Question proposed, That the clause stand part of the Bill.

Central to the value for money framework is the assignment of value for money ratings. We discussed that briefly during the evidence session on Tuesday, and some hard questions were asked of me by the hon. Member for Wyre Forest; this Clause will help to explain more about it. Rating or scoring a scheme’s value is a major cornerstone of the VFM policy. It is essential to helping savers and employers make informed decisions; they would otherwise have to analyse a very large amount of data. The finer details behind the ratings, such as the conditions under which each rating will apply and when they should be used, will be provided in full in regulations. That will provide clarity and allow the framework to evolve with the market.

After a VFM assessment, trustees or a manager will be required to assign a VFM rating. The clause describes the three categories of ratings that will be used in the VFM regime: fully delivering, intermediate and not delivering. As I pointed out on Tuesday, there are multiple levels available within intermediate—it is not a one-size-fits-all box.

Arrangements rated as fully delivering are those deemed to be providing best value for their members. At the opposite end of the scale, we have the “not delivering” grade. For those arrangements rated as not delivering, trustees will have to draw up an action plan of next steps to move pension savers to an arrangement that is providing value, thus avoiding persistent underperformance affecting members for long periods of time.

Arrangements given an intermediate rating will be those that require more work to improve their value to members. They may be required to inform employers of a “not delivering” rating and to produce an improvement plan that outlines the steps they plan to take towards improvement. That, in turn, will help employers to be better informed of the status of the schemes or arrangements that their staff are enrolled in and allow businesses to make better informed choices when it comes to workplace pensions.

The clause provides flexibility for multiple subcategories of the intermediate rating, meaning that the rating system is not limited to three ratings. To help tackle potential gaming of the VFM regime, we will tighten the rules on how some schemes choose comparators, so that schemes are not able to self-select the comparators they are able to use. That will be done by defining what a scheme should be comparing itself against and detailing the metrics that will determine whether a scheme is providing value. We will of course consult on the draft regulations.

In a broad sense, we are very happy to support the Clause. There are, though, a number of issues, and the point about benchmarking and what performance is being valued against can be rather complicated. We heard from the Liberal Democrat spokesman, the hon. Member for Torbay, a little earlier about his father’s experience of putting money aside and finding himself wanting to take it out in October 1987—I remember it well; I had been a dealer on the floor of the London stock exchange, so a stock market crash was a pretty hideous thing. However, if we look at a chart of the FTSE 100 from the early 1980s up to now and the 1987 crash, although I think it was down 37% at one point, looks like the smallest of blips in what was otherwise a very long-term bull market that continues to this day.

The one thing we do know for sure is that those wanting better performance are likely to be investing in slightly more volatile assets. That can come from investing in equities or higher-growth businesses. There is no doubt that some higher-growth businesses will go bust, because they are taking risks, but ultimately, how many of us wish we had put more money into Amazon, Google or Apple back in the late 1990s? At the time it was not necessarily seen as a brilliant thing, but some of these businesses have done unbelievably well. That said, how can anybody understand how a company like Tesla, which is really a battery manufacturer, is worth more than General Motors, Ford and Chrysler? It does not necessarily make a huge amount of sense, and yet people are still investing in it.

We can find ourselves looking at the value for money framework and come up with a load of benchmarks, which brings us to the point about the intermediate rating. We could find that an intermediate rating is done at a time when there are particular problems in the stock market, yet, looking at the long term, we could have what could turn out to be a stunning performance. We have to be very careful and not find ourselves throwing out the good in favour of the perfect. This will be something quite complicated; I do not necessarily think it is something for the Bill to worry about, but, as we continue the discourse of pensions performance and adequacy, we need to be very careful that we do not become obsessed with ruling out risk.

There is a big argument about risk in our economy at the moment, which, again, is not for this place, but we could find ourselves ruling out risk. The other thing worth bearing in mind is that, by ruling out risk, we could stop money being invested into businesses that may look absolutely bonkers today, but turn out to be the next Apple, Amazon or Google. We just have to be careful about that.

I suspect we shall have lots of debates over this. The Pensions Minister is on such a meteoric career progression at the moment that I am sure he will find himself as Chancellor of the exchequer before very long—probably quicker than he imagines—but this is something that we need to keep an eye on. As I say, it is about making sure that we do not rule out the good in pursuit of the perfect.

My hon. Friend is making an excellent speech with a very good historical analysis of what has happened over the last 30 or 40 years. It is worth reflecting on the risk point, particularly for the wide age range of people who hold pensions. This came up during the evidence session: if we end up avoiding risk, the people who are just starting out in their careers and might only be in their early 20s or 30s could end up with a pension that does not deliver anywhere near what it could have delivered, if we apply those same factors. A thought that came to me in the evidence session was how we can ensure that our system allows for risk at the bottom end, but with a tapering out of risk as people get older. The Minister is the expert in this area, and I am interested to know what might be possible in the future. Ultimately, we want to ensure that value for money is based on the right level of risk for the right stage in people’s careers and the right stage in their pensions journey.

My hon. Friend makes an incredibly important point. The story that the Liberal Democrat spokesman, the hon. Member for Torbay, told about his father is the most important point here. As we come to the point where we want to cash in the defined-contribution pension, we could find ourselves cashing in at completely the wrong moment. In a stock market crash, although it could be just a blip in a long-term bull market, none the less the hon. Member’s father would have seen a 37% drop in the value of his equities if he was benchmarked to the FTSE 100. If he was in higher growth businesses, he could, as the hon. Member said, have seen a 50% drop. So we have to be very careful.

We can be as risky as we like when we are 21 years old. I cannot remember whether it was Adam Smith or Einstein who said that the eighth great wonder of the world is compound interest. Obviously we want to take risk early but, as we come up to that day when we finally turn our papers in and go home on the last day of work, we need to make sure we have got as much money out of our pension fund as we possibly can. That is why it is important to ensure that the VFM framework does not cause problems.

This is a very interesting debate as lives continue to lengthen. In terms of people’s capabilities at different ages, 70 is probably the new 60. The reality is that someone might want to take out a proportion of their pension and hope for growth into their 80s, and then crystallise it at that stage of their life. Not that long ago, we had to buy an annuity, and there was not much choice, so we hit a hard wall. There is greater flexibility in the system now.

I want to talk about chickens. We heard talk in the evidence earlier this week of herding chickens, and of people not wanting to be the only white chicken in brown chicken world. It is about allowing the risk that drives growth. We know that allowing that risk can also drive a more vibrant economy. I welcome the Minister’s thoughts on how this framework can avoid that herding and how he would do that. I fear that the answer will be, “It will all be in the regulations and secondary legislation”, but some words of wisdom from the Minister would be welcome.

I always aim to provide words of wisdom—say one in 100. Let me engage directly with the points about the nature of the arrangement. The honest answer is that lots of it will be in regulations, but the exact issues raised by both main Opposition parties are ones that we have thought a significant amount about.

The hon. Member for Wyre Forest is right to say that risk aversion generally can be dangerous within the system, in just the same way that excessive risk-taking can be dangerous. He raised two specific issues. One was how short-term market developments affect ratings—that is why the benchmarking is a relative process. Relative benchmarking deals with the ups and downs of the stock market or other asset valuations—we are assessing the relative performance, not the absolute performance.

The hon. Gentleman raises a separate question on the nature of the investment we want to look at, where there may be returns over different timescales. That is why we need to look at different measures and metrics, some of which are backward looking—for example, more standard measures of value for money—and some of which might be forward looking—for example, looking at the costs and asset allocation strategy to come to a view about what forward-looking returns might look like relatively. We have thought about that in some detail.

We then had a useful discussion about life stages—when someone moves from higher risk, because they are confident that they will not be retiring in the middle of a 1987-style downturn. That is exactly what we should be thinking about. One of the objectives of the Bill as a whole is to drive higher returns on average. Later lifestyling, as it is called, into safe assets means that someone can be exposed to some growth potential for longer over their life. When we come to discuss the default pension solutions, that is exactly why, on average, that approach will drive safer outcomes.

At the moment, defined-contribution pension schemes often put people into very safe assets—almost entirely bonds—in the run-up to their retirement. That would not be necessary if we knew that they were heading for a default solution with annuitisation or lifetime income coming in their 70s or 80s. That is exactly the benefit of the changes that we will discuss later. I hope that was a useful discussion of the important points that hon. Members have raised.

Question put and agreed to.

Clause 14 accordingly ordered to stand part of the Bill.