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Baroness Turner of Camden: Amendment No. 9, which is grouped with the amendment we are discussing, stands in my name and that of my noble friend Lady Castle. Originally we tabled this amendment because the consultation brief proposed a maximum figure of 1 per cent of the fund per annum. That would mean that a person who pays into a scheme for the whole of his or her working life would find that up to a quarter of his contributions could be swallowed up in charges. The amendment seeks to limit the reduction in the value of benefits to a maximum of 10 per cent. I shall be interested to hear the comments of my noble friend the Minister on this matter.
The noble Lord, Lord Higgins, has mentioned the problem of front-loading in connection with normal insurance contracts. There has been criticism about the cost of administration and about the level of commission. Those criticisms are not always fully
Lord McIntosh of Haringey: I am grateful for the explanation that has been given of both these amendments. They both relate to the charging structure for stakeholder pensions although they are very different--indeed, opposite--in their approach. Amendment No. 8 would mean that stakeholder pension schemes could charge their members in any way and at any level they wished. Amendment No. 9 seeks to put on the face of the Bill a restriction on the level of charges in terms of a percentage of the benefits provided.
I shall set out the Government's thinking on this matter. We think that a simple and transparent charging structure should be one of the fundamental features, and indeed one of the fundamental attractions, of stakeholder pension schemes. The Green Paper proposed minimum standards for stakeholder pension schemes. Our proposals were set out in our consultation document published on 2nd June. As the noble Lord, Lord Higgins, rightly says, it has aroused a considerable response. There are those in the pensions industry who believe that tough standards have been proposed. However, others in the pensions industry believe that they can meet those standards. We propose setting restrictions on the way charges are made--both the amendments address this matter--and an overall limit on the charges.
Some personal pensions have a charging structure which bears heavily on those with low pension savings, or penalises those who stop paying into the pension scheme. The noble Lord, Lord Higgins, mentioned front end loading. Personal pensions often charge in a complicated way so that scheme members find it hard to understand how the overall charge is worked out. I know that there have been some improvements in the terms offered by some personal pensions. That is good news, but we want to make sure that no stakeholder pension scheme is able to charge in a penal or complex way.
We have proposed that stakeholder pension schemes may charge only in terms of a single annual charge on the value of the fund. We have also proposed that there should be a 1 per cent limit on total charges. No additional charges will be allowed for transferring in or out of a stakeholder scheme, or for stopping or changing contributions. We have invited further views on those issues.
I understand the thinking behind Amendment No. 8. We know that the proposed limit on charges will be challenging for some schemes. However, we want to make sure that the members of those schemes get a good deal. Some have said that a limit is not necessary and that competition will drive down costs. However, many providers have come forward with proposals for
Every fraction on the charge means a lower final pension for scheme members, and a limit on charges provides them with important reassurance. We are determined to strike a hard bargain on behalf of the consumer. That is why we proposed the challenging but realistic limit of 1 per cent. We have taken into account responses to the Green Paper and have considered what charges are being levied. As I said, we have already seen charges being offered at this level and lower. However, we shall listen to what the industry has to say and take its views into account before a final decision is made on the wording of the regulations.
But even with a limit on charges, there will still be competition between stakeholder pension scheme providers and managers, and this should help to drive down charges below the maximum. The governance structure of stakeholder pension schemes, which we have already debated, should enable schemes to negotiate competitive charges for their members and obtain value for money.
Amendment No. 9 seeks to limit the amount that can be taken in charges to 10 per cent. The noble Lord, Lord Higgins, asked me what that meant in terms of numbers of years. If we assume that contributions rise in line with average earnings, at the 20-years point we would just about reach the 10 per cent limit. A large number of schemes finish before 20 or 25 years. I do not know what the proportion is, but a high proportion of schemes would be below my noble friend's limit.
The only way that we envisage Amendment No. 9 being workable would be for stakeholder pension schemes to make a single charge on contributions. A charge of 10 per cent on contributions would have the same outcome as the limit suggested in the amendment. We looked at the possibility of a charge on contributions. That would provide more revenue for the scheme in the early years, compared with a charge on fund value. But it would not provide schemes with any revenue when the scheme members suspend contributions, which is one of the conditions of the scheme. The other main option--a single charge on the fund value, which we favoured--produces an incentive for schemes to maximise the value of their funds, either by maximising investment returns or by transfers-in from other schemes. It should continue to provide schemes with some revenue from dormant accounts and means that those who suspend contributions to a scheme should not impose an excessive burden on other scheme members.
These are finely balanced arguments, but we came to the view in the end that a single percentage charge of fund value was the better scheme and that is the one favoured by the great majority of Green Paper responses.
Amendment No. 9 also seeks to quantify the limit on the face of the Bill. We do not want to do that yet. We are in the process of consulting further on the details of the minimum standards, including charges, and will lay down
I did not respond to the point made by the noble Lord, Lord Higgins, about the costs in early years. It is true that there will be extra costs in early years; that is not uncommon in business. We do not expect that to be unmanageable.
Lord Higgins: I am grateful to the Minister for that reply. I raised one other point: I was not clear why commission should be included in the list of legitimate costs. I have always been better on concepts than arithmetic; I therefore have some difficulty in relating the 1 per cent charge per annum on funds under management to the amendment of the noble Baroness, which requires that the fund as a whole should not be reduced by more than 10 per cent. Am I wrong in thinking that if it is 1 per cent per annum and it runs for 30 years, that will be significantly in excess of the restriction which the noble Baroness was suggesting?
Lord Higgins: Even at 1 per cent the value of the fund will be quite significantly reduced. The noble Baroness's amendment would be much more stringent than the figure suggested by the Government. There are also more technical questions about discounting back and forth to get a present value and so on. I do not think we need to go into that on this occasion. Perhaps I may ask the Minister to answer my central point. Can he clarify why there is commission? Is it suggested that there should be different charges for investment in tracker funds rather than funds which are managed on a more general basis?
Lord McIntosh of Haringey: I am guessing now, but it seems to me that commission is a way of incurring marketing costs--and marketing costs are part of the costs of running a pension scheme. It is not up to us to decide how a pension scheme provider should allocate its costs. So far as concerns the customer, commission is the same thing as any other back office cost. Commission is like any other cost; it reduces the value of an individual fund. That is why we have set the 1 per cent limit on the total fund rather than attempt to distinguish between different kinds of costs. That would be too detailed. As to tracker funds, the same charging rules would apply as to any other fund.
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