My Lords, I will also speak to Amendment 62H, which is again in my name and that of my noble friend Lady Sherlock. Amendment 62G would amend Clause 41, which is
the statutory basis for the Secretary of State to make regulations to restrict charges or impose requirements on work-based pension schemes. The amendment would amend that clause to enable the Secretary of State, following a public consultation, to set the standard by which pension schemes must declare charges and transaction costs to their members and the members’ employers.
Amendment 62H would give effect to a DPRRC recommendation and prevent the Secretary of State from amending legislation “whenever made” and imposing requirements on certain work-based pension schemes by secondary legislation, thus bypassing full parliamentary scrutiny. The DPRRC made this recommendation because it was not persuaded adequately by the Government’s justification for granting themselves this power. We agree with the DPRRC. That is the simple basis for Amendment 62H.
While I am dealing with this group, the noble Lord, Lord Lawson, has two amendments in it. Amendment 63 would create a power to require disclosures at least annually of certain management and transaction charges incurred by administration and management of investment portfolios. Amendment 67 would create a power for regulations to be made requiring work-based pension schemes to disclose periodically certain costs and information relating to charges for management of investment portfolios. I shall return to these amendments later. However, by proposing them the noble Lord has made a powerful intervention into this debate and one I hope that his noble friends will treat with the respect it deserves.
Finally, there is government Amendment 70, which would give effect to a DPRRC recommendation that the first set of regulations under paragraph 1 of Schedule 17 should be subject to affirmative procedure. We support that.
In my noble friend Lady Sherlock’s excellent speech at Second Reading on 3 December 2013, in considering this part of the Bill she made the compelling point that the state owes a serious duty of care to the large numbers coming into auto-enrolment. It is crucial that every one of the 10 million auto-enrolled between 2012 and 2017 can be sure of getting value for money from that pension scheme. That necessity for value for money drives all the Labour amendments to Part 5 of the Bill, on private pensions.
In my noble friend’s Second Reading speech, she said:
“This is a huge industry in the UK. About £180 billion is invested in trust schemes and £275 billion of assets is invested for DC schemes. Some 180,000 people with assets worth £2.65 billion have money in pension pots with annual management charges of over 1%, and 400,000 people a year buy an annuity. The numbers are eye-watering but the principles are pretty simple: the pension industry has to deliver value for money. However, the OFT study published this year made it clear that there are some serious issues in this industry which need addressing”.—[Official Report, 3/12/13; col. 147.]
Her amendments are designed to address those issues. Amendment 62G argues for the full disclosure of all costs and charges, including the costs extracted by fund managers.
I am sure that all Members of your Lordships’ Committee agree that pension charges must be reasonable for people to have the necessary confidence to invest their hard-earned money in pension schemes. From the evidence available now, it is difficult to exaggerate how obscure the charging structure on pensions is. Pensions are pretty complicated to begin with because, in an occupational pension scheme, the employer—not the employee—is the person buying the pension. That pension schemes are then invested in asset classes by fund managers further complicates the challenge of understanding what is charged.
For reasons we have debated repeatedly in this Bill, the market cannot address this challenge. I regret that the Government have been slow to understand the depth of the problem in the pensions market. My right honourable friend Ed Miliband first raised this issue in July 2012. He identified pensions as the next big scandal, warned that savers must be protected from the scandal of hidden pension fees that can see people stripped of huge percentages of their savings, and called for a new regime imposing a clear charging structure on pension funds. He warned that fees need to be capped. He was accused by the Pensions Minister of being irresponsible. Regretfully, the Minister joined industry voices who were making accusations of scaremongering. The next day, the RSA published Seeing Through the British Pension System, which found that 21 out of 23 providers denied that there were any additional charges other than the annual management charge and administration costs. They failed to reveal what is charged for items such as audit, custodial costs and other costs such as taxes, lending fees and broking commissions.
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The report, of course, corroborated the basis for Ed Miliband’s concerns. In his conference speech in September 2013, he announced that Labour would support an OFT inquiry into the pensions industry, put a cap on pension charges and force pension firms to stop hiding the full impact of the pension charges they intend to levy on the full value of a pension. The Pensions Institute at Cass Business School published a report entitled Caveat Venditor, which examined the default funds that it is estimated more than 90% of private sector employees will use under auto-enrolment, and raised serious concerns about the continued use of older funds with what it described as “toxic charges”.
January 2013 saw the announcement of an OFT inquiry, while the Pensions Minister maintained his scepticism about capping pension charges. March 2013 brought the publication of a Which? investigation, which revealed a complexity of some 18 or more charges, and revealed that in some cases first-year charges in enrolment schemes can be as high as £600 per member, followed by an ongoing £60 per year charge. In May 2013, the Government stirred and announced a ban on consultancy charges on auto-enrolment schemes, and they are to be congratulated on that. In October 2013, on the day of Report in the Commons—although it was trailed the previous day—the Government launched a consultation on setting a cap on the maximum charge that can be levied on savings and default funds, and moved the inclusion of Clause 41 in the Bill.
I am bound to say that there were those who were sceptical about whether Steve Webb and the Government had really woken up to the dysfunctionality of the pensions market or were merely acting politically in an attempt to take the impetus away from Ed Miliband, who had clearly identified pension charges as a crucial part of the current cost- of-living crisis. The reasons for that view were simply that the Pensions Minister continued repeatedly to oppose Labour’s amendments on the grounds that they would interfere with the functioning of the pensions market. He appeared oblivious to the findings of the OFT report. In particular, I remind the Committee that the report stated:
“The OFT has provisionally concluded that the legal test for making a Market Investigation Reference is met … in light of the fact that there are steps in place to address the competition concerns”,
and,
“that the Government is currently poised to take forward reforms that are likely to impact on competition on charges and quality in the market, we have provisionally concluded that now would not be an appropriate time for such a reference”.
One wonders what the OFT has been thinking this morning, following the report in the Financial Times on Friday, 16 January, which stated that:
“Government plans to cap charges on workplace pensions will be shelved for at least a year”,
and went on to say that,
“senior pensions industry figures have been briefed by officials this week”.
I pause to pose some questions to the Minister. Can he confirm that that report is correct? In particular, can he confirm that senior pensions industry figures have been thus briefed by officials last week? If it is true, can he confirm why the Government appear to have caved into the vested interests of fund managers and pension companies? Can he confirm that the proposed reforms are now unlikely to emerge until some time next year at the earliest and may not take place even during the current Parliament? In the light of the Government’s reported position—again, if true—a package of measures on value for money is all the more essential. This amendment simply proposes a mechanism whereby all costs and charges would be disclosed. I cannot see any basis on which the Government could be against full disclosure of every cost or charge that impacts on pensions, especially in the face of mounting evidence, which was added to on Friday by the publication by the Pensions Institute at the Cass Business School of a further report, entitled Assessing Value for Money in Defined Contribution Default Funds.
As of today’s date, the amendments in the name of the noble Lord, Lord Lawson, contain a comprehensive definition of a total expenses regime. They identify and incorporate the 18 charges identified by Which? and the OFT reports. My reservation, however, is that such a comprehensive present-day list may not be future-proofed. To put it simply, we have no reason to trust the sector not to invent other forms of charging to get round such a comprehensive list. Anyone who has read the OFT or the Cass/Pensions Institute reports would be wise to hold such a position. This industry is dysfunctional and in large part does not act in savers’ interests. When it has been forced to make changes, it has done as little as possible. I fear that if we set in law
a comprehensive list of charges as of today, the industry will not be long in dreaming up another set of charges to avoid accounting for them. Our amendment does not seek to specify the charges. We believe that this more flexible approach, leaving definition, enforcement and review to the regulator, is a better way. In our view the sector needs to be kept on its toes with active ongoing scrutiny. However, I have to say to the noble Lord that between now and Report, depending on the Minister’s response to the debate today, we will be open to discussions about what is the best way to proceed on this issue, where we have a significant common interest.
We need active management of the fees and charges to keep up with an industry that has shown itself in large part not to be trustworthy, which is why we prefer the framework approach. I beg to move.