Tim Fassam gave evidence.

We will now hear oral evidence from Tim Fassam, director of public affairs at Phoenix Group. We have until 3.45 pm for this panel. Will the witness please briefly introduce himself for the record?

Tim Fassam:

I am Tim Fassam from Phoenix Group. We are one of the country’s leading pension and long-term savings providers. We look after about £290 billion for our 12 million customers across a range of brands, most famously for Standard Life. We are a major player in the workplace automatic enrolment market as well as the bulk-purchase annuity market for DB schemes. We are also proud of our history as a consolidator of historical private pensions.

We have been passionate about the investment agenda. Our chairman, Sir Nicholas Lyons, took a year out of being chairman of Phoenix to be Lord Mayor, and the Lord Mayor who co-ordinated the Mansion House compact, which we were supportive of. We were also heavily involved in the development of the Mansion House accord. In order to facilitate that, we worked with the leading asset manager Schroders to create a joint venture called Future Growth Capital to deliver private market investments that are specifically designed for the pension market. We have made an initial commitment of £2.5 billion to that and are looking to invest up to £10 billion over the next five years. This is an agenda that we think is incredibly important, and we are very supportive of the focus that Parliament is giving this Bill.

I call the Shadow Minister.

Q I want to ask about the value for money framework. There seem to be a lot of fans of the value for money framework. Are Phoenix as enthusiastic about it as everyone else seems to be, if that is not too loaded a question?

Tim Fassam:

The short answer is yes, we are big fans of the value for money framework, but it is worth thinking about why that is. When we are looking at why we have not had the investment that we would necessarily expect, and that we see in other similar countries—so, exposure to private markets and exposure to productive assets—we think there are roughly three groups of reasons. Some are cultural and have been helped by things such as the accord and the compact. Some are regulatory, and that will be a major topic of conversation in this Committee. But some are market, and the market challenges are really around who is the buyer of automatic enrolment pensions. That is usually the employer.

Historically, we have seen most employers focus on the charge, and the charge alone. That means we are now seeing charges well below the price charge cap for automatic enrolment, which is a good thing for consumers, but it is at such a low level that it is very hard to offer more enhanced investment solutions, so that means they tend to be invested in more passive investments and trackers. The value for money framework is important because it should have an impact on those purchasers, making it easier for them to see a more holistic view of the value that they are getting from the pension that is being offered to them, in terms of investment, service and a wider range of metrics. We are not sure it is perfect, as currently developed, but it is certainly in the right direction.

Q There was an interesting Intervention yesterday from the Reform party about local government pensions. I know that is not necessarily part of what we are talking about now, but they made the point that 50 basis points is way too much to charge for assets under management and that it should be 10 basis points instead. You raise exactly that point, which is that it is not about how much you are being charged, but about a combination of that and the performance and how much you are growing. I am 100% behind that particular point, because it makes a huge amount of sense, but one of the things that slightly bothers me is about the metric data. It looked at the quality of service provided to members, which is a nice thing to have—it is about whether you are looked after properly—but it is a marketing type of thing. Slightly more important are the investment performance and the cost, and also the asset classes that the scheme or arrangement invests in.

Where I begin to get slightly confused is that it then switches to member satisfaction surveys. I am curious as to what the member is. You raised the very good point that the customer is the business, but that is not the same as the member. Who is being asked whether they are investing in the right assets? That is quite a technical question by the time you start looking all of this. Can you see that there are anomalies and Gordian knots within this?

Tim Fassam:

There is certainly a lot of detail to be worked through. That will include understanding the impact of all these factors. For example, investment return will be an incredibly important part of the value-for-money framework. It is very hard to do forward-looking investment return analysis, but if you do backward-looking, you cement the best of what we have today. The premise of the Bill is that we want to see a different investment pattern going forward. It will be very hard to, say, model a higher allocation to private markets in a forward-looking metric unless we have some creative thinking. Getting those investment metrics right is absolutely critical.

Service does matter to customers in terms of how easy it is to deal with and how much support they are getting to make good investment decisions. That will have a significant impact. When you combine it with things like the potential for targeted support, that could make a very significant difference in terms of the outcomes that the consumers get. We always think of the end customer being the individual. We have a close and important working relationship with the employer, and they are often working with employee benefit consultants to choose their scheme, but the most important stakeholder in all of this is the end user. We want them to get the best possible result to help them prepare for retirement.

Q I have one final question. Various clauses look at the asset manager and the trustees effectively marking their own homework on this. There are consequences of an intermediate rating, consequences of a “not delivering” rating and various other issues. Is that the best way of doing it? To a certain extent, the managers and the trustees have a vested interest in doing well.

Tim Fassam:

We are certainly concerned about the intermediate rating and the risk that that could cause a cliff edge if it means that, to get an intermediate rating, you are effectively closed for new business and potentially existing new joiners for a new firm. We think an intermediate rating that aligns with delivering value, but with a warning light that gives the firm a couple of years to get back into high value for money, will stop the perverse consequences. What I mean by perverse consequences is that if the cost of underperformance is significantly higher than the benefit of outperformance, you will see everyone herding in the middle. That will mean that you may well get a better outcome than today, but you will not get the competitive pressure to be the best of the best, which I think will see the better outcome in the longer term.

Q Very quickly, if you get an intermediate rating, is it published?

Tim Fassam:

Your value for money rating will be published.

Q So you could run into the same problems that we saw recently where the Financial Ombudsman Service was publishing who has been under investigation, which caused problems. That has now been changed, but we could be entering into that same problem.

Tim Fassam:

If you see very strong market or regulatory consequences for hitting an intermediate rating, the focus will be on not being intermediate rather than on being the best that you can be. We would like to see a focus on delivering the best value for money that you can.

Q In your written evidence, the Phoenix Group encourages Parliament to reassess some of the timelines for the initiatives to ensure that there is sufficient time for market participants to respond in the interests of members and consumers. However, you also advocate for bringing forward the 2030 timeline for small pots and extending its scope to all pension schemes. How do you reconcile those two comments? Could you elaborate on why you think the deadline should be brought forward for small pots and extended? What are some of the barriers or challenges that might make the Government reluctant to take up your suggestion?

Tim Fassam:

That is a very good question. One of the things that makes the Bill powerful but more complex is the number of elements that interact. Eventually, we hope, it makes the whole greater than the sum of its parts, but it does mean it is critical that you get the ordering right. For example, we need the value for money framework and transfer without consent as soon as possible, so that we are able to get in good shape for the 2030 scale test—so those deadlines brought forward. Small pots are part of that scale: we are seeing thousands of new small pots generated every year, so the quicker we can get on with managing small pots, the fewer of them there will be for us to manage going forward.

It is critical to think very carefully about the staging and phasing of the various elements of the Bill. That is the point we are trying to make. On the elements that help the market get to where we hope to get to by 2030, we need to get in as swiftly as possible, with enough time after the detail is in place for the industry to implement. I appreciate it looks like we are asking for things to be slowed down and sped up, but it is just making sure the ordering is correct and we have enough time to get into good shape for that 2030 deadline.

We think the scope should be extended partly because of how supportive we are of the measures. Being a historical consolidator of private pensions, we have millions of customers who are not workplace customers but who could benefit from being transferred into a more modern, larger scale scheme and from going into a consolidator of small pots, for example. We see that value in our own book. We look at the opportunity and think, “We wish we could do that for this group of customers. They would really benefit.”

The pensions market is quite complex, as others have pointed out. It is contract-based and trust-based. You also have workplace and private pensions. The more consistent we can be across all the different types of customer, who often do not think of themselves as being any different from each other, the more coherent a scheme we are likely to get at the end result.

Q What would be the challenges of that extension and scope?

Tim Fassam:

We see it predominantly as opportunity. We are not saying that the rules necessarily need to change. We are just saying these new opportunities should be extended to a wider group of available schemes, but the infrastructure we are putting in place regarding workplace auto-enrolment savers can be utilised across the piece.

Q The bar for small pots is currently set at £1,000. Is that ambitious enough? Should it be £2,000? £5,000? Or is it a matter of eating an elephant and having to be sensible about what is achievable?

Tim Fassam:

I think eating an elephant is a very good way of putting it. I think £1,000 is certainly a good place to start. This will be an incredibly valuable part of the pensions ecosystem, but it will be complex and getting it right will require a lot of thought and a lot of close working between Government regulators and industry. Having that narrow and focused scope allows us to get it in place and get it working; then it would be perfectly reasonable to look at the level at a later date. For the time being, I think that is a very clear cohort of individuals who are likely to benefit from consolidation, because at the moment they are in uneconomic pools.

I call Kirsty Blackman. Very quickly, please.

Q In relation to private assets and the investment in them, is the balance between carrots and sticks correct in the Bill, or should more carrots, for example, be provided to encourage that investment?

Tim Fassam:

That is another very good question. As the previous witnesses said, it is important to ensure that there is a pipeline of assets coming to us. A lot of what the Government are doing with the national wealth fund and the British Business Bank is helping with that. We would like to see—we would say this, wouldn’t we?—a little more focus on insurance versus banks. Banks are a vital form of capital—I am absolutely not suggesting they are not—but there is a skew towards banks. A few more insurance experts in the national wealth fund, and ensuring we have that pipeline of investable assets, could be valuable.

We are very lucky in the UK that we have fantastic start-ups, and amazing universities that are generating brilliant ideas. What we really need is scale-up capital. At the moment, about 70% of firms that need major scale-up capital go overseas for it, and then their head office moves. We need to make sure that we have an attractive environment for those firms to stay in the UK, and that is where scale comes in. A number of witnesses have talked about the benefits of economies of scale and professional asset management capability. That is absolutely right; they are critical benefits. One of the less discussed benefits is if you want to—

Order. I apologise for the interruption, but that brings us to the end of the time allotted for the Committee to ask questions of this witness. On behalf of the Committee, I thank the witness for their evidence this afternoon.