Pension Schemes Bill
Public Bill Committee, 23 October 2014.
Linda Riordan (Labour, Halifax)
May I remind hon. Members that mobile phones should be switched to silent and that tea, coffee and any refreshment other than water are not allowed in Committee?
Examination of Witnesses
Linda Riordan (Labour, Halifax)
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?
Linda Riordan (Labour, Halifax)
Thank you. I will now call Members to ask questions.
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?
Stephen Hammond (Conservative, Wimbledon)
Mr Lindley, what do you think is the level of take-up for collective defined contribution schemes?
Stephen Hammond (Conservative, Wimbledon)
You are suggesting that there is no evidence of any appetite for it at the moment.
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.
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.
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?
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?
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?
Nigel Mills (Conservative, Amber Valley)
So the view of Which? is that we should rely on best practice and not on regulation?
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?
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.
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.
Richard Graham (Conservative, Gloucester)
What would you like to see permitted?
Richard Graham (Conservative, Gloucester)
You have not had those discussions yet with employers.
Richard Graham (Conservative, Gloucester)
But you will be doing so.
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?
Richard Graham (Conservative, Gloucester)
So what will your scheme do to prevent that?
Richard Graham (Conservative, Gloucester)
Do you have an idea of what specific questions those would be?
Richard Graham (Conservative, Gloucester)
Thank you; that is very helpful.
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?
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?
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?
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.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
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?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
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?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
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?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
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.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
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?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
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?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
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?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Dominic or Matthew? Only if you wish to.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
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?
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.
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.
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?
Richard Graham (Conservative, Gloucester)
We have one minute.
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.
Linda Riordan (Labour, Halifax)
We will now hear evidence from Chris Curry, director, Pensions Policy Institute, Dr Ros Altmann, pensions expert, and Jane Vass, head of public policy, Age UK. For this session we only have until 1 pm. Would the witnesses please introduce themselves for the record?
Linda Riordan (Labour, Halifax)
Thank you. I will now take questions from Members.
Nigel Mills (Conservative, Amber Valley)
Perhaps we will start with you, Dr Altmann. Could you talk us through what you think the guidance guarantee could achieve to help protect people in choosing their retirement income?
Nigel Mills (Conservative, Amber Valley)
What would those additional safeguards be?
Nigel Mills (Conservative, Amber Valley)
Okay. Thank you.
Steve Webb (Liberal Democrat, Thornbury and Yate)
My first question is for Chris. We will no doubt discuss the issue of governance, and I think you heard the argument this morning that, “The only good governance is trust governance. Trust good, contract bad.” Indeed, so unsatisfactory is contract-based governance according to that argument that CDC should only be set up under trust. Do you think it is as stark as that?
Steve Webb (Liberal Democrat, Thornbury and Yate)
Thank you. Ros, you were very supportive of the new freedoms the morning after the Budget. Lots of people contact you, and I am guessing that you have been contacted by people who missed out. It would be interesting to get a sense from you of how big this issue is for people who locked into annuities before the changes came in. How strong is the case for finding some way of addressing their concerns?
Steve Webb (Liberal Democrat, Thornbury and Yate)
Thank you.
Stephen Hammond (Conservative, Wimbledon)
May I ask three questions? First, given the new rules on annuities, is much of the benefit of this Bill going to be taken away, because the new rules are really much more important to the consumer? If not, what do you estimate the take-up of collective DC schemes to be?
Dr Altmann, when you spoke initially about the guidance guarantee to one of my colleagues, a moment ago, you expressed some hope that it would be taken up. I suppose I am looking for a confidence level, and what we should do to make sure that confidence level is better.
Thirdly, I take your point about the end process where you do income draw-down, but could you not argue that, through the life, a CDC is effectively less transparent than an ordinary DC scheme to the average member? It may or may not be more transparent if you have the right trustees in place, but then that begs the question whether we have enough people to be the right trustees, and whether those trustees choose to give that information to the members of the scheme. That is to any and all of you, I suppose.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Jane, can I ask you something first? I imagine that Age UK has a particular concern around the impact of changes in the pensions landscape on older individuals. Previous witnesses discussed to some considerable extent the issue of how one gets safeguards into the processes around guidance, particularly with the new draw-down products. What is Age UK’s sense of how robust those safeguards are as things stand? In what direction might they travel?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Does it seem peculiar to you, Jane, and Age UK that just as the nettle is beginning to be grasped on charges and quality criteria in the “building the pot up” phase, that we are now moving into a greater emphasis on draw down, without those same safeguards?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Ros, you addressed some of this in your response to questions from other members of the Committee. I noted down that you were calling on the FCA to ensure proper compliance with treating customers fairly. We know that in the wider contract pensions space, that criteria has not always worked effectively when put against the pressure to deliver for shareholders. How would you like to see the FCA make that commitment manifest and effective for savers? What specifically should it do to ensure that customers are treated fairly in this new draw-down space?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Thank you. Chris, the Minister asked you about the debate over contract versus trust. I think it is fair to rephrase the Minister’s question as, “Have there been some circumstances and times and places where contract has worked better than trust in this space?” On balance overall, given the challenges we are talking about around this new world of draw-down, in your judgment what system of governance is necessary and most likely to deliver a decent outcome for all savers?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
In your judgment, on balance it is more likely to be easier to achieve in a trust?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
I like empirical evidence.
Richard Graham (Conservative, Gloucester)
We have only six minutes left, so I would be grateful if you could all be swift in answering. Jane, did Age Concern consider offering yourselves as people who might provide this guidance? Is this not something that naturally in future would be an area for you to try to take forward? Secondly, in terms of your current clients, many of whom are our constituents, what issues would you like to see covered specifically in the guidance?
Richard Graham (Conservative, Gloucester)
That is very helpful stuff. Chris, a more philosophical one, because you produce papers on all sorts of thoughtful issues. The changes that have come through from both DWP and Treasury suggest that we are gradually moving in the direction of a greater focus on savings and a lesser focus on pensions. What do you think the implications of that are, as far as you can concisely put them in about one minute?
Richard Graham (Conservative, Gloucester)
Do you think the big challenge will be about a source of guaranteed income?
Richard Graham (Conservative, Gloucester)
Thank you. Ros, lots of things, really. You talked earlier about perhaps having a default that allowed people’s pensions to run on and then they would decide when they wanted to use them. The argument against that is the one about knowing what your income is going to be. For those people who do not have many other savings—individual savings accounts or whatever—what are they going to live off if they simply leave their pension in there to accumulate and grow once they have stopped working?
Richard Graham (Conservative, Gloucester)
Savings for care?
Richard Graham (Conservative, Gloucester)
And because it can be handed on, people might think of it more as a legacy?
Linda Riordan (Labour, Halifax)
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank the panel for their evidence.
Peter Bone (Conservative, Wellingborough)
Welcome to this afternoon’s session. We will hear, first, oral evidence from the head of savings, retirement and social care at the Association of British Insurers, and from the National Association of Pension Funds. Unfortunately, I understand that Dr Debbie Harrison from Cass Business School is unwell and not able to attend. For this session, we have until 3 pm. A Division in the House is likely some time this afternoon. When that happens, I will suspend the Committee for a quarter of an hour. I am afraid we will just have to take that when it happens.
Witnesses, could you introduce yourselves for the record, please?
Peter Bone (Conservative, Wellingborough)
Thank you. These sessions are fairly informal. We just ask Members to ask questions, and you can respond how you like. Does the shadow Minister want to kick off?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Good afternoon. Let me begin with the larger part of this Bill, which is around collective defined contribution. What is the major flaw of individual defined contribution, and if that is your view, which collective defined contribution might or does have the ability to remedy?
Peter Bone (Conservative, Wellingborough)
Before we go to the next question, can I ask the witnesses to speak up? This room is not brilliant for acoustics, so if you could do that, it would help.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
That answer was very useful, and I will come back to that.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Yvonne, you elaborated to some extent on your earlier answer. Obviously, this Bill is permissive rather than prescriptive. Do you have an opinion on where you think the collective model will end up in terms of design? Will it be closer to DB-lite or to individual DC-heavy, to coin phrase? Will it be about risk sharing within a generation—the pooling of asset, risk and reward—or do you think there is an appetite for intergenerational collective DCs?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Thank you. Let me take up the guidance issue, which has dominated the witness sessions so far and played a significant role. The evidence so far strikes everyone in the Committee—there is real concern in the pensions world about the lack of clarity in what guidance will amount to, and the role of the FCA, the Treasury and the Department for Work and Pensions in ensuring appropriate safeguards, checks and balances in the system. Would you like to comment on where you think there is room for improvement in the guidance?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Did you say 101?
Peter Bone (Conservative, Wellingborough)
If these 101 are written out, have you submitted them, and if not would it be possible?
Andrew Love (Labour, Edmonton)
By the time you submit it, it will be 105.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
We have 150 days, just about, so if we get one solved a day we just might get there.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Was this list of 101 bigger at one stage? Is the Treasury dealing with this multitude of issues? Is that already happening?
Peter Bone (Conservative, Wellingborough)
Did Mr Graham want to come in on this point?
Richard Graham (Conservative, Gloucester)
The thing I suppose that I would just like to clarify is, there are 101 questions but have you made 101 suggestions? Have you offered solutions as to what you think would work best for the schemes? That is the most important thing: the positive contribution. Any of us can sit and ask the questions, but what the Government really need is strong input about what you think is most important and how it should come out.
Richard Graham (Conservative, Gloucester)
No, but the 101 questions—have you proposed answers to them? That is the key thing.
Richard Graham (Conservative, Gloucester)
So when we get the submission of this 101 we will see what the proposed solutions are as well, will we? Transfers, for example, is a classic example. Schemes have been dealing with defined benefit/defined contribution issues and transfers for donkey’s years, so they must surely have an idea of what information should be in there, what questions should be asked and so on.
Richard Graham (Conservative, Gloucester)
The thing that surprises me is that you referred earlier to our needing to define “defined ambition” better, and to understand the demand, but the National Association of Pension Funds is precisely the body that should be helping to define it, and it has been out there now for the last two or three months. In terms of understanding demand, your members are the people who, potentially, are going to be interested, so have you asked them what the demand is?
Richard Graham (Conservative, Gloucester)
Okay, and what about CDC?
Richard Graham (Conservative, Gloucester)
Right, and the actuaries who are also members of the NAPF have confirmed that, have they?
Richard Graham (Conservative, Gloucester)
Right. Sorry, I did not mean to interrupt, but I would love to get back later if I may.
Andrew Love (Labour, Edmonton)
You said that there was no demand for shared-risk schemes or collective schemes. Have you done some surveys among your membership to elicit that view? When you say no demand, do you mean absolutely no demand or little demand?
Andrew Love (Labour, Edmonton)
How do you interpret that? Do you interpret it as them waiting to see before they make a decision, or have they most definitely made the decision that this is something that they are not minded to be sympathetic to?
Andrew Love (Labour, Edmonton)
How about the ABI?
Andrew Love (Labour, Edmonton)
I want to go on to the guidance guarantee. Does Richard want to come in on this?
Richard Graham (Conservative, Gloucester)
That is very kind of you. I would just like clarification. Has the National Association of Pension Funds had discussions about levels of interest with the Association of Consulting Actuaries?
Richard Graham (Conservative, Gloucester)
I think you ought to, because what you said today pretty well directly contradicts what the ACA said yesterday or the day before. I do think that there needs to be a dialogue. I do not know how many of your members respond to your surveys or questionnaires, but we are getting conflicting evidence on that point. I just note that at this stage; we can come back to it later.
Andrew Love (Labour, Edmonton)
Pension providers will have a statutory duty to direct individuals to the guidance service. How do you interpret that duty? What do you think it will entail for the providers?
Andrew Love (Labour, Edmonton)
Can I ask about this balance between giving people information overload and keeping it short, sharp and punchy? Where are you in terms of deciding between those two and where on the spectrum you will fall?
Andrew Love (Labour, Edmonton)
But we do know, as you have mentioned, that the take-up of regulated advice, if it costs money, is likely to be very low. We do know that there is no regulated advice at a cheap rate. We have not solved that problem with regulated advice, so how pessimistic are you that people will not take adequate guidance and advice to make a proper decision?
Andrew Love (Labour, Edmonton)
Have both of you made that point to the Treasury and to—
Andrew Love (Labour, Edmonton)
Do you have anything to add, Dr Braun?
Andrew Love (Labour, Edmonton)
Has either of your organisations considered a second line of defence? It was put to us yesterday that when someone comes to take their pot out, a question should be asked as to whether they have received guidance or advice or both. Do you think that that would be a sensible inclusion, and have you discussed it among your organisations?
Andrew Love (Labour, Edmonton)
Picking up on a point you made a second ago, are you entirely satisfied that the FCA is on top of what its guidance role is? It is not regulated as such, but it will clearly be crucial. Is it taking a positive line of ensuring that the guidance matches the requirement, or is it saying, “This isn’t regulated, so it really doesn’t involve us”? Clearly, from all that you have said so far, we need the FCA to take a real interest in what guidance is delivered.
Peter Bone (Conservative, Wellingborough)
Unusually, in evidence sessions, a Minister gets to ask questions instead of being grilled, but he will be grilled later on, so you can take some comfort from that.
Steve Webb (Liberal Democrat, Thornbury and Yate)
Defaults have come up several times. What happens to the people who do nothing and whose money just sits there? One of our witnesses this morning presented a nightmare scenario in which people’s money is in cash, earning next to nothing, and by the time you have knocked the charges off, the actual value is going down. Do you feel that more needs to be done to legislate or regulate for defaults, or are you content that scheme members will get a good outcome with no further action?
Steve Webb (Liberal Democrat, Thornbury and Yate)
Perhaps I can follow that up. It was honest of you to say that you did not have answers, but perhaps I can ask you something that you will know. At the moment, where people do nothing, can you describe to us in your two different sectors what happens to people’s money? In particular, do you think that schemes or providers will act differently post-April 2015 because of the freedoms? What happens now, and how do you think it will change?
Steve Webb (Liberal Democrat, Thornbury and Yate)
I was shocked, though encouraged, Yvonne, when you said that the ABI wanted more regulation. I think what you said was that your members want additional regulation, in terms of when they provide an apt retirement product, they have to ask all these questions or whatever it was. Will you just repeat that, if that is a fair statement? The ABI is asking the Government to regulate to require its members to ensure that they are not mis-selling products.
Steve Webb (Liberal Democrat, Thornbury and Yate)
Thank you.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
The issue of how one safeguards in the guidance space, and then in the sale of products, is key. Do either of our witnesses see a role emerging for products that ensure against longevity risk? Is that something that will emerge on the landscape? More widely, should there be a requirement for products to include a regular review of changes in circumstances and, in particular, of when the optimum moment for moving to an annuity occurs? A simple way to put that set of questions is: how do we envisage that space being filled, in terms of the sale of products?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Would you elaborate on the FCA’s role in this area? You mentioned its review of annuities; do we have any idea of when that never-ending story will be completed and there might be some action?
Richard Graham (Conservative, Gloucester)
There are a numbering of fascinating issues here. On the NAPF side, Joanne, there is the business about what happens at the moment—that was the question Steve Webb was asking. I was a bit surprised, because the bottom-line answer seemed to be, “Well, we don’t really know. Different things happen to different people.” That has to be true, but it must be possible through your members to have a better analysis of what happens now, and therefore what might be different in the future. I am sure that that would be useful to all of us who are grappling with the Bill.
On the ABI side and the pot that is deferred, Yvonne, you referred to needing a statutory override. Again, I am not quite clear about that. If people are in default at the end of their working life, that will tend to be, as you rightly suggested, in assets that are “low-risk”. Presumably there is no reason why those assets should not remain in the same investments. I suppose the question is: some time before that moment, do you need to send a letter to them that simply says, “You have some important decisions to make. We are going to make sure that you are put in touch with the right people to give you guidance. If, by such-and-such a date, you have not decided what you want to do, we will keep the assets in your pension pot as they are, unless you wish us to do something different.”? Surely that is an adequate way of handling the problem.
Richard Graham (Conservative, Gloucester)
But there is the question, rightly referred to earlier, of the danger that they will all be shoved into cash, so that, net of fees, let alone taking into account any inflation, the customer will be losing money month by month. What percentage of customer assets do you guesstimate to be purely in cash at the moment of retirement? I presume that there is a mixture of fixed-income and other instruments in there.
Richard Graham (Conservative, Gloucester)
And then in terms of the opportunity both for providers and for individuals—the pensioners—what discussions have happened with members perhaps to create a marginally different type of offering that could be available to people who do not want to make a decision now, but for whom some growth would actually be quite useful? The letter could have a variation that says that if you are looking for a higher-growth option, this is one you may want to consider—tick here if that is what you want. Are there not those sorts of opportunities as well?
Richard Graham (Conservative, Gloucester)
I was just trying to cater for inertia, which will be the greatest danger in all these things. Choice is fantastic, but there will be those who will not make a decision. Is that a discussion you have had with the regulator?
Peter Bone (Conservative, Wellingborough)
Order. I have to suspend the sitting while Members vote. The Committee’s evidence session will resume at 3 pm. I thank the witnesses for coming. I am sorry that we have to dismiss you rather abruptly at this stage.
- Examination of Witnesses
Peter Bone (Conservative, Wellingborough)
We come to our second oral evidence session of the afternoon and will now hear from a pension journalist, the director of the Strategic Society Centre and a consultant from Towers Watson. We have until four o’clock and are unlikely to be interrupted by any votes. Will the witnesses please introduce themselves for the record?
Peter Bone (Conservative, Wellingborough)
Thank you. Shadow Minister, would you like to start?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
John, you have written a number of articles about the potential implications of the decumulation reforms for taxation. Will you please elaborate on some of your concerns?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
In layman’s terms, what is the problem?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
You said that the Treasury had missed that, which seems quite surprising given that it is not a particularly complicated form of paying less tax. Do you know of any reason why that might have happened?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
When did you make that request?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
James and Ian, I do not know whether you want to comment on that or more widely. James, I know you have written extensively on aspects of the guidance guarantee and those reforms. Ian, do you want to make an opening statement about what you think are the key aspects of the Bill?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
What are some of those international comparisons and evidence for countries where there is voluntary annuitisation?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
What do you think of the argument put forward on a number of occasions by the Government: that as long as individuals can fall back on a state pension of £145 or £150 a week, that is enough for them to live a decent retirement on?
Richard Graham (Conservative, Gloucester)
It is nice not to come on last, Chairman, because otherwise we either run out of time or get into a vote. So, thank you for calling me.
James, that was all pretty gloomy: a plethora of problems with voluntary annuitisation; poverty; insecurity; death; disaster; the guidance is irrelevant; and so on. Does that suggest that you thought the previous scheme was a wonderful solution and that annuitisation was working well, that everyone was getting perfect results and that the man in Whitehall, or anyway the Strategic Society Centre, had all the answers perfectly arrayed and no change was needed?
Richard Graham (Conservative, Gloucester)
Is that really an appropriate analogy? Everyone can carry on buying the same annuities that have been bought before if they want. The car has not been blown up; it is still there, but a better car may be available.
Richard Graham (Conservative, Gloucester)
On the way forward, you suggested that the guidance would be useful if it was “mandated”. You went on to talk about default options, which we discussed with the previous witnesses—I think you were here for that—and they could offer some interesting different draw-down products. Tell us a little more about how both of those could or would work: first, the mandating of guidance and, secondly, how the FCA would regulate effectively new draw-down products offered by existing providers.
Richard Graham (Conservative, Gloucester)
How do you make that mandatory? How do you deal with someone who does not turn up?
Richard Graham (Conservative, Gloucester)
It does not matter. If it is mandatory but they do not do it, what is the penalty?
Richard Graham (Conservative, Gloucester)
Okay. Tell us about the other aspects: draw-down and defaults.
Richard Graham (Conservative, Gloucester)
This is a good moment to move on to Ian. Tell us a little about the client base of Towers Perrin today. Roughly how many schemes do you have in the UK?
Richard Graham (Conservative, Gloucester)
Towers Watson, yes.
Richard Graham (Conservative, Gloucester)
So you have a reasonable feel for what I think you described earlier as “interest in shared risk”, by which I assume you mean defined-ambition-type products?
Richard Graham (Conservative, Gloucester)
Right, and the consultancy is supportive of them?
Richard Graham (Conservative, Gloucester)
What is your understanding of the likely take-up of defined-ambition and CDCs? Are you expecting a handful of clients, or significantly more interest? Will it grow over time?
Richard Graham (Conservative, Gloucester)
There will be 100,000-plus companies coming into auto-enrolment at beginning of 2016; many of them will be completely new pension schemes and not many will necessary be your clients. How do you see that evolving in terms of their interest in a CDC offering that might be put together either by the National Employment Savings Trust or one of the big providers, such as Standard Life? Is that not an obvious type of offering solution for them?
Richard Graham (Conservative, Gloucester)
And what would happen to the assets of different types of default—the people who are in the schemes, but have not yet made or are reluctant to make a decision?
Richard Graham (Conservative, Gloucester)
I would like to ask one last question to John. As a journalist, it is great to have a headline saying that the Treasury will lose £20 billion from the changes to pension schemes. I am a bear of small brain, so I did not grasp all the detail as clearly as Gregg obviously has, but can you patiently run through the detail—if our Chairman is prepared to allow you—and also send the Committee a copy of the article? I just could not understand in particular why an individual would want to act in the way you were suggesting that everybody is going to act.
Richard Graham (Conservative, Gloucester)
We are talking about a salary.
Richard Graham (Conservative, Gloucester)
You say, “If I”. You discussed income and now you are talking about a defined-contribution pension into which I, as the employee, and you, as the employer, are contributing.
Richard Graham (Conservative, Gloucester)
Why do you do that? Normally, it is a percentage that gets paid rather than a fixed sum.
Richard Graham (Conservative, Gloucester)
After the age of 55?
Richard Graham (Conservative, Gloucester)
And you are anticipating that every employer in the country is going to do this and every employee over 55 is going to react?
Richard Graham (Conservative, Gloucester)
So what are the assumptions behind your magic figure?
Peter Bone (Conservative, Wellingborough)
May I just interrupt for the convenience of the Committee to ensure we are all understanding this? In the example you are using, the salary would have been £40,000 a year. That switches to £30,000 and you, as an employer, then pay £10,000 into the pension?
Richard Graham (Conservative, Gloucester)
Ian, can you comment on that?
Richard Graham (Conservative, Gloucester)
Has Towers Watson produced any particular paper that has gone to all your clients saying that this is a terrific wheeze and they should jump on the bandwagon immediately?
Richard Graham (Conservative, Gloucester)
Just before you finish, John, in that scenario it is a unilateral decision made by the employer who is writing to me as the employee and explaining to me that, from now on, my salary is going down from £40,000 to £30,000 and the extra £10,000 will be paid into my pension. What happens if I say, “Thank you very much indeed. That’s jolly interesting, but I am aged 35. I am not interested in you adding 10,000 quid to my pension in 20 years’ time. I need my income now.”
Richard Graham (Conservative, Gloucester)
And what happens if they are not interested either?
Peter Bone (Conservative, Wellingborough)
May I just go again to the example? I guess what you are suggesting is that if you are a limited company that you own and are a director of, this would be something you would look at seriously.
Richard Graham (Conservative, Gloucester)
Is it more remuneration? That is a curious choice of words.
Richard Graham (Conservative, Gloucester)
So your argument is that if the Bill is unchanged, this could come into effect in April next year and that people could be planning ahead to make these changes?
Peter Bone (Conservative, Wellingborough)
Thank you.
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
John, may I pursue this point? A loophole exists already in relation to people making additional pension contributions to remain eligible for child benefit. They bring their salary below a certain level, so they put more into a pension fund and can still get child benefit payments.
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
Having identified the problem, has any work been done to identify a solution that would not break the objective of giving people the flexibility about their pension resources in the way that the Government want?
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
May I clarify a point you made earlier? Did you say that you had written to the Treasury on half a dozen occasions on this matter but have not yet had a response?
Andrew Love (Labour, Edmonton)
There is a pension taxation Bill in the works in the Treasury. Do you have any indication that it is furiously working through the six communications that you have delivered to it about trying to close the loophole?
Peter Bone (Conservative, Wellingborough)
It is unusual in a witness session for a Minister to have the chance of grilling the witnesses. It is unique for a Minister to have the chance to grill a journalist.
Steve Webb (Liberal Democrat, Thornbury and Yate)
It is worth it just for that. Thinking about your scenario, John, and your hypothetical situation, it would be true to say that the loophole you describe is potentially available this year, so we have jacked up the trivial commutation limit to £30,000. Would it be correct to say that your reasoning would apply this year and that my employer could pay me up to £30,000 into a DC pension and avoid all the NICs you have described, and then I could take it as cash tomorrow?
Steve Webb (Liberal Democrat, Thornbury and Yate)
Sorry, I have just found an even bigger hole.
Steve Webb (Liberal Democrat, Thornbury and Yate)
In that case, why is everyone not doing it?
Steve Webb (Liberal Democrat, Thornbury and Yate)
The point I am making is that the logic of your argument is true this year. If your argument was plausible, you could save all this money this year, and it does not seem to be happening. As I recall, immediately after the Budget, people such as Paul Lewis on “Money Box”, who is often ahead of the game on all these kinds of things, were highlighting exactly the potential for cycling money around in this kind of way. There were suggestions that billions would be lost. Sure, on a blackboard it looks plausible, but in reality it does not seem to be happening and it could be happening today. Why would you wait until next April? Why would you not just fill your boots today?
Steve Webb (Liberal Democrat, Thornbury and Yate)
Why do you think that is?
Steve Webb (Liberal Democrat, Thornbury and Yate)
Hold on. You are talking about 2015; I am talking about 2014-15. The Chancellor announced in the March Budget that the trivial commutation limit would rise for 2014-15. Those are the rules in place today. Forget what insurance companies might do in 2015-16—people could do this thing now and they are not doing it on any significant scale. Does that not blow your hypothesis out of the water?
Steve Webb (Liberal Democrat, Thornbury and Yate)
Even though there is free money to be had this year.
Steve Webb (Liberal Democrat, Thornbury and Yate)
I think that undermines the plausibility of your hypothesis.
Steve Webb (Liberal Democrat, Thornbury and Yate)
Even though you could have free money today.
Steve Webb (Liberal Democrat, Thornbury and Yate)
In terms of numbers, although in theory you could do this with DB and transfer across, that is a hell of a hurdle, so we are mainly talking DC. Out of the five million people you mentioned aged over 55, how many of them are employees in DC pensions?
Steve Webb (Liberal Democrat, Thornbury and Yate)
80%? So what is your 5 million number then? Five million people who are?
Steve Webb (Liberal Democrat, Thornbury and Yate)
And in work.
Steve Webb (Liberal Democrat, Thornbury and Yate)
And in a pension?
Steve Webb (Liberal Democrat, Thornbury and Yate)
But if the workplace has not got a pension, they have got to set one up to do the dodge.
Steve Webb (Liberal Democrat, Thornbury and Yate)
It is just the way you ask; I do not know. As we have talked about this, you have identified that we are talking about fewer and fewer people and you have identified all sorts of barriers. You can get a big headline out of a big, scary number. The £20 billion got into the headlines.
Steve Webb (Liberal Democrat, Thornbury and Yate)
Indeed it was. I was being gentle, but okay, £24 billion. Clearly, it is a theoretical issue. As we have said, anyone who does this once sacrifices a big slug of tax-free allowance for the rest of their life, so there is a downside risk. There is a cost to employers and a barrier. To put it gently, is there not a risk of overstating this?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
To elaborate on that briefly and then move on to other matters, the issue surely is whether there is the chance to take a tax-preferential approach to one’s income. The history of the last 40 years would suggest where that possibility exists. Human resources and individuals are often keen to take those advantages where they can be found. I just make the point that, in so many of our discussions, the elephant in the room is the Treasury. We are asking witnesses to be commentators on Government policy when the Government are not even here to explain what the policy is. I just make that observation.
I move to the wider issue of collective defined contribution. Ian, I have asked this question of other witnesses: what is the fundamental weakness, if there is such a weakness, in individual defined contribution that a move to collective defined contribution could remedy?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
In terms of the model of collective defined contribution that is most likely to emerge—I am asking you to gaze into a crystal ball, but there are different models—which one do you think will emerge in the short term as an offer, as a proposition?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Very understandable. Is there anything in the Budget changes, particularly the ability to access one’s pension pot from the age of 55, that will either hinder or encourage an appetite for CDC?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Thank you. James, would you like to add anything on that subject or more widely?
Peter Bone (Conservative, Wellingborough)
Does any other member of the Committee wish to ask questions of our witnesses? If not, I thank the three excellent witnesses for their very clear evidence; we do appreciate it.
Examination of Witness
Peter Bone (Conservative, Wellingborough)
We resume the afternoon session. We will now hear oral evidence from Steve Webb, the Minister for Pensions, and we cannot go on any longer in this session than 4.45 pm.
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
The last session was really interesting, in particular the exchange with Mr Greenwood and the point he made about that loophole. You, Minister, obviously came in and answered a number of questions, which demonstrated you are sceptical about some of the points he made. First, do you believe that HM Treasury and the Department for Work and Pensions did not think this change through properly before you made the announcement of the decision, which meant you overlooked his point about the ability of people to take money out of their salary, put it into a pension and then withdraw it immediately, and so the Treasury loses out?
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
On that penalty value, the danger is that people will not look upon a long-term pension investment in that way and they will just think about making what they would consider to be a quick buck. Therefore, is that an issue that concerns you, or your colleagues at the Treasury, whereby if a sizeable chunk of people took advantage of this change—I would not call it a loophole, but this consequence of introducing these new rules—would that not give you a concern about how it would impact on the Treasury coffers in that particular year alone?
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
Alternatively, they have not sussed it out yet.
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
May I ask one other question from a global context, taking an overall view of this proposed change? The picture in Britain is much the same as in every other part of the world, in that we have an ageing population. In my constituency, 60% of it is East Kilbride, which is a new town created in 1947. It has more older people than perhaps any other part of Scotland, because people all arrived at the same age and they are all growing older. So we know of all these demographic problems.
We are increasing the retirement age, because more people are living a lot longer—not necessarily healthier lives, so there are impacts upon the health service, as we have mentioned, and impacts upon social services and social care. And at a time when there are these demographic time bombs that we face in a whole range of different areas, we are introducing a change in pensions that is so dramatic that it has the ultimate effect that it can encourage people to draw down cash and not think carefully about their future. We had the sports car analogy when you first announced the policy. In your heart of hearts, are you not genuinely concerned that this policy could go pretty pear-shaped if people in large numbers start making decisions that are not very wise, even after they have had the 30-minute interview with the adviser?
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
Finally, do you not feel therefore that, by making this change, you could make all those other demographic issues that we face worse?
Kwasi Kwarteng (Conservative, Spelthorne)
You mentioned earlier, at the beginning of your statement, that you felt that there were certain obstacles preventing people from getting their money out of the pot. Will you speak more broadly and more specifically about what those obstacles are? You alluded to them, but did not really expand.
Kwasi Kwarteng (Conservative, Spelthorne)
From my understanding, it was a revolutionary change, and pensioners were able to take large amounts of money from their pension pots without needing to or being forced into the annuity market, so it was a great act of liberalisation in that way. You said that there were obstacles and that this had not actually happened. When you look on the ground, people had not been doing this to the extent that you thought.
Kwasi Kwarteng (Conservative, Spelthorne)
As a follow-up, what are your expectations about the take-up in terms of people releasing money from the pension pot? How will that work?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Steve, to take you up on the issue around the potential loopholes or whatever one wants to call it, I think you said in your response to Michael that you were not saying that people could not do this, and you were not even saying people would not do it. The question is: is there an analysis of what behavioural impact you expect to see in this regard? Have the Government done a behavioural analysis?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
I understand that, but I am slightly unclear whether you are speaking for the Government or whether the Treasury are speaking for themselves. There seems to be some ambiguity here. The Government must have done some analysis to think that it is not a big problem. Is there any chance of us seeing that analysis?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
That is baked into that.
Peter Bone (Conservative, Wellingborough)
Mr Graham, were you going to say something?
Richard Graham (Conservative, Gloucester)
Not at this moment, but I will come in in a moment or two if that is all right.
Peter Bone (Conservative, Wellingborough)
Do any other Members wish to speak?
Therese Coffey (Conservative, Suffolk Coastal)
On the whole revolution of freedoms that came in at the Budget, why has it taken until this Parliament for that to come about?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Perish the thought that one would question the Government on their policies.
Peter Bone (Conservative, Wellingborough)
Was Mr Blenkinsop trying to catch my eye?
Tom Blenkinsop (Labour, Middlesbrough South and East Cleveland)
No.
Richard Graham (Conservative, Gloucester)
One of our previous witnesses described the pensions revolution as blowing up the world of annuities and “Whitehall knows best” as though that was an absolute disaster. The point I was trying to make is that that which has been blown up is still available in exactly the same format, but there is now a variety of choice and options open to people, trusting people that they prefer to know what to do with their own money in precisely the way that you have described. I guess that in some ways the nightmare scenario for those of us who believe in having that greater choice is that something goes horribly wrong. I suppose equally that that would be the ideal scenario for those who prefer not to give people great choice.
Minister, what do you think the likelihood is of real issues over either inadequate guidance or possibly people being unable to make decisions based on the guidance that they are getting? What sort of risk is there that later on, people will regret the decisions that they have made and the choice they have been given and that they will wish to go back to an unsatisfactory form of annuity that enabled some to muddle through?
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
We heard evidence a couple of days ago about how the scheme would be rolled out. I am afraid that, as a former civil servant for 10 years and then as full-time trade union official in the civil service who negotiated with a range of Departments, agencies and non-departmental public bodies across the whole UK, I know that this country does not have a good history of Government roll-outs of computer programmes and things going well on that front. Every Government, irrespective of hue, will have the scars of being told, “This is all going to work,” and then finding that it all falls flat on its backside.
I cannot remember exactly what evidence session it was—I think it was on the first day—but we heard about the plans for roll-out and how it was all going to work. When that moment comes and people are making phone calls and trying to get things on their computer screens, do you have any fears or concerns that we will have the same problems that have plagued Governments, Olympics opening events and Commonwealth games ticketing, which was a fiasco? Have you had a chance to dwell on any of those issues?
Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)
Given that comprehensive response, I hope it does not, which I will be quoting back if it does.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
I have a couple more questions for the Minister, building on a previous question and thinking about his answer. He stated to the Committee that he understands that the Treasury has baked into its analysis potential tax avoidance from the changes. What does that baking-in involve? How much tax avoidance do the Government expect to take place?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Are you able to confirm that the Treasury has examined this potential tax avoidance mechanism in what you call its global figure?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Thank you. It just seems a little strange that we are talking about pensions and the issues pertaining to the Bill, of which this is one, which is why we had a witness, but we have to go elsewhere to get—
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
That is an issue for Mr Bone, then. Let me ask the Minister another question on the disclosure requirements. As I understand it, an individual wanting to take advantage of the new flexibilities and options will have to inform all their pension providers within 31 days and if they do not do so, some pretty heavy fines are being proposed. Is that the case and if so, do you think that that approach will stand the test of time?
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
I seek your guidance, Mr Bone. I understand the Minister’s position, but it is becoming very difficult to work out, given the relationship between the Bills, how one is meant to get answers that pertain to this Bill as well as to the Treasury Bill.
Peter Bone (Conservative, Wellingborough)
I thank the hon. Gentleman for that. Is the Minister aware of whether the Treasury has done a memorandum to the Committee, and if not, whether it might do a memorandum, because perhaps, with hindsight, the usual channels might have asked for a Treasury representative to be a witness? That did not happen, so I think a memorandum would be useful to the Committee, if it were possible to arrange.
Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)
Thank you for that guidance, Mr Bone. It was very helpful. Does the Minister agree that once one gets beyond the technicalities, these things do pertain to the discussions that we are having? They clearly must pertain to the discussions we are having, which are about the guidance guarantee as a central part of the Budget reforms. There is an issue here about how one makes a judgment on the Government’s reforms, given that those two Bills are happening simultaneously. It would be very helpful to have that memorandum from the Treasury.