take your point completely. If the consumer does absolutely nothing, I guess you would want their money to carry on being invested. That comes back to a previous point: because you do not know in advance when that is going to be, de-risking may happen too early for optimising the pension pot. I do not know what the answer is, I am afraid.
Jim, I have a question on employer attitudes. In our conversations, we conflate CDC with risk-sharing defined ambition, and they are separate types of scheme in the Bill. If employers are worried about volatility of cost, which of course they are, would they be more attracted to the defined-ambition bits where, for example, a third party ensures the volatility—paying a set, predictable premium—and the risk is borne by the insurance provider, which ensures that the pension is paid at a certain level? Would that be a more attractive model?
Jim Bligh: I think that it would. You are right; we tend to conflate the concepts, which does not really help. The Bill is not massively clear on what is DA, CDC, a risk-sharing scheme and so on. It would probably be more appealing if there was consistency in the amount they have to pay and that is being treated the same over a long period of time. With the benefit of hindsight of years and years of pensions rules being changed and the complexity that is increasingly added to pensions, employers are fearful that future Parliaments will not stick to the intent and will change the rules of the game in the way that DB rules were changed. The bits that worry them are about funding evaluations leading to funding requirements —repaying deficits one way or another. If there is a way of ensuring that kind of additional cost, that will be more appealing to employers, but if there is not, at the moment it is a difficult view for employers to handle.
I think that you heard the witness who was sitting in the seat you are in. I asked if there is any appetite among employers. You are sort of saying they are not very interested and they do not trust politicians. The previous witnesses said that they are talking to potential clients now who are interested; they hear the trade unions are interested. There is a dissonance between the two perspectives.
Jim Bligh: There is, and David and I are obviously talking to different people. I think that he might be behind me right now. I am sure that there are some people who are interested in looking at this, as they are reviewing existing benefits packages; they are just not people who I have been talking to. I have been talking to a large range of employers. What concerns us is that employers that already offer good pensions schemes are not interested in taking this on further. There are certainly some who will be but they are not coming to the CBI to say this is something that they would like to see more of.
May I ask you the same question that I asked a previous panel? You might have a slightly different perspective. Should there be a single regulator or the existing two? Would you prefer to see a single regulator and, if so, do you envisage the Pensions Regulator absorbing the role of the FCA or vice versa? Should the two merge to form one organisation, or do you envisage a completely different structure?
Sue Lewis: We can see pros and cons as well. Ideally, you would move towards that, but I think it would make most sense for the FCA to absorb the Pensions Regulator. The FCA at the moment has just had so much stuff thrown at it. It is probably not a priority, but it would be a good idea to move towards it to avoid overlaps, especially as pensions become more hybrid, if you like. I think there are advantages in a single regulator.
Jim Bligh: Like my fellow panellists, I think there are pros and cons and we do not have a fixed view. What I would ask is: what is the problem we are trying to solve? Are we trying to get a regulator to regulate products or to regulate systems? I think there probably is a difference in the products and systems that the FCA and TPR regulate. In future, once auto-enrolment is completely rolled out and our policing function from the regulator is in a more steady state—not trying to encourage compliance in the way it is now—and assuming the number of DB schemes gets smaller, I suspect that there might be more of a case for looking at the efficiencies that can be gained by merging the two. At this stage, however, I am not sure that it is the right time.
Mr Bligh, I want to go back to this point about transparency. In your response to Nigel Mills’s question, you said that more transparency would be required. Can you define what you mean by more transparency over and above what is given to either a DC member or a DC trustee at the moment?
Well, I think you were implying that if you were in the collective scheme, you would need more transparency than under the current DC arrangements. Unless I misunderstood, that is what you replied to Nigel’s question. I am keen to understand what you mean by more transparency than the current arrangements that are already in place if I am in a DC scheme.
Jim Bligh: I did mean if you are in a collective scheme. I think that Martin answered the question for me earlier by saying that at the moment, investment information, the performance information of a DB scheme—all that stuff is given to the trustees of the DB scheme, because the members do not really need to know about it particularly. They get some, but not a massive amount of information; it is not really their business. Well, it is, obviously, but they do not need to know as much about it as they would if they had a direct stake in it in the way in which they do with collective DC, because their pension in payment might change. Some of the information that already goes to trustees could be shared, probably in a more palatable format, with scheme members of shared-risk schemes.
Is your point that as a member of a DC scheme, I get certain information from my provider, and what you are suggesting is that that information needs to go to the trustees, who do not see that information in a DC scheme at the moment?
At the moment, if you are in a DC scheme, for instance, most DC people make a choice between a range of products that they go into. They get transparency twice a year about what that product is and the opportunity to switch once a year, usually. I am asking what extra transparency you think is needed for the member of a collective DC scheme or the trustees.
Martin Lowes: They are putting together a package. What you need to know is what principles they are operating under when they are putting together those combinations of investments. That is a slightly different thing from “Do you want to invest in equities or do you want to invest in bonds?” It is about the way in which they are combining equities, bonds and other stuff so as to achieve an overall objective.
So potentially, if you are a member of a collective DC scheme, you will get less information because it will be about the principle underneath, which will be “We will maximise risk” or “We will minimise risk”, or whatever, with the criteria.
How do I get more information than now? At the moment I get what the DC scheme produce is doing in terms of performance and underneath that I get what it is involved in, be that bonds or equities, and I can make a choice. I am not sure what extra information I would get as a member as opposed to as a trustee.
I take that point, but I suspect that the average member of a scheme would find that more confusing than understanding whether a particular unit trust or investment had gone up or down over that year. Potentially that will make it even more difficult for a member of a scheme. I take your point that a trustee will understand that, but it seems to me that the member of a scheme will get less information of a reasonable quality than they do at the moment.
The short answer to that is that the individual may get more information, but he or she has significantly less choice. That is the crucial thing. That may be fine, but, when there are problems if investment decisions turn out not to have worked, no doubt that will come back to Sue’s panel.
Can we go back to guidance? Sue, you mentioned consistency. How easy will it be to get consistency from three very different organisations with different cultures? Secondly, in terms of them being given a bit of a runaround, how easy will it be for a member of the public to ring all three of them and get three different bits of advice? How important is it that they have some form of customer relationship management system that means that, when Joe Bloggs rings up, that organisation can tap in to him and see that he has already had the guidance, or whatever?
Sue Lewis: Yes. Well, that will depend, as I said earlier, on having those standards spelt out more specifically, so that each organisation knows exactly. A little bit like how an IFA will work to a fact-find, I think that all these organisations should be working to something that looks like that, so that the experience is the same. How that will operate online, and what the online will be, I do not know. I have a little bit of concern about gov.uk. I must say, I have never managed to find anything on it. Sorry, you had better not record that.
Everything is recorded here. The second part was about how an individual customer could ring around three organisations and get three different answers and no one would know that he had spoken to one of the others.
Sue Lewis: Again, the consistency bit is about standards, the training and the output that people get, so in theory, if someone seriously wanted to do that, they should get the same information out. That needs to be monitored—perhaps not across every organisation, but certainly part of monitoring standards must be about ensuring that that experience is the same.
Sue Lewis: Clearly, it is a worry and it is a particular worry for those who will be going through the system first, because it is almost accidental that they are the people who are going through it first. It is a concern, but it is not clear what can be done about it now except just to try to get it working as well as possible, as fast as possible.
I am intrigued by the guidance guarantee, Sue. You appear to be assuming that it will be pretty close to individual advice, whereas I would be on the cynical wing, who think that it will be a pretty uninspiring conversation saying roughly, “Think about what you’re doing. Work out what you want. Shop around. Pay off your debts, and make sure you are thinking about your spouse,” rather than one that goes, “You’ve got these six pension pots, a house and some savings. Perhaps you should do A, B, C, D and E.” I just struggle to see how you can get into a statement of facts, without wandering into advice, which then leaves you with all the legal exposure if you get it slightly wrong, in an half-hour call. Do you really think that can be done?
Sue Lewis: I think that you can have individualised guidance, and I would go back to the Thoresen review of generic financial advice, which demonstrated that guidance could go quite close to the regulatory boundary and be very useful to individuals. This is a problem with the guidance guarantee; when you say it, people do have different things in their heads. I have a quite rosy picture of something that is genuinely useful to me or to you as an individual, which takes account of all our circumstances, and then says, “And here are some of the options that you might want to think about.” It could be lot more mechanistic of course, and it may start out that way, and change, depending on how people find it, how useful it is and what they get out of it.
To move towards the more useful end, ideally you want the guidance provider to have sight of certain facts before they get to the conversation; otherwise you are flicking through 25 pieces of paper. You are putting in a very different thing from picking up the phone and saying, “Hello, I have been told to ring up for some guidance. What shall I do?” You are sending in the statement of affairs and that starts to get very expensive, and very risky, doesn’t it?
Martin Lowes: Even without going to the point of saying, “You should do this.” Should your conversation spend 10 minutes on, “You might want to think about paying off your debts before you do anything else”? You would want to know whether there were big debts around. You would want to know whether there is a spouse before you spend 10 minutes on how you take care of your spouse. Even without very detailed advice, even just thinking about which areas I need to cover in that hour session, you would need some kind of factual background.
That brings me back to the question that I asked earlier about whether we need to regulate or legislate for an industry backstop to the guidance to an extent? Do we need to say to a regulated provider that you cannot sell a product until you have checked that somebody has had the guidance, and that they have understood it? Is there a way of creating a back-stop that we could enforce?
Sue Lewis: Yes. Everyone has to have the right to the guidance, and equally a right to refuse and say, “No, I’m fine. I’ll go with this product, thank you very much.” It is quite hard to police that. I think there are rules—again, I have spent just five minutes on the clauses, but I think that is allowed for in the draft legislation.
No, I was thinking more that the person selling the product would say, “I now need to record your answer to this question: ‘Have you had the guidance, or did you waive it?’” It would be that kind of tick box.
To take up that conversation. Sue, you mentioned that in the glance you had had at the guidance, you had seen that it would not involve looking at wider assets, just the pension savings. What are the implications of that for the kind of guidance conversation that Nigel referred to?
Sue Lewis: Sorry, that is just my interpretation of the draft clauses. I think that is what they are saying. The conversation surely has to be about wider things than just the pension pot. How that is going to work with the legislation I do not know. It has to be because, as people have said, there has to be something about the debts people may have, or the other assets such as housing. If you just have a conversation about pension saving, I do not think that is going to be terribly useful.
Jim, what is and what should be the role of employers in the process of turning a pension pot into a retirement income? Auto-enrolment was predicated on the notion of rebuilding a workplace pension system. It strikes me that in the reforms the Government are taking forward on the income side of things, there is not a role for employers. Is that a fair assessment?
Jim Bligh: I think the workplace is the delivery mechanism for savings and getting people into savings, contributions and all the rest of it. When it comes to the point of retirement, the employment relationship has finished and so the choice for people to spend their money is up to them rather than the employer. That said, we know that a very large number of employers already provide free individual regulated financial advice that they pay for—I can find you the exact stats if that would be helpful. Lots of employers also refer people to guidance, but they will often work with their schemes to ensure that people are getting signposts to the right places. Few of the larger employers who have offered pensions for years would want to do nothing. Many would offer advice, guidance and signposts at the least. That would be different with a raft of smaller and medium-sized businesses coming in over the next few years. They do not necessarily know that that is something they might be able to do or should be doing.
Martin Lowes: It is very difficult to build a retirement process that depends on the involvement of the employer, because the vast majority of people coming up to retirement, as well as having the pension from their most recent employer, who they might or might not still be with, have a number of pots from previous employers, with whom they no longer have any contact. You could not build that in because there is no link any more. They have a pot from a contract-based pension scheme and no link to the employer for any kind of advice or support.
Sue Lewis: The other people you have to think about are the self-employed, of course. They will not even be auto-enrolled. In the whole pensions landscape, self-employed people are more at risk: they have more debt, more housing debt and little opportunity to save for a pension. I would just wave a flag for the self-employed.
If there are no further questions from Members, I thank the witnesses for their evidence and ask the Government Whip to move that further consideration of the Bill be now adjourned.
Adjourned till Thursday 23 October at half-past Eleven o’clock.
Written evidence reported to the House
PS 01 Mercer
PS 02 TUC
PS 03 Society of Pension Professionals
PS 04 Equity Release Council
PS 05 John Greenwood
PS 06 British Airline Pilots Association
PS 07 Association of Consulting Actuaries
PS 08 Intergenerational Foundation
PS 09 John Ralfe