‘(1) The Chancellor of the Exchequer shall, within one year of this Act receiving Royal Assent, publish and lay before the House of Commons a comprehensive review of the impact of the changes made by this Act to the Finance Act 2004 and the Income Tax (Earnings and Pensions) Act 2003.
(2) The information published under subsection (1) must include—
(a) the distributional impact, by income decile of the population, of changes made by this Act to the Finance Act 2004 and Income Tax (Earnings and Pensions) Act 2003;
(b) a behavioural analysis;
(c) an analysis of the impact of this Act on Exchequer revenues;
(d) an analysis of the impact of this Act on the use of salary sacrifice arrangements; and
(e) an analysis of the impact of this Act on the purchase of annuities.”—(Cathy Jamieson.)
I beg to move, That the clause be read a Second time.
I hope that my powers of persuasion are slightly more successful for this new clause, although I hae ma doots, as they say in my part of the world, and possibly yours as well, Mr Weir. I will do my best to put forward the case for new clause 3.
The new clause asks for a review. I do not need to go through all the areas that we debated earlier today, but we need a review to look at how the Bill is implemented in practice. As I have said on numerous occasions, I am giving Ministers and the Government the benefit of the doubt, but I am weighing their intent against what the industry and consumer organisations are telling us about the potential problems. I do not want to go over the issues that we have already debated on the guidance, which is not in the Bill but is none the less integral to it. To a large extent, the potential for success or otherwise of the measures in the Bill is linked to the effectiveness and operation of the guidance guarantee. I have expressed concerns on several occasions about the mixed messages we have received about what the guidance will look like in substance.
On Second Reading, I highlighted the apparent dichotomy between the views of the FCA and those of the Minister for Pensions, who seemed to imply that the guidance would not be regulated, personalised or product-specific, but would be substantially cheaper than advice and would be enough
“to get people to base camp”.—[Official Report, 2 September 2014; Vol. 585, c. 199.]
However, that was at odds with the view of the FCA, which said that the guidance should be an interactive exchange setting out
“the relevant options, and key facts and consequences of each, including financial consequences, e.g. tax implications.”
We have all heard about the study conducted by the Chartered Insurance Institute, which suggested that, although take-up of the guidance might be higher than had been suggested elsewhere—for example, the Legal and General pilot suggested that it could be as low as 3% and the Pensions Advisory Service said it could be about 25%—customer expectations would also be high. We are back in the unknown. We do not know how many people will take up the guidance guarantee, how many will use the flexibilities that the Bill will introduce and what the behavioural impact will be.
I appreciate the question. In terms of the wording, as the hon. Gentleman is aware, the guidance is dealt with in the Pension Schemes Bill. I am quoting it to back up why we need this new clause. The new clause aims to cover a range of specific areas on which the review would focus, but would also allow for a review of the operation of the Act in the round. The reason why we have chosen a year is that there has been a considerable amount of pressure to get to the point of implementing this Bill on 1 April. It would seem odd to say, “Yes, we can do this for 1 April and the industry will respond and everything will fall into place on that relatively short time scale, but we are not going to look at the outcomes until a couple of years down the line.” We very deliberately wanted to see what the impact was in the first year, so that any lessons from that year could be learned and changes, tweaks or amendments could be made at that time, on the basis of understanding the behavioural impact in that first year.
I understand the hon. Gentleman’s point. Perhaps the Government can give us more information on the expected date of Royal Assent. We have had the debate about delay and the Minister did not accept that suggestion. I am not advocating a delay in the implementation of the Bill. I am not sure whether the hon. Gentleman is suggesting that there is not going to be enough information within a year, or that we need longer to collect the information and understand the behavioural impacts. I would be grateful if the hon. Gentleman would clarify.
I think the matters that we are talking about today, particularly on taxation, will make it quite difficult to establish what everybody has done, in the middle of a financial year. Were the Committee to agree to a review, I would have thought that a financial year would be about the minimum time that one could consider, to get sensible information.
Perhaps the hon. Member for Redcar wanted to take up my suggestion of a delay of one year. I am not clear whether he could put that suggestion before the Committee if he wanted to.
As I have said, I am not suggesting that the whole Bill be delayed. I hear what my hon. Friend is saying, but I do think that we have an opportunity here to insert a new clause that provides the basis on which to have a review and bring back further information. That is going to be important.
The behavioural impact here is absolutely crucial. To go back to the Legal and General pilot study, one of the comments made was about the importance of personalisation. We just do not know how people will get the advice, guidance and information, how many people will have the regulated advice or take up the guidance guarantee or how many people will rely on having a look at a website and making their own decisions. The study showed that the way the guidance guarantee was delivered was very important; 70% of the people felt it important that the person delivering the guidance guarantee was fully interacting with the consumer, and not simply reading from a script. Some 66% expected that they would be asked detailed questions about their circumstances, for example, other financial holdings, family and health information and attitude to risk. That question of attitude to risk will be for many people, if not a new concept, in their face as never before when they take these decisions. That expectation from people accessing the schemes sounded considerably more detailed and substantive than the form of guidance I understood had been described by the Pensions Minister.
In last week’s evidence session, Rachael Badger of Citizens Advice, one of the bodies responsible for delivering face-to-face guidance, told us:
“Guidance sessions will be tailored to people’s circumstances. They will cover things such as tax benefits, possible social care needs, savings and debt; there will also be signposting to regulated advice if that is appropriate.”––[Official Report, Taxation of Pensions Public Bill Committee, 11 November 2014; c. 23, Q34.]
That is a fairly substantial piece of work; it is quite a tall order. She appeared relatively confident and happy that CABs had the capacity to deliver that guidance. However, she went on to mention the need for training, delivered by paid staff who would need to be recruited. In raising questions on this, I do not intend to criticise Citizens Advice, an organisation I respect. However, it is another of those challenges. If the guidance guarantee is not absolutely in place, is not clear and is not consistent, it could have an impact on behaviours, which would need to be assessed.
Having served on the Pension Schemes Bill Committee, I have been through these issues once or twice before. It would be useful to understand what modelling the Government, the FCA and now the providers are using to decide how long these sessions are meant to be, how much they will cost, and how much levy there will be on the industry. That information would settle a lot of questions.
I am grateful to the hon. Gentleman for raising those points. I appreciate that he served on the Pension Schemes Bill Committee and a number of other Committees of which I have also been a member. I know that he takes these issues seriously and probes all the details.
I had hoped that, if the Minister did not provide the information, the hon. Gentleman would do so, with the benefit of his experience. However, he does not know the substance of the guidance, notwithstanding all the time he spent on that Bill Committee. That makes me even more concerned not only to press to get this right from the outset but to get it reviewed in due course. It does seem a huge amount of ground to cover in a short time.
The reply to the hon. Member for Amber Valley is that we are not seeking to impose more expenditure on the Government. These reviews must in any event be carried out internally in the Treasury and other Government Departments concerned with the implementation and success of this policy. It is a question of transparency. We want to see what is happening so that we can avoid the sudden emergence of a scam, as has so often happened in this industry in the past.
Once again, my hon. Friend makes an important point. Consumers want to be able to trust pension providers and be confident that the information they get is good quality and suited to their circumstances and that they are not going to be ripped off.
Before we suspended for the Division, I was talking about new clause 3 and the need for a review of the implementation of the Bill. A number of issues have been raised about the timing of the Bill and the scope of the new clause. If hon. Members suggest that something should be added to the proposal even if it is not accepted today, I am sure there will be a further opportunity to consider how we might improve on it. I am always open to suggestions from any hon. Member as to how we might table a new clause that would find favour with the Minister. I can see from the look on his face that I would be unlikely to get that support at the moment.
I was talking about some of the evidence submitted to us, particularly in relation to the guidance guarantee and how critical that is to the effectiveness of the Bill. Various concerns were raised, and the representative of the Financial Services Consumer Panel said:
“We are very worried about the face-to-face guidance delivery. It is a huge challenge for CAB to get ready for April.”––[Official Report, Taxation of Pensions Public Bill Committee, 11 November 2014; c. 12, Q14.]
Again, we see that difference of opinion. Citizens Advice is determined. It wants to do its best and ensure it has everything in place—it wants to ensure that it has staff in place, that the training is done and so on. At the same time, people are concerned about those time scales and whether there will be the consistency and quality we want. The Minister said something about that earlier. He seemed to be confident that everything would be in place and it would all come together. Perhaps, on reflection, he wishes to say something that will influence whether I press the new clause to a vote. I am willing to listen.
It is not just about the short time scale to get the guidance in place and get it right. One crucial point that has been raised is the take-up of the guidance. Will the initial take-up of the guidance be low, will people use it, and how useful it will be? The other question posed by Members today was whether the people who will access the guidance guarantee understand that it is not regulated and that, therefore, there is no redress. We need to consider that when information goes out.
It has been suggested—some may think this is unfair—that the first tranche of people who go through the process using the guidance guarantee are effectively the guinea pigs. How much will we be able to learn from that and seek information back from them to find out how useful they found it? How many of them, for example, will be signposted to take regulated advice, and what will they feel about their experiences? Those are the kind of things I hope to capture as part of the process of a review of the legislation.
Does the hon. Lady concede that other countries have gone down the route of allowing greater flexibility when people reach retirement? I am thinking of Denmark and Australia. There is already a lot of evidence that people can be trusted to be responsible with choices about their pension funds.
I thank the hon. Gentleman for that intervention. Throughout the debate I have been at pains to say that, for me, this is not a question of our trusting people to do what they ought to do with their pension funds. We have to trust that people will be able to take decisions, but when we put in place such legislation, we have a responsibility to ensure that people have access to appropriate information that allows them to take the best decision possible.
I do not want to go over all the things I have been saying today. It is the Government’s stated intention that they want pension reforms to give that freedom, choice and flexibility, but also that the reforms ought to allow people to plan for their long-term retirement. I keep stressing the point about the longer term, because the fear is that, if people make the wrong decisions at an early stage, it may seem like a quick fix to deal with things that are going wrong in their lives. They may want to pay off a mortgage or take that holiday that they have never had to the other side of the world to see family. Indeed, they may want to buy a car, although in most circumstances it will probably be more modest than a Lamborghini. None the less, they also need the information, guidance and, in some cases, that regulated advice, to ensure that the decisions they take at that early stage do not have a negative impact further down the line. We could have a series of new products coming on the market and we do not know their shape or scope, or how they will work in practice. This is not about saying to people, “We don’t trust you”; it is about saying, “We actually want to give you the best possible advice to enable you to take that decision in your own way and in your own time.”
People do not have to take the decision right at the beginning, when the new regime comes into place—people need to understand that, too. However, concerns have been raised that, in the early stages at least, some people may be guinea pigs, as it has been put. If we go back to the evidence session, Adrian Boulding of Legal & General used the analogy of the toothpaste being out of the tube. I suspect that anyone who has ever dealt with toothpaste tubes knows that it is probably harder to put the toothpaste back in than it is to put the genie back in the bottle. That shows just how seriously he was taking it. Once the changes are made, we will have to live with the consequences.
We have a responsibility to people between now and then to make the best use of our time to get the guidance guarantee in place. Equally, we have a responsibility to future generations of people to learn from anything that takes place in the first few months or the first year. That is why we also heard the call for further support for a backstop option as a second line of defence, as it has been called—the Minister referred to that in his remarks this morning. As the Financial Services Consumer Panel representative said, there will be people who completely miss the guidance service for various reasons. A lot of consumers do not understand what they are giving up by going straight to the provider. There needs to be a second line of defence, but that cannot be too prescriptive. We need to put all that in place, and we need to understand the behavioural impact as the process goes through. We need to be able to change, amend or adapt as we go through the process.
As an example of support for the concept, we heard the idea of a sanitised pension passport that would be received by all consumers—that was supported by a number of organisations, including the ABI. It would give people information, but would also flag up the guidance. Those are the kind of things that will be discussed and looked at in the next few months.
From everything that has happened since the Government announced the Bill—the oral evidence in Committee, the written evidence, the informal discussions and the comments made—we have seen the series of concerns that people have. People are not saying that they are not going to work with the grain of the Bill. We want it to work in the best interests of consumers. I have no doubt that that is what the Government want, but we have a responsibility to put in place everything possible to make the system work, and to put in place a process by which we can review and learn from it. That is why we tabled new clause 3.
We want information on salary sacrifice because we are not entirely convinced that the Government have fully looked at that and closed all potential loopholes. If we can look at that during the process of the first year of operation, we may well want to make changes if necessary—the Bill allows for further amendments to be made in due course. It is important that we put something in place to look at that. I believe that some of my hon. Friends wish to raise concerns while supporting the new clause, so I shall draw my remarks to a conclusion to allow others to speak.
It is a pleasure to speak under your chairmanship, Mr Weir. My hon. Friend has focused on the nub of the question, which is the need for a behavioural analysis. I hope that, when the Minister responds, even though he might disappoint us, he will demonstrate that a proper analysis of behaviours will take place and appropriate action will be taken. In the course of the debate, and in the oral and written evidence, it is clear that there are a number of significant areas of concern. As my hon. Friend says, the toothpaste is out of the tube and we need to live with the consequences. The majority of people from whom we have taken evidence want to embrace the future, but to do so in a way that minimises risks to individuals and to the UK economy.
As a Government member of the Committee indicated, a number of cases of mis-selling of products have had significant consequences for individuals and reputational consequences for financial services. Indeed, there have been consequences for the general public’s confidence in this and other places. Behavioural analysis of what happens as a result of the significant and welcome changes is very important. The guidance guarantee is at the heart of the matter. Getting that right and having an effective impact on the system is crucial to its success for individuals and the state.
One bit of evidence that we had from Adrian Boulding of Legal & General raises concerns. There was a lot of interest and attraction when people were surveyed initially about the pilot guidance offer that Legal & General put in place. Adrian Boulding said that
“90% of consumers said that they would be likely to take up an offer of guidance.”
However, when the pilot went ahead, only 3% of consumers actually took up the offer of guidance. That gap between hope and reality is a concern. If that happens for real—the Bill is far more significant than a pilot—the consequences could be considerable for individuals and the state. That needs to be looked at carefully.
When pressed in further evidence, one witness gave as a possible explanation for the low take-up of 3% that at the point of the money becoming available people just want to get their hands on the money and get going, as it were. We can very much understand that desire. That comes back to the concern that has run as a golden thread throughout our consideration of the Bill: much of the media focus has been on access to finance rather than on someone planning their affairs around pensions, so that they—everyone’s circumstances are different—are better able to make the right decisions to support their longevity into the future. We have heard concerns from the ABI, for example, that if it is handled in an unfortunate way, the Bill might result in additional pressures on care services, which no one would want. I am sure it is not what the Government intend.
There are behavioural analysis issues that need looking at in relation to how the guidance guarantee works and how that impacts on behaviour. That is important. Secondly, there is the problem that has been identified on the future impact. Is there a possibility of creating circumstances that result in another mis-selling episode? That would create all sorts of chaos, which would make the Arch Cru example and others of small importance in the grand scheme of things. That is a genuine worry and concern. Analysis of the Bill’s behavioural impact would be a safeguard against that. If anything inappropriate was happening or the safeguards were not strong enough, that could be addressed, sooner rather than later, which would be to the benefit of everyone.
I have been listening intently to what my hon. Friend says about the behavioural issues. Does he agree that there needs to be a clear focus on the potential behavioural impacts in relation to tax avoidance? It is the nature of things that as soon as a scheme is put in place, there will be people who will try to find their way around it.
I thank my hon. Friend for that. Indeed, the third point of concern I identified was the behavioural impact in tax avoidance. The Minister has rightly recognised that concern and taken action to reduce the possible impact of tax avoidance. As we have gone forward, he has given answers that give greater assurance, but not total assurance, because we do not know what will happen. To be fair, he is frank, open and honest about that. That we do not know what will happen is the very reason why an analysis and review would help. In line with the evidence presented to us by John Greenwood and others, a review would highlight tax avoidance, if it happens—we hope it will not—and allow early action to address it, rather than it becoming a great problem.
Having served on this Bill Committee, those are the three things I am most concerned about. A review of what is happening, in line with what my hon. Friend the Member for Kilmarnock and Loudoun has tabled with new clause 3, would assist with those concerns. My first concern is about how the guidance guarantee is operating and how people are behaving in relation to it. Secondly, are there any behaviours that might create the circumstances of mis-selling, which would create great concern? My third concern is on the recycling around tax loopholes, creating a tax avoidance problem that needs to be addressed immediately.
It is a pleasure, Mr Weir, to serve under your chairmanship. I want to make a few points in support of the new clause. I support the review because, although most of us would agree that the annuity market has not worked well for annuitants for a long time, we do not know what will happen. The important thing to recognise is that the decision is not like buying a mobile phone, where, if it does not work, it can be traded in for a different one the next year. It is a one-off decision that will affect individuals and their family for the rest of their life. It is therefore really important that we get it right.
We agree that we want pension flexibility, but there are a number of risks, all of which seem to fall on the person who is about to retire. There is a risk that a person might pay too much tax, run out of money, purchase the wrong product or leave their spouse with no money should something happen to them. Those are all important issues. A review will show us whether things have gone as we intended. We all hope that opening up the pensions market will work well for the consumer, but, as is the case whenever anything is opened up to the consumer, we know that, as we sit here, people are working out exciting products to sell to people whose knowledge of the market is relatively unsophisticated. It is important that we have more than a single line of defence. The Minister has mentioned a second line of defence; if we are to have one, I hope that it is in regulation rather than voluntary, because there has been a circular dance of voluntary regulation in the annuities industry that has not worked.
We are discussing taxation—this is the Taxation of Pensions Bill—but a large number of people in this country think that pensioners do not pay tax. That is some people’s level of understanding. Has the Minister considered any options for public information or advertisements?
My hon. Friend makes an important point and also raises a question: by the time people get to the stage of thinking about their retirement options, is it not rather late in the day for financial education? Should such education not come much earlier in the process in order to avoid misconceptions?
I agree that financial education must start an awful lot earlier, although next April might be a bit too soon for some people. We need to ensure that people are saved from making bad decisions that they will live with for the rest of their lives. It is therefore perfectly reasonable to ask for a review.
If the Minister thinks that a review is unnecessary, perhaps he has a better idea about how things are going to play out than we do. Currently, the guidance guarantee is voluntary. We all hope that 100% of people take up that guarantee, but at what take-up percentage would the Minister consider it to be a failure? Should we not have a review so that if, for example, only 10% of people take up the guarantee, we know that we are heading for a storm? Will the Minister explain more about the second line of defence, how he thinks it will be put in place and whether it will be regulated or purely voluntary? Also, what would he deem to be a successful rate of take-up for the guidance guarantee?
My hon. Friend has just spoken with immense sense. I think that her contribution will be proved very prescient if the Bill becomes an Act and things progress in that direction. She raised the issue of regulation, which is in part at the core of new clause 3. The whole point is to get an early warning of when things are going wrong or, indeed, to laud the Government and the industry if everything goes right.
As legislators, our job is to foresee the worst—to know that it is going to happen. Although regulation may appear negative and boring, nothing reveals how important it is better than the history of the banks and the banking crisis. The Government and the industry say that we can take matters only so far in terms of spelling out the warnings—that is the point of a health insurer or a lifetime solvency issue. When it comes to those who are reaching pension age over the next few years—the newcomers to the new set of arrangements—we cannot have the industry sounding like Pontius Pilate, saying, “There you are; we have given you all that you need to know in the dense prose of our circular letters,” and then sitting back and saying, “Now it is up to you.” We cannot do that.
Although the Government are not directly responsible and the industry is not directly responsible—it puts out its guidance and we are held to account directly on the question of regulation. What nobody could understand was how the banks were allowed to build up such liabilities and make huge loans. The value of assets under management with the pension companies is 25% of our total national net worth, as we heard earlier. We found that the Royal Bank of Scotland had borrowings nearly as great as the total that the UK had borrowed; it had taken on liabilities to that extent, but how could it, with such a tiny balance sheet, engage in borrowing to such an extent in the name of a bank—
The point that the hon. Gentleman is making is all well and good, but surely the Government are trusting people. My constituent who said, “I saved this money. This is money that I have actually accrued over a period of time,” was saying that he would do a much better job looking after this money than all the institutions that the hon. Gentleman is talking about, which obviously lost it.
I take the hon. Gentleman’s point. He speaks with a great deal of knowledge of this industry and experience in it. Trusting people is all well and good, as is trusting people with their money, but if he wants to go back, that would be, as I have said before, a nanny state approach. Indeed, I think it was an adviser to the ABI, Dr Braun, who said during our first sitting that she wanted people to get into an adult conversation. However, people do hold us to account for regulation, and regulation of the industry is at the centre of what will be necessary if this arrangement is to work in future. For regulation to work there has to be timely, relevant information. A review of the kind proposed in the new clause would surely set out to do nothing more, but nothing less.
It is amazing how people say, when see the evidence of what is taking place, “Oh, gosh! Look, something’s going wrong. I never realised that.” Unless Parliament is confronted with that evidence in the first place—hence the annual report to Parliament, after a year—and that is regarded as necessary, people do not realise what is happening out there in the market. We tend to live in a hermetically sealed, pleasant environment in the House and we see our constituents, but when all the things were happening in the banking world nobody—not even the Treasury—seemed to have any clue at all of the full extent of the liabilities that were being accrued by irresponsible banks.
Returning to what the hon. Member for Hexham said, certainly, nobody wants to try to cater for every need. No doubt some people will make a huge success and will make a lot of money, but I doubt that they will be typical of the people I represent in Coventry North West and many other people throughout the country. I am not sure that those people would break down on any particular ideological or party lines, but they would be a minority, albeit vocal and successful, and long may they do well; but even they could come unstuck and look to us to deal with this issue. Regulation cannot be reduced to the concept that the hon. Gentleman mentioned, although I know that he has great experience in the industry.
Regulation will be essential. So many different public bodies are involved, including the Treasury, HMRC, the Department for Work and Pensions, the Financial Conduct Authority—the regulator—and the Pensions Regulator that the process is almost tailor made to lead to all sorts of different problems falling between the gaps or cracks in between these overlapping organisations.
My hon. Friend makes a powerful argument for why there ought to be a review. Does he agree that, given the number of different organisations and bodies involved, there needs to be a focal point to ensure that a review takes place, because otherwise things could fall between those organisations or, indeed, not be addressed?
I agree. I was trying to make precisely that point. What sort of focal point she has in mind, I leave her to develop further. I am not quite sure how one would do that, but certainly the Government, in opening up the regulatory arrangements—[Interruption.] What did my hon. Friend the Member for Scunthorpe say? I am sure that I have the rapt attention of all my hon. Friends and that I am gripping Government Committee members, Mr Weir. However, I shall be brief and will not delay the Committee. I think we have another session on Thursday, which we all await with great anticipation; particularly the prospect of the Minister’s returning in a less gainsaying mood than he has been in so far and agreeing with us.
Incidentally, on the point raised by the hon. Member for Redcar about when we would start, we have not tabled a wrecking amendment; this is a constructive amendment and a technicality of that kind really should not bother us. Whether it is six or nine months or a year and three months is not the issue. Precisely when we start has not got much to do with it. It is not the date that matters, but the principle of regular review. Perhaps, when we resume on Thursday, I shall mention a couple of other important points. However, there is a general indication that the Committee wishes to adjourn, so I terminate my remarks at this stage. Thank you.
Adjourned till Thursday 20 November at half-past Eleven o’clock.
Written evidence to be reported to the House
TP 05 Mark Hattersley
TP 06 Towers Watson’s
TP 07 Just Retirement
TP 08 Friends Life
TP 09 Talbot and Muir
TP 10 John Greenwood
TP 11 Hargreaves Lansdown
TP 12 Association of Taxation Technicians
TP 13 Association of British Insurers