Supplementary Memorandum submitted by
HM Treasury
PERSONAL PENSIONS ISSUES
During evidence to the Committee on 6 May, the
Treasury team undertook to provide further information on a number
of issues. This letter covers the issues where the material is
readily to hand. The Committee also requested information on some
further matters relating to the prudential supervision of insurance
companies. I will write again on this subject on my return from
two overseas visits, which will take me out of the office for
the next week or so.
SERPS OPT-OUTS
The Treasury undertook to give to the Committee
a report, published in 1996 by the Securities and Investments
Board (SIB), now the Financial Services Authority (FSA). The report
outlined the results of research conducted to estimate whether
people who opted out of the State Earnings Related Pension Scheme
(SERPS) in the late 1980s and early 1990s and took out an Appropriate
Personal Pension instead, stood to make a loss as a result. A
copy of the report and the SIB press notice that announced its
publication are attached at Annex A [Not printed].
The report's main findings were that:
— the vast majority of people (between
96 per cent and 99 per cent) stood to gain from opting out of
SERPS;
— where prospective losses arose, losses
per case were small, averaging between £33 and £78 a
year in reduced pension rights;
— fixed charges were a major factor
in most of the cases where loss was expected, as they slowly erode
small or closed policies.
This is why the Treasury's evidence was that
most people stand to gain from opting out of SERPS into a personal
pension. The review of personal pensions mis-selling relates to
people who were either in, or eligible to join, an occupational
pension scheme (OPS), but took out a personal pension instead.
For a rebate only case to qualify for review, the person must
have either been in, or eligible to join an OPS. The most likely
source of loss in these circumstances is the loss of an employer's
contribution to the pension. Had the investor jointed their OPS,
they would in any case have been opted out of SERPS. The fact
of opting out of SERPS is consequently of little significance
in this context.
I should add that as a matter of policy the
Government of the day provided powerful incentives on people to
opt out of SERPS, and that this can only have been a major influence
on those who chose to opt out. The future of SERPS and of the
structure of second tier pensions more generally is of course
being considered as part of the Pensions Review currently being
carried out by the Department of Social Security.
EFFECT OF
THE STOCK
MARKET ON
CASE ASSESSMENTS
The second request for information arose from
a question by Mr. Davies, who suggested that, as a result of the
recent favourable performance of the stock market, redress might
have been paid to people, who, were their cases assessed today,
would be found not to have been disadvantaged by pensions mis-selling.
He asked whether the Treasury was aware of any such cases. As
was noted during the evidence to the Committee, the Treasury is
not aware of any such case. We understand that the FSA is similarly
not aware of any instance of this kind.
This is not surprising, as in practice the trend
has been for the likelihood of loss to increase. At first look,
this may seem surprising. It arises because case assessments must
take a long term view, looking not only at past returns but also
at likely future returns.
Since the start of the review, the outlook for
future long term investment returns has fallen, reflecting a downward
adjustment in market expectations for long term inflation. This
has meant that the cost of providing benefits equal in value to
the occupational scheme benefits a person would have enjoyed had
they stayed in or joined their OPS has increased. The rise in
this cost has been greater than the increased value of the average
personal pension fund. Thus losses measured today are greater
than earlier in the review.
To be fair to investors, and to the firms making
redress, the assumptions firms must use to review cases are updated
each quarter by the FSA to reflect the latest assessment of the
longer term market prospects. It is inevitable that these will
change over time particularly over as long a period of time as
has now elapsed since the review of personal pensions was first
launched.
TREASURY POWERS
OF INTERVENTION
OVER INSURANCE
COMPANIES
Sections 38-45 of the Insurance Companies Act
1982 give the Treasury (formerly the Secretary of State) various
powers of intervention in relation to insurance companies. These
powers can be exercised in the circumstances set out in Section
37 of the Act. An important ground for the exercise of powers
is that the Treasury considers this to be desirable for protecting
policyholders or potential policyholders of the company against
the risk that the company may be unable to meet its liabilities
or, in the case of long term business to fulfil the reasonable
expectations of policyholders or potential policyholders.
The number of times these powers have been used
is set out in the Insurance Annual Report, published by the Stationery
Office. The Annual Report for 1997 has not yet been published,
and statistics on the exercise of powers of intervention in that
year have not yet been compiled. But the Committee may find it
helpful to see the figures for the years 1995-96, which give a
good indication of the frequency of use of the various powers.
These are set out at Annex B to this letter, which also summarises
the nature of the various powers. For ease of reference the full
text of Sections 37-45 of the Act is attached at Annex C [Not
printed].
ATTRIBUTION OF
COSTS
Finally, during the course of the evidence,
reference was made by the Treasury team to a Parliamentary Question
answered by Mr Nigel Griffiths prior to the transfer of responsibility
for insurance supervision from the Department of Trade and Industry
to the Treasury. A copy of the question and answer is attached
for ease of reference at Annex D.
I hope that the Committee finds this further
information helpful to its enquiries, and stand ready to provide
further information or answer any further questions it may have.
11 May 1998
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