My Lords, I thank the Minister for his explanation of these regulations, my noble friend Lady Drake for a characteristically thorough interrogation of them, and my noble friend Lady Donaghy for highlighting some very important lessons from the past that should inform our discussions today. I remind the Committee of my registered interest as the senior independent director of the Financial Ombudsman Service.
We on these Benches welcome the fact that action is now being taken to address the problems with governance and excessive charges. Like my noble friend Lady Drake, I welcome action on the active member discounts, although her terminology may indeed be a fairer description of what happens there.
As the Minister indicated, 5 million people are already saving in schemes under auto-enrolment, and that figure will end up closer to 9 million or 10 million in due course. The point made by my noble friend Lady Donaghy is crucial here. If we are to cap the charges levied on pension savers in such schemes, we need to be sure that it works well because of the duty of care owed to those savers who have made no active choice about saving but who have been defaulted by their employer in particular or by the state in general into schemes which they have simply never chosen. It is critical that those who are auto-enrolled remain so and that we do not see a significant opt-out rate, but also that the highest possible retirement income is derived from the savings that individuals and their employers make. That is the context for these regulations, and the history lesson from my noble friend Lady Donaghy is very helpful. People need to know that their pension pots are not being siphoned off in unreasonable charges and that someone in whom they can have confidence is looking after their interests.
My noble friend Lady Drake asked a number of very important questions, and I will add just a few. First, on the charge cap, Labour has been campaigning for that, so it would be churlish not to welcome it—and I very much welcome it. However, can the Minister please tell the Committee why the Government chose 0.75% and what plans they have to reduce that further? The latest impact assessment suggests that, following the response to the consultation, the Government considered just two options: the one set out in these regulations, and doing nothing. I agree that of those two choices, acting to cap charges is definitely the right one, but the case for a lower figure
is very strong. Certainly on these Benches we support capping charges at 0.75%, but with the aim of reducing it to 0.5% over the course of the next Parliament. Does the Minister agree that that is where we ought to end up?
Secondly, I would appreciate some clarification about how the cap will work. The Minister explained that it will be set at 0.75% of funds under management or an equivalent combination charge, but can he explain a bit more how the combination charge will be calculated? Regulation 5 seems to suggest that there will be three options: a funds-under-management charge, a combination of a funds-under-management charge and a contribution charge, or a combination of a funds-under-management charge and a flat-rate fee charged to the member.
Regulation 6 sets out the limits if one of the combination options is chosen. Can the Minister tell us a bit more about why these were fixed as they were? Is it the intention that a combination option cannot yield more than the equivalent of 0.75% of funds under management? If so, how can the saver be assured of that? If that is not the case, why are the Government giving the option to choose a charging structure that could yield more than the headline rate of 0.75% of funds under management?
Whatever figure is chosen, for controls on charging to bite, savers need to understand fully what charges are being levied. As we know, defining pension charges is not an easy job. The Minister indicated that transaction charges are not included in the cap. The biggest problem is that, as my honourable friend Gregg McClymont pointed out when the regulations were considered in another place, we do not yet know the full range of transactions attached to pension schemes. The only way to deal with that is through full disclosure of all transaction costs, which is long overdue and to which the Opposition are committed. I would be interested to know the Government’s position on that.
Will the Minister tell me a bit more about the compliance regime? Whose job is it to check that the cap is not breached and what will the penalties be for a breach? As for the minimum governance standards, they are welcome as far as they go, but again I would like to ask about compliance. Is the intention that the main or only compliance tool will now be the chair’s statement? Paragraph 7.34 of the Explanatory Memorandum says that the Pensions Regulator will have the power,
“to issue a fine against the Board of trustees or managers”,
in the event of failure to prepare a chair’s statement as required by the regulations. Will the Minister give some indication of the likely level of fines?
Of course, charges can take different forms, and the Government have made a welcome move in recognising this. For a while, they chose to focus primarily on the annual management charge, but these regulations acknowledge that that is only one part of the picture. My honourable friend Gregg McClymont highlighted the need to focus on the total expenses ratio, which includes custody, legal accounting and administration, and which consequently tends to be significantly higher than the AMC. Do the Government
have any plans to evaluate the impact of the regulations on the total costs levied on affected pension schemes and savers?
We need urgently to address the range of challenges facing pensions at the moment if we are to be successful in persuading workers to save for their retirement at the rate that they need to do. My noble friend Lady Drake mentioned the draw-down products, but Labour will take a range of other, tougher steps to protect savers—for example, from new products that damage retirement income. Indeed, a Labour Government will begin immediate consultation on plans for a cap on fees and charges for income draw-down products, with a focus on products bought from the saver’s own pension provider. However, I welcome the progress that has been made and I very much look forward to the Minister’s reply to these and all the other questions that have been asked.