Work & Pensions Committee - Minutes of EvidenceHC1494

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Oral Evidence

Taken before the Work and Pensions Select Committee

on Wednesday 30 November 2011

Members present

Dame Anne Begg, in the Chair

Debbie Abrahams

Harriett Baldwin

Andrew Bingham

Shelia Gilmore

Glenda Jackson

Brandon Lewis


Examination of Witnesses

Witnesses: Otto Thoresen, Director General, Association of British Insurers (ABI), Jonathan Lipkin, Head of Research and Pensions, Investment Management Association, and Joanne Segars OBE, Chief Executive, National Association of Pensions Funds, gave evidence.

Q121 Chair: Thank you very much for coming along this morning. It is quite significant that we are meeting to discuss pensions and the future of pensions on a morning when large numbers of public sector workers are on strike defending their pension.

Glenda Jackson: Hear, hear.

Chair: We are looking at the whole issue of ensuring that those who presently do not have occupational pensions can enjoy the benefits of a pension scheme. Thank you for coming this morning. Can I ask you very quickly to go along the row and introduce yourselves for the record?

Jonathan Lipkin: My name is Jonathan Lipkin. I am Head of Research and Pensions at the Investment Management Association.

Otto Thoresen: I am Otto Thoresen. I am Director General at the ABI.

Joanne Segars: I am Joanne Segars. I am the Chief Executive of the National Association of Pensions Funds (NAPF).

Q122 Chair: Thank you, and welcome. Just to get straight into the whole issue, one of the things we are concerned about as a Committee is the transparency of the charging regimes of any of the new schemes that are set up under auto-enrolment. In recent weeks, the RSA and others have expressed concern, particularly in the press, about how easy it is for someone to understand exactly what the charging regime is or indeed what 0.5% is compared with 0.3%. The other thing that has also come out in recent weeks is that the actual cost of trading could potentially be adding another 0.7% on top of what is already the charging that an individual might understand. I was wondering what your views were about the kind of hidden charges that make it impossible for a person whose pension pot is being affected to know just how much is coming out in terms of both the trading and the normal annual managed charge.

Joanne Segars: You touched there on a very important issue. As we are about to auto-enrol millions of people into pensions, and into defined contribution (DC) schemes, for the first time it is absolutely essential that people get good value for money for those pensions, but also that they can see where their contributions are going and how much they are being charged. They also have to see how much they are being charged in a language that makes sense for them.

We have just published some research this week on this very subject. This is Ipsos MORI consumer research. The information that came back from consumers was really quite fascinating. The public said to us, "We simply do not understand all these costs and charges. We do not understand what is on our pension statement." One person said to us, "You need to be Einstein to be able to understand these things." Another, reflecting on the complexity, believing that was deliberate obfuscation on the part of their provider, said, "The public is just there to be fleeced." It is important, if we are to re-instil trust and confidence in pensions, that people are very clear about how much they are being charged, and that it is described in a language that makes sense to them.

That is why we have, together with colleagues elsewhere in the industry, suggested that what we need is a very clear code of practice so that there is a common language in terms of how we describe pension charges to individuals. At the moment there are different rules for different types of pension schemes. That does not seem to make very much sense. The different regulators have different rules; that does not seem to make sense. That is just confusing to individuals. What we want to do is to try to develop an industry-wide code of practice that ensures individuals can see how much they are being charged. That will also help employers, who will be choosing pensions for the first time, see how much their staff will be charged. In the public interest, it will help politicians, regulators and others monitor the level of costs and charges. This work at the very early stages, but I very much hope it is something we can develop. Steve Webb supports it, and I hope this Committee can too.

Q123 Chair: Who should be doing that work in building the code of practice? Do you think that is something for Government to do, or is it something for industry to do?

Joanne Segars: It is something for industry to do together with consumer groups, employer groups, and trade unions so that they collectively own and develop this code of practice. That is a much more productive way of doing things than the sort of regulatory approach. Frankly, the regulatory approach we have at the moment is hugely confusing. If the industry can develop something together with those consumer and stakeholder groups, that will be the way forward.

Otto Thoresen: The test will be the extent to which we can begin to come up with something useful reasonably quickly.

Chair: That was my next question.

Otto Thoresen: I think that is the point. Just a few comments from me: I have been in the industry for over 30 years. I was CEO at one of the UK life and pension businesses before I came into this job. The industry has had complexity in its product design and charging through most of those 30 years, but it has now moved to something that gives us an opportunity to do something more useful, more useable, in terms of being clearer about charges and engaging better with consumers and employers. A number of things mitigate against moving quickly on that if you try to do it through the regulatory space, because essentially if you offer product solutions through insurance companies, you have FSA1 regulation; if you are offering them with trusts, it is The Pensions Regulator (TPR) that regulates you. Although there are similarities between the regulatory systems, there are also quite large differences.

One of the ideas that came out early from this group that Joanne has put together was finding something that we could use to explain to employers how different systems work, and so translate the still quite complex world of percentages and fees into something that was comparable. It is also important to point out that the typical pension charging system-we take NEST2 as an example of a new model charging system-effectively has within it cross-subsidy between people who are just entering the system and people who have been in the system a long time. Take the charges that will be levied on an individual. Say it is 20 years from now and NEST has been running for 20 years; if you are in the scheme for your first year, the cash value of the charges that you are paying will be quite different from somebody at that point who has been in the scheme for 20 years. The service that you will be getting from NEST or any pension provider would be quite similar. Some issues will arise as we try to explain these things more clearly, but at an employer level, we could certainly get to something quite quickly that would help them make sense of what is still quite a complex area.

Jonathan Lipkin: Could I just add a couple of points? I agree generally with what has been said. You mentioned the question of hidden charges in your opening comments, and it is important, just as an opening remark, to say that, certainly with respect to the investment funds that are at the heart of the products that our members offer, there are no hidden charges. Everything has to be disclosed-it has to be disclosed by law. There is a distinction-and I would be happy to go into it in more detail with the Committee in due course-between the headline charges that are levied for the services that managers provide and the costs of investing. Either in terms of the charges or in terms of the underlying costs, everything is disclosed, but it is disclosed in different ways.

My second point is that the collective work we as an industry have to do, together with Government and regulators, is work out how we can move to a place where consumers are given the information that they need better to understand what is being undertaken on their behalf. Thirdly, on consumer capability, information that is not based on such capability is information without value. That is not me speaking-a leading consumer representative for the UK made that remark at a conference in Europe a couple of weeks ago. What we have to do collectively is work out what consumers should know, what can help them to make informed decisions-and help employers who are making informed decisions on behalf of those consumers-but also consider how the capability can be developed so that people can make sense of the figures that are provided to them.

Q124 Chair: Is it possible to simplify it in such a way that Joe Public can understand?

Otto Thoresen: We have to believe that it is, because if we cannot remove the barrier in terms of not understanding the charges, so that people have confidence again in the system, ultimately the ability of auto-enrolment to achieve the objectives that we all are working really hard to achieve will be constrained. People have to know what it is that they are getting for what they are putting in.

In terms of the move to a simpler charging system, if you compare what we are doing with what the industry was doing 15 or 20 years ago, there has been a significant simplification and there has also been a reduction in the levels of charges, but it is still the fact that something like a 0.3% annual management charge (AMC) is still difficult for people to understand. They do not understand what it is a charge on or how big it will become. One of my concerns is that, when we begin to explain more clearly how the charges build up, people may initially be put off by the prospect of what the level of charges could be, even at a 0.3% annual management charge, because it is difficult to get your head round that. However, we have to try.

Joanne Segars: I very much agree, and I really do not think that this should be an insurmountable problem. The other thing is we have to have a common language. We have been looking at the way in which different providers and different pension schemes describe what they are doing. Some of them talk about bid-offer spreads, some talk about reductions in yields, some give percentage AMC and some talk about basis points. We are not even talking the same language for the same thing. I very much agree with Otto that we really need to try to do this. I believe that it is within our grasp, and we have to do it. If we do not, then we are never going to help restore confidence in pensions.

Jonathan Lipkin: Just to add one further comment, it is important to emphasise that this issue is bigger than charges. The communication with consumers is about the value for money of their pension and, for most people, that will mean being automatically enrolled into a scheme that they have not chosen and being automatically put into an investment strategy that they may not have actively chosen; in other words, the default. The critical point with respect to default arrangements in DC is to be able to communicate to people what it is you are trying to achieve on their behalf. Indeed, the starting point needs to be: what is the objective for this pension-scheme member and how am I going to deliver that in the most effective way, including the most cost-effective way? It is about charges but it is also about this broader piece of how you tell people what it is you are trying to do for them over a 30 to 40-year saving period.

Q125 Chair: Isn’t it the case that, whatever happens with charges, the people who will end up making the profit will be the industry itself, and the people who will be worse off will be the poor pensioners?

Jonathan Lipkin: In a competitive market environment, what should happen is that there should be a balance between the interests of commercial providers, whatever their position in the market, from investment managers through to pension distributors, and the interests of members. In the longer term, if you are unable to deliver effectively for consumers, you may well not be in business. It is something that is true across the piece in terms of commercial activity. We have to get to a place where the governance process improves, which includes charges but also, critically, includes the design of defined contribution schemes. We have already seen initiatives taken across the piece, for example the Investment Governance Group DC principles, to try to raise standards of governance. I think the work that the NAPF has started, which we look forward to playing a part in, can provide a very concrete further piece to ensure that the governance framework does deliver in the very best interests of members, and we believe that it can be done.

Otto Thoresen: If you look back, the last big dislocation, if you want to describe it as that, in the way charging worked in the pension system was when stakeholder pensions were brought in, and the market response to stakeholder pensions was to radically simplify charging structures. Many of the extra charges that had existed in the previous market were removed, and there was then a focus on a simpler charging system that allowed competitive pressure to work more strongly. The equivalent for me in the current regime is the existence of NEST, which is setting standards that will force the market to normalise at a level that I think we should be able to demonstrate is good value for money for the services provided. That, in the end, should be one of the tests.

Chair: We have some questions on NEST and how it will operate in just a minute, but Harriett wanted to come in briefly, and then Glenda.

Q126 Harriett Baldwin: Just briefly, investment management charges are one of the factors that may reduce returns in pension funds, but transaction costs will be another. I was just wondering if any of your organisations had done any work on the proposal that is coming out of the EU at the moment to implement a small tax on financial transactions. Have you made any estimate of what the costs might be for pensioners if that were to happen?

Joanne Segars: It is an issue that we are looking at currently. We were very pleased to hear George Osborne say yesterday that he is going to oppose that the proposed Transactions Tax, and oppose it very strongly, and to hear him say that this is a tax on pensioners. We very much echo those views.

Q127 Harriett Baldwin: Can anyone quantify it though?

Joanne Segars: We are going through the process of trying to do that at the moment, and we would be very happy to share the results with the Committee once we have done that work.

Jonathan Lipkin: We are also doing an internal exercise in terms of costing this, and likewise we would be happy to share our finding with the Committee.

Q128 Harriett Baldwin: Do you agree with the assertion that it would be a cost on pensions rather than a cost on banks?

Jonathan Lipkin: Yes, because it is aimed at all asset classes and at all actors across the financial system. In the way that it is currently drafted, it would have multiplier effects across the system. But the broad point is that this is not a tax on institutions; this is a tax, ultimately, on millions of pension savers, not just in the UK but increasingly across Europe, who will be relying on a mixture of state and funded provision for their retirement.

Q129 Glenda Jackson: To go back to the initial point about the overarching incomprehensibility of most pensions as far as the contributor to the pension is concerned, and the variations in regulation, both of which are essentially proof of the failure by the pension industry to get its act together, what I want to know is what auto-enrolment is bringing to the table that is going to make the pensions industry get its act together. It has failed in the past; what is the driver now?

Otto Thoresen: I would say that the industry has been getting its act together. As I have already said, we, as an industry, had a real tendency to go for complexity and apparent choice for the consumer, but actually it was very hard to see where choice was and to get through the complexity to exercise that choice. We have moved now to a system where the products and services-whether it is the way that the information is provided, products are structured or the level at which charges are made-have come a long way, but what is still clear is that there is too much material in the communication that does not help the communication.

If you take the FSA regulatory system, the amount of disclosure material that we send to people is very thick in terms of the number of pages and very difficult to penetrate. As an industry, our ability to communicate well with customers after they join us seems to be much poorer than perhaps at the point when they do join us. The regular communication we have with customers, again, historically, has not been strong enough, and the way we explain to them how their funds have grown and what charges we have taken from them has not been strong enough. There has, however, been significant progress and there is more coming through.

In terms of what auto-enrolment brings, we have to give credit to what NEST has set out to do, because it has set out to use the opportunity of, if you like, soft compulsion in the process to redesign the way they engage with and talk with their customers. In terms of the language that is used and the simplicity in the way facts are presented, in all aspects of what they are doing, Tim Jones3 and the team are seeking to design in simplicity and access for the consumer, and the industry is now responding too. The best practice in the industry, I think, is at the same level. Is that best practice wide enough in the industry? Not yet. What we will see over the next two to three years is that best practice becoming more the normal practice, and that has to be the belief if we are going to engage with people and they are going to save for retirement. Ultimately, that is the objective of this, and we are all working to try to achieve that objective.

Q130 Glenda Jackson: With respect, the opening piece of evidence, which was very graphic, was that you do not even speak the same language. One of the pieces of evidence that is constantly being presented to us, which we all know from our own constituencies, is that people are deeply distrustful of the pensions industry, because of the failures of that industry, so I ask again: what is auto-enrolment bringing to the table that is making the pensions industry decide-if you do not like "to clean up its act"-that it will provide an infinitely better service to the people who are paying their contributions?

Otto Thoresen: I will make one more comment to see whether I can respond well to the question. I do not think it is auto-enrolment that is changing the attitude of the industry. Having been in the industry for many years, I believe that the industry is now absolutely clear that it is its relationship with its customer that is going to drive its success or its failure. It is clear on that. There is a history of systems, communication materials and ways that we have done things in the past, which, because of the technology and other things, takes time to change, but I have no doubt about the change in attitude.

Some of the aspects of what the FSA have done over the last few years have helped us. The Treating Customers Fairly concept has had a mixed set of reviews in terms of its effectiveness, but I have seen it change the way people in boardrooms think about the way their companies are operating and the way they are engaging with their customers. More and more of them are taking the responsibility for doing that well. That, for me, is what will drive change that will be visible to you in the years to come in terms of the way the industry is performing. I genuinely believe that.

Jonathan Lipkin: Could I just add another aspect to this from an investment management perspective? Auto-enrolment is clearly concentrating minds, but there is something bigger happening that is concentrating minds significantly on how to deliver in defined contribution pensions: the huge shift that we are seeing from what was the prevailing model of UK provision, which was defined benefit, both in the private sector and the public sector, towards defined contribution. Defined benefit for the end consumer was about a promise from an employer. In terms of the provider, the prevailing relationship in terms of the millions of beneficiaries of private sector pension provision, as provided through the workplace in this country, meant the provider was hidden away. There was a promise that was part of the employment covenant and part of defined benefit.

Defined contribution, and the trend globally towards money purchase or DC schemes, changes that relationship between consumer and provider. What we are seeing-and Otto has already referred to this-is that this is not just about auto-enrolment changing the thinking within the industry; the industry, for the last few years-and certainly my part of the industry in terms of investment managers thinking about defined contribution pensions-has been confronting a very different pensions environment, and we are at the beginning of a process of adjustment that we genuinely believe will result in very good outcomes for consumers. This is a far bigger shift, of which auto-enrolment is, of course, a very significant part.

Chair: I am going to move on because Brandon has some more questions on this, so you may be able to say what you wanted to say in some of your answers to him.

Q131 Brandon Lewis: Going back to the initial main theme of charges and transparency, in effect, one of the problems at the moment is we have people who have high-end pensions and who have advisers who read through stuff and tell them what the costs are. NEST does offer an opportunity, but, because of the structure of the auto-enrolment, we are still going to have a huge number of people who are not captured by auto-enrolment-either because of their salary or the way they work-who we really should want to be getting into pension schemes. There is some evidence that shows that, for them, it is not so much about whether they can afford £1, £2 or more a week to go into a pension, but they do not trust pensions. There is this real issue around trust, and charges seem to be quite a large part of that. They do not understand it, let alone whether they trust it or not.

Do you think the current work that is being done on the code of practice will lead to a stage where there is a very simple, easy-to-understand line that says "cost of charges"? It has always been put under different headings, which may well have been created to get round the regulations and problems the Government presented in the past. But can we just simplify this as: the management cost is X amount of pounds? Do you think the industry will achieve that and, if so, why has the industry not already done that, because banks have managed to do it in a relatively straightforward way?

Joanne Segars: That is a very good question. One of the issues that came up at our summit meeting on Monday was that pensions are way behind the curve, so what we are trying to do now is to move pretty rapidly up that curve. Ensuring that we can disclose to scheme members or customers what they are being charged for their pension will be a big step forward, but it is only part of the solution to ensuring that there is better trust in pensions. We run a pensions confidence index a couple of times a year, and that confidence index at the moment is minus 6%. Confidence is as low as it has ever been in pensions. Transparency in costs and charges is part of the solution, but I do not think it is the only thing we need to look at.

To go back to Ms Jackson’s comment, part of the opportunity we have with auto-enrolment is to start to rethink the way in which we offer defined contribution schemes so that there is good governance-there is somebody within the scheme operating on the members’ side, working for the member. While individuals do not trust commercial pension providers and they do not trust Government, frankly, either-it has a worse reputation even than the commercial pension providers-they do trust their employer. What we need to do is to try to ensure that we are bringing employers into the piece and freeing them up to be able to say more to their employees than they currently can. Employers feel tremendously constrained about what they can and cannot say on pensions, so we need some thought on that and on perhaps creating some safe harbours in terms of what employers can and cannot say.

We also need to create the right type of DC pension scheme. At the moment, we have something like 54,000 separate DC schemes in this country, often operating for tiny employers. If we can start to consolidate them and put some really big DC schemes into operation, with some really good governance, operating on the same model as NEST we can start to re-instil trust in the system. Costs and charges are part of it, but I do not think they are the only part of it.

Q132 Brandon Lewis: Just before we move on, can I ask a question based on what you were just saying? I should declare I have an interest: I still have an interest in a private business that has a pension scheme. You just commented on freeing up and creating a safe harbour-I think that was the phrase you used-for employers to be able to talk more, because there is a concern for employers at the moment that they should say as little as possible, or nothing, and leave it all to the advisers they appoint in order to avoid contravening regulations that are put down. Is this an area where you think Government can help by stripping away some of the regulations that have been imposed over the last few years?

Joanne Segars: It is an area that Government and the regulators can look at in tandem. The regulators all say, "There is an awful lot of perception that employers cannot say things but they can say more than they think they can," yet there is a very real problem. Whether it is guidance from Government or from the regulators-and we are talking regulators, plural, here, which is not particularly helpful- there is more that could be done to help employers to communicate with their employees. Many employers are running very good schemes yet they are really worried about saying, "I have a good scheme-join it."

One of the things that would also help is the move to the single-tier state pension because, if we have that and people know it pays to save, the employer can say, "Join my scheme-it is a good scheme. If you do not join it, you are throwing away free money."

Q133 Brandon Lewis: From that, would you therefore say one of the biggest beneficial moves the Government can make would be to change the structure so that there is one clear, obvious, known regulator rather than plural?

Joanne Segars: We have argued there should be a single regulator for pensions and that should be The Pensions Regulator, but it is clearly a very complex issue because of the prudential side aspects by regulation, which Otto and Jonathan’s members are concerned with.

Otto Thoresen: We talked earlier this week across various parts of the industry specifically to try to get early movement on the charges piece, but there was a broader discussion about the other barriers or hurdles that we have to overcome. That discussion needs to continue, because to move from the system we have now to a common system would be a big challenge.

Joanne Segars: It is a very big push.

Otto Thoresen: There are also the European impacts. For me, this is one of the aspects, but there are others too, which we may come on to talk about later, about how, if you like, the plumbing of the pension system works, which we need to look at making simpler and easier for people to make sense of. Whether it is how you deal with the issues at retirement or how you deal with small pots along the time that you have before retirement, all of these things need to be looked at if we are going to make a system that can work effectively for people.

Q134 Brandon Lewis: I am very conscious of time and needing to move on, so I am going to just ask two questions in one of all three of you to finish my section. From the NAPF’s point of view in putting together a code of practice, what sort of timescale is there at the moment? If that is agreed, do you believe that the entire industry will take part in that? If not, in order to restore confidence to allow all potential clients, if you like, to be confident that they are getting a fair deal-regardless of how simple this line may end up being that says, "This is what your pension is costing you"-should the Government give that confidence by putting a cap on to say, "This is the most it could cost you," so at least there is some confidence there? To avoid that, do you think the industry will come together and reach an agreement and, if so, in what timescale?

Joanne Segars: I think they will, for that very reason. We know we have to get our own house in order; otherwise, Government and the regulators will do it for us. We recognise that and we recognise the need to move quickly. It is a first step towards producing something quickly that works for employers, who are going to be faced with choosing a DC pension for their peers. There is a commitment to move forward on a pretty sharp timetable.

Jonathan Lipkin: I would echo that commitment. I would also just make a brief point on the concept of the single charge, because in terms of point of disclosure requirements at the moment for personal pension sales, for example, there is a single charge. One of the problems is it is not entirely clear what that means to consumers. I would broaden the question that we consider to say: Is it not that people need to know what they are paying for the investment, for the administration and for the advice, where there is advice?"-indeed, the RDR4 is moving in this direction already-so that we can best address the question of whether it is a single number or a breakdown of exactly what the value proposition is.

Just as a second comment, there is also a European dimension to this now in that EIOPA is proposing adapting the Key Investor Information Document that is currently required of investment funds for use in occupational pension schemes. It is part of the IORP5 review-a complex and difficult review, as I am sure you are aware-but it also means that the timescale will partly be determined by what is happening at the European level too.

Q135 Brandon Lewis: I know I said that was my final question, but you just said something I just want to pick up on, Mr Lipkin, in particular. I appreciate and understand your point about the different items that make up the cost of the pension, but surely the whole point of getting it to a stage where everybody can understand it, not just the financial advisers, is, even if that breakdown is there, ultimately a bottom line that says to the low-earner or somebody who does not have the time or the background from which to understand what all these different things make up, because the phrases used are exactly what people do not understand, "This is the cost of your pension"?

Joanne Segars: Absolutely.

Otto Thoresen: I would go along with Joanne’s commitment. I think, at an employer level, we can move quite quickly. Whatever we do is going to be additional to what is already going on, because to get to a point where you are replacing something is going to take a lot longer to work through in terms of the regulatory impact of that. We could get to something additional quite quickly, which would be some kind of schedule or table that the employer could use to get a sense of comparability between schemes, and cash costs. That would help the employee and the member understand.

To move to a point where everybody got a personalised piece of disclosure material instead of all the stuff that exists at the moment could take a bit longer. That is my concern, because the impact of taking stuff away and putting something in always takes longer to consult on and to implement. That is why I would like to see a quick fix in terms of something we can offer that improves the situation quickly, as a sign of intent and where we are trying to take this.

Jonathan Lipkin: Just to clarify, I am absolutely not arguing against the concept of a single bottom line; I am just suggesting that, if it is determined that consumers would find it helpful, going back to the point about capability and understanding, to be able to see the different components, then it is something that should be explored as part of that overall single piece.

Chair: Because we have now touched on the communications, we will move to Andrew’s section of questions on that, and then we will ask questions specifically on NEST.

Q136 Andrew Bingham: I know colleagues want to ask you about NEST, but Joanne, you mentioned the fact that people trust their employers. I think you are right, and that is a bond of trust that we do not want to break. First of all, what information should be available to employers, because their employees will come to them? Secondly, the TUC suggests that certain financial advisers may not be offering impartial advice to employers because they work on things like commission and other things. Is there a risk that the employers could go to the wrong party and give their employees the wrong advice, the knock-on effect of which may be that it destroys the trust that you mentioned earlier?

Joanne Segars: We need to think very carefully about what it is that employers are going to be receiving and also giving out to their staff. Many employers will be small employers who are not pension-savvy themselves, and they will not be much more pension literate than the staff who they are trying to auto-enrol. We do have to make sure that, as we think about how we communicate to individuals, we think about how we communicate to employers. The Pensions Regulator has started this process-they have produced a "good guide for employers"-but we have to be much more proactive on this. Frankly, we would like to see more coming forward from the Government and from the Pensions Regulator on this issue, again written in a language that an employer new to pensions will understand. As I said earlier, there is more that we can do to free up employers who want to say more.

As far as commissions are concerned, the RDR bans commissions and incentives from 2012, and Otto and Jonathan are much more expert in this area than I am. There are limits in the Act already about employer inducements, so I think, hopefully, some of those regulations will help protect the position of employees, but it is something we have to watch very carefully indeed. The key issue has to be ensuring that employers are ready for auto-enrolment. We know the timetable has been pushed back, but still there will be many employers who will be looking to auto-enrol and starting to prepare for auto-enrolment over the next 12 to 18 months, or six months even. We do want to see more coming forward from Government and the Regulator about support for employers. At the moment, we have pretty scant details.

Q137 Andrew Bingham: I know a lot of IFAs6 are particularly concerned about the RDR and that it will reduce the number of IFAs because of the way it works. The employer has taken whatever advice and offered whatever pension scheme; is there a way that the employees then can feel more of an ownership of that scheme or is it something that the employer has just foisted upon them-taking it on to the next stage, if you like? We need employees to not only understand it, going back to what Brandon said about the demystification of it, but to feel a bit of ownership of it. Some of the NEST material that is on offer online is very good.

Joanne Segars: NEST provides a very good model of what we want to see. We want to see providers-whether they are traditional providers or some of the new providers coming into the market-providing. To go back to the question of what auto-enrolment brings, it does bring a new way of thinking about how we do DC and some of the services that we need to start to offer to individuals and employers who will be new to pensions. There are some good models there, to answer your question.

Otto Thoresen: If I could just come back to the potential for bias or incentives to drive bad behaviour or bad outcomes, undoubtedly the RDR, but also existing regulation from the FSA, goes a long way to ensuring that it is a well-regulated advisory system. It is not just about commission; it is about fees as well. That still has the potential for people to make decisions for their own reasons. For me, the important thing is a combination of this simple way of the employer engaging with what it is the scheme does, how it is charged for and whether or not it is value for money, and the media being able to make those comparisons too, so that you can have well-informed stuff being written in the papers about what a good scheme looks like, and you can look at what you have and see whether it looks like a good scheme. In the end, that is the test that should give people confidence that what they have is up to the standard that you would expect to see. At the moment, that is not very easy to get, because the way the media engage with the subject is constrained by some of the complexity that still exists within the system.

For me, that is another big step we could make: making it easier for the media to write about this subject in an informed way but in a way that people can engage with it and say, "I understand that. I have one of those. What I am paying is X and that is Y, and I can see how that works for me." That is part of the answer too.

Q138 Andrew Bingham: You are right, because if you look in one of the Sunday papers, they always have the best buys on savings and mortgages. We could get a similar comparator with pensions.

Otto Thoresen: In response to the NAPF work on the code of practice, we have done some work on some of the history as well as where we are now, and some comparisons of the different schemes and arrangements at different times. For example, year one, year 10, year 20, what does it look like if you are on minimum earnings or on median earnings? What does it look like if you stop paying after five years? How do the charges work and what does that do to your pot? That is the beginning of trying to open the subject up in a way that people can engage with and say, "Now I can understand how this works, and I understand where I fit in this system."

Chair: I said we had questions on NEST, and now we are on to them, so, Sheila?

Q139 Sheila Gilmore: Thank you, Chair. As everybody knows, the Government has placed restrictions on the operations of NEST. Whose interests are these restrictions protecting? Perhaps in the interests of time, I will just follow that up with another question as to what your view would be about whether the restrictions should be removed after 2017 or do you have any view that they should be removed sooner?

Joanne Segars: Part of the problem is we do not know when this review will take place now. The start date for auto-enrolment, we know now, will be 2012, but the finish date now will not be until 2018-19, following the delay to auto-enrolment for small firms that was announced on Monday. It would seem rather odd-to us at least-to understake a review in 2017 before everybody is through that auto-enrolment process.

Where we came from, when we were creating the consensus around NEST and auto-enrolment, was to ensure that we can introduce this big new way of doing pensions in a way that did not upset existing pension provision. What we did not want to see was employers levelling down in contributions or shifting into NEST. Frankly, that would not be in the interests of scheme members who are in schemes with, generally speaking, higher contributions. That was why, as a body of stakeholders-and this is part of what remains a very fragile consensus, to my mind-those restrictions were put in place, both on the amount that can go into NEST and on the transfers in and out.

Ultimately, yes, there might be a case for easing the ban on transfers sooner, and a lot of that will now depend on the detail Government comes forward with in terms of the delay to auto-enrolment, and it has to come forward with that detail sooner rather than later.

Q140 Sheila Gilmore: Just before I go on to my other questions, you are suggesting then that the ultimate interests of a lot of people who are already in pensions schemes were protected by this restriction, not just the viability of other providers.

Joanne Segars: My members are companies providing pension schemes to their members, so they do not have a commercial provider interest. They do not have a profit motive for pensions, as it were, but they are interested in good pension provision. What they did not want to see was employers levelling down and going from contributions that have 11% or 12% going into them to something that had much poorer contributions. It is about protecting and helping to insulate existing pension provision.

Otto Thoresen: On the question of whenever the review takes place, the Making Auto-enrolment Work group is suggesting that the constraints should fall away.

Joanne Segars: I think everybody accepts that.

Otto Thoresen: That is essentially where we all are.

Q141 Sheila Gilmore: Do you think there is a case for not waiting until the end of the process or it being brought forward?

Otto Thoresen: My general comment is that, given there are so many issues within the process that we still have to make work well if it is going to be successful, the less we change things over the next few years, the better. We have a direction of travel and we should continue on it. The review point is a good point to make that decision, and it looks like there is a consensus on what that decision should be.

Jonathan Lipkin: Can I just come back to your initial question about whose interests this is in? There is often an implication that this is basically in the private sector’s interests. NEST was an unprecedented intervention in the private savings market, but nonetheless an intervention that many stakeholders, including the IMA (Investment Management Association), strongly supported. Its impact, as the Johnson review acknowledged, is highly uncertain. The interests it is protecting are broadly everybody’s.

From the Government perspective, it was certainly not in the Government’s interest to set up a scheme that could potentially become a dominant or near-monopoly provider in the private savings market. If you look at it in terms of UK or European competition issues, the Government would not want to be on the hook for that kind of intervention. From a consumer perspective, Joanne has already alluded to existing pension scheme members, but also in terms of future scheme members, I do not think that anyone would disagree that it is important to have a degree of competition and choice in the marketplace. Secondly, then, it protects choice, and consumer choice in particular.

Finally, yes, it does allow the flourishing of private sector pensions provision and, therefore, plural pensions provision in this country. Were we to move ahead now to commit to remove those restrictions, given the uncertainty about take-up of NEST and how the market is going to evolve, those risks will be in place for all of those actors, and it makes sense, given this uncertainty, to wait until the review. The review, as Joanne said, might not take place now until after 2017, but it is very difficult to argue that you should decide to do something before fully assessing the impact of such a dramatic policy shift.

Q142 Glenda Jackson: Upon whom? Simply those people who are already in pension schemes?

Joanne Segars: Amongst others, yes.

Q143 Glenda Jackson: Why and how?

Q144 Chair: Yes, I am not clear. Joanne, you said you did not want to see any dumbing-down, but those decisions and that discussion were in a landscape where it was likely that NEST was going to be effectively the default scheme and there were not going to be many other players. In the next session, we will be hearing that is not the case anymore and that there are other providers who are coming into this market, but they do not face the same restrictions. How can that be competitive when, in fact, they have already nobbled NEST before they have even got to the starting line?

Otto Thoresen: A couple of comments from me: the point that has already been made about the basis on which NEST was set up, the Government funding, effectively, to create it and the importance of that not creating a distortion in the market, is a point worth making. Another is the stability of the market, if I put it that way, which is really the point Joanne was making but from a different perspective, and the stability of existing pension arrangements and pension providers in continuing to deliver solutions to people. There is an issue there about focus on the target market too, where the whole concept here was to bring pension solutions to a part of the market that had not been served before. The combination of those three created a rationale that still looks sensible.

The view about how that should be looked at in the review has also been discussed through the body that looked at this. I know that Adrian Boulding, who is in the next group of witnesses, was involved in that, and the view is that there is the opportunity there for these constraints to fall away.

Joanne Segars: As I said earlier, I do not think anyone who I have come across would argue against those restrictions being removed.

Q145 Chair: What has become crucial this week as a result of the announcement on Monday is the timescale for removing those restrictions. People were saying before Monday that 2017 is a reasonable time to wait to see it all bedded in, but now they are talking about 2019 before a review and, therefore, a potential removal of the restrictions. It is getting further and further away and it is making it more and more difficult, particularly in terms of volumes, for NEST or, indeed, for the other providers to be able to quantify exactly how many are going to come in and at what stage.

Joanne Segars: Yes, and the Government have to come forward and they have to say exactly what the impact will be on NEST and their business model. It would be helpful if they were to say what the benefit is to Treasury of this delay and exactly what their proposals are in terms of auto-enrolling and phasing the staging dates, and what their intentions are with regard to this review. The Government have to be very clear about that and they have to be very clear very quickly, because, frankly, my members, who are involved in trying to prepare for auto-enrolment, are sceptical that this reform will ever get completed. There is a huge amount of uncertainty this has thrown up in the employer and pension scheme provider community.

Chair: I know I interrupted some of my colleagues, so Sheila.

Q146 Sheila Gilmore: Otto, have you already carried out any impact assessment on pension providers of the lifting of these restrictions-maybe yourselves as providers?

Otto Thoresen: I am not aware of work that has been done by the ABI, although it may well have been. I can check whether we have anything and forward that on to you. What I sense from within the membership of the ABI is that there are a number of very large organisations that are very positively engaged around the whole pension reform and auto-enrolment agenda, providing good solutions for their customers and trying to improve those solutions. They are very confident about their ability to compete well in the market, and many are in partnership with NEST. Already, in fact, one of our members is in partnership with NEST for NEST’s own employees to provide solutions. While there may be some work-and I will check and make sure it is made available if there is-there is a confidence that the industry can compete and succeed in an open market.

Glenda Jackson: It won’t be open.

Q147 Debbie Abrahams: Can we move on, specifically looking at one of the restrictions that has been placed on NEST? That is particularly about the lack of ability to transfer pension pots into and out of NEST. What do you think the impact is going to be on the employees who have these small pension pots?

Joanne Segars: The Government is looking broadly at this issue of transfers and is about to issue a consultation document any moment now. We have to look at the issue of transfers across the piece; it is not just a question of transfers in and out of NEST but an issue about how we make transfers easier between schemes wherever they are. Again, part of the solution for the NAPF is thinking about how we reduce the likelihood of transfers by creating a new breed of DC schemes. If we are in a situation where we already have 54,000 separate DC schemes, it is very likely that, when you change job, you are going to have to think about transferring your pension.

Our view would be, if we had fewer, larger schemes-and, just as with NEST, if you are a member of NEST and you change jobs, and that employer is still a member of NEST, you stay within the scheme-then the incidence of transfers would be reduced. We have to think about this issue quite broadly. It is not just about NEST, but about the structure of DC and the DC market in the UK as a whole. It is a much broader question for me.

Otto Thoresen: For me, the issue is that there are a lot of consumers who already have small pots. One of the aspects of getting people to engage with saving is to get the sense that there is a point to it: that the saving is making a difference to your own financial independence, and you know that you are beginning to build up something that will be able to make a difference to the quality of your life in return. If you are unable to join that together, whether it is in one place or at least in a way that you can assess what the total worth that you have built up is, you are not going to be able to engage in that way. We are working at the moment on what we can do as an industry to accelerate getting to a point where that can happen. The consultation will be something we will respond to as well.

If you are in NEST in the future, you will take it with you and you will continue to contribute if you change jobs, but the answer for the future is something that we should be able to respond to more quickly, to be honest, because clearly we should be able to offer a service as good as what you would get if you were in NEST.

Joanne Segars: You raise an important point about the need to consider ways in which we can help people consolidate their existing small pots so they get good value for money for that. As I said, for us as the NAPF, that is about rethinking the way in which we do DC in a much more radical way, perhaps along the lines of the Australian pension system, where there are fewer, larger DC schemes.

Q148 Debbie Abrahams: Do you think there should be a limit to the amount that can be transferred-say about £10,000-between pots?

Otto Thoresen: It is not something, I must admit, I have given thought to in that way, but I do not see why there should be. For me, if you look at the outlook for the next 10 to 20 years of trying to encourage and engage young people in their 20s and 30s with the concept of beginning to save and giving up having discretionary income now in order to have a better quality of life in the future, there are four or five things out there in the current environment that make that difficult: people do not have discretionary money in the first place, there are constraints on salaries, and investment markets are very volatile and uncertain. There are so many things over which one cannot have control that, in the things that you can have control over in terms of how, as I described it earlier, the plumbing works, we have to work on every single one of those to try to make them work better. Those are the things that we within the industry can change, and we have to show that we are responsible and able enough to deal with them.

Q149 Debbie Abrahams: Can we just look at the impact of some of these restrictions on enrolment by employees? How do you think these restrictions will affect their take-up? The success of NEST is predicated on a high yearly sign-up.

Joanne Segars: It will not be any restrictions on NEST or the ability to transfer that will affect take-up; it will be the world economic conditions. We conducted some research, just at the end of September/beginning of October, which showed the likelihood of people opting out was about 25% higher than it was when DWP did very similar research three or four years ago. That was purely down to economic circumstances. 60% of people said to us that they would stay in; of the 40% who did not, 40% of them cited inability to afford the contributions. Getting people to auto-enrol and to stay auto-enrolled will be much harder in the current economic environment. It will be that, rather than any particular rules on NEST or auto-enrolment, that will affect people and their propensity to join the scheme.

Q150 Debbie Abrahams: You mentioned the December consultation paper. What would you like to see in that?

Joanne Segars: I would quite like to see an open line from Government about how they think about this across the piece in a very sort of holistic fashion. As Otto and I have said, this is a much bigger question than about whether or not you can take your money in or out of NEST.

Otto Thoresen: I would respond to that more in terms of the way I would like to see the industry respond to it. As we were saying earlier, I was thinking about why certain things have happened and why the industry has behaved in certain ways. We have had a tendency, if you go back far enough, to respond to what we thought the Regulator asked of us and do what we were being asked to do, rather than thinking about what it is that is going to make the thing work-how we are going to make this thing work. That for me is what should be driving our response. We have a lot of creativity and knowledge across the industry; it is not just in the insurance industry, it is not just in the NAPF, and it is not just in the IMAs. It is across all aspects of the industry. We have to try to pool that together, to get creative, to work with Government, to make this thing work.

Debbie Abrahams: For the pensioners of the future. Thank you.

Q151 Chair: The original thinking behind setting up the personal accounts from Lord Turner’s commission was that there had been a market failure; that the market, your industry, was failing to provide pensions for this particular group. Is it right that as a Committee we should be a bit suspicious that, lo and behold, now there is autoenrolment the industry has come up with a solution and there is not the market failure that we thought? It goes back to what you just said yourself: why did they not think of it sooner?

Otto Thoresen: I understand why you would be suspicious.

Chair: Can you allay our fears at all?

Otto Thoresen: For me, measure us by what we do. That is why I would like to get something quickly coming out of the NAPF initiative. If we can start to demonstrate delivery, that is what is going to make an impression. It is going take a while.

Q152 Glenda Jackson: Why is it going to take a while?

Otto Thoresen: I simply meant that because of the history, it is going to take a while to persuade you that we have changed. That was my point.

Glenda Jackson: Oh, I see what you mean.

Otto Thoresen: A different point. We cannot afford it to take a while, because the problem is very real and very immediate.

Glenda Jackson: Indeed, and urgent.

Chair: We will maybe get some answers to that in the next session. They may be sitting in the audience, so they have heard my questions to you. Thank you very much for coming along this morning. It is much appreciated and it will certainly be useful when we come to write our report in the new year. Thank you very much.

Examination of Witnesses

Witnesses: Martin Palmer, Head of Corporate Benefits Marketing, Friends Life, Adrian Boulding, Pensions Strategy Director, Legal & General, Morten Nilsson, Chief Executive, and Nigel Waterson, Advisory Board Member, NOW: Pensions, gave evidence.

Q153 Chair: Hello. Thank you very much. Could I just begin as we did last time and ask you to introduce yourselves for the record?

Adrian Boulding: My name is Adrian Boulding. I am the Pensions Strategy Director of Legal & General, and a non-Executive Director of Pension Quality Mark.

Morten Nilsson: I am Morten Nilsson, and I am the Chief Executive of NOW: Pensions.

Nigel Waterson: I am Nigel Waterson. I am the Chairman of the Trustee Board of NOW: Pensions and, by a strange reversal of roles, a former member of this Committee.

Chair: We used to sit together.

Martin Palmer: I am Martin Palmer. I am Head of Corporate Benefits Marketing, at Friends Life.

Q154 Chair: Thanks very much again for coming along. You have just heard the last session where we were taking about costs, transparency and charges. Perhaps if I could ask this question of NOW: Pensions, because I understand that you believe the costs of pensions and administration of pensions in the UK are ridiculously high and that you can do it for a lot lower. Why are you able to offer much better value that it appears the industry in the UK can offer?

Morten Nilsson: We see the UK market as overly complex. The complexity and a lot of the innovation has been driven not by member or employer needs but the industry itself. That complexity costs money. If we look at all the choices a member has to make, it is actually only 1% or 2% who are making any of those choices, but the choices cost money. The choices complicate the processes, make them inefficient, make layers of complexity, and add to the advice you need. There are a lot of reasons why you are being charged too much in our view.

Being here for a while and analysing the market, it is very clear that there is a lack of trust in the market, as you say, but in our view that lack of trust is also born from it being impossible to see what you are paying. Sometimes providers are getting fees that you would not know as an employer or an employee. In analysing the market, it has been very hard to get the benchmarks that we are looking for.

Q155 Chair: What top level of charging would you envisage if you were to enter in to the market, which I understand you are keen to do?

Morten Nilsson: The charges we are proposing are £1.50 per member, per month.

Chair: A flat rate change.

Morten Nilsson: A flat rate charge on the administration side, and 0.3% on the investment side. For us it is very clear that we want to have a website where you log on and you can see your contributions, your pot, and what you have paid in pounds and pence on investment and administration charges.

Q156 Chair: The question that Brandon put to the previous panel was about having a final line saying, "This is how much it has cost to administer your pension each month." Will that line be on anything you offer?

Morten Nilsson: Yes. You will be able to see that from the beginning of next year when we launch. For us, part of that charging structure is also that having a real fee on the administration side means you are paying for what you get. Older members are not subsidising younger members; members who are paying in more are not subsidising the other members. It is clear that you are just paying for what you are getting. We think that is a more sustainable way of doing it.

Q157 Chair: Presumably you make your profit on the Annual Management Charge, because that goes up as the pension pot grows.

Morten Nilsson: We have to make a viable business, and it has to be a business that gives a profit. What we have been trying to achieve is to have a set-up where you are paying for what you are getting and there are no conflicts of interest. We have a set-up where no one in our structure will be able to make more money from promoting different products. They can only make money out of promoting what is best for the members. Creating an alignment between the investment managers, the members, and the members’ risk tolerance in what we are trying to achieve for them is quite significant.

Q158 Chair: Moving to Friends Life and Legal & General: what is your charging going to be? Have you worked it out or do you still not know?

Martin Palmer: From our perspective, it will vary very much from scheme to scheme. Charges for our schemes can vary from 0.3% typically to 1.0% depending on the quality of the scheme, what type of services they are requiring, whether advice is being provided, whether we are providing seminars, bespoking, etc. The actual services have a big impact on the charge levels on our schemes.

Q159 Chair: Assuming that most of the people who are going to be auto-enrolled will be on fairly low incomes-the cap means that they are unlikely to be in the higher incomes, although you have freedom to have that range-why do you need all the extra bits that we have just heard add to the complexity and charges?

Martin Palmer: I am not actually sure it does necessarily add to the complexity. One of the crucial things when auto-enrolment gets introduced in a year or so’s time is around engaging the individuals who we are introducing auto-enrolment for. One of the things that is going to be fundamentally important to the success of auto-enrolment is around getting people really interested in their savings-actually getting them engaged.

The problem is going to be that on day one they will get enrolled into a scheme, and unless they get the right communication, the right seminars, and people talk to them about the benefits of saving for a pension, the risk is they will just put the minimum contribution in and that is where they will remain. From our perspective, certainly a lot of the employers we work with are really keen on ensuring that we go out and provide quality services to their employees so they appreciate the value of the employer contribution and also understand the benefits of savings. That is going to be really important.

Q160 Chair: Is the ordinary person going to be able to quantify that they are getting all this extra advice, but it is 15% less in their pension pot when they get to retirement? That is quite expensive in terms of the cost for what you are offering. Will they be able to weigh up, "Okay, I will take 15% less, but I get all this extra advice, flashy leaflets and brochures, and all of that"?

Martin Palmer: In that situation they will not necessarily have that choice, because the employer will choose the scheme or the provider they want to use for that particular employer. The key thing from an employers’ point of view is the value of the employer contribution is really critical here. If the employer puts increased contributions in, the individual will benefit significantly from those contributions that are being paid in. If we can find a way of really engaging the employer in that process, it adds significant value.

Q161 Chair: I am sure Brandon will pick that up. Can I just go to Legal & General?

Adrian Boulding: We compete on price in the marketplace, and we are able to do that because we have invested heavily in technology. If I look at the pension schemes that we have sold this year, they have all been sold within a price range of 0.3% at the bottom to 0.8% at the top. 90% of them have been sold at 0.5% or less.

One of the particular features of our pitch to the market is that we charge just a single charge for the scheme, whereas some providers like NOW want to charge £1.50 in addition to a fund management charge. NEST charges a contribution charge of 1.8% in addition to a fund management charge. Some insurance companies charge higher fund management charges when people leave the scheme. We charge a simple straight fund management charge and it is the same for all members whether they are in the scheme or whether they have left, and there is only the one charge. We find that gives us an edge in the marketplace.

Q162 Brandon Lewis: Have you found it difficult to get to that point? We were hearing evidence earlier that it is quite complicated and there are lots of different things; you make it sound like it is quite straightforward to have that simple, clear, understandable single charge.

Adrian Boulding: No, it is not simple to get to that point. We have got there by investing heavily in technology and by winning lots of business to put through the machine. When you build a technological machine, you need to get lots and lots of business to flow through it. That is why you have seen those providers that have not been terribly successful exiting the pensions marketplace. This year we have seen Axa leave the market. We have seen Threadneedle leave the marketplace and bequeath their schemes to us. We have seen other companies, like AEGON, reduce their marketing effort. Even the mighty Prudential no longer competes for new business in the automatic enrolment market. This has become a scale game, and the big providers that have invested serious money in technology and done that well are able to deliver the very low charges and good value to customers.

Q163 Brandon Lewis: Bearing in mind your comment about scale, and this is to the entire panel but to you first Mr Boulding as you have commented on it, do you think that therefore limits the risk of there being almost too many competitors in the autoenrolment market and therefore effectively not getting the economies of scale? Because of the way it works, will we end up with a relatively small and healthy number of competitors?

Adrian Boulding: We are seeing that already. The market is evolving in a Darwinian sense. The providers that have not achieved scale are exiting the market. By and large we are seeing that in an orderly manner. If you look at Threadneedle, they said, "We are not big enough; we have not achieved the scale; we do not want to be in this market anymore," and Threadneedle negotiated an agreement with us to move their schemes to us. Their consumers now benefit from the economies of scale that we have achieved and that they had not succeeded in achieving.

Martin Palmer: I would echo that point. Ever since the introduction of stakeholder pensions 10 years ago, charges have been coming down dramatically. We are getting a lot of pressure from employers to push our charges down yet further. It is a regular occurrence. The introduction of NEST and auto-enrolment will drive that process yet further, but it will be down to efficiency and economies of scale. I totally agree with Adrian.

Nigel Waterson: May I add to that? I am convinced that the combination of NEST and NOW: Pensions, and perhaps others, will drive up efficiencies and drive down costs to the ordinary members. It is a matter of transparency and simplicity. The Danes, the Dutch and others have proved that, if you can get the scale, you can really drive down costs and deliver really long-term reliable returns at very low administrative cost.

Q164 Brandon Lewis: You touched on simplicity, I noted that you have suggested the Government or The Pensions Regulator could develop a certification process to identify schemes with sound governance. Talking about simplicity, Mr Nilsson you commented earlier about the costs and regulation, and we heard earlier about regulation and the costs and the time involved in the industry in this country. One question in two parts: one, surely that would simply add to those costs; and secondly, if we are getting this kind of change, Darwinian to use the phrase, in that market anyway, is it necessary? Isn’t the market self-creating a structure where only strong offers are going to survive anyway?

Adrian Boulding: The market has already created a solution to this. There is a certification process, a benchmarking, kite-marking process called Pension Quality Mark. It was originally established by NAPF but has now floated off as an independent body in its own right. It measures the governance, contribution levels, charges, and the communications of the schemes that apply to it for the mark. If they are good enough, they get awarded the mark.

Already 250,000 people in this country are now saving in workplace schemes that have been awarded a pensions quality mark. When Pension Quality Mark surveyed the companies and employers that have been awarded that mark, they found significant increases in the trust that those employees place on their pension as a result of their employer having had their pension scheme benchmarked and having won the Pension Quality Mark award. It answers one of the questions that your colleagues were asking earlier on about how we rebuild trust in the pension market. We rebuild it by working with employers and using initiatives like the Pension Quality Mark to enable employers to demonstrate to their staff that they have a good scheme that has been independently benchmarked and confirmed as such.

Morten Nilsson: As we have seen, a lot of new entrants are coming in with a lot of offers of different kinds. In working in setting up our own trusts, it has been quite obvious to us that it is easier to create a governance structure where you, as a provider, can control everything than it is to create a governance structure that is set up in the members’ interests. That is why we think that some of the governance issues would be solved by a certification process where it is the regulator certifying the providers; in our view, that would strengthen trust in the set-up. You could control some of the governance issues; you could ensure that it is delivering proper default funds, etc, so there is some quality in what is being offered. That is where we have seen there could be potential. If you have that kind of certification process, you also relieve employers of some of the liability of choosing a scheme, so making it easier for the employer to choose a decent scheme.

Q165 Brandon Lewis: Mr Palmer, you made the comment just now that, because of the way the market is moving already, and since it has stabilised, we have seen these drops in charges anyway. In your opinion does that mean that the market force itself would mean that there is no need for the Government to be interfering and putting a cap on charges, because the market is driving it that way? With auto-enrolment, the size of the market, and comparing the competition opportunities out there, will that happen in a natural way anyway? Or do you think that the perception of the Government doing that could, if nothing else, build public confidence in pensions again?

Martin Palmer: I must admit my personal view on this is that there should not be a cap per se. The Government should rely on the industry to drive the charges down. There is a very strong incentive on employers to come up with good quality schemes for their employees and to get charges down to an acceptable level-actually I think they are at an acceptable level potentially to drive them down further. There is a need for providers to disclose charges in an active way.

In terms of going forward, clearly the DWP have made it very clear that they will take an active interest in charge levels. So effectively the market is very clear on that fact. I believe they should continue to monitor very actively to make sure those charge levels are being monitored and are at an appropriate level.

Q166 Chair: You have just illustrated the complexity and the difficulty of comparing like with like. Adrian, you talked about charges still being within a range in your own company. Only NOW: Pensions have said, "We have 0.3% and a flat-rate administrative charge." You are saying you do not have an administrative charge, but you have a range between 0.3% and 0.8%. The difference between 0.3% and 0.8% is a lot more than what NOW has got as their administrative charge in terms of their charging. Is that not the difficulty for employers in comparing schemes? It is really difficult for them.

Nigel Waterson: Jonathan Lipkin put it rather well in his evidence a moment ago when he said that of course everyone has to tell people what the changes are, but they tell them in different ways, which is really the point behind all this. We think a straightforward pounds and pence figure per month, plus the 0.3%, means there is nowhere to hide-that is precisely what people have to pay. We worked out that, if you compare our charges level with a not untypical charging structure for another scheme, you could end up 30% less well off in terms of your ultimate pensions pot over 40 years of saving. It does make a huge difference.

Q167 Chair: That is our point. That is what we are trying to grapple with: whether the industry is ready to perhaps go down your route and be a bit clearer. It is the same question that Brandon put to the last panel about having this single line that says, "This is how much it is costing us to administer, and everything else, your pension this month or this year." Are you two ready to go down that line?

Martin Palmer: It is an interesting concept, because I have actually said that the industry did move down that path when stakeholder pensions came in and effectively there was a single charge, which was the Annual Management Charge. That is basically what the industry used to compete on.

Q168 Chair: It was about 1% though; it was still pretty high.

Martin Palmer: In many case a lot of the schemes were being written at an AMC of below 0.5%. It did vary very much depending on the scheme. That is what the industry used to compete on: one charge, which was the AMC. We have moved a little bit away from that so I can consent to the question that we do need to find a way of trying to be able to compare the different charging structures.

Adrian Boulding: When we have a single charge, it is difficult to get any simpler than that.

Q169 Chair: You still have a range, though. You are still offering a range, and that is the difficulty.

Adrian Boulding: We offer a range scheme by scheme, and we negotiate that individually with the employer. The employer that is prepared to do more of the work gets a lower charge; the employer that is larger gets a lower charge. That is the way that we operate in the marketplace. Within a particular scheme, we have one charge. If that charge is 0.5% and you have £1,000 invested in the scheme, we will charge you £5. If you have £10,000 invested, we will charge you £50 that year. It is difficult to get any simpler than just one single charge that is written into the scheme deed that says it is half a percent of whatever funds you have invested in the scheme this year.

Q170 Harriett Baldwin: I have questions about the operation of NEST. I declare that I was an investment pension fund manager, and I know that this is an economies-of-scale business. I really wanted to ask you some questions about those kinds of issues, starting with Friends Life. You are planning to working collaboratively with NEST to support employers and employees. Are you planning to do that for every potential size of employer? How are you going to be collaborating with NEST?

Martin Palmer: Very much from our perspective, it depends on the requirements of the employers. Basically we found that a lot of the employers that we are currently working with are obviously having a decision to make now as to whether they use NEST, whether they use Friends Life, or alternatively whether they use a combination of the two for different populations of their workforce. What we have found is that, by doing that-having different populations going to NEST and different populations going to Friends Life-it makes life quite complicated from their perspective. They may well have multiple payrolls; they may well have multiple schemes that they need to deal with.

What we want to try to do is come up with a solution that would make it much easier from an employer’s point of view to work out which individual employees they need to enrol into the scheme and how much they needed to contribute for all those members, and then effectively transfer that information across to NEST, alongside the information that went along to Friends Life. In that way it meant that it simplified the process from an employer point of view, as they did not end up having to have three or four different systems taking information and passing them to lots of other different administrators.

Q171 Harriett Baldwin: So you would end up with the higher earners and allow the less-profitable customers to remain in NEST. Is that how it would work?

Martin Palmer: That would depend on what the employer wanted to do. I do not know if it would necessarily be the profitable ones per se. It would be the ones that may well already be part of the scheme or maybe the ones that are already engaged, or the ones that are paying in a certain level of contribution or, alternatively, those that may be in different populations of the workforce. It might be that they decide to put some employees into NEST, and some employees with their existing provider.

Q172 Harriett Baldwin: Would you do that for any size of employer? Even those with one or two employees?

Martin Palmer: It is probably unlikely we would do it for the smaller employers, because in those situations we think those employers would probably just want to use one provider for their whole scheme; it would not be worth their while having two different providers for an employer of, say, three or four employees. It would just be too complicated. But certainly for the employers that might have 100 to 200 employees, that would be the kind of thing we would talk to them about.

Q173 Harriett Baldwin: So the business is attractive to you if you are able to get your hands on the larger savers and allow NEST to take on the smaller savers? We cannot disagree that they are less profitable.

Martin Palmer: Clearly, from our perspective, we would want to consider employers that are going to make profitable clients from our perspective.

Q174 Harriett Baldwin: Moving on to Legal & General. Again, I should declare that I do save with Legal & General, because of their low charges.

Adrian Boulding: I am delighted. I just hope that we are administering your plan well.

Q175 Harriett Baldwin: Again, you are expressing concern in your evidence about the fact that NEST is also going after the larger employers, who, let’s face it, are going to be the less costly to serve. You would prefer it if NEST just focused on the smaller employers. If NEST is intended to be the safe, low-cost, simple option, why on earth shouldn’t large employers be able to use that too?

Adrian Boulding: I hope, of course, that we are safe, low-cost option as well.

Q176 Harriett Baldwin: But why shouldn’t NEST be able to compete with you for those larger customers?

Adrian Boulding: NEST is able to and NEST does indeed. The big schemes will normally go to tender to the marketplace-a professionally organised tender by an employee benefit consultant-and we will quite often find that we are in the room competing against NEST. We compete honestly and openly against them. So far we have had quite a good track record of achieving that.

What I have put in my evidence was just to draw to the attention of the Committee the fact that NEST does not exist solely to service small schemes and low-paid employees. NEST actually sets its stall in the market also to go out and to attract big schemes. It has a sales force doing that, and that is simply a matter of fact.

Q177 Harriett Baldwin: For your business model at Legal & General, will you be prepared to take on the small employer or will you also be just focusing on the larger, more lucrative, employers?

Adrian Boulding: Within a firm, we have a particular pitch that is a bit different from Martin’s. We are prepared to take on all of the workers. Our pitch to a large firm is to say, "We can service the needs of all of your employees, and you do not need to slice the workforce and only give us half of it and give half of it to NEST." Within the ambit of all employers, we underwrite each application that an employer brings to us for a pension plan and we price accordingly.

If a particularly small employer with a particularly low payroll comes to us and we find that we cannot price competitively in a sense that would give good value to the employees, we decline to tender for that business. That is precisely why NEST was built. The review that I had the honour to serve on last year under Paul Johnson looked at that question and said that the small employers in particular, the very small ones-the corner shop and the vegetable stall on the street and things-would struggle to find a private sector provider if NEST did not exist. So it was vital and correct that NEST should go on and be built by the Government.

Martin Palmer: Can I just correct my point? I was not saying that from a Friends Life point of view we would pick and choose which employees we want. It is very much down to an employer. Clearly for many employers, if the employer wanted to select Friends Life for all their employees, we would be very happy to provide pension services.

Q178 Harriett Baldwin: I think what you are both saying, correct me if I am wrong, is that you will pick and chose the employers. What would the cut-off be? Is it 50 employees? Is it 100 employees? Both of you are saying there is a cutoff point, although I can imagine it might be commercially sensitive for you to say on the public record where that cutoff point is.

Adrian Boulding: It is a complicated underwriting model that we use, and number of employees is only one of the factors that feeds into that. There is a cutoff, and the cutoff is really in the sense of value. When we assess the employer, we assess all the factors: it is not just numbers of staff or pay of staff; it is their likely future turnover, the age of their workforce and the time that they have until retirement. There are many factors that we put into the mix, and there are some employers that we do not pitch for because our business model would not deliver them good value pension plans. We are honest and upfront, and we say to them "We are not the right pension provider for you."

Martin Palmer: I would agree with that. There are a number of different factors we take into account. One of the key factors as well is around how long those individuals are going to stay with the employer. Clearly if you have a lot of people and half the population of employees are going to move after three or four months, then in that situation it is probably much more sensible for those individuals to go into NEST, because they can stay with one provider when they change employer and it avoids some of the small pot issues that we were talking about before.

Q179 Harriett Baldwin: If I can move on to NOW: Pensions. We are all quite excited that there is a new entrant into this space from Denmark. I know that you are very well established in Denmark. As I understand it, you are backed by the Danish Government in the same way that NEST is backed by the UK Government. Can you tell me a little bit about the backing you get from the Danish Government?

Morten Nilsson: There is actually no backing from the Danish Government. ATP is an independent entity. It has its own Act, so it is a statutory entity, but it is an independent entity. NOW: Pensions is again independent from ATP, but it is basing its business model on some financial support from ATP, and we are using ATP as the investment manager for the scheme. That is leveraging off the experience of delivering results for many years for the Danish scheme.7

Q180 Harriett Baldwin: What is the legal framework for ATP? Is it owned by the Danish Government, or listed, or a co-op?

Morten Nilsson: In the Danish context it is a bit of an odd entity, but it is owned by its members in essence. It is governed by the employer organisations and the unions with a neutral chair.

Harriett Baldwin: It is a mutual.

Morten Nilsson: It is a kind of a mutual, yes.

Q181 Harriett Baldwin: In your evidence you said there is an automated electronic system in Denmark and that makes it easy to consolidate lots of small pension pots. Is that something that you are planning to bring in to the UK? Do you think the UK can learn from that experience?

Morten Nilsson: Potentially the UK could learn from that experience. It has been run by an organisation that is the NAPF and the ABI in one organisation. They are responsible for running the setup. It works quite well because, as you say, it is an automated process. When you change to a new employer, you are asked whether you want to transfer. If you say yes, you will be transferred in and everything will be done automatically; all data and money will be transferred automatically. In a Danish context, our pension system has been developed to ensure mobility in the labour market. You can change employer with ease, and not lose your rights and savings by doing that.

Q182 Harriett Baldwin: Are the restrictions that apply to NEST, in terms of transfers in and transfers out, and the size of the income of the saver and so on, going to give you a competitive advantage in the UK?

Morten Nilsson: In our analysis of these restrictions, what we are seeing, at least in the short term, is that NEST has successfully been able to create collaborations with Friends Life and other existing providers. By having these caps, they have a business model where it is fairly easy for the existing providers to collaborate with them. In our view right now that is actually a big part of their business model. We would expect removing those caps would impact NEST in the short term more than us as a provider, if that makes sense.

Q183 Harriett Baldwin: I will open this one up to the panel more broadly. In terms of the restrictions on NEST, we have had some witnesses who think they should be removed following the review, which we were expecting in 2017. Does the panel support the current restrictions? Do you think they should be removed sooner? Could you each give a view on that?

Adrian Boulding: I support the current restrictions, and I think they are there for two reasons. They are there partly because NEST was created with state aid. They have to date been lent £120 million by the UK Government on terms that private providers cannot raise money; that is from NEST’s own accounts. NEST’s own accounts show their peak funding could be as much as £1.2 billion, which will be provided to them by the UK Government on terms that private providers cannot access. Those two restrictions make it difficult for NEST to compete in the marketplace in the areas of high-earning individuals and individuals wanting to transfer money from existing pension schemes, which are areas that are already well catered for by the private sector. Those restrictions are there to comply with EU state aid rules that say that there should be something in place to balance favourable funding terms that are given.

Those restrictions also serve to keep NEST focused on its key need, which is the small employer and the low-paid employee, who are not well serviced by the private sector. Were those restrictions to be lifted, I fear NEST would be distracted from its key need, where there is a real social purpose for it, and would wander off into other areas of the market. I think they should stay in place until all employers have chosen their first automatic enrolment scheme. That looks as if it might be a little bit longer than it was going to be, because the Government has said it will defer bringing the small schemes in until at least 2015, and we do not have any end dates for when the last one will come in.

Q184 Harriett Baldwin: Legal & General have said that it should become the norm for people to take their pension fund with them when they move employer. On average, someone moves 11 times during their career. So would the transfer ban be a real problem?

Adrian Boulding: I agree, those two are inconsistent. We are a long way off having any model or legislation where we get to the point where the norm is for people to pick up their pension and take it with them when they change jobs. That is my dream. I would love to see that happen. When people change jobs today, they pick up the photograph of their nearest and dearest that is on the desk, and they take that to their new employer. I would like them to pick up their pension and take that with them. That will need legislation.

Q185 Harriett Baldwin: But not for NEST to be able to do that?

Adrian Boulding: When we get to that point, and when we have legislation that enables that to happen, I would be very happy for them to take it to NEST, and take it back from NEST to the next employer when they go from a NEST employer to somewhere else. That transfer ban today is two-sided. The Government, to comply with the state aid rules, stipulated that NEST could not take transfers in. It was NEST that stipulated in their rules they would not let transfers out-perhaps a moment of arrogance on the part of NEST when they wrote their rules.

Q186 Harriett Baldwin: Any other views on the panel on that particular question?

Martin Palmer: I would totally agree with Adrian on the argument about the contribution level. Clearly, when NEST was set up, it was based very much around a certain population, and the proposition has been developed on that basis. I would agree that we should review that when all employers have been moved in.

From a transfer point of view, I totally agree again that we do need to look at the whole transfer piece to make it much simpler for people to move their pot when they move employer. We do need to look at how that works for different sizes of transfer. Clearly for small transfers we have to make it much simpler so it becomes almost automatic. For the larger transfers it is a more complicated process, because things like advice become more of a pertinent issue in that situation. At that point, it would be a very good time to review the decision about transfers for NEST, because clearly, if we are trying to develop a solution for small pots, NEST has to be accommodated within that solution.

Nigel Waterson: Just to add to that, there is a broad consensus-and we heard this earlier-that sooner or later the annual cap and the transfers ban will go. There is some uncertainty about the date of the review. It is also crucial that review looks at the 8% contribution level; that is something else we need to think about.

Wearing a different hat, I was very involved in the original legislation, and it was all part of a consensus at the time that, at least to start with, there should be these restrictions, and that was built into the legislation. It was, as I say, the base of consensus, driven, I have to say, by a real worry about levelling down of existing, more generous pension provision. That was the driver at the time. It is important to remember that.

Q187 Chair: ATP, you said you were not backed by the Danish Government, but you do get some guaranteed work from the Danish Government. Their employees or whatever have their pensions with you, is that right?

Morten Nilsson: It is a mandatory scheme, so in that sense you are right.

Q188 Chair: I am just wondering. Adrian mentioned state aid rules, and we have had other witnesses previously saying that the state aid rules probably did not apply-that it is the Government being overly sensitive about it. What about in Denmark, with getting the guaranteed work? Do the state aid rules come into force there at all, or did you get state aid when you were set up originally?

Morten Nilsson: When it was set up, it was a consensus across the labour market. Unions and employer organisations agreed that this would be a way to reduce the future burden on the welfare system. It was set up as a consensus.

Q189 Chair: So it came along the same sort of route that NEST is taking some 20 to 30 years later.

Morten Nilsson: Exactly.

Q190 Chair: Adrian, in response to Harriett, you said that you will say to some employers, possibly small employers, "We are not the best provider for you." At what annual management charge level would you say to an employer, "We are not the best for you"? Have you got a cut-off point? Is it at 0.7% or 1% that you would say, "Do not come to us because we are too expensive"?

Adrian Boulding: I look at what we have underwritten this year, and the highest charge we have made is 0.8%. As an absolute ceiling, we would feel very uncomfortable with a charge that was higher than 1%.

Q191 Chair: At that stage you would say, "We are not good value for money. Go somewhere else."

Adrian Boulding: We would not want to proceed, and we would want to suggest that they should look somewhere else. There would be other providers who had a business model that was more suited to that particular employer.

Q192 Glenda Jackson: If I could start with NOW. The issue of trust, or rather the lack of trust, is very central to the pensions industry of this country at the moment for a variety of reasons. Yet auto-enrolment is going to attempt to attract certainly the employees in their millions who have never ever considered contributing to a private pension before. What would you advise the United Kingdom’s pensions industry to do to create that trust in the British public, which, as I say, is markedly lacking at the moment?

Morten Nilsson: The response we have had from individuals in the UK is that, first of all, it is unclear to them what they are being charged. So there is something on the charges, which we have talked about. The other thing on the communication side is that they are burdened by a lot of information about all these wonderful different investment choices they have to make. They can do this, that and the other. All this choice is seen as a burden for many people and it is disengaging, rather than cutting down and being a bit simpler in the communication. Most members have no idea about this and it is too costly for them anyway to start to do these individual investments.

Q193 Glenda Jackson: What do you do?

Morten Nilsson: We say to them, "There is one fund structure. What you need to consider as a member is your contribution levels, your retirement date, and your other pots. Those are the central things you can influence." Where we can support them is to deliver good returns on the investment side, and de-risk them up to retirement. For us that also means, if you have a structure like that, we can pool the investment and we can offer a really good default fund for everyone.

Again, when we are analysing what kind of default funds people have in the UK right now, they have far too much risk in their funds. 80% equity is not unusual, and 20% bonds. That is a really big risk exposure in the current environment; even in a normal environment, that is high risk. We are seeing a misalignment of what people actually need from the investment product and what they are being offered. A recent research paper showed that up to one year before retirement a lot of people were not being de-risked, so they were still having this huge risk on their investment side and no one is taking care of them. 98% have not made any real decision on this.

Q194 Glenda Jackson: That element of the risk should, I understand, be driven by the markets. Or is this just poor management of the actual funds-too many eggs in the wrong basket?

Morten Nilsson: ATP’s heritage is something in between DB and DC. It is a hybrid scheme in Denmark, which means it has liabilities. When we started to devise our investment proposition for the UK, we saw it as a pension fund with liabilities. A DC scheme has not got any liabilities, but the member has the same liabilities. In our view, it is a bit too easy if you say, "It is a DB scheme, the pension fund has no liability, and it is all your risk." As an individual, you cannot handle that risk. Our view is you have to have default funds that have a higher quality than the standard is right now.

Q195 Glenda Jackson: I have been rude about the British pensions industry; would you like to chip in on this?

Adrian Boulding: The single biggest thing we will do to restore and build trust amongst the millions of workers who will be automatically enrolled into the schemes is offer clear and simple communications, so that all our new customers are able to understand what it is they have. As I have been a bit critical of NEST on two or three occasions so far this morning, I will take the opportunity to be complimentary to them. Ever since NEST’s inception they have led the way in forming a new lexicon and new ways of creating very clear and simple communications to customers that the rest of the industry are avidly following. That is the easiest way to get trust. It is not about having all sorts of complicated investment schemes; it is about ensuring that the millions of new people that join us can get information that easily explains what it is they have. If they know what they have, they will trust it. When the people do not know what they have, they inherently distrust it.

Morten Nilsson: The thing is you are still asking people to make choices. You are still saying, "We have simplified the communication, but you have to make a choice between these things." If that is what you are offered, you would think, "If I am not making that choice, I am probably being a bit stupid. It is something that I should do." That is our take on that.

Glenda Jackson: Absolutely.

Martin Palmer: From my perspective, I totally agree with Adrian that communication is crucial. To build on the choice piece, within the UK industry we do offer quite a bit of choice, but where we have got to-and we probably have a step further to go-is around the default position. We know that 90% of people do not actually like making the choice, or most people do not want to make a choice. The key thing for us is how we communicate that default position, so that the people who probably are not going to necessarily want to read all the information can just know what the actual situation is that applies for them. We keep it nice and simple for those individuals, and if others want more information, it is there if they need it. There is a danger that, through regulation, we produce an awful lot of information, much of which is not read.

Q196 Glenda Jackson: That is a point that has been well established, not just today but in other evidence that we have taken. Mr Boulding, I presume you would like NEST to be the benchmark for the industry as far as the communication is concerned. Yet the previous panel today, in their evidence to us, were very clear that the industry does not speak with one voice, or in one language, and yet they presented a picture, as far as I could see, that it is going to take forever for this to be a unified, industry-wide approach to delivering information.

Martin Palmer: I think NEST will actually be a benchmark against which the industry will need to be compared. There are things that NEST provides that will definitely take us in the right direction, but there are a hell of a lot of other things that the industry does that will take us forward as well. I was making the point earlier that this isn’t just about communication on day one. For me the most fundamental thing is making sure people appreciate the value of the contribution that they are putting in and the employer is putting in all the way through the duration of the plan. It is around communicating with people in one, two or three years’ time, at which point they will have built up a bigger fund than they probably had on day one. We do need to make sure that we are engaging with people at different life stages.

One of my big points is when people get to age 45 to 50, and retirement becomes something that is a bit more in their mindset, we need to be going out and talking to people then in a different way. Not talking to them about starting contributions but talking to them about increasing contributions, what retirement age they are thinking about retiring at, and making sure that they are putting enough contributions in to fund that. For me it is an ongoing communication message that we need to do more of as an industry and as a nation. We need to communicate with people in the right way, at the right time, and in the right medium.

Q197 Glenda Jackson: You made the point that you see the employer in the new auto-enrolment scheme requiring a great deal of support and information. It is a whole new world that they are entering. They are going to have to attract their employees into the realities of making contributions themselves. How would you go about that and to whom do you think that responsibility should be handed? Our previous panel briefly touched on this and I got the impression they think it is the Government’s responsibility. I do not personally. What do you think?

Martin Palmer: It is a mixture. The reality is you are going to have some employers who already have pension schemes for their workforce, and some of those will be big, and some of those will be small. In those situations they probably have a trusted relationship with a provider and adviser. For those employers it is going to be a lot simpler. The problem will be for the other employers. Certainly for the small employers it will be tricky, because it is unlikely that they will get an awful lot of support from pension advisers, who will probably be dealing with the schemes that come onto auto-enrolment first they are going to be the ones that are going to be the highest priority from that perspective. I suspect where they will be going to is talking to people that they typically deal with, people like accountants, but also TPR and the service that the Pension Regulator provides will be important there as well.

Q198 Glenda Jackson: You made the point that you regard it as part of the industry’s responsibility to alert people over their working lives to the need for contributing. You talked about the life stages. Don’t you think there should be something from the industry now that is not linked to simply selling their own programmes but which is actually assisting these employers? We heard at the beginning of the week the timescale for some employers to have to join has been delayed.

Martin Palmer: We have been sitting down with the ABI, certainly with the Pensions Regulator, and the DWP to think about how those communications work, to try to come up with a concerted and joint programme of activities. So yes, it is something that we do need to think about.

Adrian Boulding: This task sits very firmly with the employers, because Parliament has laid it with them, and Parliament has said the employer will enrol their staff and they will take pension contributions out of that member of staff’s pay packet. The employers I work with do not want to duck that communication issue; they want to lead on that communication issue with their staff, because they know they are going to do these things and take money out of their pay packet. We work hard with employers to equip them both with the knowledge but also with the materials so they can give those materials to staff. We provide that in various formats. We provide it in a printed format, on the internet, and in podcast format, so that the employer can educate their staff and take the staff with them on this journey into pension saving.

Q199 Glenda Jackson: We have received evidence from the overarching organisations of employers making the point to us that this is an additional bureaucratic burden, particularly on small employers. They say they already have difficulties and this is going to make it even more complicated for them. It will actually cost them money. All I am trying to dig down to is, is there some way that the industry and possibly Government or someone else can work together essentially to help employers? Is there any way of ensuring that the advice that they receive is going to be unbiased?

Nigel Waterson: It all comes back to this issue of simplicity and transparency. You can spend a fortune on podcasts and one-to-one interviews and so on, but, if the information you are trying to get across to people is inherently complicated, they will switch off completely. That is why we think transparency of governance of these large master trusts that are popping up all over the place, simplicity of charging rates, and comparability of charging rates are hugely important, as we discussed earlier. The message must be simple.

Adrian Boulding: The fears of these overarching employer organisations are unfounded. The predominantly large employees that we work with do not say it is an imponderable burden and it is too difficult for them.

Q200 Glenda Jackson: No, I did not say it was the big employers. It was the organisations that represent small employers; they were the ones who were arguing that this was an additional, unwelcome, bureaucratic burden.

Adrian Boulding: When I sat on Paul Johnson’s review last year, NEST were kind enough to show us their administrative systems specifically designed for small employers. We came away impressed and with a belief that it was really only adding a few minutes of extra time on to the end of a payroll process to do that. I have since spoken with small employers that are now with NEST in their pilot programme, and they tell me it works well, and it even works well for those employees who are not internet friendly and refuse to do internet communications. NEST is even able to handle those. These fears that it is a terrible bureaucratic burden on firms are proving to be unfounded as firms find their way into the pension system and experience it.

Q201 Glenda Jackson: In light of that, and this is general for all of you, would you be directing the very smallest of employers to NEST to actually set up their schemes or to enter into that scheme?

Adrian Boulding: I believe that the TPR should be doing that. When TPR writes to firms and says, "You have got this statutory duty coming," and when they write to the smaller firms, they should signpost to them that NEST has been created with taxpayers’ money specifically as a body that will accept all firms, whatever their size, whatever their payroll, whatever their turnaround, whatever the age of their staff-NEST will take them all. That should be clearly signposted. Leave some room for competition, because actually we will compete against NEST for some of those. The existence of NEST should be very clearly signposted by TPR so employers know that there is at least one place they can go to that will take them.

Q202 Glenda Jackson: Anyone else want to add anything?

Nigel Waterson: We are open for business for any size employer, big or small. Our only concern ultimately is not size or number of employees; it is really how well their records are kept. We do not of course have the universal service obligation that NEST do, but then again we do not have lots of taxpayers’ money either.

Q203 Glenda Jackson: Do you see, because of the delay-well we heard about it at the beginning of the week, as I said earlier-in terms of certain small <?oasys [pc10p0] ?>employers not being required to move into the scheme in the previous timescale, that this could have a deleterious effect on other parts of the scheme?

Adrian Boulding: It will do, and there is a delay for both small and large firms. 4 million employees of small firms are having the date at which they start pension saving put back by at least a year. 6 million employees of medium- and large-sized firms are having the date at which their contributions increase from the initially very low 1% by employer on to 2% and 3% put back by at least a year. That will have a significant effect on pension saving. I did the calculations last night and it means that £5 billion less will go into workers’ pension accounts as a result of those delays on small, medium and large firms.

Martin Palmer: Just to build on Adrian’s point, it also increases the risk of levelling down as well, because we are hopeful that, many of the employers that already have pensions schemes at the moment and are contributing to those schemes when they automatically enrol the people who are not in that scheme at the moment, we are hopeful that they will keep their contributions at their current level-in other words, that we are not going to get levelling down. Clearly, the problem is, by delaying the date at which those kinds of individuals have to be increased up to 2% and 3%, you are effectively lengthening that period, and it means that, for an employer that is suffering financial hardship, they might be encouraged to level down at that point.

Nigel Waterson: We all agree on what Adrian and Martin said. It sends an incredibly mixed message to lots of people about pension savings on whichever side of the line they fall.

Glenda Jackson: Absolutely.

Nigel Waterson: It could contribute to abuses and a whole chunk of Turner’s target audience, as Adrian was saying, are taken at one stroke out of pension savings. Even on the current timetable, they will have a big gap that they would never be able to make up in their pension pot, and this is only going to make it worse.

Q204 Chair: I was just wondering, although the delay is about when they are statutorily obliged to auto-enrol them, presumably there would be nothing to stop employers auto-enrolling earlier. I know this has only happened this week, but do you think your companies might actually start to make bids for that to try to encourage people to beat the compulsion, if you like, and approach some employers saying, "You are going to have to do this sometime. You have a bit more time. Let us work with you on that." Otherwise, are you not going to have problems with volumes as well and making it pay for your organisations?

Adrian Boulding: We always try to sell to employers the merits of having a pension provision: it will help them to attract staff and it will help them to retain good staff. In the current economic climate, it is <?oasys [cn ?>difficult. The whole rationale of Turner’s idea of autoenrolment was an element of compulsion to bring into the fold those employers who to date have resisted the siren calls of the pension industry saying, "Help your employees to save, it is good for them." Putting back the statutory date will put back the date that these employers come in. It is £5 billion of savings that is lost, and it will never be made up.

Q205 Chair: Will any of you be paying commission or other payments to advisers who recommend your products?

Adrian Boulding: We do not pay initial commission at the point that an adviser brings us a scheme. If the adviser wants to be remunerated on a trail commission, so wants to take a proportion of that annual management charge, we are happy to do that, and that is disclosed to the employees and employer.

Morten Nilsson: We do not pay any commission.

Martin Palmer: We do not pay initial commission on new schemes.

Q206 Chair: Finally, this is a big question, but I want a quick answer. Do you think auto-enrolment presents any significant risks of mis-selling?

Adrian Boulding: No. The work the DWP did last year using their PenSim 2 model confirmed that, even though people might lose a little of what has been saved by them and their employer together, as a result of offsets against means-testing, the vast majority of them will be much better off in retirement. As a minimum, I use with people something that I call the pint of beer test. I say, "If you put the cost of a pint of beer into your pension plan today, then when you retire and draw the benefit out, will it draw you at least the pint of beer in retirement?" The runs on the PenSim2 model show that over 95% of people saving through auto-enrolment will pass the pint of beer test.

Q207 Chair: Any other contributions?

Martin Palmer: The employer contribution is crucial, given that the employer is putting in at least 3%.

Nigel Waterson: Two very quick concerns. One is the obvious one of means-testing at the bottom end of the scale. The other is more and more offers of so-called master trusts popping up all over the place with greater or lesser transparency of governance. The experts think there could be up to 50 different offers in the post2012 market. I suspect that many of those will fall away in due course, and some will be more sustainable than others.

Chair: On that note, thank you very much for coming along this morning. As I said at the beginning, it is a day where lots of workers are thinking about their pensions. We as a Committee think it is very important that people save for the future, and hopefully as auto-enrolment does roll out, albeit delayed, other workers will realise the importance of saving into their pensions.

[1] Financial Services Authority

[2] National Employment Savings Trust

[3] Chief Executive of NEST

[4] Retail Distribution Review

[5] Directive on Institutions for Occupational Retirement Provision

[6] Independent Financial Advisers

[7] Note by Witness: ATP has no shareholders and is not subject to any form of public or private ownership. Since ATP's founding, the assets of ATP have only been obtained through contribution payments from employers and wage earners - ATP's capital and/or operating costs are not and have never been financed through state funds.

Prepared 13th March 2012