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8.9 p.m.

Lord Peston: My Lords, I congratulate my noble friend Lord Haskel on his clear and cogent introduction to this debate. Perhaps I may also say how much I am looking forward to the speech of the noble Lord, Lord Mackay of Ardbrecknish. Everything he has to say in your Lordships' House is interesting and sometimes it is even convincing. But let me say that I do not remotely regard this topic as being about social security. It is about economics, industry, finance and regulation, which is why I am speaking.

Perhaps I may say a few brief words on the facts. I do not know where the noble Earl, Lord Clanwilliam, got his figure of 500,000 from. The Securities and Investments Board itself has said that nearly 1.5 million people have been wrongly advised in a personal pension plan. Estimates of the compensation bill range from £1 billion to £4 billion. The noble Lord, Lord Jenkin of Roding, used the expression "relatively small proportions". The numbers seem quite large to me. I also have to tell noble Lords that it is always dangerous to discuss matters like this in terms of ratios.

The Earl of Clanwilliam: My Lords, I may be wrong in the figure of 500,000, but the point at issue is that no one is going to know how many have been mis-sold

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until the industry has sent out its letters and replies have been returned. Any figures that are mentioned in the meantime are pure speculation.

Lord Peston: My Lords, I certainly agree with the noble Earl that we need more convincing figures. But I am not convinced that any figures up to now are pure speculation—most certainly not. The main point I wanted to make about ratios per se is that, if you are one of those who has suffered, the only ratio that interests you is 100 per cent.—namely, you. That is what we ought to be concerned with.

Turning to matters of principle, we all accept, I am certain, the vital importance of the pension decision. Unlike most ordinary purchases, a mistake has long-term consequences, and when those consequences are adverse they are extremely difficult, if not impossible, to rectify. Again following the noble Lord, Lord Jenkin of Roding, of course individual people have to take financial decisions, frequently involving pensions. I readily agree that many are capable of doing so sensibly. I myself have done precisely that, taking advantage of the very generous tax concessions which one gets under a Schedule D form of income. But it is known and well established that quite a lot of otherwise rational people blunder when it comes to financial matters. They are naive, they are trusting and they are excessively optimistic. That is why consumer protection is so important. I hasten to add that by "protection" I do not mean compulsion. In the end, while intervention can help, someone who is intent on financial self-destruction cannot be prevented from doing so. But that is not the point. The real point concerns what kind of protection is required.

The point was made by my noble friend Lord Desai that central to any form of protection is information and, if I may add to that, information that is readily comprehensible. Secondly, there really must be much stronger constraints on the hard sell. No one should be allowed to sign a binding contract in this area without a cooling off period of significant length, but that cooling off period should require at the end a positive decision—namely, it is now my decision to go ahead—rather than the negative decision that people like—namely, if you do not hear from me, let it go ahead. That will not do in this case.

Next—and this, I agree, is an extremely difficult matter —all purchasers should have access to advisers with no financial interest whatever in the sale of the pension. All financial products should carry a financial health warning. That should be in large print and not in print smaller than anything else in the advertising or other relevant documents. In terms of pensions, what we are saying is that, at the very least and in very clear terms, all purchasers should have been informed that, while what they are being offered is hoped, even expected, to give them a net benefit compared with what would otherwise be the case, there is a distinct possibility that it will not. In addition—this again has been raised by my noble friend and by other noble Lords—there should be a proper and easy-to-use procedure for the redress of grievances. That is less to protect the foolish and the greedy and more to protect the trusting. That is what has gone wrong here. Those

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people who believed in the probity of our financial institutions—notably in the insurance companies, the pension funds and related financial concerns—have been let down and they should never have been let down. That will simply not do.

Who is to blame? Many noble Lords have asked that question. The Government, initially, were seriously at fault. They were partly seriously at fault because of their antipathy to public expenditure and partly because of an ideological commitment to the market, which I increasingly believe they never had the faintest understanding of. My noble friend Lord Desai has made that very clear. They mouthed the words of the free market but they had no idea of what they were talking about. But—I say this to my near namesake, the noble Lord, Lord Meston—it is not the case that when we were discussing legislation on this matter there were no warnings. The dangers that were involved were made very clear, both in connection with these matters and in connection with financial regulation and self-regulation generally.

There is nothing surprising about what has happened. We are unhappy about it but certainly there were warnings. Therefore, the Government cannot possibly be allowed to wash their hands of any or all of this. What has really emerged —here I echo the remarks made by other noble Lords—is the failure of financial self-regulation.

What worries me—this is a broader question than simply to do with pension mis-selling—is that in all sections of the financial services industry the rules are being consistently and comprehensively flouted. The Consumers' Association has published research confirming that. In several different issues of Which? it has published evidence of bad advice and commission bias among the banks and building societies and among mortgage brokers with regard to mortgage advice. They have given bad investment advice to people who have been made redundant. To say the least, the advice given about life insurance has been mixed. I am certain that the article in the September 1994 issue of Which? would be of some interest to the noble Lord, Lord Jenkin of Roding. I can tell him that it is definitely in the Library. Therefore, what we ought to be saying is that the lessons required here are lessons about regulation. I have to say that I no longer believe that self-regulation is remotely viable. We must have statutory regulation, but of a simple kind.

Coming to my final remarks, the real villains of the piece are the sellers of the pensions themselves. We have to decide whether what we have witnessed is simply senior managerial incompetence—a failure both to set standards and to control the lower level staff—or whether it is much more serious still; namely, whether monetary greed was the root cause, the desire to make a quick buck. I should like to believe—although given this choice, it is not much of a choice—that our insurance companies and pension funds are not greedy: they simply did not do the job properly. Perhaps both factors were at work.

Despite all the talk about these matters being difficult to calculate, that it is difficult to get evidence and that actuaries are not helpful, the fact remains that the

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outcome has been that pensioners have suffered and will continue to suffer unless something is done. Given that, it must also be the case that shareholders and some managements have gained. If those who have suffered are to be compensated—I believe they must be—then those who have gained—the shareholders and managers—must pay. They must bear the cost.

My noble friend Lord Haskel, I assume tongue-in-cheek, suggested that perhaps future buyers of such products would pay with higher premiums. We must distinguish always—economists are very keen to distinguish this—the "will" from the "should". It would not surprise me in the least if those of us who are still buying insurance of various sorts are asked to bear the cost. I think that that may be what various parties will try to make happen. There is not the slightest doubt in my mind, however, that we should not be asked to pay for that. There is no doubt in my mind that the cost must not come from raising insurance premiums. It must come from the shareholders who freely bought the shares, if I may take a free market view, and from the management who freely took those decisions. They must now bear the consequences of their actions.

Finally, because noble Lords will be upset if I do not say this, the Government cannot be allowed to get off the hook. They cannot say that this is a matter for the Securities and Investments Board and the industry. The Government must show some leadership quality and get things done. And in the light of what we have heard today, they must get things done rather quickly.

8.20 p.m.

Lord Mackay of Ardbrecknish: My Lords, as a number of noble Lords have pointed out, choosing a pension is one of the most important financial decisions that most people will ever have to make. I believe that it comes second only to buying a house. I therefore welcome this opportunity to explain what the Government and the regulators are doing to ensure high standards of investor protection and to provide remedies where these standards have not been met.

During the debate, we have heard from noble Lords who have considerable knowledge of the pension industry and involvement in company pensions schemes or in life companies. We have also heard from two economists—we may have heard from more than two, but we have certainly heard from two whom I recognise from our previous debates on financial subjects.

Personal pensions play an important role in the Government's strategy for bringing about a sustained improvement in the general level of income of those who have retired. I doubt whether any noble Lord would disagree with that. The availability of occupational pensions and personal pensions widens choice and encourages more people to plan for their retirement and to build a solid base of funded pension provision for the future.

The noble Lord, Lord Haskel, mentioned future problems due to the fact that a smaller working population will be paying for increased provision for a large elderly population. That is precisely why the

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Government took measures in the mid-1980s to widen choice and to give people more ways in which they could make provision for their retirement.

Before we reformed pension law in the 1980s, employers could require people to join their scheme as a condition of employment. Where no employer's scheme was available, people had no option but to contribute to SERPS. We ended compulsory membership of a particular scheme and gave people the freedom to plan for the pension which best suits their needs, whether it be state or non-state, occupational or personal. As my noble friend Lord Jenkin mentioned, before the reforms, no one who changed jobs had the right to move his or her pension. Now everyone has the option of transferring accrued pension rights. Those who chose not to transfer now see their pensions protected against inflation. People also have the right to make top-up payments either to their employer's scheme or by way of free-standing contributions.

By widening choice in this way, the Government have enabled more people to make appropriate provision for their retirement. This strong foundation of privately funded pensions leaves us well placed to face the challenges of the next century.

It is well worth putting the numbers on the record because several noble Lords have referred to the number of people who are involved in making their own pension provision either through occupational pension schemes or through a personal pension scheme. The latest figures that I have available show that 10.7 million people of working age are in occupational pension schemes and that something like 60 per cent. of them are in the private sector. Furthermore, 3 million people of working age have a preserved pension from a former employer and a further 1.5 million people have a preserved pension from a former employer and are now members of their current employer's scheme. Noble Lords can therefore see that a considerable number of people are involved in occupational pension schemes. In addition, 6.5 million people who are retired right now are receiving at least one occupational pension. Currently, 20 million people have rights in an occupational pension scheme.

People with personal pensions are additional to that number. Since June 1988 we have now reached a situation where 7.8 million people are in personal pension schemes. It is well worth saying that it is thought that about 6 per cent. of that population were opt-outs and that about 13 per cent. were non-joiners of their occupational pension scheme. That comes to slightly less than 20 per cent. of the total number of people who have taken out personal pension schemes.

An effort has been made to quantify the number of people who acted after advice from a personal pensions salesman. It would appear that, on opt-outs, about 4 per cent. of the total took such advice. The number amounts to just over 300,000 if my arithmetic is correct. Of non-joiners, the proportion is 7 per cent., which amounts to just over 500,000 people. Those are the figures with which we are dealing.

People will, of course, be willing to save for retirement if they believe that their pension rights will be secure. That means that they must receive the

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information that is required to enable them to make an informed choice. The noble Lords who are economists told us that that was an important part of the operation of the free market. I agree. People have to be able to rely on the highest standards of expert advice. They must be able to have confidence that the regulatory framework will protect their interests against the unscrupulous and the incompetent.

The Securities and Investments Board, the chief investments regulator, has taken a series of steps to ensure that investor confidence is maintained. First, it identified the problem; publishing evidence last December that many sales of personal pensions appeared to have fallen short of the required standards. Then it acted to prevent the recurrence of these problems. Now, with the help of expert advice from the life and pensions industry, SIB is ensuring that remedies are provided where necessary. I believe that that is an example of an effective regulatory regime.

The board's recent statement sets out how compensation should be provided for people who have personal pensions instead of being in an occupational pension scheme and who now face financial loss as a result of bad investment advice. As my noble friend Lord Jenkin of Roding rightly pointed out, that does not mean that anyone who changes his or her mind is entitled to compensation. The question is whether bad advice was given. If anyone with a personal pension is found to face financial damage as a result of mis-selling, he or she will be entitled to redress. The aim will be to restore people to a financial position equivalent to that which they would have had if the mis-selling had not taken place.

There is at present no way of knowing the eventual total cost. I am not a clairvoyant and I shall resist the invitations to speculate. We must all wait for the reviews to be completed. It is, however, clear that there will be a substantial call on the financial services industry. Investors can be reassured that the industry as a whole can and will pay. In cases where the firm responsible has ceased trading, that will entail calling on the industry's compensation scheme.

The SIB statement sets out in detail how firms responsible for sales of personal pensions should review their cases; how they can identify mis-selling and damage to investors caused by it; and, where mis-selling leading to financial damage has occurred, how appropriate redress should be provided. The details of the review process and the formula for redress have been drawn up with the assistance of experts in the life and pensions industry and in the legal and actuarial professions. The regulators will now ensure that firms responsible for past pensions business take the necessary steps to review their casebooks. The Personal Investment Authority has set up a pensions unit to examine cases sold by firms which are no longer in business. It has also set up a pensions helpline. I advise the noble Lord, Lord Haskel, that its hours of opening are similar to those of our very successful helplines in the Department of Social Security, so I do not think that his criticism was merited.

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Many people will be contacted by the firm which sold their pension, or by the pensions unit, and asked for information to help decide whether further investigation is required; SIB is distributing an explanatory leaflet, the Investor's Guide, which will also be available from libraries and citizens advice bureaux.

It will take at least two years to carry out the reviews in an appropriately thorough and systematic way as the interests of both personal pension holders and other policyholders require. The first cases to be reviewed will be those where financial damage caused by mis-selling is most likely and where this could have the most immediate impact. These priority groups include the cases of investors who have died, retired or are close to retirement. However, any personal pension investor who seeks it will have his or her case reviewed whether or not he or she is in a priority group.

These reviews will no doubt show that many people who transferred to or opted for a personal pension were given good advice. Where redress is required, its form will depend on the circumstances of the investor. Where possible, it will often be desirable to reinstate people in their occupational schemes. If this cannot be done, the personal pension will usually be topped up.

The action announced by SIB relates to people who bought personal pensions in preference to an occupational scheme. There are many others who would otherwise have been contributing to the State Earnings Related Pension Scheme (SERPS). SIB is also investigating, with the help of DSS, whether there has been mis-selling to people in this position. SIB intends to publish its findings in this further review next year. If a problem is revealed, SIB will prescribe appropriate remedies.

The Government are also taking action to make sure that the arrangements for redress are brought into effect as efficiently as possible. The public service pension schemes, such as those for teachers and nurses, are allowing current employees not only to rejoin for future service but also to have their pension rights for previous service restored at reasonable cost. I very much hope that occupational schemes in the private sector will adopt the same approach.

The Government have also clarified the tax treatment of compensation payments. All the remedies are designed to put the investor in an equivalent financial position to that which would have been the case if the mis-selling had not occurred. The Chancellor intends to introduce legislation in due course to ensure that an investor in that position will have the same tax bill as if there had been no compensation payment for mis-selling.

Some noble Lords have suggested that, as the Government were responsible for the introduction of personal pensions, the taxpayer should provide compensation. There is no case for this. The concerns that have been identified—


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