Examination of Witnesses

Pension Schemes Bill – in a Public Bill Committee at 11:30 am on 23rd October 2014.

Alert me about debates like this

Dominic Lindley, Matthew Oakley and Tim Sharp gave evidence.

Photo of Linda Riordan Linda Riordan Labour, Halifax 11:31 am, 23rd October 2014

I have spoken to the Minister and shadow Minister and they have agreed that we do not need to go into private session to discuss questions before we hear from the witnesses today. We will hear oral evidence from Dominic Lindley, consultant, Matthew Oakley, head of economic analysis, Which? and Tim Sharp, pensions policy officer, Trades Union Congress. For this session we have until 12.15 pm. Would the witnesses please introduce themselves for the record?

Matthew Oakley: Good morning, I am Matthew Oakley, head of economic analysis at Which?

Tim Sharp: I am Tim Sharp. I am policy officer at the Trades Union Congress focusing on pensions and investments.

Dominic Lindley: Good morning, I am Dominic Lindley, an independent consultant on consumer and pensions issues.

Photo of Linda Riordan Linda Riordan Labour, Halifax

Thank you. I will now call Members to ask questions.

Q 165165

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon

May I start by asking Mr Oakley to give the view of Which? on what the guidance guarantee will deliver? Which issues still need to be rectified?

Matthew Oakley: Obviously, there is some uncertainty about how it will work in practice. We want to see a three-stage process where you work out how the consumer can get the information they need before the guidance session, ensuring that at the guidance session all the relevant areas of finance are covered so that the consumer leaves that session with an idea of where to take the next steps, to go to an independent financial adviser or to explore a different part of the market.

I guess the concern, particularly with reference to the Bill, is that there will be a proliferation of different types of pension and different types of schemes which might make decisions more complicated for consumers. It is really important that those be explained clearly and that the guidance cover all of those in one pot. Moving  on from there, we would like to see a clear evaluation strategy. I have heard a lot of talk about evaluating the take-up of the guidance guarantee, but I think it needs to go much further than that and evaluate each of the three stages that I outlined: take-up; customer experience of the guarantee itself; and then where people are going afterwards. So, are they taking advice from an IFA, are they just sticking with their pension provider or are they going to another place? It is essential to put that in place quite quickly.

Q 166

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon

Mr Lindley, what do you think is the level of take-up for collective defined contribution schemes?

Dominic Lindley: They definitely offer potential advantage to consumers. If you explain a defined contribution scheme to consumers they regard it as chaotic. They regard it as investment which they see as like gambling. The more you explain it, the more uncertain they become. The No. 1 question that consumers have when then are enrolled in a pension scheme is, “Can you give me any certainty about what I might get at the end?” When they find out that you cannot give them any certainty they become disengaged. Collective defined contribution schemes undoubtedly have the potential to deliver more certain pensions but also to take away some of the complexity of decision making from consumers. The Bill is about giving people more freedom and that is very welcome, but we also need to recognise that there are some people who do not want to or cannot exercise that freedom. They want the kind of relationship that might exist between a doctor and a patient. They want the kind of relationship that might exist between a doctor and a patient. They want someone to act in their best interests and help them get the best possible pension.

In terms of take-up, one challenge will be to get these schemes to achieve significant scale. Where is the capital going to come from to back them? You need either big employer groups or the National Employment Savings Trust to be interested and offer these schemes, or you need some existing large defined-contribution schemes to want to convert to CDC. That is where the biggest uncertainty is. I absolutely support making them legal, but there is gong to have to be a very detailed strategy for getting the schemes off the ground and helping them achieve scale.

Q 167

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon

You are suggesting that there is no evidence of any appetite for it at the moment.

Dominic Lindley: Not among the employers that I know. I think these schemes will develop. The key will be persuading employers to take them up. If NEST were to offer one of these schemes, that could give the market a big boost, as we have seen with NEST changing the market and how schemes are sold to employers.

Tim Sharp: Can I come in on that? Allowing CDC should be seen simply as the first stage. I am not sure at this point that you would expect to see crowds in Parliament square demanding access to Dutch-style collective risk-sharing pension schemes. However, if you asked people, there might be more demand for more secure, predictable retirement incomes. Likewise, employers might not know the nuances of CDC but might be quite keen to provide schemes that would give better outcomes for the same contributions. We hope  that bringing in a law is just the first part of this. We are keen to see the Government in particular work on consensus building in developing how these schemes can work in practice, and help build demand.

Q 168

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

Mr Sharp, following on from that, one way the Dutch have made these schemes successful is that trade unions sponsor them and encourage their members into them in each industry sector. Can you see any prospect of that in the UK? It looks a little unlikely at this stage to me.

Tim Sharp: There is certainly a role for trade unions in working with employers to develop the best pension schemes they can for workers. At the moment, maybe conversations concentrate on contributions. Hopefully, in future they will also look at the types of schemes available. We would expect unions, where they have good relationships with employers, to be working with them, where there are single employers or in helping to develop multi-employer schemes. That is how we would see the role of the union.

Q 169

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

You cannot see a car industry workers’ collective pension scheme above and beyond individual employers’ pension schemes. That is not something that you can see a trend towards.

Tim Sharp: I could see a trend towards industry-wide schemes, and I could see why trade unions might be supportive of those. That is where I would see the trade union role, not necessarily as a provider, though some might want to be more active in that way.

Q 170

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

Okay, thank you. Can I turn back to the guidance guarantee? Mr Oakley, you gave us some thoughts about how that might work. I suppose the tension is, where does guidance become advice and how much guidance can you give before you are drifting into regulated advice, which starts to get expensive and risky for the person providing it? What can be done with guidance without crossing that line?

Matthew Oakley: Reading through the responses in the past couple of days, the consensus view has been that that is possible. We are clear that there is a good level of personalised and tailored guidance that can be given helpfully. The key thing is to explain to the consumer what it is they are getting. Even the name—the guidance guarantee—can be quite confusing to consumers. They might think it is guaranteeing them an outcome. They might wonder what the guarantee is that they are getting.

We are keen that the Government, the Financial Conduct Authority and others work with industry to show consumers what they can get and what they should expect. They should know that it is not a distinct piece of advice that says, “You should go and do this.” It is saying, “Here is the kind of thing that you can be doing. Here are the questions that you could take away and speak to an IFA about. Here are the questions you should be asking of the products that you are looking to engage with.” It would really equip consumers with the tools they need to take the next step, rather than necessarily give them an answer. That is where the difference would lie.

Q 171

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

How long do you envisage a guidance session needs to be? Are we talking about a quarter of an hour, half an hour or an hour?

Matthew Oakley: It is going to vary an awful lot, of course. What we are keen on is that it really is a personalised and tailored experience. Some people will have a good idea of what their pension pots and their other investments look like, and they can go into a guidance session and have a clear conversation, and just be signposted to other places. That might be quite a short conversation.

For others, of course, we think that they will need a lot more information and a lot more guidance. That might include a repeat session, or having to come back with more information because they have not come to that first session with enough information. That is one of the key things here: we are worried that not enough is being done, particularly before the roll-out of the guidance guarantee in April, to ensure that consumers know what they need to take to that first session. What we would like to see is a much more concerted effort to ensure that consumers get a full picture of each of their pension pots, alongside each of their other investments, that they can take to that session and really start off on the best possible route.

Q 172

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

I suppose the key to making guidance work is that it needs to stick in your head and make you change your actions after you have received it. Do you have any ideas about how we could get the guidance followed up, or checked up on? Perhaps when someone goes to buy a product, say, should there be a kind of follow-up prompt in that situation, saying, “Before you sign on this dotted line, have you had your guidance? Have you thought about your spouse?”? Is that something we ought to be regulating for as well?

Matthew Oakley: This is a discussion around the kind of back-stop option. There are obviously a range of things that you could do here. Obviously there is a worry that people have not had the guidance and that they are then making decisions based on a lack of information, or just not making a decision.

Obviously, regulation is one way of addressing that, with the examples that you put forward. I worry, however, that that could have unintended consequences. So, you could ask, for instance, “Have you thought about whether you have provided income for your partner?” Of course, that pushes someone in a certain way, because we know what people feel emotionally, and so that in itself is not even an objective and clear piece of information for a consumer.

What I think we would like to see, certainly first off, is that pension providers and broader providers are working in the best interests of consumers. That means that they should be working as an industry to get best practice principles about how they deal with this situation, because they know it is coming. We know that take-up estimates vary from 3% to 93%; I imagine that it will be somewhere between those two figures. We know that a lot of people will not take the guidance, certainly initially, so the industry needs to work out how it will deal with that, and it needs to be conscious that we must improve the situation so that people are signposted regularly to the guidance.

Q 173

Photo of Nigel Mills Nigel Mills Conservative, Amber Valley

So the view of Which? is that we should rely on best practice and not on regulation?

Matthew Oakley: No. I think that is the initial point, and I am thinking back to my point earlier about making sure that we evaluate the system properly. If it is  found that people are not taking up the guidance, or that if they are taking up the guidance they are not going to see an IFA or taking other options that are available in the market, then we need to think much more carefully about whether we should and could regulate to ensure that those sorts of options are taken. What I am saying is that we should not necessarily jump to regulation, which can be quite prescriptive and can lead to unintended consequences.

Q 174

Photo of Richard Graham Richard Graham Conservative, Gloucester

I am a little bit frustrated, because this is your chance to shape the Bill—we want to hear your ideas—and it is all a bit vague and woolly at the moment. Matthew, if I wanted to know what sort of questions I should ask a second-hand car salesman about a car, Which? would give me a checklist of questions I should ask. You are the interim head of personal finance. What sort of questions do you think people should be asked during this guidance? Will Which? produce a report on that? You have done a report outlining areas where Government must focus to boost growth in the long term; how about a report outlining areas where Government guidance on pensions must focus?

Matthew Oakley: That is a very good challenge. I think I will go back to my point that I would not want to prescribe a set of things that must be ticked off and asked of a person in guidance. The key thing here is that it is a personalised experience, and that the people giving that advice are qualified and professional enough to see the whole picture of someone coming in to them and give them a routeway into further options to consider what they need to do.

Q 175

Photo of Richard Graham Richard Graham Conservative, Gloucester

I don’t think we are asking you to prescribe, but we are trying to get your best ideas, and I have not really heard one yet. Have a go at thinking about that, because we want to get the maximum out of these sittings.

Matthew Oakley: I go back to my point about making sure that people are coming with the right information. One thing that you could do quite straightforwardly is ensure that there is a one-page summary of each of the pension pots that someone has, which people are provided with before they go to the guidance, which they can collate and take in. That is one distinct thing that could happen straight away. There are various names for this—pensions passport being one of them—and that is an immediate thing that could happen.

In the longer term, you can start to think about whether, as they have done in Sweden with the orange envelope, you could start to have a data-led solution—a midata example, where you have an online platform potentially, where you can bring together information about everyone’s pensions pots in one place, alongside the state pension and alongside an understanding of their savings portfolio to really give them that information, so you can start to have discussions with them an awful lot earlier. That is the kind of thing—consumer information power—that we want to see much more of.

Q 176

Photo of Richard Graham Richard Graham Conservative, Gloucester

Tim, what about you? You are the pensions policy officer. I am not quite clear what your policy response to the Bill is and whether you are broadly supportive or have concerns about bits of it.  You intimated in your answer to Nigel that trade unions would not really be leading on creating a CDC yourselves, but that you might be working alongside an employer to do so. Has the TUC had those sorts of conversations with large employers that have, for example, existing defined-benefit schemes but might be looking to change them? Try and give us a practical sense of where the TUC is coming from and what it would like to see happen.

Tim Sharp: We are very supportive of measures to bring in CDC. In terms of the law as it stands, these are still the very early stages, in the sense that we still need to flesh out what kind of schemes will be permitted exactly.

Q 177

Photo of Richard Graham Richard Graham Conservative, Gloucester

What would you like to see permitted?

Tim Sharp: We would like to see the broadest possible range. I think that what we really need is a period of discussions between Government and employers and providers, and trade unions and employers, to develop where these schemes should work. So I think there is going to be a very different model in a multi-employer setting than there might be if there is an individual employer interested in improving their DC schemes. The role of the TUC in that is in supporting discussions.

Q 178

Photo of Richard Graham Richard Graham Conservative, Gloucester

You have not had those discussions yet with employers.

Tim Sharp: No.

Tim Sharp: It is possible. I think it is more likely that affiliated unions would have those relationships with individual companies, but we are very happy to talk to anybody who wants to discuss the merits of CDC pensions.

Q 179

Photo of Richard Graham Richard Graham Conservative, Gloucester

Dominic, you are a consultant; does that mean that you have clients with pension schemes and that you have been talking to them? I thought you were quite vague, again, in your answers to Nigel. What is the level of interest that you are seeing either in defined-ambition or the collective DC options that the Bill provides for? Are you saying that they are of some interest?

Dominic Lindley: They are of interest, but of limited interest so far. One of the big concerns is where the capital is going to come from to establish these schemes, because you either need to charge the new members at the start a bit more to build up that smoothing fund, or the capital needs to be provided by an existing insurance company or other provider.

In terms of the guidance guarantee, I am also a trustee of a pension scheme with £100 million-worth of assets, so this is certainly an area where the retirement income market—the inertia and complexity—has delivered really poor outcomes for consumers for many years. The guidance guarantee is absolutely welcome, but unless we take further action and introduce extra lines of defence, you are still going to get insurance companies defaulting people into very poor value products. They have been defaulting people into poor value annuities for years.

Q 180

Photo of Richard Graham Richard Graham Conservative, Gloucester

So what will your scheme do to prevent that?

Dominic Lindley: First, there will be strong governance around the options offered, and because it is a trust-based scheme, there will be a strong duty for me, as a trustee, to act in the best interests of my members when selecting the products, whereas that is completely absent for insurance companies.

One of the things you could do is this. New clause 5 gives the Department the power to impose a duty

“to act in the best interests of members”.

At the moment, the intention is that that will apply only to the CDCs, whereas you could expand that power to give insurance companies a duty to act in the best interests of members. That certainly would preclude them from offering annuity rates 20% off the market best. If my mum takes out an annuity with a rate 20% off the market best, that is like taking the last 11 years of her pension contributions out into the street and just burning them. Nothing in the Bill introduces that strong governance around retirement income processes.

However, there are also some extra lines of defence that need to be introduced. You could expand the charge cap, which at the moment applies only during the investment phase, to income draw-down arrangements. You could require, as was suggested earlier, an extra line of defence by getting pension schemes and providers to ask specific questions at the point at which people are making decisions.

Q 181

Photo of Richard Graham Richard Graham Conservative, Gloucester

Do you have an idea of what specific questions those would be?

Dominic Lindley: First, regarding tax arrangements, there is a big risk if you draw down your pension over one tax year that that could push you into the higher rate tax band, so people need to be clear on that. They also need to be clear on what they will live on if the money runs out, the financial position of their partner, their entitlement to state benefits and whether they have any health conditions.

However, there is also a fundamental issue with the definition of pensions guidance in the Bill. At the moment, pensions guidance is defined only as helping you to decide what to do with your pension, whereas we know that for many people the defined-contribution pension is only a small proportion of their household wealth. For one family in four, the defined-contribution pension represents only 4% of their total financial wealth.

If I was sending my mum to get guidance about how to maximise her retirement income, I would want the person to ask questions about her existing assets, her savings, how to get the best deal on them, where the investments were and whether she was claiming all the state benefits to which she was entitled. At the moment, the definition of guidance in the Bill kind of precludes that. You hope that people such as the Pensions Advisory Service and Citizens Advice would cover those issues in the guidance, but at the moment that is not in the Bill.

Finally, we need everyone to review the default investment option in their schemes. In most pension schemes, the default investment option is targeted towards people buying an annuity at age 65, whereas we know that that is not going to happen for many people in the future. But if your default investment option is, say, to go into  cash at age 65 and then the consumer is just leaving it in the pension scheme for 20 or 25 years and not actually drawing much of an income out of it, you will not only be losing money in real terms, but losing money in nominal terms. Some of the cash funds offered by pension providers are actually losing consumers money, because their charges are greater than the tiny rate of return you are getting on cash at the moment.

Again, at the moment, in a trust-based scheme, there are strong duties on the trustees to act in the best interests of members. Those duties are absent for insurance companies and for contract-based schemes. We are kind of relying on the FCA, and as you saw earlier in the week, the FCA does not seem to want to introduce even the second line of defence by getting providers to ask specific questions at the point at which people access their pension.

Photo of Richard Graham Richard Graham Conservative, Gloucester

Thank you; that is very helpful.

Q 182

Photo of Angela Watkinson Angela Watkinson Conservative, Hornchurch and Upminster

One of the most important things to a pension saver is certainty about what will happen at the end of their working life when they retire, so that they can plan their retirement and have some certainty about their retirement income. Do you think that the new shared-risk schemes will increase certainty, compared with existing defined-contribution schemes?

Tim Sharp: On collective defined contribution, where we have the greatest hopes, the modelling that we have seen certainly shows more stable increases in the size of the pension pot and greater increases, so we would be hopeful that that would meet that sort of demand.

Q 183

Photo of Angela Watkinson Angela Watkinson Conservative, Hornchurch and Upminster

Do you think that the increased complexity in the range of pension schemes available to people now will result in higher take-up than we see at the moment?

Tim Sharp: There is clearly a need to build trust in the pensions system. Dominic touched on this as one of the issues. One of the slight concerns we have about the Bill is about governance. That has been tightened up, but we think that it is important that consumers have trust, particularly in new forms of pension scheme, so we would regard, for instance, CDC as being most appropriately introduced under a trust-based model, whereby trustees are obliged to act in the interests of scheme members. I am talking about those sorts of development. A general move in the market towards trust-based schemes would help to foster trust and over the longer term build contributions and participation in pension saving.

Q 184

Photo of Angela Watkinson Angela Watkinson Conservative, Hornchurch and Upminster

Do you think any further regulation is needed to increase that and could it be included in this Bill?

Tim Sharp: We are disappointed that when it comes to the new forms of pension scheme, contract-based arrangements can be allowed. We think there are too many conflicts of interest when a provider must not just think about acting in the interests of scheme members but also has that profit motive. We think that schemes are best as not-for-profit trusts that then contract in services from elsewhere. We would prefer to see things like CDC only introduced under a trust model.

Q 185

Photo of Angela Watkinson Angela Watkinson Conservative, Hornchurch and Upminster

Do you see any difficulty in the new shared-risk schemes having a viability level, and that people will want to hold back and see how successful they are before they join them? If they do not join them, they will not reach that volume whereby they can achieve viability.

Tim Sharp: The hope would be that employers with large schemes would initially convert to one of these new models such as CDC, therefore providing some initial capital. You can easily envisage two or three big employers, which already take their pension provision very seriously but currently have DC schemes, looking to move to things like CDC. The challenge will be rolling that out across the market and seeing the development of multi-employer schemes and so on. We think there could be a role there for allowing NEST to operate a CDC scheme as a way of building scale in the market and showing that it is viable.

Q 186

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Dominic, you gave a useful and detailed list of things, taking up Richard’s challenge to fill in many of the blanks in the existing guidance proposals. Have any of your organisations been asked to contribute to the Treasury’s development of the guidance guarantee?

Dominic Lindley: I have not personally.

Q 187

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

So we are all working with a foggy mist descending on this policy area. On the question of making this guidance guarantee worth the paper it is written on, first and fundamentally, how can you help individuals to predict their own longevity?

Dominic Lindley: I don’t think you can. People underestimate their own longevity. What you need to do in terms of withdrawing from your pension is to be clear at the start and it needs to be reviewed regularly. Not only do you need a pensions passport at the start—because if you have four separate pension schemes you need to bring them together, know where they are invested and know how much you have in total—but you almost need some kind of dashboard which, as you withdraw money from your pension every month, shows you whether you are going too fast or too slowly. That is the other risk: you just leave the money accumulating and do not spend it, even though you need it. If you are given a pensions dashboard, which shows at your current withdrawal rate when you will run out of money, then you can adjust that.

One of the big issues about income draw-down is that more people will use it and those products have both investment and longevity risk. If you live through a period of very volatile returns, like the financial crisis, then if you keep withdrawing at the same rate you will pretty soon run out of money. So the guidance guarantee not only has to be an at-retirement thing; it has to have space for regular review. Fundamentally, on income draw-down, those products have to offer value. You are taking extra risk by staying invested in riskier assets. If all of that extra return is going in charges, you are not getting any benefit.

Finally, annuities are not going to completely disappear. Many of them will be bought later and will remain appropriate for people to buy at much later ages. We have to make sure that people get asked proper questions about medical history. We have to stop insurance companies  offering poor rates. So you can put regulation on insurance companies to act in best interest or you can set up an annuity clearing house like they have in Chile. If a consumer wants an annuity quote, they can go to the clearing house and get a competitive quote even though that might not be the absolute best.

Q 188

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Thank you for that very useful answer. Does the panel agree that we are clearly moving towards a system of much greater participation in draw-down? While the phase of building up the pension has been a thrust towards better, not necessarily more, regulation with better quality criteria and the like, as we move into the new draw-down world there is none of that as things stand. There is no proposal from Government to extend the cap, as you suggested, into the draw-down phase or to have those quality criteria that are there in the building of the pension pot. Is that surprising? Is it a problem? Have you heard anything about the possibility of the Government moving?

Dominic Lindley: Not at this stage, but I think we are all relying a bit too much on the FCA to act on those things. As we have shown, with its proposals on independent governance committees, it is not imposing the kind of governance arrangements and duty to act in the best interests of consumers that most consumers need. If the FCA is not willing or able to do it, that is where the Government are going to have to step in.

At the moment, the FCA seems focused on setting standards for the guidance guarantee, which are very important. It is almost designing a leaflet to ensure take-up when it should be focusing a lot more on the regulation of insurance companies and the emergence of some alternative products. You probably will not have people being sold annuities any more. They will be sold secure income plans, which will be fixed-term annuities for a number of years and then you will get your money back. The FCA should be watching closely and reviewing every single product when it comes on to the market.

The final thing, and one that worries me, is people falling prey to scams early next year. If you search for pensions advice or guidance on Google, you will get a lot of websites where they are not actually providing you with pensions advice or guidance. All they are doing is getting you to type in your information, which is then sold on to various people. We must have additional warnings for people who fall prey to unregulated investments and scams.

Even if you go into a high street bank, if a very elderly person comes in and withdraws large amounts of cash, most staff would have been trained to ask questions about that and double-check. Those sort of policies are completely absent with insurance companies. They have never really had to think about them before. They need to do some thinking pretty quickly before next April.

Q 189

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

I intend to move on to CDC shortly. First, the FCA’s evidence seemed extraordinary to me, making it clear that it would not get involved in anything other than setting the guarantee guidelines, and would not get involved in those extra lines of defence. Have you any opinion why that might be? Is it a capacity or philosophy issue? We know that the FCA does not have a great record on pensions.

Dominic Lindley: It is partly philosophy. The FCA is very driven now by risk it identifies. It has a kind of conduct risk outlook that identifies the risk across lots of different financial products. There is virtually nothing about auto-enrolment pensions or workplace pensions in the previous conduct risk outlook. It has been doing a market study on annuities for about nine or 12 months. Even when that market study concludes, it will then go into a next stage of proposing changes, which will probably be too late. There definitely needs to be a greater sense of urgency.

Tim Sharp: We’re concerned that the guidance guarantee maybe gives a false sense of security that somehow, through a half-hour session, you will create this perfect consumer operating in a perfect market. A lot of Government policy so far, through auto-enrolment or the charge cap, has accepted that it isn’t there and is very hard to create. We think there should be a lot more emphasis on helping schemes to develop strong default options. Particularly with the time scale of bringing in the freedom of choice measures, the schemes are reporting that they are not necessarily going to be able to do all that they would want to bring in robust retirement income options for scheme members. That concerns us greatly.

Matthew Oakley: I share that concern, particularly around whether we are going to see a continued inertia from consumers. Again, I go back to the point that we really need to keep testing this and have a clear evaluation strategy that says who is taking the guidance, what they are going to do with it, and who has continued to stay with their pension provider when they hit retirement and what are they going into. If we decide in six months, or a year or two, that we have not had an improvement in this market in terms of consumer engagement and making informed choices, we need to consider much broader options. There are other options out there: there is potential for a state-backed scheme, post-retirement; there is potential to draw on the example of NEST, and to use a default scheme on the decumulation side as well. There are options there that we can take, but I would not rush into them right now.

Q 190

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Matthew, perhaps I am putting you on the spot, but do you think that the Financial Conduct Authority’s history in this area suggests that it is up to that task?

Matthew Oakley: Up to the task of evaluation and taking action? I am not necessarily saying that this should be incumbent on the FCA. The Treasury and the Department for Work and Pensions are highly invested in this. It needs to be a joint programme of work between those three bodies to work out what is happening, and we need some serious consideration of how it will happen. We need to start collecting data now that say how consumers are engaging and behaving, and what they think of the guidance guarantee and the market once they hit retirement. That needs doing; otherwise, we will end up in a situation in five years’ time where we basically do not know what has happened, and that is a real worry.

Q 191

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

On that point, there was a very good question asked the other day—I cannot remember by whom—around the sharing of information between the various agents in the guidance process.  It was asked whether Citizens Advice and TPAS in particular had shared IT systems, to allow them to call up previous engagements with the guidance process. The answer given was no, as far as we are aware. Is that the kind of area where we will have to see movement quite quickly?

Matthew Oakley: I would hope so. That talks to the point I made earlier around having a combined view of the person’s investments, savings, and pension pots. You could imagine in due course that each of those guidance providers could have access to those with permission from the consumer. My worry is around consistency across the country between providers, and between face-to-face, online and over the phone. There is a worry that consumers will face detriment because of the choice of where they go or where they live, not because of their poor choices. For me, it comes down to ensuring that we have the information available to say, “It is working here, but not there,” and to take action as soon as possible to rectify that.

Q 192

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Let me ask about CDC, the larger part of the Bill. I want to try to put this as simply as possible, because there is a lot of ground to cover. What is the fundamental problem with individual DC, which collective DC has the potential to solve?

Tim Sharp: We think it is fundamentally inefficient. You have got lots of little pots of money that are being invested. You have efficiencies through having one big pot of money. I think that feeds through to the investment choices that can be made. When you have collective schemes with lots of members, you can invest in a broader range of diversified assets and, hopefully, have a smoother growth in the pot.

The final part of it is around the retirement income. CDC provides the ability to share longevity risk across a big cohort of people, rather than the expensive process of either draw-down or buying an individual annuity, which you would have to do under an individual DC.

Q 193

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

Dominic or Matthew? Only if you wish to.

Dominic Lindley: I would absolutely agree with those. It provides greater certainty to consumers and greater efficiency, and takes away the burden from consumers of making complicated decisions. I have seen market research around the new freedoms where consumers say they want freedom and choice, but a substantial proportion also wants a secure income for the rest of their lives. Many do not want to make complex choices. At the same time as we are introducing a welcome additional freedom, we have to ensure that that option is there for people who are not willing or able to make those complex and very difficult decisions. It is very difficult to decide exactly how much you want to draw out of your pension each year, and how long it is going to last.

Q 194

Photo of Gregg McClymont Gregg McClymont Shadow Minister (Work and Pensions)

With the Chair’s permission, can I ask another question? If anyone else wishes to come in, please stop me. There are different forms of CDC. There was an interesting exchange between Richard and Nigel and previous witnesses around how one puts into practice making CDC work, and whether the pooling of risk is intergenerational or within one generation. What do you think in reality is likely to be the form of collective defined contribution that first emerges after this Bill?

Dominic Lindley: One thing to point out is that there are already schemes that involve some risk-sharing and smoothing. They are called with-profits funds. They have been around for many years. Some of them have not provided particularly good outcomes, partly because, as Tim said, they were run by insurance companies that put shareholders’ interests above the interests of consumers. Some schemes smooth out the return over time. Again, somebody will have to provide capital to back those schemes, or you will have to charge the first lot of members a bit more to build up that fund. That is a big question that still remains to be answered.

Q 195

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon

Probably my question was asked with more skill and guile by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East. I was listening to some of the interchanges, particularly the comments from Mr Lindley about the FCA. I would be a bit blunter than the shadow Minister and say that I rather detected from your comments that, given its preoccupation with its regulation of banking, you had a low level of confidence in its ability to regulate in this area.

Dominic Lindley: Yes. The pensions regulator has the right ideas, but it lacks the capacity, the powers and the funding, and it does not cover contract-based schemes. The FCA has been slow. I will give you one example. Consultancy charges could have resulted in people being charged very high amounts of money when they were auto-enrolled. I was warning about risks of high charges for years, and the FCA did not take any action. It took the Minister to intervene and ban consultancy charges. The FCA still did not do anything about them. At the moment, the jury is still out. I really worry that it will spend a lot of its time designing a leaflet to go into the pack that consumers get at the time. While it is important, it will not provide that second line of defence, that strong governance and that cap on charges that consumers will need to protectthem.

Q 196

Photo of Stephen Hammond Stephen Hammond Conservative, Wimbledon

With regard to your very last comment about with-profit schemes, it would be fair to say, would it not, that a number of with-profit schemes have been highly successful and have generated significant benefits to the members of those schemes? It is important that we put that on the record. Your comment rather suggested something else.

Dominic Lindley: Certainly a lot of with-profit schemes, and even with-profit schemes that were supposed to be run in the best interests of members—Equitable Life, for example—made a big mistake in not reserving for the guarantees that they had offered to members, and then got into significant difficulty. Other with-profits funds such as Prudential have delivered very good long-term returns with smoothing. The real difficulty came when the initial company that set up the with-profits fund sold it on to a consolidator who started to run the fund more in their interest than the interest of consumers. As those funds are closed to new members, they are not interested in attracting new members, which pushes down the performance. Funds such as Prudential are still open and interested in attracting new members.

Q 197

Photo of Richard Graham Richard Graham Conservative, Gloucester

I am conscious that time is running out, so this will be a very quick soundbite. On that last point about with-profits schemes, these were  totally inexplicable to the consumer. They made huge mistakes and they blew up. Do the three of you really feel that they can be resurrected in the way that people can understand, and without the risks of them blowing up?

Tim Sharp: The point at issue here is around scheme governance. If it is run by trustees operating entirely in the interests of scheme members, then a lot of the problems we saw with with-profits should be avoided. There are more potential conflicts of interest in contract-based schemes, but the moves to place obligations on managers—

Matthew Oakley: I agree with that. The only thing I would add is that consumers need to understand what they are getting into. These schemes are by their nature welcome, in terms of innovation and delivering more certainty in retirement, potentially, but they will be complicated. Consumers need to understand that.

Dominic Lindley: With-profits funds are another example of failed FCA regulation. The FCA required with-profits funds to set up what it called with-profits committees to provide some kind of independent judgment. Of course those with-profits committees could include people from the insurer executives, including executives from other insurers. The FCA is really repeating those mistakes when requiring contract-based companies to set up so-called independent governance committees. The FCA really has not learned its lesson from with-profits funds. The other issue is that the FCA allowed proprietary companies to raid the with-profits funds to pay compensation when the company mis-sold a policy.

Photo of Linda Riordan Linda Riordan Labour, Halifax

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank the witnesses on behalf of the Committee for their evidence.