Pension Schemes Bill

Public Bill Committee, 4 November 2014.

Peter Bone (Conservative, Wellingborough)

I remind members of the Committee to turn their electronic devices to silent. If they wish to take their jackets off, that sounds good.

Clause 44 - Commencement

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move amendment 58, in clause 44, page 17, line 12, after “3” insert

“and section (Pensions guidance) and Schedule (Pensions guidance)”.

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

Government new clause 12—Pensions Guidance.

Government new schedule 2—Pensions Guidance—

1 The Financial Services and Markets Act 2000 is amended as follows.

2 After section 333 insert—

“Part 20A - Pensions Guidance

Giving of pensions guidance

Designation of guidance providers

False claims when giving pensions guidance

Standards for giving of pensions guidance by designated guidance providers

FCA’s duties and power to give guidance

Funding of pensions guidance

Steve Webb (Liberal Democrat, Thornbury and Yate)

Good morning, Mr Bone. We now move on to consideration of new provisions and amendments relating to the guidance guarantee, as it has become known, with regard to the Budget freedoms. Government new schedule 2 includes the whole framework for the guidance guarantee and so, as the Committee will appreciate, it is one big slug rather than a set of different amendments that we could debate separately. I apologise in advance, but this will be the longest contribution I will make to our debate. However, I hope the Committee will find it helpful.

I will go through what the new schedule does as well as the content of the guidance guarantee. I am grateful—well, relatively grateful—to my hon. Friend the Member for Amber Valley for his amendments (a) to (h) to the new schedule. I will not deal with those as we go through, but I am sure he will seek to catch your eye, Mr Bone, and if so I will be happy to respond to the issues that he raises.

I am delighted to introduce this group of provisions—it says that in my brief, but I am—and in particular new clause 12, which paves the way for new schedule 2; the schedule sets out the legislative framework for the guidance guarantee. At the Budget we announced what we call freedom and choice in pensions—in our view, the most far-reaching changes for nearly a century to how defined-contribution pensions savings can be taken in retirement. Colleagues at the Treasury have introduced parallel legislation, also currently before the House, to implement the tax changes that permit the new flexibility.

Under the measures, people will have the freedom to access their hard-earned pensions savings in a range of ways. Crucially, however, people may need help to navigate the wider range of choices they will have and work out the right path for themselves. Deciding how to put one’s pensions savings to best use to fund one’s retirement is one of the most significant financial decisions an individual will make, which is why at the Budget we committed to a guidance guarantee, meaning that everyone with a defined-contribution pension will be able to access free and impartial guidance on the available options as they approach retirement. That is set out in some detail in new schedule 2.

Many of the provisions in the new schedule amend the Financial Services and Markets Act 2000, and I will refer repeatedly to proposed new sections 333A and so on, inserted in that Act by the new schedule, which set out the framework. I will start with proposed new section 333A. It defines pensions guidance and articulates the central objective, namely helping people to make decisions about how they use their pension savings in retirement. The responsibilities of the Financial Conduct Authority and the Treasury on financial services currently sit in that area.

Going through the schedule, we set out the role of the Treasury, the FCA and the delivery partners, the Pensions Advisory Service and Citizens Advice. It was announced in July that the Treasury would retain overall responsibility for the guidance service to make sure that it is up and running in good time for next April, and that it would do so not alone, but in partnership with organisations with track records in delivering expert, trusted guidance on pensions and wider personal financial issues. Proposed new section 333B of the 2000 Act puts a duty on the Treasury to put in place the guidance service and ensures the Treasury is accountable for delivering for the commitment made at the Budget to a guidance guarantee. That means that the Treasury can deliver aspects of the guidance itself or make arrangements with other bodies to do so. In fact, the web channel—that is nothing to do with me—of the guidance service is being delivered on the gov.uk website by a Treasury-based team of experts drawn from the Government Digital Service and the Money Advice Service.

In July, the Government gave a clear commitment in their response to the consultation on the Budget flexibilities that organisations providing guidance must be genuinely impartial and not subject to any conflicts of interest that could affect consumers’ trust or cause them to question their motives, such as a commercial interest in selling financial products or services. The overwhelming majority of respondents to the consultation were of that view. We want to ensure that the measure works effectively, so we have involved not-for-profit consumer organisations such as Citizens Advice and the Pensions Advisory Service. Those are trusted brands that we want to involve in the process.

There are scammers out there, and the FCA has set up a campaign called “Scam Smart”—difficult to say, but you know it when you see it—to alert people to the risk that someone will come along and say, “I’m from the Government and I’m here to give you the guidance that the Chancellor told you about. Why don’t you put your pension money where I tell you to?”. That is unacceptable, so the new schedules introduce a power to make it a criminal offence for somebody to impersonate the guidance services.

In the interests of giving the Committee all the information it needs, I will just say that I have been given a single-sided copy of my notes, so I am missing alternate pages. At the moment, I am busking the even-numbered pages. Nobody had spotted that so far, but I should mention it just in case the even-numbered pages happen to appear.

The FCA has a crucial role to play in putting in place a robust regime and equipping it to ensure that the guidance is high quality and consistent across our delivery partners. Proposed new section 333E introduces the concept of a designated guidance provider, which signifies that the delivery partners and, importantly, any subcontractor providing pensions guidance to consumers, will be subject to the FCA’s new standards regime. The standards regime is similar to but not the same as the FCA’s regulatory regime, because guidance will not give recommendations and is therefore quite distinct from regulated financial advice.

The Government believe, however, that the FCA has an important role to play in overseeing how guidance is delivered. It is important to be clear to the Committee what guidance is and is not. Guidance will discuss the pros and cons of different types of financial products and services, and many consumers will engage with the regulated financial services market, whether taking financial advice or buying a product, after taking guidance. I want to stress, and I am pleased to do so on an even-numbered page, that guidance and advice will not be in conflict with one another. I have likened it, in the past, to wine tasting and fine wine. I gather—I do not do it myself—that one samples the wine, thinks “Yes, I fancy a bit of that,” and buys a case or whatever it is called.

Michael McCann (Labour, East Kilbride, Strathaven and Lesmahagow)

A box.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Yes, a box—working-class Tories, I think. The idea is that people receive guidance and they realise they have choices, but they do not feel sufficiently equipped to make those choices; they want to pay for some regulated financial advice. We see guidance and advice as complementary. That is reflected in the levy to pay for the guidance.

FCA standards will help to ensure a high-quality and consistent service across different delivery partners, just as in regulated markets, where the FCA sets rules and supervises firms’ compliance. Many respondents to the Government’s consultation after the Budget agreed that the FCA should have a role.

Proposed new section 333N binds together the FCA’s functions in relation to pensions guidance under a focused new duty to ensure that consumers using the guidance service are appropriately protected. However, the FCA must also have regard to its wider objectives—protecting consumers of financial services, and promoting competition in consumers’ interests and market integrity —as the regulator responsible for the conduct of the financial services industry, ensuring that in setting standards for guidance, it takes into account developments in the market and any wider regulatory interventions.

The Government plan to introduce secondary legislation to clarify the fact that guidance providers are not subject to FCA regulation, which is why, instead, the Bill proposes to make them subject to a new, bespoke FCA standards regime. The Bill designates the delivery partners recently announced by the Treasury and gives the Treasury the power to designate others, and indeed withdraw designation by notice in writing, after consultation with the designee and the FCA. The Treasury must make the list of designated bodies public.

Proposed new section 333G places a duty on the FCA to put in place standards with which designated guidance providers must comply. Standards are, to all intents and purposes, equivalent to FCA rules for regulated markets. Like FCA rules, subsection (2) of proposed new section 333G provides that failure to comply is actionable by a private person—that is, individuals can take designated guidance providers to court for breaching the standards whereby they have incurred a loss as a result. The FCA can specify where any standards are not actionable, where, for example, a standard is high level. I should stress that we do not expect consumers to be bringing lengthy and costly court cases. Like the Financial Ombudsman Service, which helps individuals resolve complaints against financial services firms, there will be robust arrangements for handling complaints about the guidance service, with recourse to an independent adjudicator and ultimately to the Parliamentary and Health Service Ombudsman.

Proposed new section 333O allows the FCA to issue guidance to complement or explain standards, in the same way that it does with rules for regulated markets. Proposed new section 333H places a duty on the FCA to monitor compliance with standards and gives it powers to monitor compliance, broadly similar to the powers it has to supervise regulated firms. It can request information, conduct interviews, obtain evidence and, in extreme circumstances, could obtain a warrant to enter designated delivery partners’ premises if that were necessary. We hope that we will not be raiding the offices of TPAS any time soon, but we have that reserve power.

It is worth explaining at this point how the roles of the FCA and the Treasury complement each other in ensuring the guidance service works effectively—a belt-and-braces approach in other words. The Treasury is responsible for choosing and designating delivery partners and holds the funding levers over them. The FCA will be equipped to set the standards, bringing to bear its insight as the regulator responsible for the conduct of the financial services industry, and to monitor them. That is why the Bill gives the FCA and Treasury a dual-key approach to ensuring delivery partners comply with the FCA’s standards. The FCA will be able to make recommendations to delivery partners to remedy any non-compliance and, in the interests of transparency, it will make this public, as in proposed new section 333I, with limited exceptions. It must set out its policy on recommendations, with the consent of the Treasury under proposed new section 333J. It must consult on this policy statement in draft under proposed new section 333K.

While it is difficult to imagine that delivery partners will not respond to such a recommendation, the FCA can, if necessary, recommend to the Treasury that it should issue a direction in writing, copied to the FCA, to designated guidance providers. The Treasury’s powers in that respect are set out at proposed new section 333L, and non-compliance with a direction can be enforced through the courts. Like FCA recommendations, directions will, with limited exceptions, be published by the Treasury, after it has considered any representations by the designated guidance provider regarding publication. Proposed new section 333M sets it out that revocation of designation is also an option in cases of non-compliance with FCA recommendations. I apologise for the exhaustive nature of those remarks, Mr Bone, but the new schedule is very long.

Part 4 deals with funding and the levies. Proposed new sections 333P and Q concern funding. Taking 333Q first, this provides for the mechanism for funding the running of the guidance service in future. While set-up costs are being met by the development fund of up to £20 million allocated at the Budget, the Government announced in July that this service will be funded by a levy on the financial services industry. The Government believe that those firms that stand to benefit from better-informed consumers, who are more inclined and better equipped to engage with the financial services industry, should pay their fair share towards the costs of the guidance service. Proposed new section 333Q allows the Treasury to ask the FCA to collect a certain amount to cover the costs of delivering the guidance service. The FCA must then propose, and consult on, how it plans to allocate the levy among regulated firms.

The FCA has already proposed some initial models for allocating the levy, weighted in different ways, and proposed that small firms should pay nothing at all. It is considering the responses to the consultation. Finally, the FCA must seek the Treasury’s approval before making the rules for the levy. Once collected, the FCA will pass the funds to the Treasury, net of its collection expenses, which will in turn pay the funds into the Consolidated Fund. Funding for the costs of the guidance service will then be voted by Parliament to the Treasury’s budgets as part of the usual arrangements for departmental budgets. Proposed new section 333Q allows the Treasury to tell the FCA which factors will inform its consent to the allocation, and that the FCA must have regard to those factors.

Proposed new section 333Q defines the Treasury’s guidance costs in doing so. It is clear that those costs include cover to fund the delivery partners’ costs, its own costs of delivery, awareness raising, research and evaluation, and other relevant costs.

Proposed new section 333P provides for a separate levy to cover the FCA’s costs of setting and monitoring against standards and its other pensions guidance functions. That will be paid by guidance providers as a fee to the FCA, in the same way that regulated firms pay. That ensures that the costs of the FCA’s monitoring of designated guidance providers are transparent. Proposed new section 333Q provides that the costs of the fee can be met out of the grant given to delivery partners by the Treasury.

Nigel Mills (Conservative, Amber Valley)

Last week, the Minister said he was targeting some time in March for Royal Assent. Is he confident that these provisions can be in place by then and that there will be enough money in the pot to pay for the guidance, or will that be sorted out through the general fund?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend for that intervention. We are very focused on the April delivery date. The £20 million for start-up funding is already being spent. We are already working with TPAS and Citizens Advice groups, and money is being spent on preparing the websites. There is a lot going on already, including the spending out of that £20 million to get the system in place for April.

Obviously, the levy will be collected in the new financial year and will pay for provision of the guidance during that financial year. Prior to our discussions, the FCA has already launched a consultation on the structure of the levy. It already collects a levy, so the mechanism is in place. Once the FCA has heard the response to the consultation and reached a decision that is approved by the Treasury, the levy can be collected in the new financial year.

Moving on to part 5, which concerns the crucial issue of signposting, making people aware of guidance and prompting them to engage with it will be key to the success of the service. Historically, consumers have not engaged with decisions about what to do with their pensions at retirement: even though an increasing number of people are aware of the benefits of shopping around, most people still do not do that. Instead, they stick with their current provider and lose out on the best deal.

The pensions flexibilities give individuals a reason to engage and a chance to make a meaningful decision. Interest in pension saving and engagement with retirement decisions have increased since the Budget announcement. The Government want to ensure that providers, as part of their engagement with customers, must tell people about their right to guidance: an impartial source of information and support on their options as they approach retirement, which complements the information they will get from their provider. That is the purpose of proposed new section 137FB.

Rather than prescribe the signposting requirements in statute, the Government have decided to place a duty on the FCA to impose signposting requirements on pension providers through their rules. The FCA, as regulator of contract-based pension schemes, is well placed to specify the detail of—and to monitor compliance with—rules requiring signposting, and to consider how that sits alongside its other rules and requirements on firms to ensure consumers are being treated fairly.

The FCA’s rules are flexible and can be updated much more easily than statute. That is clearly important. The FCA has proposed that signposts be included in wake-up packs that are sent out four to six months before the intended retirement date, or when a customer makes contact indicating that they wish to access their pension funds. However, if it becomes clear that different timing or a different approach is necessary to maximise engagement, the FCA can change its signposting rules or make them more or less prescriptive.

As the FCA’s recent consultation makes clear, signposting is about more than simply referring to the existence of the guidance service. Signposting should include reference to the fact that the guidance is free and impartial and that it is designed to help consumers with defined-contribution pots approaching retirement to understand and navigate their choices in the new retirement landscape. It should show how guidance can be accessed and provide contact details and the basic information that customers will need to make an informed decision about their pension pot.

Proposed new section 137FB also requires the FCA to consult the Treasury before publishing its draft rules that will apply to FCA-regulated pensions, which are usually referred to by the shorthand of contract-based schemes, as it will be important to ensure that they align with the Treasury’s implementation of the service.

My hon. Friend the Member for Amber Valley may be interested to know that the FCA will also be required to consult the Secretary of State for Work and Pensions and to have regard to existing regulations to ensure coherence with requirements on trust-based pension schemes and any proposals to change those requirements. My Department will amend its disclosure of information regulations for schemes regulated by the Pensions Regulator, usually referred to as trust-based, to align with signposting requirements for contract-based schemes set by the FCA.

Finally, part 6 deals with consequential, transitional and commencement issues. Paragraphs 5 to 15 of proposed new section 137FB make consequential amendments to ensure the new provisions fit as part of the 2000 Act. In particular, they allow the FCA’s consultation on standards and on rules on signposting and on fees, published earlier this year, to be regarded as fulfilling the consultation requirements in the Bill. That means that the FCA rules and standards will be in place in good time for April, which comes back to my hon. Friend’s point, and will allow firms and delivery partners to prepare appropriately to be compliant by April. The Government are considering tabling amendments in due course to commence the guidance guarantee provisions on Royal Assent, so that the legal framework is in place in advance of April.

I hope that that gives the Committee an exhaustive, if not exhausting, account of new schedule 2. I commend Government amendment 58 to the Committee and look forward to the Committee’s comments.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

It is a pleasure to serve under your chairmanship, Mr Bone.

We now come to the issue that has captured most interest outside this place, and there are good reasons why that interest was piqued. I shall begin with the Minister’s remarks on guidance during his exhaustive run, as he described it, through the new schedule. The length of the schedule speaks to the complexity of the legislation that the Government are seeking to implement through it, and through amendment 58 and new clause 12.

If we step back for a moment, it becomes clear that, given the Government’s emphasis on guidance, they recognise the complexity and difficulty of the decisions being placed into the hands of individual savers as a result of the Budget reforms. The Government thought that deciding what to do with one’s pension pot, at age 55 and onwards, was simple and straightforward. However, the decisions that are going to have to be made are difficult and complex; the Government would not be putting so much emphasis on guidance otherwise.

The question is whether the guidance, as the Minister set it out, appears robust enough to the Committee—and, indeed, to the House and the public. That is an open question. I will go through some of the issues that emerge from the Government’s approach to guidance.

First, the retirement income market needs to be reformed; there is no doubt about that. The annuities system was not working effectively for substantial numbers of people. Members on this side of the Committee think that greater options are necessary for people at the point of retirement. What emerges very quickly is the rapidity with which the Government have undertaken these measures. The hon. Member for Amber Valley raised the issue of how confident the Government are that the levy will be raised and in place by April. The Government have set themselves an extraordinarily rapid timetable; one would not want to be awfully cynical and suggest that that timetable is linked to that of the next general election. However, the rapid timing raises questions, given the importance of getting the guidance right, which the Government insist is absolutely critical to making the reforms work for savers.

There has been confusion and a lack of clarity since the Chancellor announced the reforms in his Budget, but that is not surprising. He told the House that people would get advice, but, as everyone in Committee knows, advice and guidance are very different things. From that moment on, there has been ambiguity and a lack of clarity at times around the Government’s approach. The Minister has done a manful job of trying to sweep up some of the detritus; the day after the Budget, he was making the distinction between advice and guidance, but that speaks to a larger issue.

As the change comes very fast, there will be a multiplicity of new products emerging on the market. The Government know that. They place such emphasis on guidance because of the memory of the mis-selling scandals that surrounded the pension reforms undertaken in 1986. A lot of their rhetoric around the reforms is similar to that in 1986. The Government recognise what they missed 30 years ago and are trying to fill that gap through guidance, which is to be welcomed.

Impartial, face-to-face guidance was originally promised by the Minister post the Chancellor’s emphasis on advice, and now there are to be different options for people. The guidance will not necessarily be face to face; it could be on the phone or via the internet. That raises questions about whether multi-platform approaches are equally credible and equally likely to deliver high quality guidance. There is a question mark about that. I do not have a crystal ball, but it seems obvious that face-to-face guidance is likely to be the most substantial, although the Minister might have a different view.

When the Minister and the Chancellor introduced the reforms, the Opposition set three tests to gauge the likelihood of the reforms delivering for savers. First, how good will the guidance be and will it deliver? Secondly, there is the fairness test, about the impact that the reforms to the retirement income system have on the building up of the pension pot part of saving—to use the jargon, the linkage is between accumulation and decumulation—and particularly the potential impact on investment strategies that pension funds have to undertake.

For example, one criticism of individual defined contribution is that the pension scheme is managing an individual’s pot and does not have the scale of assets through which one can take greater risks and hedge against those risks. Managing an individual’s pot 10 years from that individual’s retirement date, the pension fund has to move that individual’s assets into low-yielding, low-risk assets, usually Government bonds, therefore reducing the pension pot that an individual might otherwise have had. One of the great claims made for collective defined contribution is that it allows the pooling of asset risk to the benefit of scheme members.

If pension schemes now have to work on the assumption that an individual is going to exit at 55, does that have an impact on the investment strategy? Will the same thing, often called “lifestyling of assets”, now happen at an individual’s pension scheme progression at the age of 45? If someone joins a pension scheme at 25, they have only 20 years of growing their assets in the most beneficial way possible, and then they have 10 years of low-risk, low-return assets. That is what we mean by the fairness test. What does all this mean for the pension pots of middle and lower-income savers? What is the connection between the fees for building up the pot and turning it into a pension income?

We added a third test, which we call the cost test. That is about trying to dig into the potential impact of these changes—the ability to cash a pension pot at 55 —on eligibility down the line for means-tested benefits. To draw on the Minister’s infamous Lamborghini comment, somebody might be in the scenario of having spent their money and then finding they did not have sufficient income to live on in retirement.

I think it is less likely that people would be imprudent in the use of their savings and more likely that they would simply outlive what they had bargained for. What do such cases mean for eligibility for means-tested benefits, and the potential extra cost to the state? Flowing from that is the issue of social care. Does being able to cash out at 55 impact the relationship with local authorities, which might insist that an individual pays for social care from that pension pot? Since the pot can now be accessed at 55, down the line it is no longer a pension in the same sense.

Those are important tests. So far the Government have struggled to meet those challenges. That might be due partly to the rapidity with which the reforms are taking place and partly to the Treasury’s not being keen to share its modelling on the behavioural impact of the reforms. In that context, I thank the Treasury for providing the memorandum that you, Mr Bone, had said would be useful following the evidence provided to the Committee by the journalist John Greenwood.

In the context of the long-term costs and benefits to the public purse, the absence of evidence from the Treasury showing how the policy had been developed makes it difficult for either side of the Committee to judge the potential risks and rewards. I want to develop the area of risks further. What did the Minister tell us in his run through of new schedule 2? First, that there is to be a multiplicity of guidance options. Online guidance will be available on the Government website and through MAS. Face-to-face guidance will be delivered by Citizens Advice, CAB Scotland and CAB Northern Ireland.

Steve Webb (Liberal Democrat, Thornbury and Yate)

For the avoidance of doubt, I should say that the role of the Money Advice Service is within the Treasury, working with the Government Digital Service to produce the website for the guidance guarantee, so it is not a MAS-provided website.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank the Minister for that useful clarification. Telephone guidance will be provided by the Pensions Advisory Service. The Minister described those as trusted brands. Certainly, CAB has a widespread reputation. TPAS has a good reputation among those who know about it. We have to recognise that most people will never have heard of TPAS. The reputation of MAS is a bit more mixed but, as the Minister said, it will work inside Government rather than provide guidance.

I take the point about trusted brands but I think it is more complicated than that. Citizens Advice does a very good job but historically has not undertaken this sort of guidance role in such a complex area. We must also be honest and bear in mind the pressure that Citizens Advice is under to deliver a whole range of advisory services across a range of benefits and other legal matters. That raises the issue of capacity. The potential for a capacity crunch will depend on the take-up of pensions guidance. That is a critical point. I said at the outset that the Government recognise, through their emphasis on guidance, how absolutely critical it is that savers have the ability to seek guidance on these difficult and complex decisions. Put most bluntly, how is one meant to estimate one’s own longevity? Giving guidance is so important. The fact that take-up could be far lower than 100%—it could be much, much lower—raises its own issues.

A number of witnesses at the evidence sessions were concerned that the FCA has no plans for the second line of defence, as it was called, for those—up to 75% according to at least one witness—who might not take guidance. That is a really difficult issue for the Government. The Minister made great play of how the Government are absolutely committed to ensuring that those taking guidance—we do not know how many people that will be—are signposted towards advice. He used the analogy of wine tasting and wine consuming. There is a big difference, which is the cost of advice. The guidance is free. What is the current annual cost of advice? A saver goes to a financial adviser to ask about the best annuity under the current system. The National Association of Pension Funds has estimated that the average flat-rate cost is £681. That is a hell of an expensive bottle of wine. My hon. Friend the Member for East Kilbride, Strathaven and Lesmahagow would be looking for dozens of cases of wine for £681.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Just to pick a random colleague.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

It is not random at all. My hon. Friend was the Member who, from a sedentary position, suggested that it was not about a bottle but a case. That is the big difference in that analogy. The cost of advice is significant. We should not be naive about the resistance of savers to paying that kind of money for advice even if it might be in their interests in the long run. That is another issue we cannot ignore. It is worth remembering that the Government initially said that the advice would be face to face. First it was advice; then it was guidance, face to face; and now it is guidance face to face, on the phone or online. One has to ask why.

I mentioned the take-up of guidance. Legal & General undertook a pilot in conjunction with TPAS and others. It offered guidance to 9,000 individuals reaching the point of retirement. Only 225 took up the offer, a princely total of 2.5%. Legal & General’s director of retirement solutions, Tim Gosden said subsequently:

“It will difficult to get around consumer apathy without making [guidance] compulsory. The choices are far more complicated and there are so many more opportunities to make big mistakes such as people cashing in their pots, which could have a significant effect.”

It is hard to argue with that statement.

The substance of the guidance will be absolutely critical, as I hope my remarks so far have indicated. On the issue of what guidance amounts to, the Minister has described it as giving a saver the pros and cons of various options with signposting towards advice, but there have been significant concerns about whether guidance as currently constituted under the Government’s plans will do the job. The Trades Union Congress noted:

“Independent guidance is clearly better than that provided by company sales teams”—

of course it is—

“but half an hour of the best...advice will not equip people for what could be thirty years of managing their pension pot...The annuities market was broken, but what we need is the same careful consideration of policy, consumer preference and evidence that led to pensions auto-enrolment.”

The TUC allude to two issues, the first of which is managing a pension pot for 30 years. Guidance is a one-off 30-minute conversation face to face on the web or by phone. It is unlikely to equip a saver for a retirement lasting 30 years. It is easy to imagine circumstances in which it will subsequently make sense for a saver to take out an annuity. It might not make sense at the age of 55, but it might make sense at 75. The notion that guidance will provide all the answers for savers is unlikely. I reiterate that, since no one can predict their own longevity, there is a fundamental issue to start with—one that annuities were meant to solve by providing an income until death. Of course, the annuities market has not been working effectively in recent years.

The Pensions Minister talked to the Work and Pensions Committee in April about the nature of guidance. Looking at it, it is not actually devastating, but the issue is the substance of the guidance. The Minister and the FCA have made their views clear, but I will quote what the Minister said in April and compare that with what the FCA said in its consultation. The Minister said:

“The thing we are talking about is free to the customer. There is no charge for it. It is what we call ‘guidance’, rather than independent financial advice, so it is not formal, detailed, or product-specific; you can go and buy that if you want to, but this is familiarising people with the options they have and some of the concepts, even. Most people do not know what an annuity is.”

That is similar to what the Minister has said this morning. In its consultation on retirement reforms and the guidance guarantee, the FCA stated that, although it will not be product-specific,

“to be effective the guidance will need to be tailored, providing consumers with sufficient personalised information, so that they can understand their options and make confident, informed decisions about their retirement choices.”

It also states that the guidance should ensure that consumers are aware of

“the relevant options, and key facts and consequences of each, including financial consequences, e.g. tax implications.”

There was some dubiety during the evidence sessions about the breadth of the guidance to be provided. Will it simply be about someone’s pension pot, abstracted from their other assets and liabilities? That is critical. If the guidance is to meet the challenge set by both the Minister and the FCA, it has to be about more than the pension pot. How can an individual make a wise decision about what to do with their pension pot, or pots, if a broader view of their assets and liabilities is not included in the guidance conversation? That is very important.

The FCA is clear that the conversation should include tax implications, but working out the tax implications depends on a broad perspective of an individual’s assets and liabilities. That tension can be summed up by asking whether guidance is a portal towards advice or something more substantial. Are individuals making the right decisions about their pension pots, given their assets and liabilities more widely? Will that be part of the guidance conversation, or will that conversation only take place if someone pays for advice? Those questions are critical. Nothing the Minister has said this morning would convince one that it will be a guidance conversation that takes into account an individual’s widest financial circumstances.

Debbie Abrahams (Labour, Oldham East and Saddleworth)

My hon. Friend is making a powerful speech about the risks still associated with the implementation of the guidance guarantee. Is he concerned, as I am, that the impact assessment does not refer to an assessment of the risk and to what it could mean for the future incomes of people who do not take informed advice and that the Department has not published a risk assessment?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

My hon. Friend makes an important point about the Government’s failure to provide concrete evidence about the risks and rewards of the policy direction. It is somewhat inherent for Governments to talk more about rewards. In saying that, this is a particularly obvious example of the upside being promoted, and trying to make a balanced judgment is difficult owing to the absence of the publication of the risk assessment and the behavioural estimates made therein. That speaks to a wider issue to which I alluded earlier: pension policy, for the past decade and a bit, has tended to proceed on the basis of consensus. The auto-enrolment policy, which the previous Government legislated for and the current Government have taken forward, is the product of a decade-long process of dialogue, evidence-based discussion and independent commissioning—no rabbits out of the hat, but sustained discussion.

Richard Graham (Conservative, Gloucester)

The hon. Gentleman is right to raise the general cross-party consensus on the philosophy of auto-enrolment, but does he accept that, during 13 years, the previous Government unfortunately failed to produce auto-enrolment? It has taken this Government, in a much shorter time, to implement the legislation and ensure that large numbers of people all over the country are saving for the first time. Does he accept that it is not good enough just endlessly to talk about things? We need action.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

To be honest, I think the hon. Gentleman is being rather unfair. Auto-enrolment emerged from the Turner commission, which was a successful example of evidence-based analysis by an independent body. The previous Government legislated for auto-enrolment. If he wants me to congratulate the Government on implementing it, I am happy to do so. Surely, a sensible, balanced and fair approach would be to say that one Government put the framework in place and, following a general election at which that Government were ejected from office, the subsequent Government took it on.

Although this is not for this Committee, many other things happened in pensions policy under the previous Government, not least something that I always try to mention when challenged by opponents: the remarkable differences that pension credit made to the poorest pensioners. Some £75 billion has been redistributed to the poorest pensioners so far. I see that Mr Bone is getting antsy, so I will move off that subject, having been beguiled by the hon. Member for Gloucester to go off my main point. I have put on record the fact that the importance of pension credit for the poorest pensioners in this country, who suffered most when the previous Conservative Government abolished the earnings link, should never be forgotten.

Back to the issues at hand: how is consistency of provision to be maintained between these providers and platforms? That is an obvious question. In the evidence sessions, I, and the hon. Member for Gloucester or another Government Member, asked at least one of the representatives of the guidance providers whether there would be an IT system for the sharing of information. How will the Government ensure that capacity is not stretched further by the same individual going to different guidance providers? The Government have not yet addressed that obvious and basic point.

Stephen Hammond (Conservative, Wimbledon)

The hon. Gentleman is not undermining the concept of the guidance guarantee; he is just laying out the risks. I do not think that he is suggesting that the Government provide advice of the costs, whatever those costs might be. We have seen similar circumstances where best practice or frameline guidance is put in place later by the regulatory authorities. Is it not likely that that is how the guidance guarantee will proceed?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The hon. Gentleman makes a good point, which takes us on to the regulator. The Financial Services Authority and, so far, the FCA, do not have a wonderful track record on pensions, and we can see why: they have so many other things to regulate. The FSA was simply not equipped, in my opinion, to deal with pensions. The obvious rejoinder is to say that that has been going on a long time and is not just a product of the current Government. That is absolutely true. In my judgment, the FSA was not equipped to do the job on contract pensions and the jury is still out on the FCA’s ability to regulate contract pensions and the guidance therein. So the hon. Gentleman makes a good point—that has to be the answer—but there are still questions about the FCA’s ability to do that effectively. It has beefed up its pensions team somewhat, but I think it is fair to say that their track record is not great.

The hon. Member for Amber Valley asks how confident the Minister is that the collection of the costs of the guidance guarantee through the levy and then via the guidance providers paying the regulator will proceed smoothly and on time. The Minister said that we will collect in the new financial year, but we simply do not know how much the guidance will cost. The Government have allocated £20 million per year to fund the launch of the guidance guarantee and the rest will be raised by an industry levy, but, unless I am wrong, the Government have not set the level—I think the Minister confirmed that because he has handed it over to the FCA—or stated how much they expect to raise. That remains unclear in the Bill.

More precisely, to be effective, the guidance presumably needs to include a discussion of draw-down and an individual’s tax situation. That point goes to the substance of the guidance. I am loth to say, “holistic”, which is a word that has emerged out of cultural studies. However, in the round, will the guidance cover an individual’s financial situation? I have noted already the issue of the assets and liabilities held by an individual; more widely, there is the draw-down issue. It seems clear that we are moving to a draw-down world. It is worth remembering that the average pension pot in the UK is not at all large. The median is somewhere between £10,000 and £20,000. Savers in that situation will probably take cash, but who can predict that? Above that median, draw-down will become crucial, especially in the long term.

One answer that the Minister might give is, “Well, one step at a time. We will consider draw-down and the regulation behind that as we go forward.” However, there is a further issue with the guidance. Will it include the pros and cons of drawing down, relative to an individual’s tax situation, when the possibility of a saver making a bad decision might be increased? This goes back to my earlier point that the Government are doing this very quickly and are not providing as much detail as one would expect. The training of the guidance givers will be a significant task in itself and gives rise to questions. We often talk about how complex pensions are; turning a pension into a retirement income is equally complex.

The document “Freedom and choice in pensions: government response to the consultation” indicates that draw-down is likely to be treated similarly to annuities—that is, income is assessed, not capital. In a 30-minute conversation, one can see the tension. How can the Government insist that an individual’s assets and liabilities, both of wealth and income, are included in that 30-minute conversation? So far, it is difficult to have overwhelming confidence that that will happen.

At the moment, the landscape appears to be that the Government have proceeded rapidly to abolish the necessity of taking an annuity. One can see absolutely why that decision has been taken. It would be difficult for me to complain about that, given that I spent so long arguing against the inefficiencies of the annuities market. However, in introducing this reform so rapidly and putting so much weight on the guidance guarantee to deal with the complexities and difficulties of assessing one’s financial situation at the point of retirement, there are significant questions to which we seek answers.

I will lay down some questions to which I hope the Minister can provide answers. First, in response to the hon. Member for Amber Valley, the Minister said that the Government are very focused on getting things in place. The hon. Gentleman did not ask precisely the question that I am about to ask but was concerned about ensuring that the money was in the pot. Can the Minister turn the expression “very focused” into a guarantee that the guidance will be available across the country by April 2015? Is he comfortable that the timetable will be met?

Secondly, to make a familiar request, will the Treasury publish its risk assessment of the delivery of the project, which so far it has refused to do? Thirdly, what are the uncertainties about the amount of tax that will be received by the Exchequer following these changes? Will the Treasury publish its assessment?

I note in the penultimate paragraph of the Treasury memorandum, which was provided under your auspices, Mr Bone, that the Government believe that Mr Greenwood’s figures are a significant overestimation of the risk to the Exchequer. That confirms that there is a risk, but we have no way to judge either it in the narrow sense of the loophole that Mr Greenwood raised or the wider risks of this project. Will the Treasury publish its assessment of this project’s value and the taxation that it expects to receive? Related to that and fourthly, will the Treasury publish any analysis that it has prepared of the distributional and behavioural impact of the Bill?

It might seem odd to ask the Treasury for those things for this Committee, but I operate on the principle of joined-up government that is effective and cross-departmental. It would seem odd if the Minister was unable to insist that the Treasury publish these papers in the interests of transparency.

Fifthly, on a different point not yet covered, will the Minister tell the Committee what safeguards are in place to prevent pension providers from enrolling savers who fail to shop around into poor-value products? Those who do not exercise a choice might be just defaulted into their current pension provider’s product, whether an annuity or otherwise. We have not discussed that.

The reason why the annuities market did not work was largely that savers did not shop around. Savers tended to accept a default option of their pension provider, so there was no competitive pressure on annuities providers to offer best value for money. If a provider had someone saving in its pension scheme, it could be pretty sure they would default into whatever the provider offered.

Not exercising a choice has obvious implications for the Government’s reforms. If the problem with the previous market was that individuals did not exercise a choice, how can the Government be confident that they will exercise a choice in the new environment? That is a wider question, but specifically what safeguards are in place to ensure that those who do not take guidance and do not exercise a choice are not defaulted into poor-value products by their current provider?

Sixthly, will the Minister provide more information about the Government’s expectation, as stated in the tax impact and information note accompanying the Bill, that around 130,000 people a year will expect to access their pensions flexibly? Bluntly, how did the Government arrive at that estimate? That point also came up in the evidence sessions.

Seventhly, does the Minister think that one-off guidance will be enough to prepare someone for more than 20 years of retirement? I have already made that point. Eighthly, to elaborate on something I raised earlier, will there be a second line of defence for the 75% of individuals some people estimate say will not take up guidance? That is a huge question.

Ninthly, and I hope lastly, what will be the qualifying requirements for Citizens Advice staff in order to dispense the guidance? That goes to the point about training, which is so important to making the reforms work.

In summary, the Government have placed huge weight on the guidance guarantee meeting the challenges that will arise from the complex decisions that they are encouraging individuals to make on retirement, or even before retirement at the age of 55. Given that, it is incumbent on them to provide clarity about the risks as well as the potential rewards—the downsides as well as the upsides—including the expected behavioural impact from April onwards and the effect that the Treasury believe it will have on tax take. The Government must clarify the substance of the guidance guarantee and the extent to which it will be an in-the-round conversation about an individual’s assets and income rather than simply about their pension pot, and the content of the training regime that will be undertaken by the guidance-guarantee givers.

I hope that the Minister will be able to provide some clarity on those questions. If he cannot do so, I think that that suggests, at the very least, that the rapidity with which the reforms have been undertaken presents a series of challenges. We have to get the reforms right. The annuities market did not work as previously constituted, although some specialist annuity providers did very well because they met an unmet need in the market. The Government have decided that the annuities market did not work, so they have ended the compulsory annuitisation of pension pots and placed huge weight on individuals making the right decision about their retirement. As the Government’s emphasis on it suggests, the guidance guarantee is absolutely critical to that, and we must hope that the Government get it right.

Nigel Mills (Conservative, Amber Valley)

I will not follow the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East with a general canter around the changes and why we need guidance. I want to focus on how we ensure that the Government’s proposed guidance is the right product and service, because people who reach retirement age will desperately need such guidance.

There are various things that we need the guidance to be. It must be of the right quality; it must be tailored to individual circumstances and needs; it must be provided at the right time; it must be impartial; and, perhaps most critically, it must be taken up. The guidance must make a difference to an individual’s decision, and it must be followed up to ensure that people understand the information and change their behaviour. We need a back-stop protection to prevent those who have not taken guidance or who have not understood the guidance they are given from being ripped off by an unscrupulous seller. Those are the criteria by which I try to judge the Government’s proposals.

I do not agree that the changes are being rushed. The Government took the right decision to end compulsory annuitisation, because it was wrong to force people into something that was not right for many and was not working for even more. After we announced that, we could not have said, “In three years’ time we are going to take away that compulsion.” In those three years, some people would have tried to self-draw down, or to defer or avoid making a decision. Those who had been badly advised might have tried to do strange things. Others might have been forced into doing something that they knew they did not want to do, in the knowledge that if they had reached retirement age three years later, they would have been all right. That would have been wrong, so the changes had to be made quite quickly.

The guidance must be available to help people who now have a choice to make, which they did not have to make in the past. It must help them to understand that choice and how to get the best outcome. I agree that it must be guidance rather than actual advice, because the cost of providing advice would be incredibly high and would fall on savers, members of pension schemes and people who buy such products. If someone has a £10,000 pension pot, making them pay several hundred pounds for advice that they do not really need and that does not tell them much would be incredibly unfair. Those who want to spend hundreds or thousands of pounds on advice can and should still go and do that. We need to find something that stops people with small pots doing the wrong thing but does not wipe out a large chunk of their pot.

It is right that the guidance is impartial. It could never have been delivered by people in the industry. We could not have even the most innocent and well intentioned pension schemes trying to give their customers general guidance. Who would have had faith that the guidance was impartial and was giving people the right answers? It is right that it comes from outside the industry. Clearly, finding not-for-profit people to give it was the right answer. Every Member here would recognise that the CAB is an incredible organisation that gives quality advice on many complex issues and has a national presence in many communities. It looks to be the ideal partner. It needs to get up to speed with the pensions industry and the various ramifications of the changes, but if it can understand and advise people on the welfare system I am sure it can deal with pensions as well.

My only reason for tabling amendments (d) to (g) was that the new schedule specifies the CAB and the Pensions Advisory Service as guidance providers but allows them to delegate to anybody. It also allows the Government to appoint new providers at some point in the future. I thought it would be better to say in the legislation that we do not want people in the industry being allowed to give the guidance. We do not want the CAB to get into the middle of next year and think, “God, this is really quite hard. We can’t train the people. Let’s find somebody else to do it for us. Oh look, here is Legal & General;”—as an example—“perhaps it might take this over.” That would be a terrible situation. I am sure the CAB does not intend to do that—I suspect no one would want that to happen—but we ought to say somewhere in the rules that nobody with an interest in selling pension schemes or retirement products can be involved in the guidance process. That was what I was trying to achieve with amendments (d) to (g).

I accept that the way in which I drafted the amendments may have included the whole world, so that perhaps no one could give guidance, so I may have gone a little too far. However, I urge the Government to think before Report about how we get into the Bill the idea that we want the guidance to be impartial by law, so that we do not accidentally end up with people giving it who should not be doing so, or with a situation in which a future Government establish a new provider that is not impartial. If we wrote into the Bill that a guidance provider has to be somebody who does not make a profit from selling pensions, that would be the right position.

I have always said that the time when people get the advice will be key. People will have to think about the sort of pension scheme they want to join right at the start. They will have to understand what the investment decisions are, and other issues of that kind, quite early on—when they get their letter asking, “What target retirement date do you want? Will you want a lump sum? How risky do you want to be and for how long?”— to get a pension scheme that does what they want.

I accept that we cannot give people pensions guidance every six months throughout their working lives, so I agree with having some kind of web portal or well produced website where people will be able to see most of the guidance content. It will not be tailored to them, but they will at least have somewhere impartial that they can trust and that sets out advice on the various decisions. That will be of some assistance to people. But the question is exactly when they should get the guidance. Ought it to be before they think of taking a lump sum to pay off a mortgage or some other debt, perhaps at the age of 55? Ought it to be when they are just about to retire, at about 65 and a half, or whatever the pension age will be by then? Could people do both, or if they get advice at 55, will that be it—will they not be able to have it when they come to retire? We need to think about what we are offering people. Someone might need advice at the age of 75 if they had chosen to live off savings or do a bit of draw-down, but then decided a year or two later that they would like certainty for the rest of their lives and so needed some advice about what to buy. How many times can people dip in and out of the guidance?

If there is no tailoring of advice, the discussion will be only theoretical. I can picture the phone call: “Hello, I’ve been told to apply for my guidance. Can I have it?” “Yes, you can. Pensions are very complex. Make sure you shop around. You have a choice: annuity draw-down or just take the cash. There are lots of other things out there. Please be careful and take up advice if you want it.” That is largely useless to people. They will forget that within five minutes of putting the phone down or leaving the room.

We need to get people in a position where they have thought about their own financial affairs. They have worked out what assets and income they have. They have thought about what they want to do in their retirement. Have they got any debts to pay off? Are they keen on a Lamborghini, or perhaps a cruise? Have they got grandchildren whose tuition fees they want to pay? Whatever else they have, they can make a choice about how much fixed income they want to take them through to when they die and how much they want as a bit of luxury in the early years. Without that, the conversation will become highly theoretical.

Amendment (h) outlines what people need to produce before they get that guidance. Let us say that people get their instruction about having guidance. They ring up to make the appointment and are told, “Here is a standard spreadsheet you should fill in”, or “Here is some pack you should work through before the appointment”. As set out in the amendment, that appointment would be at least two weeks later, so people would have time to do that. I probably would prefer it if the guidance provider said, “Have you worked through that information?” If the reply was, “Oh, no, I’ve forgotten to do that,” they would say, “Let’s cancel this now and come back another time when we can get this right.” If we do not do that, I sense that this will end up being a largely theoretical exercise that will not help people.

I can accept that there is a good question about how much we should put in law, how much we should leave to the regulator and how much we should leave to the contract between the Treasury, the CAB and TPAS, but there is a role for us here. If we agree to these reforms and think they are the right thing to do as long as we provide the right kind of guidance, we should be able to set out the standards that have to be met for that guidance to be worthwhile. It needs to look at people’s entire financial affairs, and people need to be prepared at least to understand their own situation when they are given guidance rather than it being completely abstract.

Amendment (h) would also require that guidance sessions last about half an hour. I tried to make it an average and aimed at half an hour. Clearly there is not much point in a phone conversation with someone who does not need half an hour being dragged out for an extra 20 minutes just for the sheer hell of it, but I cannot see how it can be done properly in less than half an hour. We probably do not want guidance providers to be so cost-constrained and target-driven that they try to work people through in 15 minutes, as in a call centre system. I accept that that is not what we are aiming it. We should have an expectation that the conversation will be reasonably lengthy, so that people have a chance to talk through their own circumstances, ask follow-up questions and ensure they have understood everything. Perhaps half an hour is woefully short for that, but we need to understand how long we are targeting for the sessions to last.

Talk about the levy, but the cost of providing advice depends broadly on how many people take the guidance and how long it lasts. When we do the models, what is the assumption? Is it half an hour? Is it 15 minutes? Is it an hour? That must have been thought through. We have seen previous Department for Work and Pensions contracts for which people have been able to carry out medical assessments much faster.

Andrew Love (Labour, Edmonton)

I am following the hon. Gentleman’s line of argument carefully. TPAS suggested during the evidence session that a minimum of half an hour would be required for a telephone conversation. There is an assumption that face-to-face guidance would take even longer. Although I accept his argument that personal information needs to be included in the guidance, to what extent will that be limited by the time available?

Nigel Mills (Conservative, Amber Valley)

Clearly, if someone had a fiendishly complicated financial situation with multiple pension pots and other assets, other income and a load of debt, that would be a horribly complicated conversation that could not be held in half an hour. We are not trying to get recommendations or advice. We are trying to give people an understanding of what issues they have and what options are available. I agree that if people really have no understanding of any of this, trying to bring them to any kind of understanding in half an hour would be impossible. But equally, there may be some people who have a £5,000 pension pot who do not have many choices and do not need to understand all the potential things that are out there for them. In that situation, they might not need half an hour.

If we think that in general at least half an hour is the right answer, is that something we should set out in the Bill? I take the point that it might be going into a little too much detail, but is that the expectation that we are setting the regulator? Is that the expectation we are setting in the contract with the CAB and with TPAS—that they will be resourced and funded and the levy will be set so that there will be half an hour for each person who wants it? Perhaps the Minister will answer that.

On ensuring the guidance is taken up, the Bill rightly includes duties on pension funds to market the guidance at the right time and in the right way. I instinctively think we should have a regulatory-approved flyer, letter or e-mail, so that the provider sends out something with approved content that is in the right format and easy to understand, and plays up how important the issue is, rather than something in the middle of a pre-retirement pack where, on page 37 in the bottom right-hand corner, it says, “By the way, you can seek independent guidance if you have the time.” It must be flagged up in a high- profile and positive way that explains that the guidance is impartial and will be of real use to people, and not simply one of the many regulatory things that we get in the back of a pack and never get round to seeing.

We have a DWP Minister here setting out a lot of Treasury duties. We appear to have none for his own Department. When people come up to their retirement age, not only do they get a pack from a pensions scheme, but they get correspondence from DWP telling them they are about to come to retirement age and can draw their state pension: “This is what it will be, and you can defer it if you want.” Deferment is an important decision, because the returns are quite generous.

It strikes me that the DWP communication is really where we should promote the guidance. It comes at the right time, it is from a trusted source, and it is clearly relevant because it tells someone what their state pension will be. Should not the DWP flag up the availability of the guidance in its communication as well? That is why I want a duty on DWP to promote the guidance, as suggested in amendments (a) to (c). It seems eminently sensible that we spread the love around and have joined-up government in this situation, so that all the Departments that engage with people as they approach retirement really make the guidance work.

Finally, how do we follow up and protect those who have not taken the guidance or have not understood it? There is only one way to do that. When the industry is selling products and making final decisions, it could ask people whether they have had the guidance. It could flag up that they ought to have done and could ask whether they are sure they want to waive their right to it before signing up for a product. We need to get such questions asked in a fair and clear manner.

Clearly, if I am selling something and I am about to meet my monthly sales target, I will not want someone to hang up the phone and go and take their guidance and not come back. We need the regulator to be quite strong with providers. People need to understand what they are doing. We do not want mis-selling and aggressive selling of the new super-whizzy scheme that has been drawn up to meet people’s alleged needs. We do not want to repeat the mistakes of the annuity market, where people were buying things that simply were not suitable, so we need a caveat—have people thought about what will happen to their spouse if they predecease them, or about their general financial position and their health situation? Do they have health conditions that mean that buying an annuity is still not the right thing for them to do? They need to think it through carefully.

It is important to get the regulator to take real action from the start so that we do not have a load of mis-selling before we get protections in place. We do not want the first cohort of people in 2015 and 2016 to be guinea pigs. We do not want mistakes and mis-selling to happen so that we then start to beef it up and sort it out in 2016 and 2017. The guidance needs to be of the right quality and in the right place from the start. I therefore commend amendments (a) to (h) to new schedule 2 to the Committee.

Steve Webb (Liberal Democrat, Thornbury and Yate)

This has been a thoughtful and constructive discussion. It is good to be freed from the shackles of explaining what proposed new section 333L and so on mean, so that I can discuss the substance of the important issues raised. I will start with the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East, who listed nine questions but I counted them as he spoke and I think he should have said “Twenty-seventhly” at the end. However, I will try to address his points as best I can. I agree with him that these are complex decisions. Some people, particularly those with a decent pension pot, may have many choices and thanks to the Budget may have choices that they did not before, which is why guidance and, where appropriate, regulated financial advice will be important; I will not demur.

However, the hon. Gentleman said that there has been confusion since the Budget. We were criticised on Budget day for being decisive, and asked why there was no consultation. There was no consultation because we decided that something was right, said so, and consulted for three months, which is the proper length for a decent consultation. Of course, throughout the consultation people said, “Tell us what’s going to happen. We need to know.” We told them that we were consulting, and that then we would think about what people said and make decisions. Although the Government are consulting—listening, thinking and evolving the practicalities of a decision—in principle it is easy to say that there is terrible uncertainty. There is not. The new freedoms cannot be accessed until next April and, quite properly, we are taking time to listen to the feedback and refine the proposition.

We are undertaking ongoing research, and talking to people in the target market, providers and TPAS. We are refining what we are doing and testing different approaches to see what works, so there is an awful lot of ongoing work. There is a clamour for, “Give us the figures. Tell us how many people—what will the take-up be? What will it cost?” Our estimates are being refined as we proceed, quite properly. For example, a few months ago we did not have in place the guidance providers referred to in new schedule 2, but now we do. We are working with them and talking to them about the people they deal with. This is an ongoing process of refinement, which is why there are no hard figures. By the end of the year, we will publish an update—updated estimates and a progress report—which will be of interest to the Committee.

The hon. Gentleman said that there would be a multiplicity of new products. Although I am repeatedly advised not to make forecasts, I would be surprised if April looks radically different in terms of products. Providers are thinking about the measures now and will modify existing products, but I have heard the phrase “a decade of innovation”, which probably better captures the spirit of where we are heading. For providers, getting their systems in place just to cope with the changes we have made will be an issue. Over time, they will look at how the market develops and develop new products, but I do not think there will a massive sea change. Draw-down products already exist, and one could imagine that they will be refined. I think that the development of products will be more evolutionary, but I am only speculating on the basis of previous conversations.

The hon. Gentleman raised the issue of there being multiple channels such as face to face, over the phone and the internet. My answer is, “Why wouldn’t you?” People like to consume their guidance in different ways. There is a set of people who are comfortable with the internet and do everything on the web. That is what they expect, so we want a quality website in place. There is a set of people who want or need to do things on the phone, such as housebound people, people in remote rural areas, and those who do not particularly want to talk to a stranger in a strange place and would rather get guidance sitting on the sofa with a mug of tea and all their paperwork beside them, so we are offering a phone option as well as face to face, as the Chancellor promised. There is no real problem with that.

The hon. Gentleman is right to say that all three channels need to be credible. The standards will apply to all of them and we will be seeking consistency. He overplays the issue of someone having a guidance phone call who then tries to see someone face to face or go on the internet. Everything will be branded. I cannot reveal the brand today but there will be a brand and a logo, which will be on all the correspondence. It will be apparent and will be accompanied by awareness raising and publicising that this is the Government’s guidance guarantee. There will be consistent branding, messaging and standards across all the different channels.

Andrew Love (Labour, Edmonton)

Can the Minister confirm whether the face-to-face interview will be on an individual level, collectively or a combination of both?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I have every reason to expect that people will be able to see someone individually, face to face. It may be that we can complement that with other patterns of delivery, but I have no reason to think that where we end up will not be someone sitting down face to face with one other person, not a group.

The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East asked the cosmic question of whether the guidance is just a portal to advice or whether it covers an individual’s financial circumstances. We are clear that it is more than just a portal. The FCA’s consultation set out that the guidance must cover factors relevant to an individual’s financial situation, including their motivations, and it will certainly include things such as tax, so it will not be simply a route to somewhere else. To come back to the point made by my hon. Friend the Member for Amber Valley, it will not simply say, “You have got this money and there are things you can do with it. There is a website you can look at—hope it goes all right.” It will be much more tailored than that.

The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East asked whether people will run out of money. I have a couple of observations on life expectancy. One reason why the guidance service is there is to help people understand how their pension saving can provide an income in retirement, and part of that will be addressing how long their money needs to last.

Longevity can be a sensitive issue. At some point I think I suggested that we give people their estimated dates of death, which was regarded as controversial in some quarters. However, we are trying to test how we can make the guidance effective and engaging and fit longevity into that, using insight from behavioural economics to inform the framing of such issues. For example, we might say to people, “Someone like you might reasonably expect a 20-year retirement, but you need to think that it might be 30 years or 10 years.” One can imagine such a conversation.

It is important not to be black and white about this. We are not moving to a world in which nobody will buy an annuity. Some people will buy annuities exactly as before, but there is a groundswell of opinion that some will lock into them later in life. For example, a good outcome for people would be that, early on in their retirement, their money goes on growing their investment. Perhaps they will have to be willing to take an element of the downside of such risk for the benefit of investment growth, but then, at 75 or a later age, they will lock into an annuity. People recognise and accept the uncertainty of longevity, and products will still be available to deal with that. However, to lock in at 55 to a product that insures against living to 90-odd may not be such a good thing, so there is a balance to be struck.

The hon. Gentleman said that one issue was that people might run out of money and another was that they might blow the lot. I do not know whether he envisages queues of Lamborghinis outside the housing benefit departments of North Lanarkshire—I think that is one of his local authorities—but that seems implausible. The overlap between people who have very large pension pots and those in the scope of means-tested benefits is small. For example, having a big pension pot does not correlate well with being a renter.

There is a potential impact on the Exchequer, but it is worth saying that the Office for Budget Responsibility’s latest projections, published in the 2014 fiscal sustainability report, assume no increase in income-related pensioner benefits as a result of the wider freedoms in the use of pension pots. I suspect that zero is pushing it, but, in the scale of some of the changes we have made to state pensions, we do not believe that the numbers involved in this process will be terribly eye-watering.

The hon. Gentleman referred to a fairness test and asked whether pension providers will start lifestyling at 45. As someone who is 49, I find that quite an alarming thought. He will be aware that the National Employment Savings Trust is rethinking its lifestyling and target date fund approach in light of the new freedoms.

My sense of the mood out there is that people will not start lifestyling earlier. If anything, they will go on investing in risk-seeking assets for longer because, at the point of turning their retirement pot into a retirement income, they will have more choice to go on investing. It would be very odd to lock into low-risk assets before that point and then suddenly say, “I’ve got 30-odd years to live; I am now going into risk-seeking assets”. The idea that we will all have our money in gilts is implausible, but we expect that schemes and providers will adapt their approaches in this more flexible world.

The hon. Gentleman asked an important question about defaults: what happens to people who do nothing? Our impression from looking at providers and so on at the moment is that there are restrictions on simply being defaulted into a product. There are already protections in the system, so schemes cannot default members unless their membership has been deferred for at least a year and they have provided written notice of at least 30 days. Many schemes will have other defaults—for example, cash accounts, bonds or lower risk investments that allow members to exercise all options under the flexibilities, if and when they later engage. The Association of British Insurers advises us that this is common practice when a member does not engage. This issue came up in the oral evidence sessions. Forcing people into a default such as an own-brand annuity would be exceptional and there are already protections in place, but obviously we will continue to monitor that.

Another issue raised by my hon. Friend the Member for Amber Valley and the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East was multiple access. One of the refrains that I have heard is, what happens if people want a second bite? Is one shot of guidance good enough? Compared with a hypothetical world where people are getting free and independent guidance all the way through their adult life and well through retirement, it is not as good. Compared with where we are coming from, it is an awful lot better. So many people, at the moment, are defaulted into poor-value annuities, stay with their provider or do not have an impaired life annuity.

Moving into a world where the concept of free and impartial advice is in place is a big step forward. Do we think that that is the end of the journey? Clearly not. Even if one has—roll of drums—the guidance moment with TPAS face to face, we are not going to ban people from phoning TPAS. They will still be able to ring someone up and chat things through. They will still be able to go to a website.

There is an issue about what happens on day one and what the steady state will be. On day one, we will have not just the people coming up to pension age in April 2015, but the whole carry-over group of people who have been on hold for a year. There is an issue about being sensible about capacity on day one, but in the steady state we are continuing to think about how best we meet the needs of people who would benefit from repeat visits to the service. I do not think that as someone leaves we will say, “Never darken our doorstep again.”

My hon. Friend the Member for Amber Valley raised the important point about what happens before and afterwards. We certainly envisage that if someone rings up—there will be centralised phone number—and says, “I want to access my guidance,” there will be a period of probably weeks between making the phone call and having the guidance session. At the initial call, that person will be told that the best use of the guidance conversation is to gather relevant information about their state pension and other pension rights, and other assets such as housing equity, in some sort of standardised format. If someone walks through the door and they have not done that, we are not going to send them away, but we will make it clear to people that if they gather the evidence their session with the guidance provider will be much better and more effective.

We also envisage a written output of the session, summarising what has been said and providing pointers to further sources of guidance where people can find independent financial advice and so on. Even within the model of a single guidance conversation, there is a preparatory phase and a follow-up phase, which is a process we can develop over time.

While full-blown, regulated and highly tailored independent financial advice can be relatively expensive, although it can also be very cost-effective, we are continuing to look at more streamlined and simplified advice. The FCA is continuing to encourage the development of affordable models of advice for retail investment products.

The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East asked about the 130,000 number, though he also says that we have not published any numbers. We have, and that number is in the technical impact assessment. It relates to the number of people projected to draw down pots faster than if they had bought an annuity. If they draw the income earlier, we get the tax earlier. That has to be the basis for the estimate of the fiscal impact of the changes, which is why we have published that number. The data come from the Office for National Statistics and Her Majesty’s Revenue and Customs’ analysis of the wealth and assets survey. It is an estimate and all these things are being refined.

The hon. Gentleman asked whether I can guarantee availability across the country. That is, of course, our plan and it is why we are partnering with citizens advice bureaux, which cover England and Wales, Scotland, and Northern Ireland. TPAS is an existing body and it will be expanded. We will also ensure that the website is in place. We are therefore confident that, wherever people are in the country, they will be able to access the service.

The hon. Gentleman asked about risk assessments, which is exactly what I would do if I were sitting in his place. He knows that Governments do not routinely publish risk assessments. In all these cases, we seek candid advice from officials on a range of scenarios, and that advice will be all the more candid if it is not about to be published on the internet. Obviously, we carefully model all the different assumptions and how things might come out.

The hon. Gentleman says there are uncertainties about the tax impact. Clearly, in this brave new world, every number we produce has to be signed off by the OBR. We are refining our estimates and talking to people about their likely choices.

The hon. Gentleman mentioned the take-up of the guidance guarantee, which, as my hon. Friend the Member for Amber Valley said, will largely determine the cost. Although the hon. Gentleman cited the 2.5% figure from Legal & General, he did not cite the 90% figure from the Chartered Insurance Institute, and I know he has seen its report, because we saw it in his hand the other day. Now, the Chartered Insurance Institute does not say that 90% is its forecast, but it is fair to say that the 2.5% is not a forecast either. Clearly, the more we talk to people and test the market, the more sense we will get of the likely demand. Frankly, however, we will not know for certain until next April; indeed, we will not know steady state until beyond then. However, at the point at which we set the levy, we will clearly have to have an assumption as the basis on which to do so, and we will need to be in that position before next April.

The hon. Gentleman asked about the qualifications of the people providing the guidance. We are not saying, “You have to have a GCSE in pensions guidance.” That is not the way we are going to do it. We will have an arrangement, and we will give grants to TPAS and the Citizens Advice groups. They will have a duty to provide guidance of a specified standard and content. Essentially, we are telling them, “You need to make sure the people providing this guidance are up to the job.”

My hon. Friend the Member for Amber Valley put his finger on the point: clearly, TPAS is very familiar with this territory, and although Citizens Advice is less familiar with it, it has an infrastructure not only of national offices, but of training and updating, and I am always impressed by that. As my hon. Friend rightly said, the social security system is constantly changing, and front-line CAB advisers need to know the latest law and changes. There is an infrastructure and a culture of continuous professional development—one might use that term in another context—and of training and updating, and I am sure it will be put to good use as the CAB network provides face-to-face guidance.

The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said the CAB is a bit stretched already. Actually, we are paying it. It will get extra money, which we would probably all agree is good news. I think most of us rate the CAB network highly, and we would probably all welcome the fact that millions of pounds—I do not think that is a state secret—are going into it to give it enhanced capacity. That will help the viability of the CAB network in general terms, and I am sure we would all welcome that.

The hon. Gentleman asked about the so-called second line of defence, and it is worth saying that protections and rules are already in place. If I go to a product provider, there are the Treating Customers Fairly rules, and the FCA has product regulatory powers. However, the FCA continues to look at the issue as part of its ongoing thematic review of annuity sales practices and the retirement income market study, both of which will be completed before we start the new process.

Andrew Love (Labour, Edmonton)

May I press the Minister on take-up? Almost everyone in the industry is, I suspect, a little less optimistic than he is. Let us say that take-up is not as high as 90%, which is one suggestion, but not as low as the Legal & General figure. A second line of defence is one mechanism that could be used to try to improve take-up. Why is he not more sympathetic to that idea?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Gentleman. Just to be clear, he probably is right that we are somewhere between 2.5% and 90%—there is a reasonable chance of that. As I tried to say in my oral evidence, there will be an awful lot of people out there, particularly in the early days, who have tiny pension pots. They will have been auto-enrolled in the past few years, close to pension age, and have ended up with a few hundred or few thousand quid. They are just going to cash it out. We know that. They are welcome to take guidance if they want to, but it is pretty obvious what most of those people will do. Quite a lot of the early pension pots—those in the early days of auto-enrolment—will be like that.

I am not going to get too hung up on the percentage. The key for me is that the right people take guidance. As I also mentioned in my oral evidence, there is a set of people at the top who will probably bypass guidance and go straight to regulated financial advice. They know that is what they are going to need so they might as well just get on with it. Many of the people right at the top will pay for advice straight away and the people at the bottom will probably bypass guidance. We will make it available to them, but many of them will just say, “Why do I need to do that? I’ve got 500 or 700 quid; I’m just going to take the cash.” There is not a target, but if there was it would not be 100%.

Our principal focus is on driving up take-up of the guidance, which we want to maximise. The concept of a second line of defence says that there is a set of people who probably should have taken guidance and did not, so how do we ensure that they are properly provided for? They get the wake-up pack and the flag, but bear in mind that we will not necessarily know who has visited the website. Our figures might not show that someone made a choice having found out about it and thought about it, and who might well have gone to our website, gone through it in some detail and made an informed choice based on that guidance. I am not going to get too hung up on the percentages, but I agree with the hon. Gentleman that we want to maximise take-up up of the guidance.

Andrew Love (Labour, Edmonton)

Is the Minister not attracted by the proposition that when someone comes to take their pension pot, if they have not formally taken guidance through the right provider, they should be directed—not compelled—to take some guidance?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I understand the point that the hon. Gentleman makes, but I think that as he was speaking he realised the problem with what he was saying. Seeing the CAB cannot be a condition of someone accessing their own money. The providers have to flag it and, as I said in my opening remarks, not just say “There’s this guidance thing over there,” but explain that it is independent, the Government are behind it and the sort of thing it will contain. We will expect the providers to do that. We have to treat people as adults eventually and we cannot insist on those things.

We want to avoid a tick-box mentality. If all we said to providers was, “Before they can take their money, someone has to sign a piece of paper to say that they knew there was guidance and they didn’t take it,” we all know what would happen. They would sit with a salesman or someone like that who would say, “Here’s another piece of paper you have to sign.” We have to ensure that there is content in it, which is what we are doing with the behavioural testing we are carrying out now. I agree with the spirit of what the hon. Gentleman says: we want to maximise take-up of the guidance by the people who should be taking it up.

Richard Graham (Conservative, Gloucester)

I am grateful to the Minister for clarifying the second line of defence. As he knows, that has been flagged up by a number of pensions experts as being of concern, particularly for those retiring with defined-contribution pensions in April next year. The FCA has a duty to secure appropriate protection for those who use guidance, but there is not a great deal available at the moment for consumers who choose not to. A survey by the Chartered Insurance Institute found that 92% of consumers would definitely or probably use guidance, which was encouraging. None the less, for those who do not, there is not much of a second line of defence. What can be done to help those who choose not to take up the guidance?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend. To be clear on what is already in place, firms are required to treat their customers fairly and to act in their client’s best interests. The FCA has on-going work looking at annuity sales through its thematic review and its retirement income market study. It is not a static situation. The FCA is looking closely at what happens when people buy retirement products and, through that work, at providers’ behaviour in that area, which continues to be a priority as the market develops. Again, we clearly have structures in place for April, but it will be an on-going regulatory process that the FCA will continue to be involved in.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The hon. Member for Gloucester makes an important point. The obligation to treat the customer fairly has not worked effectively enough. The Minister does not need to take my word for it; he need only look at the Office of Fair Trading study of contract-based pensions and the current investigation into legacy pension schemes. There is strong evidence indeed that the obligation to treat the customer fairly is not strong enough in the context of a pensions market in which the saver is not able to exert sufficient pressure on providers to deliver value for money.

Steve Webb (Liberal Democrat, Thornbury and Yate)

To be clear, if we thought everything was fine in the world of retirement income choices the FCA would not be doing a thematic review of annuity sales practices or a retirement income market study. We entirely accept that there are problems. The regulatory regime a decade or two ago, when the legacy schemes that the hon. Gentleman referred to were set up, was very different from the one we have now.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

A decade ago?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Well, it varies.

Provisions are in place, but the FCA is doing ongoing work. It is not saying, “We will get round to it some time—in three or four years”. That work is happening now, and it will be concluded before the new freedoms come into force in April. If further changes need to be made in the light of the review of annuity sales and the retirement income market study, they will be made.

Richard Graham (Conservative, Gloucester)

I am, in part, with the shadow Minister on this issue. There is evidence of clear breaches of the treating customers fairly regime by certain providers. As my right hon. Friend the Minister knows, some contributors in the pensions market have suggested that a way round that problem is for the FCA to oblige providers to ask a series of mandatory questions to prompt customers about issues likely to affect their retirement benefits. They said we should not continue with the status quo, and accept the customer’s instructions without active intervention. I guess the question is whether the Minister really believes that the FCA’s review will consider that option before it comes into force in April next year.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Obviously, I cannot pre-empt the outcome of the FCA’s studies and reviews, but as I said a moment ago, those studies are being undertaken because we are aware that there have been problems in this market. We are prepared to introduce further measures, if that is what the studies suggest.

Finally, I want to respond to my hon. Friend the Member for Amber Valley, who made a number of points in discussing his amendments to new schedule 1. I am gratified that he wants to share the love, as he put it, and wants DWP and the Treasury to be equally responsible for all this. He will appreciate that making two separate Government Departments responsible for the same thing creates challenges. The discussions that he, as a member of the Work and Pensions Committee, has been having about having two regulators highlight the challenges of involving different Departments with different roles and different regulators. We are clear that it is right to make a single Department responsible in legislation, but I assure my hon. Friend that our two Departments are working very closely—I was going to say uncharacteristically closely. I have met the Chancellor and other Treasury Ministers on a number of occasions to discuss this issue and—I have been dying to say this all my political life—I shall have further such meetings later this week. That is about as close as I will ever get. The two Departments are joined at the hip on this issue, because we both want to see success.

I am grateful for my hon. Friend’s practical suggestion that DWP’s pensions information at state pension age should refer to this issue. We are developing an approach that will signpost the guidance in our state pension forecast information.

Nigel Mills (Conservative, Amber Valley)

I can understand the Minister’s view that two Departments doing things will not work, but the tax changes broadly make the tax system neutral on pensions and leave the Treasury with much less real interest or involvement in the pension world day to day. Is it not sensible at some point for the guidance to become a DWP duty or scheme, rather than a Treasury one?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clearly, what we are doing at the moment is setting up a framework for April 2015. The schedule allows a lot of flexibility as to how things might be done in future, including who the designated providers might be. At the moment, “Treasury” is everywhere, because the change is being tightly and properly controlled from the centre, with a unit in the Treasury setting up the website, the brand and so on. In the medium term, if the project becomes in essence one of operational delivery, it is not inconceivable that a delivery Department would have responsibility, but at the moment it is a case of one step at a time.

On my hon. Friend’s point about impartiality, we entirely agree. The consultation was clear about impartiality and that is how we envisage it. I cannot conceive that one of the independent guidance providers—TPAS and CAB—we have identified in the Bill would throw their hands up in horror and go to a commercial provider. Quite apart from anything else, the sums would not add up. As he hinted at, if we stop pension providers providing guidance, we stop some good stuff as well, which we do not want to do. Let us consider the example of a member of a trust-based pension scheme. The trustees might already provide at-retirement and other guidance for scheme members. We do not want to ban that. Clearly, we do not want the schemes to neuter the guidance or undermine people’s independent choice, but we do not want to stifle pensions guidance in general. That is the balance we are trying to strike.

I can therefore assure my hon. Friend that there are no plans to have the guidance provided by anyone who has a financial interest. Obviously, we cannot bind future Governments anyway, so even if we put such a measure in the Bill, a future Government could simply take it out if they changed their mind. We certainly do not envisage that and we do not want to stifle the good stuff that schemes might do already.

Finally, on a couple of practicalities, my hon. Friend suggested a session duration of 30 minutes but as we agreed, the arrangement would have to be person specific. Clearly, a worthwhile amount of time needs to be spent with people. We are doing ongoing testing of opinions, attitudes and expectations, so we do not want to hardwire any such provision into legislation. Likewise with the 14-day period, we envisage some weeks between the call and the session, but on occasion someone might for urgent reasons want to get the pension—the cash—in seven days, so we would not want a provision on the statute book to prevent that. I entirely accept the spirit of what my hon. Friend was saying—there should be a worthwhile, substantive conversation, with preparation. We are working out the practicalities, rather than hardwiring anything into law.

I am grateful for what I believe are probing amendments from my hon. Friend. I urge the Committee not to accept them, and I hope that we can make progress on the basis of my assurances.

Clause 45 - Short title

Steve Webb (Liberal Democrat, Thornbury and Yate)

The clause enables the Bill, when passed, to be cited as the Pension Schemes Act 2014.

Clause 14 - Restriction on transfers out of public service defined benefits schemes

Steve Webb (Liberal Democrat, Thornbury and Yate)

Welcome back to our proceedings, Mrs Riordan. We moved this clause out of sequence because it relates to transfers out of public service pension schemes and more naturally belonged with our discussion of the Budget changes, rather than in our earlier discussion of collectives and other forms of pension scheme and benefits.

The clause would provide for regulation-making powers for the Treasury which would allow it to ban members of defined-benefit public service pension schemes from taking cash equivalent transfer values in such a way that its value is transferred to a defined-contribution pension scheme. Specifically, the clause will enable the Treasury to ban transfers from unfunded public service pension schemes to defined-contribution schemes and schemes providing collective benefits.

I advise the Committee that we intend to bring forward further amendments to the clause on Report to tidy it up in response to the consultation. The amendment will ensure that the ban on transfers from unfunded defined-benefit public service pension schemes to schemes in which the new flexibilities are available is actually made in the Pension Schemes Act 1993 rather than in regulations. That is to give the measure primary force. We also intend to table amendments that will introduce a new statutory requirement for DB schemes to check that all individuals who are transferring to DC have taken advice before transferring.

On the substance, the rationale for a transfer ban is quite clear. After the introduction of changes in 2015, it will no longer be possible for members of unfunded DB public service pension schemes to transfer to schemes from which it is possible to draw down flexibly. The reason is the risk of large cost to the Exchequer. Currently, only a small number of transfers take place out of the public pension schemes to DC schemes. The introduction of the flexibilities may make transfers out to DC schemes more attractive for some. In unfunded public service schemes there is no fund of assets with which to finance transfer payments; instead, they are funded from contributions and general expenditure.

For every extra pound paid out in transfers, the Government will have a pound less to spend that year on public services or would have to borrow the money. We have estimated that if 1% of all public service workers reaching retirement took their benefits flexibly, it would cost the taxpayer £200 million a year. However, in funded public service schemes, as in the private sector, there is a pool of assets that is used to provide pension payments, so in most cases allowing greater flexibility will have a less direct impact on public finances.

There will be limited exceptions to the ban. We intend to legislate for some limited exceptions and will table an amendment on Report to allow the Treasury to make regulations providing for exceptions. Those would be in limited circumstances—for example, some specific circumstances under the Fair Deal process. We will announce further detail of that in due course.

The clause is consistent with what we have said all along about not applying the flexibilities to unfunded public services DB schemes, and I commend it to the Committee.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

It is a pleasure to serve under your chairmanship, Mrs Riordan. For the Committee’s benefit, I would like to probe the Minister for some detail about what emerged from the consultation. He talked of some amendments here and some on Report. What issues were raised during the consultation on this very technical area?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Rather than introduce the provision through a regulation-making power, which is what clause 14 would allow, we decided, in the light of feedback, that putting it in primary legislation, in the 1993 Act, would make it clearer. Generally, people understood the idea that where there is not a pension fund to transfer money across, separate issues are raised. In general, people wanted to retain the freedoms where possible, so we have retained them for the funded public service schemes—overwhelmingly, the local government pension scheme.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Further clarification might be useful. What are the unfunded public sector schemes?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The principal ones are for the NHS, teachers and civil servants. Those are the biggest three. From memory, I think the police scheme is another one, and then there is a whole tail of small schemes.

New Clause 1 - Extension to Scotland of certain provisions about marriage of same sex couples

New Clause 2 - Judicial pensions: pension sharing on divorce etc

New Clause 3 - Pension scheme for fee-paid judges

“PART 1A - FEE-PAID JUDGES - 18A Pension scheme for fee-paid judges

New Clause 4 - Pension sharing and normal benefit age

New Clause 5 - Duty to act in the best interests of members

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move, That the clause be read a Second time.

Linda Riordan (Labour, Halifax)

With this it will be convenient to discuss new clause 14—Fiduciary duty of trustees—

‘(1) The Secretary of State may by regulations—

(a) require any pension scheme, which is not already overseen by independent trustees, to appoint a board of independent trustees; and

(b) set out the powers and duties of a board appointed under subsection (1)(a).

(2) Regulations under this section—

(a) shall be made by statutory instrument, and

(b) may not be made unless a draft has been laid before and approved by resolution of each House of Parliament.

(3) The board of independent trustees shall have a fiduciary duty towards members of the scheme overseen by them.

(4) The fiduciary duty set out in subsection (3) shall take precedence over any duty to—

(a) the shareholders in, or

(b) other owners of,

the operators of the scheme.

(5) In relation to any matters of member interest, decisions of the board of independent trustees shall be binding on the board of directors or other analogous bodies.”.

Steve Webb (Liberal Democrat, Thornbury and Yate)

In this group of new clauses we are considering the important issue of governance. Who is in charge of a pension scheme and who is looking after the members’ interests is an important issue. New clause 5 relates to the governance of the new forms of benefits and collectives, which we talked about earlier. Obviously the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East will speak to new clause 14; I will make passing reference to it and then respond further to his comments.

The Government have been the first to propose governance standards for all occupational schemes that will come into force from April 2015, subject to the current consultation and parliamentary approval. In parallel, the Financial Conduct Authority is making rules on governance in relation to workplace pension schemes. Just a few weeks ago, on 17 October, in our Command Paper, “Better workplace pensions: Putting savers’ interests first”, we confirmed our plans to introduce governance standards in all workplace pensions. The FCA recently consulted on draft rules for independent governance committees for workplace pensions to ensure oversight of these schemes in members’ interests from April 2015. These proposals are built on an early agreement between the Association of British Insurers and the Office of Fair Trading to establish IGCs and introduce them on a mandatory footing.

Back on 17 October, we published a consultation on draft regulations to place minimum governance standards on occupational schemes, which are money-purchase or have money-purchase elements to them, as part of our wider Command Paper. The consultation ends in a couple of weeks, on 14 November. Subject to parliamentary approval and any further changes, the governance measures in these regulations will commence from April 2015. They are a comprehensive response to the OFT, which, after completing its market study in the summer of 2013, proposed minimum governance standards for workplace pension schemes. What the Government are doing is therefore in line with a careful study by the Office of Fair Trading of the workplace pension market and responds to its concerns.

I will come to new clause 5, but let me say first that the challenge presented by new clause 14 is that it appears to propose two main changes to the governance of pension schemes. It suggests that all pension schemes must be overseen by independent trustees, subject to regulations, and proposes a legal requirement that the board of independent trustees has a fiduciary duty to scheme members that must be prioritised over any duty to the shareholders or other owners or operators of the scheme. The main target of the change appears to be personal pension schemes without trustees, where a fiduciary duty to members does not currently exist.

Let me explain the difference in approach between new clauses 5 and 14. If new clause 14 was accepted, it would require independent trustees to be recruited for tens of thousands of pension schemes. Data from the National Association of Pension Funds show that just under half of the 1,200 schemes that it surveyed in 2013 had independent trustees, so considerable costs could be involved in increasing that figure.

However, we recognise that there is a governance issue, which is why we tabled new clause 5. There is a potential for new risks from the new types of decisions that might need to be taken in non-trust based schemes that provide collective benefits and in shared-risk schemes. To be clear, I am talking about the new sorts of collective benefits that the legislation allows, the governance of which needs to be changed because it is a different sort of governance. As new types of schemes and benefit designs are developed, it is likely that there will be more circumstances in which scheme managers may be taking decisions on the behalf of members or exercising discretions that affect members’ benefits. As a result of the new types of risks that may arise in the new types of shared-risk schemes and schemes offering collective benefits, we want managers to have a duty to act in members’ best interests when taking certain specified decisions. That is the purpose of new clause 5.

The decisions on which we are focusing will generally be taken where the individual member has no ability to influence or control the decision made, but where that decision could have a significant impact on their benefits. The details will be specified in regulations, but such decisions could include the distribution and redistribution of assets between members in schemes that provide collective benefits and, in shared-risk schemes, decisions relating to third-party promises—in particular, decisions about whether to offer or purchase a guarantee, the accurate attribution of the promise to relevant members, and retrieving and allocating any returns on such promises. The need for a new duty obviously does not arise in trust-based schemes, as those trustees are already in a fiduciary relationship with the members of the schemes, but we want a clear requirement to act in members’ best interests in relation to certain decisions in contract-based schemes.

Under the Bill, shared-risk schemes can be trust or contract-based. Collective benefits can also be provided by a trust or contract-based scheme. That issue came up in oral evidence when the director of the Pensions Policy Institute, Chris Curry, was asked questions by both the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East and me. Although Chris Curry said that such schemes generally operate in trust, which can be a good form of governance, he would not rule out the possibility of a perfectly good contract-based scheme with collective benefits. In a sense, that is probably the difference between me and the hon. Gentleman. I have no problem with trust-based governance, which can be very good, but the Government do not want to preclude alternative models, particularly at a time of innovation, simply on principle. It is not the Government’s view that it is impossible for a contract-based form of governance for collectives to be any good.

However, we do want a clear requirement to act in members’ best interests in relation to certain decisions. Where a scheme is operated on a contract basis, scheme managers are currently required to operate under the Financial Conduct Authority’s Treating Customers Fairly principles and to comply with FCA rules. We want to put that beyond doubt for specific decisions. New clause 5 contains a regulation-making power to impose a duty on managers of non-trust-based schemes to act in the best interests of members when taking specified decisions. As a result of the new types of risk that may arise in these new types of shared-risk schemes and schemes offering collective benefits, we want managers to have a duty to act in members’ best interests when taking certain specified decisions.

Specifically, new clause 5 may require managers of non-trust-based schemes to act in members’ best interests, but it does not apply to managers of schemes set up under trust. That duty will apply, crucially, to shared-risk schemes and schemes offering collective benefits. The duty is to members in the plural, so it will include balancing the interests of different groups of members. The duty will not apply generally to scheme managers in non-trust based schemes; it will apply only in relation to certain specified decisions made by managers of non-trust-based shared-risk schemes or schemes that provide collective benefits.

The power under new clause 5 may also provide that the consequences of a manager breaching or threatening to breach the duty to act in the best interests of members will be the same as the consequences of breaching a fiduciary duty owed by the manager to the members and, accordingly, for the duty to be enforceable in the same way as a fiduciary duty. We seek to mirror the fiduciary duties of trustees and apply them to managers in regard to specified decisions. Of course, members will also have recourse to the same civil remedies as those in place for a breach of fiduciary duty in a trust-based scheme. Remedies in respect of fiduciary duty are provided for in common law rather than in statute. They may, for instance, include damages to put a member in the position that they would have been in had the breach not occurred.

We do not believe there is a need for a fiduciary duty to apply in DC schemes that offer only money-purchase benefits. In a sense, that is the nub of the debate. In relation to the issue that we are concerned about in new clause 5, DC schemes that offer only money-purchase benefits are similar to other types of commercial financial products, to which a fiduciary duty does not apply. By contrast, in schemes that provide collective benefits, members will hand over most of the decision making to the trustees or managers who run those more complex schemes. Members will not necessarily be able to exercise choice in relation to the decisions that we are concerned about, such as investment decisions. That will also be the case in some shared-risk schemes. Furthermore, there is already protection for members in DC schemes that offer money-purchase benefits.

I have a couple of other points to make. I want to clarify the role of the new independent governance committees, about which the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East is sceptical. IGCs are a response to the recommendations of the OFT, and they will go beyond the FCA’s Treating Customers Fairly principle. They will challenge providers on the value for money of their workplace pension schemes. That is different from the powers in new clause 5 in relation to schemes that provide collective benefits. IGCs will report on how those schemes meet quality standards on the design and review of default funds, costs, charges and standards of administration. IGCs will have a duty to act in members’ interests. They will have to have a minimum of five members, the majority of whom must be independent of the firm, and the chair will always have to be independent. IGCs will have the power to escalate any concerns to the FCA, scheme members and employers.

I hope I have given the Committee the sense that IGCs are not some sort of fig leaf. The hon. Gentleman tends to dismiss them, but we are setting out clearly in legislation their membership, independence and role, and the crucial part they will play in member protection. IGCs will not be involved in schemes’ day-to-day decision making, but they will have a crucial oversight role. We will not simply leave people in individual DC schemes to get on with it; there will be a complex system of protection for those people under IGCs.

As I am speaking about the power to place managers under a duty, this is an opportune time to clarify something in the record of last week’s debate on clause 33. That clause allows regulations under part 3 to confer a discretion on a person. As an example, I said that where regulations make provision for the methods and assumptions to be used by an actuary, we will leave some discretion about those matters to the actuary. I want to clarify that it is the regulations under clause 33, not the trustees or managers, that would confer any such discretion. However, trustees or managers have the power to delegate investment decisions under new clause 7, as we discussed during the previous debate.

In summary, there are two different views in this debate. We take the view that the new collectives—collective benefits and the new shared-risk schemes—require new forms of governance because individual scheme members will hand over complex decisions to those who are in charge, and those decisions will be made on their behalf with discretion being exercised. That is not the case if someone is in an individual DC scheme, where they will have a pot of money and it will be clear that that is their pot of money. They will get the investment return on it, and they will have choices about how it is invested. That is a very different sort of scheme, and we do not believe there should be a one-size-fits-all approach to governance.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

One issue here is how far I should go into the detail, given that we will be debating my new clause shortly. Let me just say a couple of things. If we step back from the disagreement and the approach that the Minister suggests—

Steve Webb (Liberal Democrat, Thornbury and Yate)

Unless I have misunderstood the grouping, the hon. Gentleman’s new clause 14 is under discussion.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Fabulous. That makes my job much easier.

The Minister began by setting out what new clause 5 does, and he ended by saying that the difference between this side of the Committee and the Government side is over the approach to money purchase schemes, as reflected in the Bill. I want to make a broad observation. We always talk about pensions being too complex and we always hear from all parts of the pensions industry that there is too much regulation. The Minister had a chance to chop down some of the regulatory forest, but adding new clause 5 complicates matters around collective defined contribution schemes when they could have been made much simpler, vis-à-vis our new clause 14.

I will come in detail to what the Minister said, but let me first set out the fundamentals of the argument around governance. Governance is a key thing in a pension scheme. There are many important things, but governance is critical to ensure that savers—members of the pension scheme—get value for money. Let us not forget what the OFT said in its market study: it could not be confident that savers were getting value for money in a contract-based market. It was very clear about that. That is a pretty strong statement from a competition body and it comes when the Government are automatically enrolling millions of people into workplace pensions for the first time.

The reasons are several, but the fundamental reason why the OFT came to its conclusion, as it made clear in its report, is that shareholder interest in contract-based schemes—the interests of shareholders who hold shares in the big contract-based insurance pension companies providing pensions—was predominating over the interests of savers getting value for money. It is not meant to predominate, because we have the Financial Conduct Authority, formerly the Financial Services Authority, regulation about treating the customer fairly, but, in the end, treating the customer fairly is an abstract—a judgment that contract-based schemes make. Given contract schemes’ legal obligation to deliver for shareholders, and in the absence of pensions savers with a strong voice being able to say, “We want to know what our pension charges are and how to compare them with other pension schemes, and we want to be able to make an informed choice about the costs and outcomes of different pension schemes,” that has not happened historically in the pensions market over a long period.

Bearing down on the tension between shareholder and saver interests is key. In a lot of markets, that works perfectly well, because the consumer shops around. There are many examples, and an obvious one is technology: mobile phones, laptops and, increasingly, tablets. Savers are very price sensitive and they can make decisions based on price and quality. Pension savers have found that very difficult to do, because, historically, pension companies have not published enough information, and also, and equally importantly, because the information that they do publish is very hard for an individual saver to understand, unless one is very knowledgeable about investment.

For example, in a debate on the Budget reforms, the Financial Secretary to the Treasury suggested that it is not the Government’s job to interfere in the investment portfolio decisions that individuals make. That was interesting because it spoke to an approach that sees the public as investors in that professionalised sense. Most people have no experience of engaging with financial markets in that deeper sense and we have to recognise that as a starting point for these discussions. The collective provisions in the Bill recognise it because they say that these decisions can be so complex that they have to be entrusted to a range of professionals to make on an individual’s behalf.

As we take the view that there is no simple or obvious way to reconcile that conflict of interest between shareholders and individual savers without trust-based governance, we take the approach that we do in new clause 14. The Minister referred to Chris Curry’s evidence, and he is right—pushed by the Minister, Chris Curry did say that he could not rule out a very good contract-based scheme, but anyone who was listening to Chris Curry would remember that he said that the international evidence strongly suggests that trust is the better approach. Nothing is absolute and finding 100% proof of anything is difficult, but the international evidence, and common sense at some level, should tell one that we are more likely to get tougher, better governance through trustees.

The Minister raised a couple of objections, both fair to some degree but one fairer than the other. The first was the suggestion that we would need many, many trustees because there are so many pension schemes. Our new clause 13 would initiate a response to that problem, but let us not forget that of the 200,000 pension schemes in the UK the vast majority are group personal pensions under the management of four or five—no more than half a dozen—insurance companies. A governance board properly constituted of trustees attached to each one of those major insurance companies would deal with the vast majority of pension schemes in the UK. That is a very important point. Group personal pension is by far the fastest growing form of pension in the UK and most people in the private sector are being enrolled into such pensions. They are individual contracts, but under the auspices of five or six big insurance companies, so a trustee board attached to each of those companies would govern most of the pension schemes in the UK.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Clearly, many people are in group personal pension arrangements, but we understand that 47,000 private workplace schemes are not group personal pensions. Does the hon. Gentleman not think that expecting tens of thousands of schemes to go out and find trustees would be costly? What estimate has he made of the cost?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Let us deal first with that number subtracted from the 200,000 schemes. So, three quarters of pension schemes in the UK that are contract based could be dealt with by setting up half a dozen trustee boards. Secondly, the Minister makes a fair point. Rome was not built in a day. As new clause 13 indicates, giving the regulator powers to force mergers of small schemes is crucial. He has no problem with master trusts, which we will see more of. We have not discussed them in relation to the Bill because so much of it is enabling and permissive rather than prescriptive, but the kind of collective defined-contributions schemes that we are likely to see going forward will be cross-sectoral rather than single workplace or the like, so that would fit well.

In the end, the difference comes down to how serious we think the situation is on the contract-based side as we move into this brave new world of collective pensions. Most, or a lot, of our discussion has been around the complexity of the technical detail of the governance of those schemes. Compare the impact on the Bill of the Minister’s new clause 5 and our new clause 14. At one level, he has given himself a headache as he has created yet another category when it would be much simpler to say throughout the Bill, “Plus these have to govern these schemes.”

Let me say a little more about the Minister’s observations. He says that collective defined contribution schemes, which are money purchase, are the nub of the difference. That is a perfectly fair point of view, but is that worth complicating the Bill and missing the chance to simplify the governance of pension schemes so fundamentally, especially given our view that independent governance committees do not meet the tests necessary to assure savers that they are getting value for money? The Minister says that IGCs will challenge boards on value for money. The chair is independent and they have a majority of independent members. Let us step back from that for a moment: they have no power to compel contract-based pension schemes to implement their findings. They can refer it to the FCA, but they have no power to ensure that the insurance company or the pension provider implements their findings.

The committees are supposed to be independent governance committees, but it is an unusually capacious definition of governance, as they are really quasi-independent advisory committees. That became clear, if it was not clear already, during the evidence session. When I questioned the FCA, its representative conceded that IGCs are a form of advisory board, so they do not provide independent governance. That is not to say that they are not a step forward. The Minister will introduce IGCs and, according to the OFT report, among all the other things going on, he is beginning to grapple with the fundamental question that we have been raising for three years. Given the extent to which the tension between shareholder interest and saver value for money has been resolved historically to the benefit of the shareholder, the measure does not go far enough. IGCs are not independent and do not provide governance.

To develop my point about the trade-off between simplicity and complexity, the Minister says that he is putting in quite a complex system of protection. We need a simple system of protection. One thing that the financial crisis taught us is that a complex system of regulation does not take us very far if the norms under which actors in the financial service industry operate are far removed from that complex system of protections. Unless we can change the incentives structure within the governance of pensions, rather than trying to regulate conflicts out of existence, I do not think we will solve the problem. That might sound techie but what I mean is very simple.

The Minister’s response is to say that he accepts absolutely that there is a tension, and that tension has not always been resolved to the benefit of the pension saver. The OFT makes that clear. However, his response is to put in a complex series of protections, which include giving these committees a little bit of space to try to persuade pension companies to do the right thing at all times, but not the powers to compel them to do so. The reason why we think trust-based governance is the best approach is not because it is perfect. There are examples of small trust-based schemes that have had issues and, I would argue very strongly, in the scheme of things that is much less so than contract-based schemes.

If we want to make this simple we need to give those doing the governing a legal duty always to prioritise the interests of scheme members. That is not needed in the tablet market because consumers are price sensitive. It is not needed in a number of other markets but it is needed in pensions. The Minister will understandably stand behind the OFT’s conclusion that shared that analysis, but called for advisory committees rather than independent governance. We say clearly that, given the analysis of the problem and the inherent conflict that has not been resolved favourably to the saver in contract-based schemes, trust-based is the best way to go. The international comparisons and evidence confirmed to the Committee by the chair of the Pensions Policy Institute made that clear.

There is a fundamental difference between the Government and the Opposition. We accept that the Minister has gone some way towards meeting concerns expressed by us and others, but it is a very complex and bitty solution, and there is an opportunity to achieve clarity.

When considering why a fiduciary duty should be imposed on those managing pension schemes, an important aspect of the conflict between the company’s understandable desire to make as much money as possible and the scheme saver’s interest is that of asset management fees. There are a number of reasons, but a fundamental one is the fact that many of the people who do the asset management are part of the same vertically integrated insurance company. There is a potential conflict right there. The money is moved from the administration side of the pension scheme to asset managers who in many cases work for the same vertically integrated insurer. That is not the insurance company’s fault; it is the way that market has developed. It is our job to ensure that that vertical integration works to the benefit of savers.

In that context, I want to read something that came out today from the respected editor of Money Week, Merryn Somerset Webb, an expert on asset management who also writes in the Financial Times on Saturdays. It is worth quoting because it gets to the nub of the problem of fund managers:

“There are too many actively managed funds—think 4,000. Most underperform their indices (despite surreptitiously tracking them). Most trade more than they should and persist in overcharging while denying they do. I have lost count of the managers who insist I just don’t understand how expensive fund management is, what with the regulation. It is a point: regulation is expensive. But you know what? It isn’t the only thing in the life of a mainstream fund manager that is expensive. Offices in Mayfair are expensive. Broker research is expensive. So is in-house catering… most fund manager founders are great art lovers or great show-offs.”

That is a respected figure in the fund management industry, with a pretty substantial knowledge, analysing and observing it. That is not in itself enough authority to make my case, but that argument on top of the one about people managing contract-based pension schemes often being in the same vertically integrated insurance company as the fund managers, point to a significant conflict of interest.

Stephen Hammond (Conservative, Wimbledon)

The hon. Gentleman talks about a conflict of interest, but he will recognise that fund managers under the proposed new regulations have to detail exactly their broker expenses and costs of dealing, so that they are transparent. One should not go too far down that line.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I take the hon. Gentleman’s point but let us not get ahead of ourselves. I spoke to the Minister the other day about that. Getting to the bottom of that we find very murky waters. It was beautifully put by Nigel Lawson’s former adviser, Dominic Hobson, at the NAPF, just before the Minister gave his “Les Miserables” tale. Dominic Hobson runs the respected magazine, Global Custodian. As he said, there is a reason why fund managers meet in Monte Carlo and pension trustees meet in Manchester.

Getting to the bottom of that rent extraction is a very difficult task. We are concerned that in the past the FCA has not shown enough oomph in dealing with this kind of thing, so we will be watching very closely. The hon. Gentleman might not be aware that the Investment Management Association, which had a long conversation with me and other people over the months, has proposed things that should be disclosed. However, it is not at a stage where it is prepared to disclose everything. It might or might not have good reasons, but it is not prepared to disclose all the costs as they accrue to the investment of pension and other assets.

Stephen Hammond (Conservative, Wimbledon)

Let us not get too technical. It is forced to disclose the costs of dealing, broker research, offices, corporate meetings and the number of those meetings. If anyone wants to see it, there is a pretty heavy element of disclosure on fund managers these days.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I have to say to the hon. Gentleman that that is not my impression, nor the impression of those who look closely at this industry. There appears to be change coming, which the Minister has promised to put in place. As things stand, much information is not disclosed.

Stephen Hammond (Conservative, Wimbledon)

Those are all statutory requirements.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Let us be clear about what is not disclosed, as that is part of the problem. As the hon. Gentleman said himself, let us not get too technical. However, part of the reason why this has not been resolved over the years—whoever has held the reins of office—is that it is technical. As I mentioned to the Minister the other day, interest in cash balances held is not disclosed, nor are the costs around foreign exchange trading. Bid-offer spreads are not disclosed and it certainly is not a statutory requirement to do so. [ Interruption. ] If the hon. Gentleman wants to intervene I am delighted to give way.

There is a problem and, as the hon. Gentleman said, it is technical: very few people understand it. It reminds me of the banks. The things that banks were doing were so complex that it was hard to work out whether even the people doing them understood them. There is a need for politicians and regulators to understand what fund management does in managing our pension assets. That is fundamental to this issue. My argument is that the only way to do the best job possible and to get that disclosure in the most efficient form is through trustee governance, because it takes out that conflict of interest. Even then it will not be easy; there are small trust-based schemes that have been overpaying for fund management for a long time. John Gapper and journalists at the Financial Times did a report on that six or seven months ago. Given that it is a very big job, the question is: what is the right way to try to get that information on the balance of the evidence? It seems to me overwhelmingly the case that, while conceding that 100% proof of anything can be hard to get, the balance of evidence internationally and also working from first principles is that trust-based is more likely to do that.

That is the basis for our new clause. We do not think that the duty to treat customers fairly has been delivered over time. There is ample evidence of that, not least in the flurry of official reports on pensions. There is no doubt that things have improved with the newer pensions, but we must bear in mind the fact that we are starting from a low base. Finally, let me put it on record that that is not because people in the contract-based schemes do not want to do the best job possible; it is just that, faced with working in that space, with a priority to maximise shareholder value, and in the absence of competing pressure from the pension saver, inevitably shareholder value is prioritised.

As should be clear from what I have said, our view is that the answer is not to try, wishful thinking-wise, and assume that the individual saver is going to be able to do that. That is why governance is key. It has to be people acting in the saver’s best interests. One of the positive things about this Bill is that it recognises that, in the form of collective pension schemes. That is very important.

We think there is a significant difference of view. We think that trustee governance is simpler—in the context of simplifying the legislation—and overwhelmingly, when one looks at the evidence, more likely to deliver the governance necessary in collective defined contribution schemes. On that basis, we intend to test the opinion of the Committee.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to the hon. Gentleman for his remarks. He has raised some important issues. My slight hesitation is that he portrays the matter as if the Government have suddenly come on board with the Opposition’s agenda. If I refer to the remarks by my hon. Friend the Member for Gloucester this morning, the framework for automatic enrolment was set up with no governance at all in place for contract-based schemes. We have made sure that we have responded positively to the OFT’s report.

There is a timing issue. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East keeps quoting the OFT report, but the IGCs that we are talking about have been introduced in response to that. They were initiated following an agreement between the OFT and the Association of British Insurers, and the OFT thinks that that is the right response to its recommendations. The hon. Gentleman describes a situation without that governance in place and the problems that that brings, but we would not be introducing IGCs if we did not think there was a problem of governance in some of the contract-based schemes.

The hon. Gentleman did not really deal with the effectiveness of independent governance committees. He says that they are quasi-independent, but when we have a committee that has an independent chair, a majority of independent members, time limits on how long people can serve, and limited occasions on which they can be reappointed, the chances of capture by the host scheme are dealt with. He says that new clause 5 complicates things, but all it says is that we have something new: collective benefits. We need a regulatory regime for something that is brand-new. I used the word “complex”, but, as I think a former President once said, I mis-spoke. “Comprehensive” was the word I was struggling for—a comprehensive system of member protection.

New clause 5 says that there is a difference between collectives and individual DC. It stands to reason: in collectives, the people in charge make judgment calls, balance the interests of members, and make decisions that members simply cannot take or be involved in. That is why we need the additional measure of governance. That simply is not the case with individual DC.

Essentially, the hon. Gentleman says that trust is good, and in many cases I would agree with him, but his case needs to be stronger than that. To demonstrate why we should accept new clause 14, he needs to persuade the Committee that contract cannot be good. If he says that everything has to be under trust, we have to sweep away 47,000 contract-based schemes and force them all to have trustees. When I intervened on him at that point, he just said, “Well, most of it is group personal pensions, so that’s all right. We have to start somewhere.” I did not understand his answer to the question. We have 47,000 schemes. New clause 14 would put a burden on the best part of 47,000 pension schemes, and he says, “Well, they can just merge.”

Richard Graham (Conservative, Gloucester)

Effectively, 47,000 contracts would be obliged to have trustees. What costs would be involved and what sort of impact might that have on an individual’s pension?

Steve Webb (Liberal Democrat, Thornbury and Yate)

My hon. Friend makes an important point. Whenever we propose additional regulatory burdens, we have to cost them meticulously. That has to be ratified by a business-led committee, and we have to find offsetting regulatory savings. The Opposition’s amendments are a significant burden on large numbers of schemes. I intervened and asked about cost. If the hon. Gentleman has an estimate for the cost of his proposals, I am happy to give way. If 47,000 schemes suddenly have to find trustees, I have no idea where all the people would come from or how long it would take.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister paints a gloomy picture of the pensions landscape that would exist if our new clause were accepted, but he must know that in every single pensions Bill we have had, there has been a recognition—almost universal among the witnesses who have given evidence—that scaling up pension schemes is an absolute necessity. He says that 47,000 pension schemes still have to find trustees, but that is not the case if they are not big enough to give value for money under another of our new clauses. Of course not—they merge. Surely he is on the record as saying that scale matters and that we need more scale. In one sense I am offering the Minister a measure that would enable him to achieve one of his ambitions: to scale up the pensions scheme landscape.

Steve Webb (Liberal Democrat, Thornbury and Yate)

The shadow Minister says glibly, “Why don’t they just merge,” but I wonder whether he has any sense of the cost of such mergers. The other question is: who will they merge with? If there is a small, contract-based DC pension scheme linked to an employer over here and a completely different one over there, will we need lonely hearts adverts to match them up?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I do not quite understand the Minister’s response. There is a broad consensus of opinion among pensions professionals at the sharp end that scaling up is necessary; we have heard that in evidence given to a number of pensions Bill Committees. The Pensions Regulator told us when we were considering a previous pensions Bill that scale matters. Have the Government not thought about these things?

Steve Webb (Liberal Democrat, Thornbury and Yate)

The Committee will be aware that I have given the hon. Gentleman several opportunities to tell us what the cost of his proposal to require 47,000 schemes either to find trustees—from goodness only knows where—or to merge. It is apparent that he has no idea and, frankly, that is not uncharitable. He has not got a clue what the cost of what he proposes for pension schemes. The point my hon. Friend the Member for Gloucester was making was that such costs come out of members’ pensions.

The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East said saying that people were being ripped off while investment managers were going to Monte Carlo and so on. However, he forgets that we are legislating for a charge cap. Going forward, more than 99p in the pound of what people put into their pension schemes will go into their pensions, not the scheme’s running costs. The 0.75% taken from the relatively modest contributions that someone on an average wage will put into an auto-enrolment scheme will be, in some cases, not much more than pennies. We have clamped down hugely on unnecessary costs, but any costs that he would add through his regulatory burden on tens of thousands of schemes would simply come out of members’ benefits.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Is the Minister moving away from his previously stated position that there should be a scaling up in the pensions system and a reduction in the number of pension schemes? That is what his response suggests.

Steve Webb (Liberal Democrat, Thornbury and Yate)

As you know, Mrs Riordan, we will be moving on to another of the hon. Gentleman’s new clauses, which deals with scale, so we will discuss that substantively. It is clear that consolidation is happening organically, but he wants to force the pace at considerable cost to members. We still have not had an answer from him on what the cost of that will be and where the tens of thousands of trustees will come from.

Richard Graham (Conservative, Gloucester)

The Minister is right to highlight these issues. It may be worse than that, because there is a shortage of qualified trustees, even for trust schemes. First, to find volunteers will be incredibly hard. Secondly, they have to be trained, which takes an enormous amount of time. Thirdly, some remuneration is inevitably involved in expenses for travelling to meetings.

The operation is enormous. It is not quite of the scale of the 1948 partition of British India, but it has been rather cavalierly wrapped into a short proposal by the shadow Minister. Does the Minister agree that it is curious that we have not heard any presentation of evidence from the 40,000 schemes involved that this is what they want to do, because they think it is needed and because members are crying out for it, let alone any costing?

Steve Webb (Liberal Democrat, Thornbury and Yate)

I grateful to my hon. Friend. My history is not good enough to know whether the analogy with the partition of India is entirely accurate, but I take his point. We are talking about huge costs, which have not been quantified by the Opposition. One reason why the Government have taken regulatory burdens seriously is that previous Governments have piled regulation on regulation without worrying about the cost to schemes, which has had an impact on members’ benefits. That is why we have to take action.

Debbie Abrahams (Labour, Oldham East and Saddleworth)

Will the Minister state whether regulatory burdens or governance are more important?

Steve Webb (Liberal Democrat, Thornbury and Yate)

What we want is proportionate good governance. We could spend the rest of the year passing more and more laws and putting in more and more requirements, but they will all have a cost. I think that when Labour was in government, it failed to recognise the flipside to regulatory burden.

We need regulation—we are passing regulations this afternoon—but we need proportionate regulation, not over-regulation. In a sense, the challenge is that we already have these pensions in place. Over time, there has been organic consolidation, which is to be welcomed. However, I do not think that there is evidence for using a sledgehammer and not only saying, “Trust, good; contract, not so good” but that trust is God and is the only acceptable form of pension scheme governance. Crucially—and this is relevant to the Bill—we are in a time of innovation. I want to stress that. We want people to come forward with new models. We want them to come up with collective benefits. We want them to come up with new forms of risk-sharing pensions. Simply to say that there is only one form of governance that could possibly do the job—and that is the proposition put forward by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East—is over-restrictive at this point.

Richard Graham (Conservative, Gloucester)

Does the Minister agree that, philosophically, the shadow Minister is starting from a very similar point to most Government Members, which is that it is important that these schemes are managed well? The duty to act is laid out very cogently in new clause 5. It is a shame that the hon. Gentleman has launched into something at the risk of dividing the Committee when there is an enormous amount of consensus. Does the Minister agree that it would be very helpful if the shadow Minister chose not to press new clause 14?

Steve Webb (Liberal Democrat, Thornbury and Yate)

Oddly enough, I do, and equally oddly, I do not suppose that the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East will accept the recommendation. I hope, however, that we can unite, as my hon. Friend says, on new clause 5, because it ensures proper governance of collective schemes providing collective benefits.

Finally, on the issue of IGCs, which the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East wants to dismiss even though it is what the OFT concluded was the right answer to the problems they discovered, the provider’s board has a comply or explain duty in response to recommendations from the IGC. If the IGC is not content with the board’s response, it can escalate to the FCA and to members of the scheme. That is crucial. If I am running a pension scheme and the governance committee in charge of it says, “Unless you sort this problem out, every member of the scheme is going to know that we are not satisfied with the way this scheme is being run,” that is a huge threat. That is like having a hand grenade threatening to go off. They can go to the regulator, they can go to the scheme, they can go to the employer and they can go public. Coupled with the IGC’s duty to act in the members’ interests, this is a practical, direct way of ensuring that members’ interests are acted on. We believe that new clause 5 is proportionate, effective regulation, which is particularly needed for the new forms of collective benefits, but that it is not over-regulation, as is the case with new clause 14.

New Clause 6 - Collective benefits exempt from indexation

Steve Webb (Liberal Democrat, Thornbury and Yate)

I beg to move, That the clause be read a Second time.

The Committee will be relieved to know that I can be relatively brief. New clause 6 puts back in the Bill two paragraphs from schedule 4, which were deleted when we deleted schedule 4 last Thursday. These relate to the requirement to increase pensions in payment and the fact that that should not apply to collective benefits.

That exemption from the requirement to index comes about because collective benefits are not like other benefits. They are provided on the basis of investing members’ assets on a pooled basis in a way that shares risk across the membership. As discussed, there will always be a target attached to collective benefits. The target could be an income in retirement, a pot of money or something else. In existing CB schemes in other parts of the world, it is normal for increases to pensions in payment to form part of the benefit design, but that is a matter for the scheme. It is important to remember that targeted benefits can go up or down, and benefits in payment can fluctuate in response to funding pressures. The essence of collective benefits is that they make no promise. There is a target, which trustees and managers work towards, but the eventual benefit always has to depend on the amount available to pay benefits to or in respect of the member, and to other members of the scheme.

Against that backdrop, it would make no sense to require pensions in payment to be increased by statute. A statutory promise of pension increases would undermine the way collective benefits work. On that basis I commend new clause 6 to the Committee.

New Clause 7 - Investment powers

New Clause 8 - Restriction on borrowing by trustees or managers

New Clause 9 - Investment powers: duty of care

New Clause 10 - Payment of amounts out of collective benefit funds

New Clause 11 - Regulations under Part 3: overriding requirements

New Clause 12 - Pensions guidance

New Clause 13 - Scale of pension schemes

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I beg to move, That the clause be read a Second time.

The new clause had an airing in the discussion on new clauses 5 and 14. It would give the Pensions Regulator, along with the trustees of such pension schemes, the power to encourage and make consolidation happen. The schemes we are talking about here are the 40,000 or so that the Minister mentioned in his response to our new clause 14. Let us be clear what we are talking about: there are about 200,000 pension schemes in the UK and about 150,000 are the type of scheme, such as group personal pensions and so on, that our new clause homes in on.

The issue around scale on the trust side is significant. It is true that on the trust side governance issues are usually around scale. There are also issues around the quality of trustees when there are so many pension schemes, as the hon. Member for Gloucester mentioned. Our answer is to encourage forcefully the reduction in the number of pension schemes to increase that scale, which is widely recognised as an important aspect of getting value for money, and to clarify the issue around the number of trustees available.

What is the international and pensions landscape evidence? The Pensions Regulator gave evidence, I think to the previous pensions Bill; there have been so many pensions Bills that it is hard to remember. The Pensions Regulator was clear that scale must be encouraged. It is critical to delivering value for money because it enables higher-quality governance and the economies of scale that can make a big difference when there is a lot of money under management. It also encourages a focus on the pooling of risk so that returns are greater; one can take more risk and hedge against it with a larger number of assets under management. That is something we discussed this morning.

The Committee does not have to my word for it, or that of other Opposition Members. In the pension world elsewhere, scale is seen as important. The most obvious examples are Canada and Australia, where we often look, not just for a Governor of the Bank of England, but for the governance of pension schemes. New Brunswick was mentioned in a different context. That ability to get scaled pension schemes can make a significant difference on a number of levels. First, it can provide economies of scale and, secondly, deal with the issue of finding high-quality trustees. If there are fewer schemes there is less need to find a large number of high-quality trustees.

Thirdly and importantly, Canada shows that if a scheme can get sufficient scale it can substantially reduce the intermediation that takes place through the investment chain. By intermediation I mean the middle men and women who handle a pension saver’s money—the pension fund money—through the investment phase. John Kay’s report for the Secretary of State for Business, Innovation and Skills was clear on the need to reduce intermediation.

Probably the best way to do that is to get pension schemes that are big enough to do a lot of their asset management in-house. That is something that Denmark and the Netherlands do very effectively. I recall a pensions observer famously writing on the wider topic of why Dutch fund houses were under pressure, saying that Dutch pension schemes do not like to pay high charges. That is something that we need to get to in the UK. Although the pension cap is welcome, the governance has to be right to drive down further to an appropriate overall level.

Richard Graham (Conservative, Gloucester)

The history of in-house asset management in UK pension schemes is by and large not a happy one. There are few examples of where it has successfully taken place and there is the well known example of the BT scheme, which created its own in-house manager, Hermes. Over time, the pension trustees increasingly outsourced the management to external asset managers precisely because the in-house operation was not good enough. The argument that in-house asset management is a way forward for pension schemes should be strongly discouraged.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The hon. Gentleman makes an interesting point and produces one example. I am not sure that I agree entirely with him about the BT pension scheme; I will have to look at that in more detail. Certainly, my sense is that Hermes has been a pretty successful fund manager.

Richard Graham rose—

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Let me make a bit of progress. Let us be clear about the evidence from elsewhere. The Danish system always talks about rankings and the quality of pension schemes, for a number of reasons. A big part of that is that intermediation—agents taking a cut through the investment chain—is much reduced because so much of it is done in-house. In Canada, there is now sufficient scale that they do not pay private equity houses and agents to buy chunks of private equity. They do it themselves. The Danes do that too. If the hon. Gentleman thinks that the level of intermediation—people taking cuts—is acceptable in the UK asset management world, he is going against the findings of the widely respected Kay report, which was delivered to his own Government not that long ago.

Richard Graham (Conservative, Gloucester)

I am sorry, but the hon. Gentleman is not on a good track here. The reason is fairly straightforward. Fees paid by pension schemes to in-house asset managers, or indeed by insurers to in-house investment managers, are by and large not less than those they would pay to external managers. In fact, quite often they are more expensive. Most important is the element of competition. Asset management mandates have to be won by open and fair tender and they should go to the best managers who put themselves forward. Where there is an easy slide of appointing an in-house asset manager, I am afraid there are many examples of inferior performance and poor results for pension scheme members.

I would put the challenge the other way: name a good example of a pension scheme in the UK where an asset manager has delivered outstanding results. Furthermore, the vast majority of pension schemes should not even be looking at private equity.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The hon. Gentleman is competing with me for the lengthiest intervention in Committee, but I think I am still winning from last week. He often makes good points, but sometimes he proceeds by assertion. That was mostly assertion, although it might be that we are not talking about the same thing. The Kay report, which looked at this in detail and was from a widely acknowledged expert, was crystal clear that significant detriment to savers and investors came from intermediation in UK financial services.

Richard Graham rose—

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The hon. Gentleman can accept that or not. He appears not to accept it, which puts him at odds with the report that his own Government endorsed. He is never slow to make his point whether through assertion or evidence. Let us be clear what we are talking about here: the Kay report, delivered to the Business Secretary, is crystal clear that there is far too much intermediation. It talks about pension schemes, which are a massive part of that asset management industry. Of course they are. The way that most people are invested in the stock market is through their pension scheme. The idea that intermediation is in asset management only outside the pension funds seems rather odd.

Richard Graham (Conservative, Gloucester)

With all due respect to the hon. Gentleman, I worked in the pension sector for well over 10 years and he is making a number of assertions from a position of not necessarily great experience in the sector. Intermediation in the financial services sector as a whole is vastly different from jumping to the conclusion that just because a scheme is bigger it will necessarily be cheaper and better run and produce better results than a smaller scheme. There will be examples where that is so and examples where it is not so. There should be some economies of scale from bigger schemes. They might also be able to negotiate better deals and lower prices, but there is little evidence to suggest a widespread, generalised conclusion that big is always better and small always more expensive, producing worse outcomes. That is simply not the case.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Again, the hon. Gentleman makes a series of assertions in the absence of producing any evidence whereas I, in contrast, am placing the Government’s own report on the table as evidence on behalf of our case. Let members of the Committee make up their minds about it. He is behind the curve, in so far as the advantages of scale are now widely recognised in the investment sphere. Just a moment ago, I quoted the editor of MoneyWeek, who said there are far too many actively managed funds, which tend to be smaller, and the tide of opinion and the investing of assets is moving rapidly towards large, passively managed investments. However, we will let the Committee make up its own mind about that; we can disagree. I put the Kay report on the table.

Debbie Abrahams (Labour, Oldham East and Saddleworth)

As we are talking about evidence, it might be appropriate to mention the Work and Pensions Committee, which looked at governance. One of the recommendations, based on all the evidence submitted to the Committee in 2012, including from the Minister, was the favouring and support of super-trusts.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I thank my hon. Friend for making an important point. I do not want to be sidetracked but there is a general view—it is certainly repeated weekly in the pages of the Financial Times, Fund Management, where this kind of issue is widely discussed by members of the investment community—that scale matters. That does not mean that there will not be boutiques that do a good job, but generally speaking, as a principle, scale is now accepted as an important part of getting value for money in pensions.

The architect of the Australian reforms is clear that the Australians are more scaled than we are, but now they feel they are not scaled enough, relative to places such as Canada, because they are not able, with a mature book, to make the variety of investment decisions, in the hedging and the risk-taking, that is necessary. However, we can disagree on that point and come back to it in future.

Richard Graham (Conservative, Gloucester)

The important thing—it is why this debate matters—is that the new clause the hon. Gentleman is trying to add to the Bill effectively requires pension scheme trustees, first, to take a view on whether the scheme has sufficient scale to deliver good value and, secondly, to require the Pensions Regulator to direct the merger of pension schemes where that would be in the interests of the members. The point is that it is not easy to establish whether it would be in the interests of members to have a merger. It is not an easy thing for the Pensions Regulator to do, nor is it an easy thing for the pension scheme trustees in the first place to do. There is no proof of these things. Every single merger and acquisition in corporate history has started from the assumption that by merging two entities the combined entity would necessarily be better, and there is a mass of evidence to show that many mergers and acquisitions have ended in disaster.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

If the hon. Gentleman wants to make a speech, he should do so. I will just say that I do not accept his argument; he has not produced evidence to that effect. I say to him again that the Kay report—produced by the commission set up by the Government and endorsed by the Business Secretary—takes a different view from him. If he disagrees with Kay and with me, that is perfectly legitimate, although I will leave it there for the moment.

To sum up, I say again that in our view and the view of the Pensions Regulator, which was set out in evidence last year, there has to be a scaling up of the UK pensions industry. At the moment, there are far too many schemes—200,000. Our new clause would not reduce that number to a handful by any means, but it would make a start, by giving the powers to trustees and the regulator to promote scale. It is something the Australians have already undertaken, as they move to scale their auto-enrolment system, which we have learned so much from. It would be a sensible addition to the powers that trustees and regulators have, given the widespread consensus in the pensions world that scaling up will have to happen.

Steve Webb (Liberal Democrat, Thornbury and Yate)

It is a pleasure to respond to someone else’s new clause for a change. Oddly enough, my little note has that word, “reject”, on it, for reasons I will explain.

Let me start with a point of agreement. Clearly, other things being equal, there are potential advantages to scale, but the hon. Gentleman talks as if scaling up is not happening. My first observation is that considerable consolidation is happening. “Organic” is probably not the right word, because we do a lot of intervening in the market, but substantial consolidation is happening. Scheme trustees and employers are deciding in certain circumstances that it would be better to be part of something bigger, and they are closing down existing schemes and merging and so forth.

To give a sense of the consolidation that is going on and the number of people who are actually in large schemes, in 2013 more than half of active members of private sector occupational defined-contribution schemes were in schemes with more than 10,000 members. The hon. Gentleman suggested—he did not say this exactly, but one might have inferred it from the tenor of his remarks—that lots of people are in tiny little schemes. More than half of all people in that type of scheme are in schemes with more than 10,000 members, so that is 700,000 out of 1.2 million active members. At the start of this century, in 2000, the figure was only 100,000 out of a total of 800,000, so there is a clear trend towards consolidation. Active members in small and medium private sector DC schemes have decreased from 300,000 over the same period to 100,000, people are heading towards the larger schemes.

The numbers show that schemes are consolidating. In the past four years alone, the number of small and medium occupational DC schemes fell by more than 40%, from 3,300 to 1,950. The number of micros fell by 10,000, from around 45,000 to around 35,000, and the number of large schemes remained relatively stable, so consolidation is happening, which is an entirely good thing. Schemes proactively look at what they are doing and work out whether they could do things better. The hon. Gentleman goes much further than that. He proposes that we force the process, and that is where we have concerns.

Forcing scale does not automatically drive good governance, investment expertise or low costs. We are already driving up standards and making sure schemes are run at the right scale through our governance requirements and our charge cap. A scheme that is too small to deliver a default fund for less than 0.75% cannot be used for auto-enrolment. I often think that the hon. Gentleman’s contributions are slightly stuck in a time warp of pre-auto-enrolment, pre-charge cap and pre-governance. He is legislating for the future, not the past—or he should be. The 0.75% charge cap is a pretty tough test. If someone is running a sub-scale small scheme that cannot deliver, they will not be able to use it. We are making sure that the inefficient, badly governed small scheme cannot continue, but the efficient, well governed one can. Again, it is the blunderbuss approach against the subtle approach. It is going with organic consolidation, rather than forcing the pace; it is the heavy hand of regulation against the nimble, light-footed regulation that we are so famous for.

We argue that consolidation and scale have their place, but we object to forcing the pace. Agreeing with what sufficient scale means and policing it would be very difficult. My hon. Friend the Member for Gloucester made a powerful point. The new clause would require the regulator to force schemes to merge where the regulator thought they were not of sufficient scale, but merge with whom? How does the regulator look at the tens of thousands of schemes and spot one that is sub-scale? How do they force it to merge with another scheme that will probably have another set of trustees, who might not want to be merged?

Richard Graham (Conservative, Gloucester)

The Minister is absolutely right. Even the Reverend Moon in Korea has not gone into the game of actually finding marriage partners for the many thousands of people he obliges to marry.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I am grateful to my hon. Friend for his ever colourful analogies, which did not appear in my briefing pack. He is quite right: the idea that we have forced marriages, to extend his metaphor, but I will not take it too far—we might call them shotgun weddings—does not seem the right approach to regulation. There is a danger in confusing means and ends. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East is focused on the means: scale is good, so we have to make things big. We are focused on the ends: we want good quality, low-cost, well governed schemes; we are requiring schemes to be all those things. They might do it and be small, and that enables them to be bespoke.

Perhaps a firm would want a relatively small scheme, bespoke and tailored to the needs of their particular employees. The hon. Gentleman might say no to that, because the regulator might say they have to marry somebody else, because they are not big enough and they do not approve; but, beyond the limits of auto-enrolment, occupational pension provision is voluntary. Firms do not have to do such things at all, beyond the legal minimum, so where they do, they often do it for a reason. They provide schemes to meet the needs of their employees, and it seems to us that they should have the freedom, within the constraints of value for money, governance and costs, to do so at an appropriate scale. The regime we are putting in place is leading to consolidation and will do so further, and we welcome that. We do not believe it is right to force consolidation on unwilling schemes that are delivering value for money, governance and cost.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister has a tendency to draw caricature dividing lines. I also noticed that after saying that “organic” was not the right word, he lapsed back into saying it. That reflects a tension in the Minister’s mind. He again tries to paint a very black scenario. Why should the regulator be given the power to force schemes to merge? Well, in many other areas of pensions policy the Minister is giving the regulators more powers. As I understand it, he has previously agreed that scale matters. He now says that, all things being equal, scaling up could be the right thing to do. I did not quite catch his last words. He again lapsed into the use of “organic”, which does not seem to meet the argument.

Let us not overestimate the disagreement, as I think the Minister does. Our view is that it is perfectly sensible to give the Pensions Regulator the power to force mergers of pension schemes where in the regulator’s opinion they are too small to give value for money. That is not a revolutionary proposal. In the Minister’s desire to create a bigger divide between us, he is caricaturing the position. Giving trustees the power under their fiduciary duty to consider whether their scheme is large enough to get value for money seems a sensible move. If the Pensions Regulator thinks there are small schemes that cannot get value for money and takes the view that they should merge, we do not see that as a doomsday scenario. In fact, it is to the benefit of those who matter, the scheme members.

This debate comes down to a difference on the importance of scale. The Minister does not see scale as being as important as we do. He also argues that scale is emerging organically. Let us be clear: there are 200,000 pension schemes in the UK. There is no other system in the world with that level of fragmentation. Pension provision is not a cottage industry. There are some industries where it makes sense to proceed on a cottage basis. The Minister also lapsed into using the word “bespoke”. When I hear the word “bespoke” my ears prick up. It is one of those adjectives that people use when they want to make a certain sort of argument.

Our view, which is supported by the evidence, is that this is not a cottage industry. We think the Government and the Minister should recognise that and not be a little complacent about the moves towards scale. Our new clause would be a sensible addition to the Bill. However, given the discussions that are still to take place and the serried ranks of Government Members, I beg to ask leave to withdraw the motion.

New Clause 14 - Fiduciary duty of trustees

New Clause 15 - Decumulation

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I beg to move, That the clause be read a Second time.

New clause 15 takes us back into the realm of retirement income and, in particular, the issue of individuals who might not exercise a choice through the new flexibilities that have been introduced, but will instead look to do something more similar to the current retirement income market. That is a roundabout way of saying that the Budget reforms and the guidance guarantees inserted into the Bill in the amendments do not explicitly solve the challenge of consumers defaulting back to their savings provider for an annuity. As the Minister pointed out, some consumers will still choose a retirement income. Our new clause is designed to ensure that those individuals—there is a danger that they will be forgotten about with the focus on the new flexibilities—get the best deal possible.

The Association of British Insurers has adopted a code of conduct that, among other things, requires its members to encourage savers to use the open market option when purchasing annuities. As mentioned earlier, only 50% of savers appear to be taking active steps to engage with the annuities market. Half of savers buy the annuity offered by the company with which they saved, without approaching other providers to discuss annuity products or gather annuity quotes. That is a fundamental reason why the annuities market and the open market option did not succeed. Some 50% of current consumers are deterred from actively shopping around. It is implausible that the situation will improve in the context of the new auto-enrolment pension system, in which the majority will be enrolled on the basis of inertia.

Much has been said about auto-enrolment, which we discussed this morning. The auto-enrolment system, which was devised by the previous Government and implemented by this Government, proceeds on the basis that if someone does not exercise a choice, they go into the pension scheme. That system appears to be the right one to both sides of the Committee, but that does nothing to deal with the issues at retirement. At one end of the scale, people are defaulted into a pension if they do not exercise a choice. When its comes to turning it into an annuity, if people do not exercise a choice, they are defaulted into an annuity that can be significantly lower—up to 20% lower, the National Association of Pension Funds estimates—than they would get if they shopped around. That is important, because that is 20% less every year for the rest of a person’s life. It is not just a one-off cost.

Pension schemes should ensure that any brokerage service they employ on behalf of their members meets best practice, in terms of providing members with an assisted path through the annuity process, ensuring access to most annuity providers and minimising the costs. Pension schemes have a duty to get the best possible deal for their members or to do it themselves in-house, as the Royal Mail pension scheme and the National Employment Savings Trust do. That view flows partly from the significant evidence that the best way to get value for money on an annuity is to bulk-buy that annuity on behalf of the cohort of scheme members who are going to retire. It is a more sophisticated version of the principle of bulk buying. That is important, because it addresses what we have discussed umpteen times about the individual being able to get value for money. That did not happen in the annuities market as things stand. Either the pension scheme has to step up and do it in-house or we should ensure it has a duty to direct scheme members to the best possible brokerage service.

Steve Webb (Liberal Democrat, Thornbury and Yate)

Can the hon. Gentleman give the Committee an idea of what the cost would be to me as a scheme member of the services of an independent annuity broker, if this new clause were accepted? Just a ballpark figure would be useful. How many zeros are we talking?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

That, of course, depends on the scale at which the pension scheme is operating. If the Minister has an estimate of what he thinks the new clause would cost, I would be delighted to hear it. I am sure he would welcome what pension schemes such Royal Mail and NEST do, which is to ensure that their members get value for money at the annuity stage.

Stephen Hammond (Conservative, Wimbledon)

Is the hon. Gentleman saying that best value is lowest cost, or is he going to define exactly what best value might be and all the possible permutations thereof?

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

Best value is the largest possible annuity per annum. The hon. Gentleman makes a fair point, but I hope he would accept that we have an annuities market that has not worked because the individual is not able to make those decisions. It seems sensible to us to have the experts who do the job of building the pension pot up also doing the job of ensuring that it is turned into the largest possible income. I never understood why that is not seen as common sense. The two things are related.

Stephen Hammond (Conservative, Wimbledon)

The hon. Gentleman makes the point that, of course, when the individual was forced to buy an annuity, there was a problem. In certain circumstances now the individual is no longer forced to buy an annuity. The reason I ask the question is because there will be a range of options for scheme members.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

I am not sure whether I quite understand, but let me see. The hon. Gentleman is right to say that with greater options there will be fewer people taking out an annuity. The new clause starts from the assumption that there will still be individuals who take out an annuity and that there is a potential detriment if the annuities market continues to operate on the same basis as in the past. To meet that detriment—and given a limited range of options—our view is that the best way to proceed is to draw on best practice from organisations such as the Royal Mail and NEST and have the pension schemes do that work for the members. There will be a cost to that, of course, but given that this is about an annuity—an income every year for the rest of someone’s life—it is important to get this right.

Dave Watts (Labour, St Helens North)

Is my hon. Friend concerned, as I am, that the Minister seems to be asking our side what the cost would be? One might assume that, if the Government were considering this clause, they would have done the assessment themselves, with the Department’s backup and resources, which are unlike those we have as an Opposition party.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

My experienced hon. Friend makes a good point. I understand that the Minister and the Treasury have been busy on other matters. It is a fair point, which I raised myself.

Let me just say a little bit about how NEST proceeds in this space. NEST requires annuity providers to make sealed bids to provide annuities to those who have saved with NEST. It takes the cohort coming to retirement and says to the providers, “We have x people; given their personal circumstances, and taken together collectively, what offer of an annuity will you make?” That seems to be a sensible way to proceed. It has the advantage of scale and the expertise of the same pension scheme that has built up the pension pot turning it into retirement income. After all, the whole point is not to fetishise the pension pot, but to ensure that it provides an income in retirement. Reconnecting those two parts of the savings process seem to us to be very sensible.

The reason why the new clause uses “most annuity providers” rather than “whole of market” is that the latter is not available for every member. The power to write the detailed rules necessary to ensure that wording is not gamed or written in a way that can be gamed must go to the regulator and not be contained in legislation, which would require a new Act if providers found a way round it. Again, as the Minister has done a number of times during the Bill’s progress, the regulator would be empowered to take on that role. The new clause would give the pensions regulator the power to set the details of best practice.

To sum up, annuities, as they are currently constituted, have not been delivering value for money for the whole of the market—for every saver who chooses to annuitise or who is forced to annuitise as things stand. The reason is fundamentally that half those coming to the point of annuitisation—turning their pension pot into an income—do not shop around for the best deal, because it is a complex and confusing process. First, because of that, and, secondly, because of getting the advantages of bulk buying by a professional expert, a pension scheme, to do that crucial aspect of retirement income planning—if someone is taking out an annuity, the fundamental aspect is to get that right—it seems sensible to empower pension schemes to do that. The new clause draws on best practice, and we think it would be sensible for the Government to accept it.

Nigel Mills (Conservative, Amber Valley)

I was intrigued by the new clause, because I remember that when the Work and Pensions Committee considered its pensions governance report I was keen on the report’s recommendation that, as an absolute back-stop, if this industry would not sort itself out, we should separate out the accumulation phase and the decumulation phase, and just say, “Look, pension schemes can’t sell annuities. They just can’t be trusted to do it. We have to separate this and make people physically have a choice, because they can’t stay with their incumbent provider.”

Things have moved on a little since we made that recommendation, in that we have stopped people having to take annuities and we have probably blurred the lines between how accumulation and decumulation are carried out, in terms of the times at which one starts doing one, then the other. I suspect that a lot of people will choose not to unravel their pension scheme when they hit retirement age; they will probably try to stay with it and work on a draw-down. I suspect that people will do that with their pension scheme provider, so it will be much harder to separate out accumulation and decumulation.

That is why I am perhaps changing my mind on whether or not we should quite go this far. I suspect that we probably still need the market to fix annuities and get to a better position. Perhaps we have to keep this threat hanging around in the background, so that if a company keeps selling bad-quality annuities that are not properly sold—to the wrong people who will not benefit from them—perhaps we would have to say, “Pension schemes cannot sell them.”

The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East has tried to deal with some of the issues related to that point. If someone’s pension scheme was offering the best annuity in the market and the law said that it could not sell to its customers, those customers would not be highly amused that they could no longer get the best annuity.

This is about trying to allow that to happen, with some kind of independent advice being given in the meantime. Then we can try to allow the independent advice to come from the pension scheme, or at least its sister company, with some kind of protection, so we are perhaps heading towards separation and then going back into a connective situation. That would look too muddy to work. We have to say either that this market can be fixed, that improvement is still needed and that, fundamentally, we will not try to separate accumulation and decumulation, or that we really cannot trust people who have a captive interest in their customers or anything at all about them. If we cannot do that through sister companies, subsidiaries or certain better-governed parts of the group, we would need complete separation, so I am afraid I cannot support the new clause.

Richard Graham (Conservative, Gloucester)

My hon. Friend the Member for Amber Valley is absolutely right to say that things have moved on. The new clause would have been much more relevant in the years before this Government ended the monopoly of annuities. Interestingly, the philosophy behind the new clause is virtually identical to that behind new clauses 13 and 14, which the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East proposed earlier. It is effectively the philosophy of the state knowing best. He wished to terminate unilaterally all the contract schemes and to force them to merge at the behest of TPR to whomever the TPR wishes. Finally, he now wishes to impose a situation where an annuity broker can overrule an individual who, for whatever reason, has decided they want an income for life.

There will be times, of course, when that protection is relevant, but to be so prescriptive and put the individual wish at the bottom of the pile is part of the overwhelming philosophy that the state knows best and the individual must come last, with the decisions imposed from the top down, whatever the cost or consequences. It is time for us all to realise that neither the man in Whitehall nor the politician knows best the correct solution for an individual’s financial planning. That is why I will certainly not support the new clause.

Steve Webb (Liberal Democrat, Thornbury and Yate)

I admit that I was keeping an open mind until I heard the debate, but my hon. Friends the Members for Amber Valley and for Gloucester have convinced me to reject new clause 15. There are obviously technical drafting issues, as there often are. It is not apparent what “a qualifying money purchase scheme” means. The only reference to a qualifying money purchase scheme is in the Pensions Act 2008, which would imply that we are just talking about defined-contribution occupational schemes here. The coverage is not what the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East would hope.

My hon. Friend the Member for Gloucester made an important point when he used the word “overrule”. Under new clause 15, if a member wanted to buy an annuity from their scheme, unless an independent annuity broker recommended it, the scheme could not sell it to them. The member could take or leave financial advice, but not in this case. They could not do what they thought was in their interests, if a so-called expert disagreed. That would be an extraordinarily prescriptive way to conduct things.

I challenge the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East on cost. Once again, he wants to put duties on individuals and schemes and has no idea what it would cost. For example, I could have a small pot and want to know how these provisions relate to people with small pots. I could have a pension pot that is less than the cost of an independent annuity broker but not be able to get an annuity from the scheme because I have to pay the cost of the broker who might cost more than the value of my pot. There is no de minimis and no provision for small pots.

The new clause is stuck in a time warp. Just at the point where annuities are no longer compulsory, the Opposition want to put an annuity broker into primary legislation. We will have a guidance guarantee. Someone will reach an age at which they are interested in doing something with their retirement pot. The Government will write to them about a guidance guarantee. The scheme would tell them that they could not take an annuity unless they had spoken to an annuity broker. That person might be well served to talk to an independent financial adviser, because an annuity might not be the right thing. All those different people could be telling them different things, but the one who had the power would be the independent annuity broker, because if the person wanted to stay with the people they were with, his word would be law. That seems a muddled, backward-looking way to do things.

I am not convinced that that is the way forward, nor am I convinced by the hon. Gentleman’s claim that how NEST operates is analogous to his proposal. NEST has an annuity panel, so it has a number of providers who will give annuity offers. However, NEST only searches a limited number of people on its panel. It is not the same as an independent annuity broker who would no doubt charge for services; NEST does not charge for access to the annuity panel. I do not think that is what NEST does, to be fair to the hon. Gentleman.

It is worth saying that some schemes offer guaranteed annuity rates. About 30% of defined-contribution trust schemes in a 2013 survey said that their scheme included a guaranteed annuity rate. If those rates were set some time ago, that is an attractive feature of a pension scheme, compared with whatever the market rate might be at the moment. There might be a compelling reason for people in that sort of scheme to stay in-house. Yet even if it is blindingly obvious that they want an annuity—perhaps an IFA has told them an annuity is best—they would still have to pay an independent annuity broker for permission to stay with the people they are with who might have a market-leading guaranteed annuity rate. The new clause is clumsy, backward looking, restrictive and costly. Those are just a few of the reasons why it should be rejected.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

The Minister has again caricatured the argument, as he has a tendency to do. The difference between us is not as wide as the Minister claims. When he resorts to repetition of phrases such as “backward looking” and “time warp”, at one level I am reminded of the “Rocky Horror Show”, but at another it makes me think that the Minister is not confident in his own argument.

The Minister talks about comprehensive protections for savers. As things stand, individuals who choose to be defaulted into an annuity do not get value for money, in a significant number of cases. We know from the current market that half of those who are annuitising do not shop around, so the idea that action is not needed and that the Budget reforms somehow make the case for action redundant does not strike me as fair or sensible.

The Minister talked about NEST. We know what it does; I described it. The new clause states:

“A relevant scheme may provide an independent brokerage service itself. A self-provided annuity brokerage service will be considered independent for the purposes of this Act if the provision of its services is subject to the direction of independent trustees.”

Our opinion is clear: NEST is included in that.

There is, therefore, a difference of opinion. The Opposition are strongly in favour of ensuring that those who have not exercised the choice of retirement get better value for money than they do now. The Minister wants to tell the individuals who are getting 20% less in their annuity than they otherwise would that that is backwards and in a time warp—so be it, but, while it is fair to disagree, I think that the Minister caricatures the disagreement between us.

I am somewhat relieved about the speech of the hon. Member for Gloucester. He compared our first new clause to the bloody chaos of Indian independence and our second to North Korea, so his comparison of our third to Douglas Jay’s phrase “the gentleman in Whitehall knows best” must be considered progress.

Richard Graham rose—

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

No, I will not give way. It is striking that when faced with Opposition arguments the Minister, in a more low-key, sensible way—but still, I think, over-egged—creates a massive division that is not there. Then the hon. Member for Gloucester goes into historical analogies that are at the very least unjustified and at worst distasteful.

Richard Graham (Conservative, Gloucester)

On a point of order, Mrs Riordan. Reverend Moon does not hold services or operate in North Korea. I suspect that his life would come to a fairly rapid end if he tried to. He operates in the democratic republic.

Linda Riordan (Labour, Halifax)

That is not a point of order.

Gregg McClymont (Labour, Cumbernauld, Kilsyth and Kirkintilloch East)

We will push the matter to a vote, because we think it critical that those who are being defaulted into annuities get value for money, and we will be testing the Committee’s opinion on that basis.

New Schedule 1 - “Amendments to do with section (Pension Scheme for Fee-Paid Judges)

New Schedule 2 - Pensions Guidance

“Part 20A - Pensions Guidance

Giving of pensions guidance

Designation of guidance providers

False claims when giving pensions guidance

Standards for giving of pensions guidance by designated guidance providers

FCA’s duties and power to give guidance

Funding of pensions guidance

Steve Webb (Liberal Democrat, Thornbury and Yate)

On a point of order, Mrs Riordan. I am aware that we are constrained for time, but I want to put on the record my appreciation of you and your fellow Chair for your wise and thorough chairing of our proceedings. I think that you got the short straw, Mrs Riordan, having had all of last Thursday—I shall have words with Mr Bone—but we are very grateful to you. I am grateful to all Members who have served on the Committee. It was fiercely contested and Members were desperate to be on it. We have the privileged few among us. I am also grateful to my hon. Friends for their insightful and knowledgeable contributions. In general, this has been a well-informed, thoughtful and constructive Committee. I enjoyed the new clauses tabled by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East. I always enjoy them when he tables them. I hope that he feels better when we get to Report, when we can further consider his issues.

Finally, I thank the officials—the lawyers, dare I say it?—and everyone who has enabled the Committee to function so effectively. I will not say that the ink is still wet on some of the amendments, but it has been like trying to keep up with a moving train. I know a huge amount of hard work has gone in. My briefing has been excellent, particularly that which appeared on the odd-numbered pages.