Work and Pensions Committee - Minutes of EvidenceHC 768

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Oral Evidence

Taken before the Work and Pensions Committee

on Wednesday 28 November 2012

Members present:

Dame Anne Begg (Chair)

Debbie Abrahams

Mr Aidan Burley

Jane Ellison

Graham Evans

Sheila Gilmore

Nigel Mills

Anne Marie Morris

Teresa Pearce

________________

Examination of Witnesses

Witnesses: Otto Thoresen, Director General, Association of British Insurers, Jonathan Lipkin, Associate Director of Research and Pensions, Investment Management Association, and Joanne Segars, Chief Executive, National Association of Pension Funds, gave evidence.

Q62 Chair: Welcome. Can I begin by asking you to introduce yourselves for the record, please?

Joanne Segars: I am Joanne Segars, and I am the Chief Executive of the National Association of Pension Funds.

Jonathan Lipkin: Good morning. I am Jonathan Lipkin. I am Associate Director of Pensions and Research for the Investment Management Association.

Otto Thoresen: Good morning, I am Otto Thoresen, Director General of the Association of British Insurers.

Q63 Chair: I cannot believe it is over a year since you last appeared before us, and a lot has happened in that year. Can I just begin with something that you all seem to agree on: that larger schemes offer better governance than smaller schemes? Why do you think that is the case, and should the Government be encouraging the creation of larger schemes? If so, how can that be achieved?

Joanne Segars: Certainly, the creation of larger schemes is something that the NAPF has advocated for many years. We have a rather odd set-up or infrastructure, if you like, of pension provision in the UK. We have something like 46,000 separate trust-based defined contribution (DC) schemes and over 100,000 separate contract-based schemes in the UK. It is our belief, supported by a considerable body of evidence both from the UK and internationally, that those smaller schemes tend to have weaker governance arrangements, and also tend to offer less value for money. So, at the NAPF, we have been saying that we should create a new breed of scheme that would actually look a little bit like NEST, which we call super-trusts, which would be large, multi-employer, trust-based occupational pension schemes, which would bring together the benefits of scale and the efficiencies and scale economies that are available through operating at scale but also importantly have the presence of an alignment of interest with the scheme members. We would get those two positive features working together, so that we have low-cost, good-value-for-money schemes that give and generate better member outcomes. We think that is the sort of model we should be moving to.

To answer the second part of your question about how we get there, we believe there is considerable scope for regulatory and government intervention. We have set out at the NAPF some of the criteria this new breed of schemes, which we call super-trusts, would need to meet. We believe that there are a number of measures the Government could take to encourage consolidation of schemes. We look in particular to the experience in Australia, where they already have large schemes, but there is a big drive to consolidate further, and where the new regulations will require schemes to pass essentially an efficiency test each year. Those schemes that do not meet that efficiency test, which includes issues around quality of governance and value for money, will be required to merge with larger schemes. We think that will be one rather effective way of generating scale in the UK. Clearly, also another is the Government’s small pots agenda, but I guess we may come on to that later.

Q64 Chair: I will come back to the issue of governance, but when you say that you would get employers to come together, would that be by sector or geographic area?

Joanne Segars: It could be either. Again, if we look at Australia, there are regional superannuation funds there-super funds-and there are sectoral super funds, and it could be either. We have seen the Building and Civil Engineering scheme (B&CE), which was for the building industry, expand its remit to become a more general fund, but it could be sectoral. Again, that could be quite effective in targeting sectors with low pensions coverage, and also sectors where people tend to move around within a sector, so the building industry would be one, the retail sector perhaps another.

Q65 Chair: Is there an appetite for such super trust schemes in the industry?

Joanne Segars: I think there is a growing appetite for them. Interestingly, over the last several years, we have seen the market bring together the presence of some of these super funds. NOW: Pensions is one-the Danish provider-The People’s Pension is another, and of course NEST. They have very many of the features that we would see as part of the super trust model, but if there is a Government and regulatory drive to create consolidation, we will see more participants coming into the market.

Q66 Chair: Would you include local government schemes in the super trust model?

Joanne Segars: There is certainly a very live debate. We had Brandon Lewis, the new Minister for local government pensions, speak at an NAPF event earlier this week, and he was very clear that he wanted to see further consolidation. We are already seeing consolidation, certainly, of some of the procurement and administration services within those schemes.

Q67 Chair: What is the IMA’s position on all this?

Jonathan Lipkin: We would see it as very important to make a distinction between size of employer and size of scheme. As Joanne has said, there are clearly identified issues within a certain part of the market, particularly small trust-based schemes. In other words, those are small schemes that are run by single employers, and that is evidenced in TPR’s1 own governance survey. We also see that small and medium-sized employers are able to access scale through going to external providers. For example, the IMA would classify itself as a relatively small employer. We have fewer than 50 employees, but we are contracted with one of the largest pension providers in the country. We think we have a good deal in place in terms of the default strategy that is available to employees. So it is a question of seeing very clearly what the issues are with respect to employer access to schemes and the nature of the schemes themselves, whether those are trust-based, single-employer schemes; multiemployer, trust-based schemes; or contract-based schemes.

In terms of how you get towards larger schemes, it is interesting, as Joanne has said, that there is already evidence of movement in the market, where we have new entrants both in the UK and from overseas. We also have existing providers with the scale. The critical point, whether you are trust based or contract based, is to ensure that the governance processes are the best possible, and I think we will get on to that in the course of the discussions later.

Otto Thoresen: I will not go over the same ground. For me, we have to look at it through the lens of how we make pension reform a success, and how we make it work for employees. I think there are four elements to that. One is about charge levels and charge disclosure. I am sure we will talk more about that. The second piece is around investment fund design: the relevance and appropriateness of the funds, and how well they work for people. The third piece is about engagement of employees with their savings, and their awareness of how things are building up and what it is likely to provide them with in retirement. The fourth piece is how you deal with the actual retirement process itself.

I think scale brings significant benefits in a number of those areas. For the insurance industry, which provides DC-defined contribution-contract-based schemes, as Jonathan said, the big players there already are providing access to scale economies. We also have to try to balance the desire to get those scale economies through with an ability to make the scheme work at a local level for the employees of the company that it is there to provide for. Sometimes, there can be tensions that do not always work in the same direction. If you can get the right quality of people involved in all aspects of the process, then those scale economies can come through in a way that will go back to support a successful pension reform agenda.

Chair: Come in, because I was going to come back to you anyway, Joanne.

Joanne Segars: It is not just the question of scale. Clearly, the presence of scale is critical in ensuring that providers-for want of a better word-can access economies of scale, but it is also about the presence of an alignment of interest. That is something that we do not always see present in the marketplace at the moment, and that is one of the special features of NEST: an independent board of trustees who are there to operate on the side of the member and who can contract with a wide range of parties-they are not tied to one particular provider, for example-to ensure that they can access the best in breed. So it is about the presence of both things: the presence of scale, but also the alignment of interest, delivered through good and independent governance.

Q68 Chair: In your opening remarks, you were very damning of the governance of many pension schemes, and particularly small ones. So my question is straightforward. How do we improve the governance of these schemes, and what regulation has to be in place in order to achieve that? We often hear that too much regulation will stifle the business rather than aid and align the interests of the member with what they are actually getting in terms of the returns. So again, Joanne, do you want to start?

Joanne Segars: I suppose there are two ways we can look at this. We can either have more regulation on what is a sort of dysfunctionally shaped market to deal with the fact that we have this very large tail of very small trust and contract-based schemes. For most contract-based schemes, there is no independent governance at the level of the employer. We have seen some employers put management committees in place, but they are a minority. So we can introduce new rafts of legislation to improve the quality of trusteeship: to require, for example, contract-based providers or employers with contract-based schemes to have management committees. That would deal with the current market that we have, but we would argue a better way is to actually target and address the dysfunctionalities of the current market by moving to a more rational pensions structure, which is to have fewer, larger trust-based schemes. By doing that, you stand a much better chance-and I think this is a point the regulator itself has recognised-of ensuring that you do get that very good quality of governance, the sort of thing that NEST and many of the very large new trust-based players do have as part of their structure.

We can put sticking plaster, if you like, over the current dysfunctional market, or we can move to something that is much more ambitious but much more rational and perhaps will deliver better outcomes.

Q69 Chair: Are you basically saying there should not be a place for contract-based schemes, and it should all be trust based?

Joanne Segars: We would prefer some sort of independent governance overlay to sit on schemes, which is why we have said that part of the answer is a small number of large trust-based schemes. We think that would be a good way to progress.

Q70 Chair: I have a feeling you might disagree with that, Otto.

Otto Thoresen: I do not think it is particularly helpful, and I do not think it is what Joanne wants either, to get into-

Joanne Segars: It is not about trust versus contract. It is about having good governance.

Otto Thoresen: No, absolutely. This is not a binary discussion, "This is right and this is wrong." I will just give a little bit of context to the way I see this issue. We have to be aware of the fact, and I know we all are in the room, that we have a Pensions Regulator and a Financial Conduct Authority (FCA)2 both operating in this territory, which creates two regulatory systems effectively: one that applies to the trust-based world and one that applies to the contract-based world, and then some of the pension regulations obviously read across into the contract-based world, too.

The contract-based world is regulated by the FCA, and the FCA’s system is the concept of treating customers fairly. Those "treating customers fairly" principles apply to every piece of business for every customer that is dealt with within the contract-based space. Those principles apply fairness and good communication challenges to the industry, to make sure that people understand what they have got and so on. That regulatory system is in place and it is taken very seriously, and is looked at by the contract-based providers. However, it does not provide the local perspective on an employer’s provision for his employees.

As I said in my introductory remarks, in the way that we deal with the pensions agenda, every single component needs to work well for the system to work well. Where there are conflicts of interest and decisions that are relevant to the employees in a company, we have to find a mechanism there that can work well. Given the fact that we are starting from an industry that on the trust-based side and the contract-based side has a long history, and there are many schemes in existence of both types, to evolve from where we are seems a more realistic way to achieve better short-term outcomes and, in a reasonable term, for the employees of these schemes.

Q71 Chair: Do you think the actual governance of both trust and contract-based schemes is actually okay and the regulation is fine, or do you think there needs to be improvement? If so, what would that be?

Otto Thoresen: I think there are strengths and weaknesses in each. When I have discussions with the two regulators, I think they acknowledge that also, but they have no appetite to work to come up with one regime that covers the whole territory. What we have within the contract-based world is a regulatory system that ensures and insists on authorised people within the organisation at the top level taking responsibility for the activities of the organisation. Before I did this job, I was in the industry for 30 years, and I have seen the changes that have happened as a result of treating customers fairly coming in. The discussions at the board table now are as much about the customer experience, and the evidence that they can see in management information on how well that is working or what is going wrong, as they are about financial performance. I have seen that at work. That is a very strong and effective regime, but it works at an aggregate level.

The trust-based world brings far more potential for that oversight to be delivered either in the company that the scheme has been provided for or, as Joanne says, in a super-trust-type arrangement, but it does not have the same level of regulatory discipline around it that the contract-based world has. For me it is trying to work out where the best pieces of both can be brought together as the best practice for the industry.

Q72 Chair: Around the stuff about customer experience, I think probably we can get into costs and charges, but can I just bring in the IMA? Where do you sit?

Jonathan Lipkin: In a sense, we sit between the two positions here. Investment managers provide investment services both to contract-based and trust-based schemes. I would just bring a perspective that steps back a little bit from the discussion about overall architecture-contract-based versus trust-based, treating customers fairly versus fiduciary duty-and ask what it is that schemes are trying to do for their members in a DC default strategy. Actually, we think they are exactly the same things, and we have to get a grip on that. It starts with asking, "What are the objectives that you are trying to deliver against for a member?" These are not objectives in terms of beating a benchmark or performing in line with a benchmark, but what is that member objective in terms of their future retirement income? How are you going to implement that objective? How are you monitoring the performance? How are you monitoring conflicts of interest?

We think that we are collectively, together with the regulators, working towards a governance framework that is starting to address those issues. You are seeing it in the DWP default fund guidance and in the Investment Governance Group DC principles, which all three of our organisations participated in and we, as investment managers, would particularly like to take forward. We think it is asking the practical questions that matter on the ground for members whatever the delivery architecture. If you do not start by asking what you are trying to do for your member and how you are doing that, you are actually not going to ensure that you get the good outcomes in DC that we all want to achieve.

Q73 Sheila Gilmore: I have a few questions-hopefully fairly small questions, but I am not sure. This is maybe mainly for Joanne: would a super-trust arrangement reduce administrative costs, or are we simply adding another layer, which would mean further costs to the member? Secondly, I would welcome comments from Otto as well on whether the reason there is more regulation on contract-based schemes is because you need it, basically, whereas with a trust you have trust law behind you, so you do not need that detailed regulation.

Joanne Segars: I agree with you on both points. To answer your first question about whether there are cost efficiencies from operating at scale and under a trust environment, the simple answer to that is yes. We see efficiencies and cost efficiencies in administration and investment-a sort of governance bonus. There is quite a lot of academic and practical evidence to support that. For example, it has been suggested that the governance bonus through the better investment returns of operating under a large trust-based environment can be as much as 2%. Similarly, there are some quite impressive administrative efficiencies, and a group of independent trustees who are not subject to what is called in the trade "provider capture" can survey the market and go outside the single provider, which is not always possible in a contract-based environment even where it is operating at scale.

We can ensure that trustees, as informed purchasers and purchasing on a wholesale basis-and part of our problem is we have a DC market that is very much on a retail model-can survey the market and can buy and purchase in bulk the best in breed. Again, that generates investment efficiencies. By operating at scale, trustees are much better placed to look to investment classes that are much more likely to generate returns. So, certainly, we think that there are some very significant cost savings. We have done some analysis that shows that the cumulative benefits of a super-trust could be as much as a 28% bigger pension pot, and we would be very happy to share that analysis with the committee. We would also be very pleased to share our thoughts on what a regulatory environment for super-trusts might look like. We have done quite a lot of work on this and would be very happy to share that with you. If we do have a small number of funds that are overseen by a group of independent and informed purchasers, then I think we can move to a much lighter regulatory environment.

Q74 Chair: In terms of fiduciary duty in contract-based schemes, does that need to be changed, looked at or tightened up?

Otto Thoresen: Can I just add a few words to Joanne’s response?

Chair: Okay.

Otto Thoresen: Just a few, because I agree in some areas and disagree in others. I agree that where you are getting access as an employer or an employee to a scale platform, if I describe it as that, the economies of scale come through lower charges. The membership that I represent-the large players in the defined-contribution world-are offering schemes at lower charge levels than some of the numbers that are quoted for super-trust-type arrangements overseas. It is not an immediate thing that follows by default-that the charge levels come down because you have got a super-trust arrangement. You have to have an efficient model behind it, and those efficient models exist within the contract-based world already.

I think there is still work to be done, and I suspect that will come through a number of times in this discussion, on how you can be confident that a scheme that was set up continues to be appropriate and relevant to the changing environment and circumstances in the employer, and the changing types of employees that they may be supporting and their needs. That relevance is an important part of the process, which an effective trust-based system can provide because of its local nature. A contract-based world has to respond, as we look at the pension reform agenda, where in the past there would have been an adviser, an IFA3 or an intermediary involved with the employer, carrying out that review function. In the future world, that may not be the case, so how will that gap that will exist, potentially, be filled? I think that is something we have to address with some creativity to find a way that works well.

Q75 Chair: With auto-enrolment, there is obviously going to be a lot of much smaller savers coming into pensions, and if they are not going to have independent advice, the default funds that are set up will be very important. So what factors do providers have to consider when designing the default funds, and how can you minimise the risk for low-income pension savers that they will not have a decent income in retirement from their small savings?

Otto Thoresen: Investment management certainly is not my speciality, but there are a number of issues for me. Clearly, there is the whole question about attitude to risk. It is clear that NEST have done the research that suggests that people do not want to see losses in the early years, and a more conservative investment strategy is the right one, so that people will stay enrolled and continue saving. I find a tension there with my natural actuarial view about investing in equities for the longer term in an environment where returns are very difficult. If you look at the current level of returns in any investment sector, they are relatively low and unlikely to improve in the short term. So there is something about the attitude to risk, the age of the employee and the outlook they have to retirement. There is something about the cost of providing the fund, too, because charges, if they are not kept to a competitive level, can obviously be a drag, and where investment returns are low, even more so. There is something about how you manage people through to the retirement years, where they want to have the best chance of maintaining that value as they go into the income phase. All of those elements need to be taken into account, and finding a simple way to do that that stays relevant with the changing times is still a big challenge.

Q76 Chair: I suppose ultimately you have to encourage more people, both employers and employees, to put more into the pension fund. How are you going to do that?

Otto Thoresen: I talked earlier about the four components, and one was about employee engagement and communication in a relevant way. One of the comments that was made earlier was about the contract-based industry being a retail-based industry. I think that is a bit historic. As we have seen pension reform coming, the big players, such as Legal & General, Aviva and Standard Life in my membership, have been looking at workplace savings as a very specific activity.

Part of the answer is some of the new ideas that are coming through and being tested at the moment in terms of applications for iPhones and the like, where people can engage with their savings and how they are building up in real time in a way that is relevant to them. The old actuarial way of thinking about pension saving clearly has to be pushed to one side. An important part of it is a more immediate sense of, "This is about your life and about part of your future, and you need to take it seriously and be interested in it, and let us make it interesting to you."

Then there are aspects of how you can deliver guidance and support to people in the workplace. What facilities can be made available to educate people in financial matters to the stage where they understand its importance? It need not be deep and technical, but it should be an understanding of how important it is to them. These are the aspects that encourage people to keep saving.

Q77 Chair: Do you think contract-based schemes can do that?

Otto Thoresen: Well, we are doing it. I would be very happy to give you more detail on this sector if the Committee is interested.

Q78 Chair: It still looks as though the return on a contract-based scheme is less for the employee than the trust-based ones. Is that just because less money has gone into the pot?

Otto Thoresen: I could probably produce data that would not show a bias. If you are talking about charge levels, then I think the data is far from clear.

Chair: We are coming on to that. That is in the next set of questions. I think Graham wants to come in on this.

Q79 Graham Evans: Just on that point, I have been in private pensions since I was in my early 20s. I remember when I had a work-based scheme. I remember the company pension man, who was a company employee, came to convince the shop floor-the workers at the factory in the North where I worked. This was Equitable Life. Do you remember Equitable Life? Yes? The wonderful adverts, and what a great company it was not. He was talking about the advantage of AVCs4, and he was talking to 20-somethings. My concern if you do not get this right is that those individuals who are company employees have been sold to by a pension company, and they send 20-somethings down a certain track. I remember asking a question of this individual. I said, "You are trying to sell AVCs to us. When will we see the benefit of that?" and he said, "When you are 60." When you are 25, 60 is a long way off. And at the time there was something called TESSAs, before the ISAs5. I said, "What about TESSAs?" and everybody said, "Oh, yes, TESSAs; what about TESSAs?" He said, "We don’t want to talk about TESSAs," because he did not want us to put money into anything other than what he wanted us to. This was not your members trying to flog to us; this was actually a colleague within the company trying to sell us this. In the 21st century, how can we do what you just alluded to there, which is looking at a portfolio?

Chair: Back to my question about fiduciary duty, yes.

Otto Thoresen: I think there are two or three questions there. One of the questions was whether pension saving is actually the right thing to do if you are in your early 20s, and whether it is the only way.

Graham Evans: If 20-somethings are doing the right thing, which is what we all want, which is to save for their future-

Otto Thoresen: Absolutely.

Graham Evans: So people are actually doing the right thing. I do not want to use the word "mis-selling", but there is misguidance.

Otto Thoresen: Absolutely. I think that is a very important point, and I will say a few more words in a second. The first thing I would say, though, is at the moment pension reform is at very delicate stage. We have got started on it; we have a number of years to go before we even get to the point where everybody has been brought into the system. Then we have further to go before we get the contribution levels up to the minimum level. We need to make sure we land that and make the system work well and effectively. There are aspects of the way the pension system works that still need to be addressed. I am sure we are going to come to those later in the discussion.

One of the things we think about is that it is the savings habit that is the most important thing we want to establish. The mechanism that you use to achieve that should be the second decision, and in a way the second decision should be about what it is that is motivating you to save. It may be thinking about your first house, a family or kids or whatever it is. It is also important that we do not allow ourselves to get into a way of thinking that is short term only, because there is a point in your 30s and 40s where you need to start preparing and putting the money into the savings vehicle that allows you to migrate on into the years when you are not working. So I think we have to come to a more informed, innovative way of thinking about this.

I have got a 21-year-old son. I try to have conversations with him about what I do. It does not tend to be a long dialogue, I have to say, but I try. The thing is he has got a load of things that he is worried about. He is worried about getting a job, and how he is going to be able to have his own independent life. He is certainly not thinking about the long term. I think it is wrong to start thinking about changing now, but I do think we have to open our minds to how we are going to make this relevant to people and how we will manage people through their different life stages, because that is another big part of the question. How do we keep people saving?

I did some work a few years ago with government on what ended up being the Money Advice Service. I have worked with Citizens Advice and others, too. It is about helping people stay in control of their money first, so they do not get into debt and out of control, and then into building up a nest egg, then into short-term savings and then into long-term savings. That is a far more sensible journey to take people through. We have a great mechanism through pension reform to get started on that, but I do not know what the evolution would need to be to make it work in the kind of way you are talking about, but I think we will have to go there.

Chair: We are going to move on to transparency and charges. Debbie has got the first set of questions.

Q80 Debbie Abrahams: My first question is to Ms Segars, if that is okay. I understand you have just published the new code of practice. Was that overnight?

Joanne Segars: I have. It has just come out this morning, yes.

Q81 Debbie Abrahams: That is very helpful to the Committee. I wonder if you could update us in terms of what that says and, in particular, how you anticipate this will affect the behaviour of providers.

Joanne Segars: Thank you. I should take this opportunity, because it is such a new code and has just come out this morning, to thank my colleagues. I know when we came to speak to you last year we all were talking and gave a commitment to this Committee to work together to produce the code.

The code is very much focused on employers, and it will help bring plain language and persistent definitions on what constitutes a charge. It will help to make sure that charges are disclosed in a very plain, consistent format to employers. In the code, we have a table that shows what is included in the charge and shows in pictorial form-and the ABI are going to develop this further-what that charge will look like to employees. We hope that it will ensure that employers themselves and trustees become more informed consumers, as they are confronted with making a selection of a scheme for auto-enrolment purposes.

Certainly, our organisations are committed to ensuring that the parts of our memberships that deal and interface directly with this code do promote the code and ensure that it does filter down through to employers, and there is also clearly a big role for advisers there. So from the NAPF’s perspective, we will be writing to our defined-contribution scheme members to ensure that, as they review their scheme as they get ready for auto-enrolment, they look at and consider the code and have a good understanding of the charges that their scheme is levying and what is included in that charge.

I know that Otto’s members, for example, have a rather different relationship with the code. Those who are dealing directly with employers will have a rather different relationship with the code. So it impacts differently on our members; but certainly, we are all committed to making sure that our memberships do use and promulgate the code.

Q82 Debbie Abrahams: You mentioned the monitoring and so on. In what form will that take place?

Joanne Segars: At the NAPF, we will survey our members each year to make sure that they are using the code.

Q83 Debbie Abrahams: So it will be voluntary and it will be reliant on their honesty?

Joanne Segars: Yes. None of our organisations are regulators, so it is a voluntary code, but our organisations are very committed to ensuring it does get used.

Q84 Debbie Abrahams: When we were going through the auto-enrolment inquiry earlier this year, one of the issues was around direct comparison. Hitherto it had been very opaque, and a direct comparison between different schemes was almost impossible, so does this sort that issue out?

Joanne Segars: Yes, and that is what we hope this code will address. It will allow a much more direct comparison between different providers of the charge and what is included in that charge. So it is not just about the lowest charge; it is about seeing what is included within that, so employers can make some assessment of value for money and what is included within the service, including advice.

Q85 Debbie Abrahams: Have you done any work to assess whether employers, or how employers, particularly small employers, will use the code to inform their employees or members?

Joanne Segars: We have not done that piece of research yet. We did some work earlier this summer, and the NAPF published some research earlier this summer, that showed that amongst small employers in particular there was a great deal of confusion about pensions generally but charges in particular, because, as you said, they are described very differently. So we took from that was that there was a pent up demand for a code like this. Obviously, we will work with employer organisations as well to make sure that they are aware of this code.

Otto Thoresen: One of the real things that could change the way the market works is if we could get the financial media to take an interest in the power of the comparison that can be made as a result of the code being available, because it does two things: it allows people to compare charges on an equivalent basis and the services that are provided; it also gives people a chance to compare the effect of different charging structures, which of course affect different types of employer in different ways. If you have got an employee base who are medium earners, that is one thing; if you have got people who are nearer minimum earners, that is another. If you have got high turnover of your employees, then that is another issue. This allows you to take into account those things.

If the media can get the message out that there is a mechanism for the employer to make that comparison, then the demand from employers to be able to see the information is potentially much stronger. I think at the moment there is a fog for employers of misunderstanding or lack of understanding, and it is very difficult to step towards the issue because of that. I think this could be a way of translating what is very complicated into something that people can engage with. Then the consumer power could really start to work.

Q86 Debbie Abrahams: Thank you. That is a very helpful point. Can I follow up with the question that I asked about how it would change in terms of providers? How will you monitor the value of this code and whether it needs to be updated on a regular basis?

Joanne Segars: Do you want to say something about providers, Otto? You are probably better placed.

Otto Thoresen: I have a couple of comments. In the way the pension provision works with small and medium-sized employers, quite often there is an adviser involved. I talked about that earlier. It is not entirely clear, as we see the changes in the Retail Distribution Review and the rest coming through, the extent to which advisers will continue to be involved in the market of the future. That is an open question, but where the advisers are involved, to a certain extent they have a lot of control over how the information gets presented to the employer. That is why I was keen to find a way for employers to be conscious of what is available to them, so that they make sure they can make the comparisons themselves.

The provider community will provide the web tool that allows some of these comparisons to be made. We are going to create that and make it available with the code, so that you can actually access the information in an easy and relevant format. As time passes, we will also be tracking the extent to which this is becoming part of the way the process is operating. The first thing is to get the thing up and running though, because it has taken us a bit of time to get to this point. Now we have to get on and make it real.

Q87 Debbie Abrahams: Thank you for that. Can I move on now to Mr Lipkin, if that is okay? I understand that the IMA has published guidance on disclosing transaction and trading costs. How have industry representatives responded to this, and what difficulties will they need to overcome in order to make these changes?

Jonathan Lipkin: Just to step back a second and go back to where we were last year when I appeared in front of you, I made the point that we have very strong legal obligations to disclose charges in a demonstrably consistent way and also to disclose transaction costs in our annual report and accounts. We recognised at that point that more needed to be done to make those transaction costs accessible. By accessible, we meant physically accessible-being able to find them easily-but also accessible in the way that you could understand more easily what actually was going on within the funds.

Subsequent to that Committee hearing, in the course of this spring we set up an industry group, which had representatives who accounted for around 50% of total investment funds under management. It was their sign-off of this guidance that has allowed it to move forward. So there is clearly very strong buy-in from the industry, first of all in terms of the commitment to construct this, and secondly from indications that we have had from our members about implementation.

Just to be clear, we are not moving to a new world where we are giving numbers that simply were not available. In terms of brokerage and stamp duty, these transaction costs were available in the annual report and accounts. We are trying to move to a world in which they are not available only on request or by going onto a website and downloading something. They will be available in a way that is much more immediate, so this guidance is effectively ensuring that you get that accessibility. We are confident that come the spring of next year- 1 April, the date at which this guidance is due to come into full effect-the industry will move to adopt it.

Q88 Debbie Abrahams: How will you monitor and enforce that?

Jonathan Lipkin: That was one of the reasons why I wanted to go back to where this started. We are not a regulator, but there is a regulatory requirement on us to disclose our charges and transaction costs in a certain way. Those numbers that are coming out into the enhanced guidance that our members are putting into force are effectively coming through an audited trail. We are not the regulator; it is a European regulator now, more than ever, that is telling our members what they should and should not do, and just to emphasise that point, we are heavily regulated in that respect.

Q89 Debbie Abrahams: It is guidance, is it not?

Jonathan Lipkin: It is guidance because we are not a regulator, but I would emphasise that we are going above and beyond the requirements that exist at European level. In terms of your question about how we monitor and enforce, I am making the point that those transaction cost figures coming in through that guidance are coming through an audited chain.

Q90 Debbie Abrahams: Thank you very much. I wonder if you can give me a time scale for how long adjustments might take as a result of this work and for when consumers might start to see charges represented clearly on their statements.

Joanne Segars: As my colleagues explained, the code for employers comes in in two stages. Starting in January 2013, we plan that the code should be used as best practice and that everyone should start using clear and transparent charges. Then the ABI are working on the web tool that Otto talked about, and that is expected to be ready by April 2013, so by that time we will be in a steady state for employers. Clearly, we hope that will start to have some traction soon, but we do want to see that process extended to employees. I know that the ABI and others in the industry are working on how we might work to ensure that those principles of clear, transparent and consistent charges are available to employees and scheme members, and that is certainly something the NAPF very much wants to see.

Otto Thoresen: We totally support that. The employer code was the priority to push through, because of the default process that we go through here in terms of auto-enrolment, to make sure that the employers are in a position to make comparisons and an informed decision. This is the work that we have started with the Financial Conduct Authority and with The Pensions Regulator on how we can achieve consistency in disclosure of costs and charges to the employees in the scheme, both at the point they enter the scheme in the first place but also as the funds build up over the years ahead. After a period where there was some scratching of heads in the industry about how important this was, the penny dropped that if people are committing their retirement planning on a basis of auto-enrolment and soft compulsion, if you like, at a company level, then it has to be a system that people have total trust in. Unless you are able and willing to disclose costs and charges, there will be questions in people’s minds about how the system works.

The issue we have is not so much one for new schemes that are set up, because as with all things to do with technology-and clearly much of this is technology-based-making changes for new schemes is easier. It still takes time, but it is easier. It is schemes that are already in existence and older technologies that need to be adapted and changed. The work we are doing at the moment with our membership is to see how quickly we can move that through. If that takes time, what else can we do in the meantime to actually get 85% of the benefit? If you are talking about transaction costs in funds, you can give people an indication of how that fund has been managed based on historical evidence, which gives people the opportunity to know what type of fund they are in and make the comparisons we have been talking about. So there may be things we can do that are a faster step towards the ultimate goal once we know what the actual timeline on this should be.

Jonathan Lipkin: There is a bigger piece here as well. I think both my colleagues have made the point that charges are important, but what is it that you are getting for a given charge and how do you communicate that? The industry collectively is starting to think much harder about how you communicate both with decision makers and consumers in terms of explaining what is happening within DC schemes and investment more generally.

There is a European disclosure debate happening that is looking at the issue of why it is that different kinds of investment products that effectively expose consumers to very similar kinds of risks do operate according to very different disclosure mechanisms. We operate as an investment funds industry under something called the Key Investor Information Document, which has a range of metrics, including charges and performance. We would like to see a joined-up debate within the UK and also at European level, given the fact that so much financial services regulation is being made at European level, to ensure that whatever you are in, whether it is an investment fund, trust-based scheme or contract-based scheme, you get towards that goal of demonstrable consistency, which Joanne emphasised, and meaningful disclosure-what it is that you are getting for your money and what you are actually paying.

Q91 Debbie Abrahams: My final question is specifically on consultancy charges. Some employers are obviously seeking advice around pension providers, particularly in relation to auto-enrolment. The resulting consultancy charges are then borne by the members, and I understand this is an unregulated practice and represents an extra cost for scheme members. What potential do consultancy charges have for consumer detriment?

Otto Thoresen: I will start on this one. It is very current. You will be aware that Steve Webb wrote to me on Tuesday asking me to work with the DWP in trying to understand how consultancy charging is likely to work in the environment as we go ahead and where the value that delivers is reflected in outcomes for employees and employers. We have not responded to the Minister yet, but of course we will respond, saying we are very happy to work with him on that. It is an important area to get right.

A lot of what we have been talking about already in terms of transparency and disclosure is important here, too. The employer disclosure would of course have consultancy charges within it, so the impact that it will have would be clear for everybody to see, which is an important part of how we make sure that this value-for-money question is being dealt with well. I now need to do the work that the Minister wants us to do and see how this practice is going to evolve and what its potential impact, positive and negative, could be for employees. It is accepted that advice has historically played an important role for employees and employers in getting the right outcomes, encouraging people to save more and making sure the product structures are appropriate for the employees and the employer in question.

Q92 Debbie Abrahams: Within that consideration are you thinking that consultancy charges should be banned for qualifying auto-enrolment schemes?

Otto Thoresen: I think the first step is just to do the work I have been asked to do and get the facts on the table. There are a number of consultations going on at the moment-for example, how "pot follows member" works and all the rest of it. I am reluctant to comment on what the outcome should be until I have got the facts.

Q93 Chair: Consultancy charges are not in your code of conduct document, are they? Is there a tick box for consultancy charges? If you go into a shop and the person behind the counter says, "Well, you could have this or that or that"-which is what you get on make-up counters a lot, and they get you to try it out-you do not pay for that consultancy charge until you decide what you will buy. They pay for the products that they buy, surely?

Joanne Segars: It does include consultancy charges.

Otto Thoresen: It will include consultancy charges.

Q94 Anne Marie Morris: Can I ask two questions? The heart of transparency is all about trying to help customers make informed choices. If you are clear about what you are choosing between, you can make an informed choice, whether it is the employer or ultimately the employee. Looking at the new code of practice, it is great to have the comparability, but my goodness me, that is quite a complicated choice. It took me back to thinking about where we are on energy tariffs and what we have been trying to do to simplify the consumer choice, so that it is a choice that realistically can be made. Is there a way in which the charging structures under both types of schemes can be simplified, so that it is a choice that realistically can be made, particularly by a small employer who does not have the time or technical experience? I appreciate if you simplify, some of the risk will pass to you and away from the employer, so I would be curious to know whether you have actually tested that form with anybody.

My second question is a more philosophical one about risk. When we are asking the energy providers to reduce to four choices or whatever it is, effectively we are asking them to take on board some of the risk. If we translate this into the pensions world, you move from a world of defined benefit, where the risk is very much with the employer, to a world mostly of defined contribution, where the risk is with the employee. We have not really looked at the risk for the pension provider, because in a sense, by simplifying, you would be taking on some of the risks of changes in the market. We have talked about the challenge of providing that trading information cost, but there is a risk issue. It seems to me at the moment the pensions industry is not bearing the risk in the same way that the employer and employee are. Clearly, you are in business to make money, but what would be fair and reasonable to look at as part of this simplification procedure, so the pension business would begin to take more responsibility and ownership and accept some of the risk of providing the pension to the recipient?

Joanne Segars: Perhaps I can deal with your first point on simplicity. Whilst we accept that the code may not be as simple as perhaps it might be, this is the simplified version. One of the reasons it has taken us quite so long to publish this code is because we had very detailed and quite difficult discussions about making something that is extraordinarily complex into something that is simple, without losing some of the meaning and some of the necessary granularity. What you see here is, sadly, the simplified version. Taking on board your point, with experience and in the fullness of time, might there be scope to simplify that further? I hope so, but for the moment this is the simpler version. Going back to the very first point, it does underline the reasons why we believe you need those independent, informed purchasers to really understand what is enormously complex.

Moving to your second point about risk and pension providers taking on risk, my members are not in pensions to make money. They are employer providers and trustees, so we are in a rather different position. As you rightly say, many of my employer members will take the view that they have taken on too much risk with a DB scheme, which is why they are now moving to a DC scheme. The Pensions Minister has initiated a very interesting debate about risk sharing in schemes. Some of the options that have been talked about there- including, for example, investment guarantees-would have implications for commercial pension providers and fund managers.

So I think this is again a very live debate, and it is one that we have encouraged. We think there is scope to think about how risk can be better shared between employers, employees, pension providers and the state when it comes to thinking about pensions. The NAPF have some quite clear views on this-in particular, around defined benefit pension schemes. If we get to the stage where everyone will get a single-tier state pension, indexed in line with a triple lock, and we see more auto-enrolment and that working well, is there a case for defined benefit pension schemes to have to provide spouses’ benefits and indexation, which currently by law they are required to do? That again puts an awful lot of financial risk and liability back on the employer. Are there different ways of thinking about how that risk can be packaged? That is a debate that is very much at the early stages, but one which the Minister is currently consulting on and seeking views on.

Jonathan Lipkin: Can I come in on both points? The first one is very important. One of the issues that has been discussed in the working group that developed the code is precisely how you help employers navigate in an environment where some providers are using a very simple, single annual management charge, or ongoing charges figure, as we would see it, in the investment funds world. Some are using a flat-rate administration fee, combined with an ad valorem charge, and some are using a contribution charge. The challenge at the moment is to build a communications tool, or a combination of communications and analytical tool, that can help people see what the effect will be, because in the short term it is very difficult to see how the different providers, including NEST, are going to converge on a single charging model.

Different providers have reached conclusions based on what they think is fair to target memberships or their particular financial positions. We would hope to develop from the code a simple tool for employers. If an employer’s employees are generally earning £14,000 a year and there is a choice of two schemes, he can easily plug in and see what the effect might be in terms of the impact of the different charging structures.

On the second point about risk, we do not have a strong view about defined ambition, although we have some observations about the debate and risk sharing. We would make the point that this does lead back towards governance again. There is a transfer of risk in DC, and furthermore there is no single right answer in terms of how you run the investment process for different groups of people or, indeed, the same groups of people. But you can start to put in place clear processes that start with: establishing who is accountable and responsible, and documenting that; asking what the objectives are, and documenting those; and asking how they have delivered against their objectives, and documenting that. You can then come up with a way in which you can deliver DC, whether in the trust-based or the contract-based space, that offers an auditable governance trail for employers and scheme members to understand what has happened and why. I think that is very important, and it comes straight out of the existing guidance and is something we would like to work with our colleagues in the industry and the regulators to develop more precisely and concretely over the next year or two.

Chair: I am going to move on, because Nigel has been waiting very patiently. He has still got more questions on this.

Q95 Nigel Mills: Could I take you to a paragraph in your written evidence, paragraph 32, where you are talking about management costs? You have what you refer to as explicit transaction costs, and then implicit transaction costs. I think you do an analysis, which is referred to in your evidence, that suggests that implicit transaction costs have no detriment on the employee or the person with the pension. That seems to stretch credulity a little bit. There is all this concern about having transparency on transaction costs, and yet there are a few hidden bits of profit taken by scheme providers that apparently have no detriment. Can you just talk us through how you came to that conclusion?

Jonathan Lipkin: First of all transaction costs are not charges in the sense that they are not paid to investment managers or scheme providers. They are paid within the market to obtain investment performance on your behalf. So if an investment manager wants to invest in a stock or share, for example, they encounter trading costs in the market. That money is not paid to the fund manager. The fund manager is paid a charge to act as your agent.

Q96 Nigel Mills: But presumably, many providers have a fund-management arm and a transaction-making arm, and you could end up with one part of an organisation paying another part to do that.

Jonathan Lipkin: No, because there is actually quite a separation along the chain. For example, within a contract-based pension scheme, you have a scheme. They may be using funds from within their own group or from outside that group. Within the fund, there is an investment manager to that fund. That investment manager has a mandate or target to perform to. It has regulatory duties of best execution to its clients. It has to ensure that when it trades, it does so in a way that is commensurate with those duties of best execution. They include costs, but they also include factors such as the equality of the trade, and being sure that it will go through. We would reject the suggestion that there is a conflation that you can make between charges and costs. Again, I go back to the point I made to Ms Abrahams: the report and accounts of investment funds are audited and transaction costs have to be accounted for, so we would not accept the point about the mix.

The second point was about how we reached that conclusion. We were being criticised from a number of quarters. It is understandable why people were asking questions about different parts of the financial system in the light of the 2008 crisis. We were facing numbers that were based on estimates of what transaction costs might be. People were saying things like, "We think a trade in the UK market may cost 1.5% or 1.8%, and if you add that to something that is known about charges, this gives you 3%," and then from that there was an inference of consumer detriment.

Our research tried first of all to look at the fund report and accounts, because we can, and calculate what the explicit trading costs were. We looked at those for both indexed and active funds, and we found that they were around 0.1% for indexed funds, and around 0.4% for active funds. I would make the point with respect to the issue of hidden charges that the majority of those costs in both cases for UK funds is tax. It does not get paid to brokers in the market; it gets paid to the Government. It is stamp duty. But that is not the point of this answer because it is absolutely important that consumers and decision makers know what those transaction costs are, whether they are tax or trading costs.

We took that empirical evidence from the accounts, took what we knew about charges in the market and then looked at performance. We said, "Surely, if you added together these explicit costs and charges and they equalled, say, 2%, you would expect to see a performance drag against what the market returned, for example." So if the market returned 4%, you would expect to see a very strong performance drag. We found that for active funds over the 10 years to the end of 2011, the market returned 4.7% in the sector that we looked at, starting with UK equity funds, but the funds returned 4%. From that, we could see that there was no evidence that hidden costs were resulting in detriment to customers. On the contrary, when you take into account both charges and costs, those funds seemed to have performed quite well. But I would emphasise that we are not saying, "Well, everything is okay then."

We were trying to demonstrate in that report that there was no clear evidence of detriment in the way that the press and some of the critics who were putting out numbers were suggesting. We also have to move forward in terms of transparency, and that is what we have tried to do in the enhanced disclosure guidance, because people do need to be sure that they know what is happening within the fund and they do not have to go and look for it on a website, through 10 pages of disclosures and so forth. They can find it easily. Sorry, that was quite a long answer, but it is important.

Otto Thoresen: Just a comment from me. My role is a bit simpler than Jonathan’s. We have a relatively small number of providers who operate in the workplace savings market, and predominantly here we are talking about the default funds that sit within the contract-based DC schemes. I have been involved in these discussions with many people over the last six months. I think if we are in a position where we are still trying to debate and argue the rightness of a position, we have not got the disclosure right. We have to be able to say, "Here are the annual management charges; here are the transaction costs. There is nothing else. Do you feel that is value for money for what you are going to get?" Unless I can have that conversation as briefly as that, and the customer has confidence that what I am saying is true, I am never going to get on from here, and we have to get on from here. So because my world is simpler, that is the test I want to apply. At the moment, we are not there because people can say, "Yes, but isn’t there this? Isn’t there that?" For each of the main providers that are operating in this market, I need to be able to demonstrate that is not the case.

Q97 Nigel Mills: Thank you for that. Mr Thoresen, you must be quite happy to be here talking about this and not about flooding insurance this week, as I guess you are quite close to a river. Can I just take you to surveys of annuity rates and publishing those? I think this is one of the issues that does come up-that when I reach my retirement date, my pension provider sends me one annuity rate and I kind of take it through ignorance, inertia or just not understanding that I could change. I think you were talking about publishing some kind of comparable annuity rate in certain scenarios. How do you think that will improve that situation and get people to look at what alternatives they have?

Otto Thoresen: That is one component of the code of conduct that we are developing, which will become live in March next year. The code of conduct has a number of elements in it which will be designed to encourage people to be aware of the fact that they can shop around and to give them the mechanism that allows them to shop around, so that we can increase the percentage of people that are taking advantage of the option to get the annuity from the best provider. The objective there is to get that figure for shopping around up as high as we can. The disclosure piece is about one of the components, because we want to make it public, and it will be available on the Money Advice Service website, or through Money Saving Expert or whatever, so people can look and see where their provider is on the table of rates and understand whether what they are going to get from their provider is attractive or not.

We believe that the steps we are taking will increase the take-up rate significantly, and we will be tracking whether it actually is or not. If it is not, we will be looking for ways to enhance the code to make it work better. This is a compulsory code for members of the ABI, to which every member of the ABI has signed up.

Q98 Chair: One of our witnesses said last week-well, I think we were waiting on your code of conduct, and you have stated that it is compulsory-it is still a voluntary code, not mandatory. He suggested that the industry is just buying time.

Joanne Segars: On annuities, sorry?

Q99 Chair: No, your code of conduct on charges. Not the annuities; the earlier stuff we were talking about.

Joanne Segars: I do not know who that witness might be, and I look forward to reading the transcript. I think that is a rather cynical view, if I may say so. Certainly, from the NAPF’s perspective, it is absolutely not about buying time. It is about changing behaviour and ensuring we have, in pretty short order, consumers who are much better informed and employers who are in a position to make good choices when it comes to choosing a scheme for auto-enrolment purposes. Next year, we will see a big spike in the number of employers who will choose auto-enrolment and be required to make a decision about their scheme for auto-enrolment purposes. Pretty soon after that, we will see many smaller employers making those choices, many of whom will not have had anything to do with pensions ever before and will be as new to pensions as the employees they are seeking to put into those schemes. So from our perspective, and I think I speak for all of us, this is absolutely not about buying time, so I think your witness was being a little bit cynical, if I may say so.

Chair: I think that was his job, to be cynical.

Joanne Segars: I thought that was our job.

Q100 Sheila Gilmore: Reading the submissions here, we have such opposing views from the ABI and the NAPF that, as a layperson, I am now baffled. The ABI seems to have changed their position. Why? To both of you, why do you think the approach that you are espousing is better?

Joanne Segars: Approach on…?

Q101 Sheila Gilmore: Small pots, whether they should be aggregated or follow the member.

Joanne Segars: Our starting point on whether we should move to a pot-follows-member model for small pots or an aggregated model in part goes back to the very first discussions that we had in this session. It is about ensuring we have a functional pensions market, for want of a better word, and that is all about making sure that we get good member outcomes. What concerns us, and we are not alone in this-the TUC, Which? and Age UK share our view-is that when somebody transfers from one scheme to another, or when they move their job, their new employer scheme may be a scheme that has a lower annual management charge than their previous employer scheme, but it may not. At the moment, that is a big lottery for the individual, and they have very little choice. The Minister says they can opt out of the process, but if this is about making it automatic and capitalising on the power of inertia that we are trying to generate through auto-enrolment, and to some extent this applies to the discussion we were just having on the Open Market Option as well, then we want people to just transfer their pots.

From our perspective at the NAPF, they have to do that and they have to be assured that they are moving from one good scheme to another good scheme. In our discussions with the Pensions Minister, he has acknowledged that argument and that point of view, so as we go forward we need to make sure that there is that quality assurance. I think he recognises that, not just for the point at which people transfer their pensions but actually the point at which they enter their pensions and an auto-enrolment scheme. Certainly, in the discussions we have had, I think he recognises that point. It is really about quality and about ensuring good member outcomes, because the impact on somebody’s final pension of transferring time after time into poorer value and higher charging schemes will be really quite significant. It could be around 30%.

Otto Thoresen: I am a little puzzled about the suggestion that we have changed our position, although I am very open to understand where we were before. I am conscious of the discussion that went on within our membership as the consultation was running on the alternatives. There were a number of alternatives that were being discussed within the membership of the ABI in terms of what would work best and how we should take it forward. There was research we carried out that suggested that individuals preferred the idea of it following them as they move through their careers.

I completely agree with Joanne’s point about making sure we do not run the risk of people moving into lower quality schemes or higher charging schemes, but I think the way to address that is to look at the quality of the space entirely and make sure that quality low-charge schemes are the norm.

Joanne Segars: That is why we were talking about consolidators, because from our perspective that is how you get those good quality low-charging schemes.

Q102 Sheila Gilmore: Can I just ask about the survey that you did? Given that we know that people do not fully understand the consequences of various pension decisions, and that is what we have been discussing at great length, what sort of question was asked of people? Did people imagine that the alternative was that they left it behind, so they had lots of small pots, or were they actually being asked about the issue that we are looking at, which is the pot transferring as you go or going into an aggregator?

Otto Thoresen: I am sorry, I do not have the details of the research here, but I would be very happy to supply more background if that would be helpful.6

Sheila Gilmore: I think that would be interesting.

Otto Thoresen: I am very happy to show the questions that were asked and the answers that were given.

Joanne Segars: Similarly, we also have research that shows that what people want is assurance that their money will go into a low-charging scheme. Again, we would be very happy to share that with you.

Q103 Sheila Gilmore: I have one further question, and this is a big question, and we are obviously short of time. We have heard from the Government about something that the Pensions Minister wants to call defined ambition, although we are not quite clear exactly what that means. There is also a lot of discussion about collective defined contribution schemes, with the assertion being made by some commentators that a collective scheme would produce substantially better results for savers. Do you want to comment on these issues?

Otto Thoresen: Again, I think there are a couple of components to that. One is the discussion about economies of scale, charge levels and administration costs. I would continue to argue that if you are one of the five or six large providers of DC schemes within the insurance sector, the platform that you are accessing is equivalent in size to a collective arrangement. It is hundreds of thousands of employees collectively who are sitting on that platform, the administration systems and the services that are provided. The economies of scale can be realised through that mechanism.

When you step over to the other side of the discussion about risk sharing, guarantees, uncertainty and how that can work, it is quite possible to create more certain outcomes within the defined contribution, contract-based system. You can design funds that provide guarantees. We had a thing historically in the industry called "with profits", which was very similar to some of the ideas that are being discussed now. There are issues with that, too. There are issues about transparency and cost, because the cost of providing guarantees can be quite high and potentially eat into the returns that are available. But there are ways that you can design solutions like that either within a collective system or within a DC contract-based system. In some of the markets overseas where these collective systems have been in operation, and the Dutch market is quite often given as an example, what is happening is that the target is having to be turned down because of the economic situation and longevity developments, so the amount that was originally promised cannot be realised.

So there are difficulties in delivering it, and there are benefits, but I still do not believe that it forces you to go left or right in terms of the structure within which you want to deliver these alternatives. I think you can do it either way, and some of the same challenges will be present.

Joanne Segars: I think you are right; we are still trying to define what defined ambition means. It does mean many, many different things. As the Minister consults on this as he considers the many options that sit within the defined ambition space from the part of the pensions universe that sits between pure DB and DC, I think it is important that he does not narrow down and rule out any particular options. We want to see as much creativity in that part of the market as possible.

Again, I think the possibilities for thinking about how we might effectively risk share are much more prevalent where we do have schemes operating at scale, and we can use some of the cross-subsidies and some of the economies of scale that are available. This may be me being boring, or perhaps possibly consistent in my answers to the Committee, but I think where there are informed purchasers making those decisions about how we can effectively share risk and what the right outcome and product formulation is for those defined ambition schemes, we stand a much better chance of getting a sensible outcome to defined ambition, because it can mean many different things and have many different outcomes.

There are some interesting examples from abroad. Otto has talked about the Dutch experience. The Danes also have some quite interesting approaches, where they look at a much more with-profits, smoothed approach to investment. There are some very useful points we can learn from abroad.

Jonathan Lipkin: I would add in different ways to both sets of observations. There are a number of questions it may be useful to ask as we enter this debate, for example, around transparency. We have talked a lot about transparency today with respect to DC, but the same issues should apply in collective DC. Yes, it is an interesting debate, but as Otto was saying, guarantees operate, but they operate at a cost. Are those costs going to be transparent? Will collective DC operate in an equitable way, not just within generations of workers but between generations of workers? One of the things we have seen with defined benefit is that there is considerable scope for intergenerational transfers that may work very well for certain cohorts of workers but less well for others. A third example of the kind of question that would be useful to ask is: how does it facilitate labour market mobility? Again, many schemes work terribly well if you work for the same employer for 40 years and you are followed by more cohorts of employees who work for the same employer for a long period of time. If you are an employee who has five or six jobs over your lifetime, will this work well for you?

It is a very interesting debate; there are lots of potential avenues to explore, but I think it would be helpful to explore certain benchmarks of the kind that we are also looking at with respect to DC.

Chair: As always we are overrunning.

Q104 Anne Marie Morris: I will keep it quick and ask two questions, if I may, and if you could each give an answer in turn, that would be helpful. As we have already heard in this hearing, the regulatory environment is significant. The Red Tape Challenge has specifically focussed on pensions, so my first question is: how effective has that been, to your knowledge, and do you think that is actually going to reduce regulation? That would be of benefit, hopefully, both to you as well as to the employers and employees.

The second question, which is also about simplifying regulation, is whether or not there is any scope for restructuring the way schemes are currently regulated. At the moment, we have a system; we have The Pensions Regulator and the FSA-shortly we expect it to become the Financial Conduct Authority. They regulate different things. The Pensions Regulator is around scheme administration and compliance; the FSA is around advice, sales and marketing. It is not true to say that one is focused just on contract and one is focused just on the trust schemes. There are also the regulatory issues around consumer protection, which are going to be reduced. So we are looking at quite a complicated scenario, with different regulators doing different things where there is overlap. The big picture: can we make it simpler but remain effective?

Joanne Segars: Perhaps I can answer both those questions as quickly as I possibly can. As regards the Red Tape Challenge, our response would be, "What Red Tape Challenge?" I see no evidence of any cutback to any of the red tape. We all entered that process for cutting back pensions regulation with great enthusiasm earlier this year, and it seems to have slowed down, if not ground to a complete and utter halt. So anything this Committee can do to reinvigorate that particular part of the process would be much appreciated.

In terms of who should regulate pensions and how we have a more rational regulatory structure, our current divide of regulatory structure really reflects the rather odd situation that we have got, which we have talked about and has been a theme throughout this session. We have argued that there should be a single regulator for pensions. We think it is logical that it should be The Pensions Regulator. That makes sense to consumers and I think it makes sense to employers, too. Again, at the risk of being boring, or at least consistent, we think that if we have a situation where we move to fewer, larger trust-based schemes, then that most naturally does sit with The Pensions Regulator. Again, the note that I will provide to the Committee on what that regulatory structure might look like sets out some very clear and new powers for the regulator.

Q105 Anne Marie Morris: So would you extend their remit, so that they cover some of the things that the FSA used to?

Joanne Segars: Yes, clearly the prudential regulation of financial services providers will sit with the FSA-the FCA. But we would certainly see that pensions regulation should sit as much as possible under the remit of The Pensions Regulator.

Q106 Anne Marie Morris: So you would still keep the two bodies, but just broaden the pension schemes that they looked at.

Joanne Segars: Clearly, the FCA covers many more things than pensions, but as far as pensions are concerned, as much of it as possible should sit under the remit of The Pensions Regulator, which is already extending its remit by taking on the local government pension scheme regulation, for example, or some aspects of that next year. So we think there is a case for The Pensions Regulator to really do what it says on the tin in regulating as much of the pensions landscape as possible.

Jonathan Lipkin: Let me try to answer both questions quickly and in one go. From our perspective, looking at the topics we have discussed today with respect to DC, we see the challenge as not so much too much but inconsistent regulation. We have had examples of that today, where part of my industry-investment funds-is under a certain disclosure regulation; Otto’s industry is under another; and trustees sit in an altogether different space. It cannot be right for consumers that we continue to operate with such a degree of fragmentation, so we need to get this joined up. Can we get it joined up with a single regulator? I think we would agree that you still need to separate the two, but you need to have a way of ensuring that those memoranda of understanding that currently exist between two organisations get stronger and clearer about the consumer outcome when we move to a place where consumers, wherever they are in the pension system, can be sure that schemes are getting regulated in a reasonably consistent manner.

I would just point out that one of the big issues with respect to financial services is we will always sit in the FCA, because our firms, our people and products are regulated in that way. It is very difficult to say you can lift out parts of the product and put them with TPR. So more consistency and more dialogue is the way we would like to see it go.

Otto Thoresen: My answer to the first question on the Red Tape Challenge is no. I think the question was whether I have seen any benefit coming through from it, and the answer is no. On the second one, there are two parts to the answer. I think working towards a consistent regulatory approach that applies to this massive part of the savings environment for people is really important. The inconsistencies that currently apply are not sustainable in the long term. So standing back and thinking about what a good system would look like and how we might get there, within the European context, too, of course, would be a very useful thing to do. But we must not rely on that as being the answer to the short and medium-term challenges that we have, because they are here now and need to be addressed. We need to get on and work within the current system and make it more effective, avoiding duplication and inconsistency. The organisations in the ABI offer trust-based schemes, contract-based schemes and master-trust schemes. They are finding that a very complicated space to operate in currently, so some of the inconsistencies should be squeezed out for the benefit of the system and the employees.

Q107 Anne Marie Morris: Should that be done on a compulsory or voluntary basis?

Otto Thoresen: If you take the disclosure piece for employees that we have started, we have started a conversation there with The Pensions Regulator and the Financial Conduct Authority about how we can move forward in a sensible way, and they are very co-operative. They cannot take the responsibility of trying to drive through massive regulatory change to get there, but they are very supportive of the industry taking the initiative to move that stuff on. I think we can move that stuff on relatively quickly to a good outcome.

Chair: Thank you very much, and we will see how your new code of conduct for charges will work in practice. I think that will be the real test for it. I am sure we will be in touch in the course of the rest of our inquiry if there is anything else that we want to clarify with you. So I thank this panel, but we do have another panel, and I think it is your members who are about to speak. So thank you.

Examination of Witnesses

Witnesses: Sean Lloyd, Pensions Product Manager, Phoenix Group, Richard Parkin, Head of Proposition, DC and Workplace Savings, Fidelity, Ronnie Morgan, Strategic Insight Manager, Scottish Life, and Steve Groves, Chief Executive Officer, Partnership, gave evidence.

Q108 Chair: Thank you very much for waiting. Sorry, we are running a bit late, but we will not expect all of you to answer every question. Hopefully, we can get through the next section, but we always have lots and lots of questions. Can I just begin by asking you to introduce yourselves for the record?

Richard Parkin: Good morning. My name is Richard Parkin. I head up the Proposition Team for Fidelity’s UK DC and Workplace Savings business.

Steve Groves: Good morning. My name is Steve Groves. I am the Chief Executive of Partnership, which is a specialist annuity provider that provides annuities to people living with material medical conditions.

Sean Lloyd: Good morning. My name is Sean Lloyd, and I am a Pensions Product Manager at the Phoenix Group.

Ronnie Morgan: Good morning. I am Ronnie Morgan. I am a Strategic Insight Manager at Scottish Life, which is part of the Royal London Group, which is the largest UK mutual life and pensions company in the UK.

Chair: Thank you for coming along this morning. We have got a series of questions on transparency of charges, default funds and communication with members.

Q109 Graham Evans: The industry all say that they support transparency, and then some of the witnesses that we have just had before you told us about a new code or practice. It has taken well into the 21st century for that to come about. Could you give us some concrete examples of steps that you have taken, as an industry and individual firms-prior to the code of practice being brought out-to break down specifically the charges and costs on transactions and the like?

Ronnie Morgan: I am happy to say as a mutual organisation we have taken some quite difficult decisions to make sure we are transparent to our customers. I will give you a few examples. One of them is that, as far back as 2005, we effectively removed ourselves from the initial commission market by introducing something called a financial adviser fee, which removed us from the conversation about the charging levels that were set for advisers, so the actual conversation could happen between the adviser and the customer. Removing ourselves from that conversation means that the product and advice charge are separated. That helped transparency, and that is obviously where the RDR7 is heading.

When active member discounts became prevalent in the market, it was something we did not feel that we should be involved in, so we have set a single price for our products. I think that has helped with transparency as far as Scottish Life is concerned. The other thing is that Royal London Asset Management provide our funds, but they do not charge any cost back to us, so we are able to keep our Annual Management Charges and our total expense ratio the same. So I think we made some difficult decisions because, when we removed ourselves from the commission market, it meant that people who wanted to operate commission did not use us, but people that wanted to be transparent and use the financial adviser fee and have that conversation happen between the customer and the adviser would use our products. It is the same with active member discount; we could look relatively expensive to someone who is using a dual-pricing mechanism in the market. So they were difficult decisions, but it has helped us be more transparent.

Sean Lloyd: In the Phoenix Group, we have a significant proportion of with-profit funds. We have tried to make those as transparent as we possibly can.

Chair: Can I ask you to speak up? These microphones do not amplify; they are actually for recording, so please speak up.

Sean Lloyd: What we are trying to do, certainly with our with-profit funds, is try to give as much important information as we can to our customers. It highlights what with profits are, bonuses and the charges and the likes that are incurred. We are trying to improve the transparency certainly in that particular sector.

Earlier in the session, there was talk about some of the jargon that is in the industry, so we tried to introduce jargon busters on our internet sites and so on. Also for unit-linked businesses, we tried to explain to customers in relatively simple terms how unit pricing works. Again, we tried to put some fairly simple language in place, which we also publish on our website.

Steve Groves: Partnership has an unusual position in this, in that we only provide annuities to people who buy in the Open Market Option (OMO). We do not participate in the accumulation stage, so our particular focus has been on improving the annuity market. I have been involved in campaigning on Open Market Option issues for about 20 years if you want to look at some of our more noticeable initiatives. We got industry agreement to a single annuity application form, so that people who want to shop around for an annuity fill in one form and all the providers will accept that, underwrite the annuity and quote on the back of it, which took out a huge barrier.

We were one of the key campaigners behind the ABI’s decision to implement an electronic system to transfer funds. We published in the media the average amount of time it took providers to transfer funds, which shone a light on an issue that we felt was very clearly there. We have also been one of the key campaigners behind the development of the ABI code, which has just been announced. I think we have an unusual perspective on this because I do not have captive customers. I win business by doing the best deal for customers in an open market, and therefore we have a very strong interest in making that market as open and transparent as possible.

Q110 Graham Evans: And you market your company in that respect?

Steve Groves: Yes, all of our business comes from Independent Financial Advisers (IFAs) and is placed with us because we have offered the best rate to the consumer in the market, with the independent financial adviser having done a whole search. So my interest is in having an open and transparent market, and that has been our focus.

Richard Parkin: We have published total expense ratios for all of the funds. We offer funds that are managed both by Fidelity and increasingly by third-party fund managers that are on our platform. We have gone beyond that and fixed those total expense ratios-if you like, capped them-so that customers are clear what cost they are paying even if there are variations in the underlying funds’ expenses. Those are absorbed within our overall margins. We have gone beyond that recently, to respond to the Minister’s challenge around auto-enrolment charges. We will ensure that none of our clients that are enrolling in contract-based plans are enrolling into funds with TERs of more than 1%.

Q111 Graham Evans: TER?

Richard Parkin: Total expense ratio, so those are all of the expenses that are attributed to the fund. I will come on to the transaction costs in just a moment.

Moreover, we are going to make those defaults available to all existing members as well, so this is not just for people coming into the plan under the auto-enrolment rules.

In terms of the transaction costs, I think the industry representatives who were here before have recognised that, whilst disclosure has been available through reports and accounts, transaction costs have not been actively disclosed to customers. Certainly, we are very supportive of the IMA’s approach there. We do think there is a danger in aggregating fund costs and transaction charges, because we worry that may lead to some inappropriate decisions being taken by members, but certainly we are on board with what the IMA are proposing in terms of further disclosure there.

Q112 Graham Evans: In terms of transaction costs, I heard an investment trader say a long-term investment is a short-term investment gone wrong. What is your view on that? How do you know when it is appropriate to have that transaction-to buy and sell? How do you monitor that?

Richard Parkin: My part of the business is actually in providing the defined-contribution plans rather than running the investment funds themselves, but on our DC fund platform we have probably around 30 or 35 managers with about 120 different funds that our clients tend to choose a selection from for their members. Within that, you get very different styles. You get some managers running very large portfolios of stocks on a buy and hold basis, and others who are trading much more actively. This is one of the dangers of publishing transaction costs, because a more dynamic and active manager who is maybe generating good returns for his investors would be perceived as having higher trading costs, so you have got to consider both.

Q113 Graham Evans: But on the other hand, when you have a good performance, your customers and your clients are not quite so concerned about the cost. The reverse, when the performance is not good, is when people start really looking at the cost, but thank you for that answer.

Evidence we have received confirms that the majority of savers remain in the default fund of their scheme. How can providers ensure that their default funds are properly designed and governed?

Ronnie Morgan: The DWP have actually produced an excellent document, "Guidance for offering a default option for defined contribution automatic enrolment pension schemes". It really gets into all the right places as far as default fund design is concerned: making sure that the objectives of the fund are clear; it is suitable for the people going into it; it takes account of the time to retirement.

The second point you came on to is the real nub of this. It is not just about designing the right default fund, and I hope you do not see this as a kind of shameless plug for Scottish Life, but I will just to show our credibility in this area. We have been voted as the ultimate default fund by corporate advisers for the last three years, and it is not just because of the way we design our fund but the governance that sits round it, which is making sure that you bring all the funds and performance under scrutiny at least quarterly. So we have an investment advisory committee that does that.

You have to have independence. I think it was Joanne Segars that said it is important to have independence on the committees. We have very strong independent members. In fact, it has just been announced that our chair will be an independent member, so they have got to look after the interest of the customers and not just the business. You must make sure that you have got the systems in place to make changes. If you are actually making changes within the funds, you might be looking at some of the evidence and saying it is going to be very expensive to make changes. You have to build the systems into the process, so that when you make changes, you can flush them through to all the policies very quickly and efficiently. The last thing is when you are actually thinking about making these decisions: make sure they are transparent to the customer, you say why you are making decisions and the customer gets to know as well. So governance is important.

Sean Lloyd: I would absolutely echo Ronnie’s comments. Actually with Phoenix, being a closed book consolidator, we will not actually be transacting in the auto-enrolment arena.

Steve Groves: I have a very different perspective, because the only experience I have of this is as a customer. We have just been through re-tendering and replacing our staff pension scheme, so from my point of view the things that were important for us were a combination of clear visibility of what the fund was going to invest in and how it was controlled, an appropriate degree of risk for our employee profile, which is relatively young, and then both a suitable expense ratio and disclosure of that expense ratio. From a customer’s viewpoint, those were the three things that concerned me.

Graham Evans: I wish we had time to explore that a bit further, but unfortunately, we do not. Thank you.

Richard Parkin: I think Ronnie has already highlighted the way that many providers operate their default funds in terms of having oversight committees, and particularly you can look back before the DWP guidance to a paper that was issued by the FSA in 2007 around Treating Customers Fairly (TCF) and how that impacts on product design, which puts the onus on us to make sure the products we are putting into the market are suitable for the customers that are likely to buy them. We stress test those products and continuously keep them under review, making sure we have the right systems and processes in place to manage them.

I would make a further point. Pensions provision is a very long-term business, and to one of the points Ms Morris made in the earlier session about the risk that providers are taking in offering pensions, the insurance and fund management industry is taking significant risk in the way that it is effectively funding the growth of defined contribution in this country. Many of us do not make money for many years when we implement a new scheme. We earn a charge on the fund, and given there is no money in the fund to start off with, it takes a long time. So it is in our interests to make sure that we are doing the right thing by our customers and our clients. We do that by making sure the products that we offer them will be durable, so that we can rely on the fact we can hold on to that customer and eventually earn the return that we are all seeking to make.

Q114 Graham Evans: I have a couple of quick questions. What are your views about the practice that some providers have adopted of using a low-risk investment strategy in their default funds? How much potential is there for consumer detriment in that practice? Secondly, what engagement do schemes have with members in the years leading up to their retirement regarding potential changes in need or legislation that would affect their planned retirement date?

Ronnie Morgan: When you are looking at risk, you need to think about taking an appropriate level of risk. I think the point you are getting at is some people are just looking to minimise risk. Pensions are long-term saving; you have to get people into the right level of risk relative to the length of time that they have to save. Maybe the example that you are pulling at is NEST’s decision to have a very low risk profile in the early years, a medium risk in the growth phase, and then the consolidation phase starts to go down to low risk again. That goes against the view that we would take, and most people understand there is a balance between risk and reward.

You can afford to take the higher level of risk when you are furthest away from actually needing that money. So I do not think the low-risk approach is going to necessarily come out with the best member outcome. I understand NEST’s research; they have looked at their particular target market, and I respect that. But it is there to minimise opt out and not necessarily to get the best outcome for the consumer, so I do not think it is the right investment approach. It is certainly not what we would advocate. You have to understand the attitude to risk of the consumer, the length of time before retirement and act accordingly. If you want to deal with the opportunity for members to opt out, you deal with that through really good education. I do not think the education we get out to people about finances in the country is right, and most people would agree with that. We have to help with that. We also need to do really good communication to say you may see falls, but it is a long-term game and you have to stick with it, far from retirement is the time that is the right time to be taking a higher level of risk.

Sean Lloyd: Again, I think that is absolutely right. Another important thing the code has addressed is retirement choices, which Otto alluded to earlier on. As part of that code in the run up to retirement-in, say, the five years before-we are trying to prompt, as part of the retirement choice piece, people to start thinking about their retirement. That also gives you an opportunity to start deciding at that stage whether there is an opportunity then for you to start to switch into lower risk as you start to plan for retirement. That is another good thing across the industry, because the code is compulsory and all the ABI members will be using it. I think that will certainly help with the engagement piece, and in the run up to retirement, certainly in at least the five years through to the statutory retirement age.

Steve Groves: I think the answer is less clear. From an investment point of view, Sean and Ronnie are absolutely right that you optimise over the long term by probably having a slightly higher risk approach. I do personally think if you talk to consumers, and we have done quite a lot of work with consumers, they have very low appetites for risk. Consumers want a high return and low volatility, which of course we all want. I am drawn to the argument that there is something to be said for getting customers in, getting them comfortable with saving, getting them seeing their pot build, and then starting to engage them more in the decision. So from an investment point of view, these guys are absolutely right. From a consumer point of view, I would get them in the habit, get them comfortable, and then as they start to learn more and feel more comfortable, get them more engaged in decisions. It is not an easy question.

Richard Parkin: From an investment point of view, it simply does not make sense, and I would argue whether it even works from the idea of keeping people opted in. I can understand as NEST goes into its early years, it can run all of its funds with low risk, but if I am coming into NEST as a 45-year-old for the first time in 10 years’ time, I am not going to be coming into a fund with a low risk. Maybe I have been in other funds where I have got used to the idea of investing, but it does seem to be something that is very ephemeral in the way it is going to operate, because it is just impossible to constantly protect people as they come in and start saving for the first time in this environment. I do not think it even achieves the political objective.

We have just been through one of the most dreadful downturns in the market that we have experienced for a very long time, and we at Fidelity have all been surprised by how little impact that has had on customer behaviour within the defined contribution business. We had more phone calls, some very cross ones-people do not like to see minus numbers-but that did not stop people from saving and it did not stop people from being in their pension scheme. We are going to be dealing with a different group of individuals as we go into auto-enrolment. Fortunately Fidelity does not have the Daily Mail and others constantly tracking our performance and potentially raising concerns when things do turn down, so I can understand we are probably in a different environment. But I think we have to be careful about trying to pretend that investment is risk free. There are a lot of examples where we have tried to do that in this country and it has ended in tears, so people do have to understand not the details of investing but that this is there for the long term, and there are some opportunities when markets are down as well. Within all of the employer sponsored schemes, the availability of employer contribution does give them some protection, some additional advantage, over and above the returns they are making on the market.

Q115 Chair: Sean and Ronnie, if your funds were going to be subject to the same level of scrutiny and public attention that the NEST one will be-and any time it goes down it would be headlines, as Richard said, in the Daily Mail-would you have answered the question in quite the way that you did?

Ronnie Morgan: Not for me. I hope that our performance, governance and what we do with our funds does come under scrutiny. I know it does actually come under a lot of scrutiny by financial advisers. We are not direct-to-consumer business; we only act through financial advisers.

Q116 Chair: I think financial advisers saying it is not the same as headlines in the Daily Mail-you know, "Government scheme a disaster", or whatever.

Richard Parkin: I would just clarify that I have got no problem with having the funds scrutinised. I think the danger is when investment markets are down, and that is something that we all have to deal with, and I suspect that the view will be that there is something that NEST or somebody else has done wrong, when in reality it is the function of the markets that we operate in. So that distinction between the reality of investment and risk taking and what a particular provider has done is one that may get lost and blurred.

Chair: Unfortunately some of our tabloid newspapers do not understand the subtleties of things when they are writing a headline.

Q117 Mr Burley: You are saying that it is not risk free. Do you therefore see a difference between the type of pensions and the risks attached to that in the private sector and what there is in the public sector, where payouts are guaranteed? In the sorts of schemes that you represent, people could pay in their money and lose everything, and that is a big difference between the public and private sector.

Richard Parkin: I think, Mr Burley, there is definitely the difference between defined benefit, even on the sort of reduced level of cover that exists, and defined contributions. Certainly, the whole principle is that with defined contribution what you get out will depend on what you put in and the investment performance. There are a number of mechanisms that stop people from losing everything, both within prudential supervision and the operation of trusts and so on. Even in the worst downturn, that is something that we would not expect. Where there are losses, there are things such as the Financial Services Compensation Scheme.

One thing that is frustrating and another example of the inconsistency of regulation is that the application of the Financial Services Compensation Scheme in the DC pension space is very uneven in terms of the way it works. For example, trustees may be covered under the Financial Services Compensation Scheme if they buy a life policy, but they are not if they buy a collective investment scheme. Similarly, if I buy a fund on behalf of my customer, I am buying as an insurance company. That then has a different treatment. Our customers see this as buying a pension. They do not care whether it is contract or trust based, or whether it is an insurance company or a fund manager. They expect certain protections and things from that, and there is a lot of work to be done as an industry and in Government to make sure that, when an individual buys a pension, they have confidence and do not have to worry about those things.

Steve Groves: I would answer your question more simply: yes, in the private sector they are exposed principally to three risks that they are not exposed to in the public sector in the same way. One is the expenses of the provider, because they come off the fund; the second is the general improvement in how long people live, because that affects the income they get at the end; and the third is the underlying performance of the funds they are invested in. Those are three risks that private-sector schemes are much more materially exposed to than any public-sector scheme.

Sean Lloyd: I think that is right. I think the other thing I would say is probably more of a concern with some of the legacy schemes. I am sure we will come on to small pots shortly, but a lot of both trust and contract-based pension products are sold with-profit so that they have effectively got the guaranteed fund value as well, so it is not just the purely unit-linked range. You have also got with-profits contracts that have got these guarantees that if you stay until the retirement date, you are at least guaranteed those values.

Chair: As I said, not everybody needs to answer. You seem to be in agreement.

Q118 Jane Ellison: I will try to be really quick with this question, because it should lend itself to a bit of a yes/no. We have heard quite a lot about deferred member charges from previous witnesses. Scottish Life has been very robust about this, and basically said they cannot be justified and they should be abolished. Is that correct?

Ronnie Morgan: That is correct.

Q119 Jane Ellison: So first of all I just want to ask the other witnesses if they agree with that position-a straight yes or no.

Richard Parkin: Yes.

Steve Groves: Yes.

Chair: That is why you are here, because you do have different views.

Q120 Jane Ellison: So I hope that is two yeses. Mr Lloyd?

Sean Lloyd: Yes. Again, it is a fairly modern design. With our closed book range, it is also termed as active member discount, and it is not something that we offer on our books of business.

Q121 Jane Ellison: Yes-Mr Parkin?

Richard Parkin: We do not think they can be justified and think they should be abolished as well.

Q122 Jane Ellison: Right, so if you all agree that they should be abolished, do you think there is a danger that some parts of the industry will find a way of putting that charge back in somewhere?

Ronnie Morgan: I do not think is a matter of the charge. I can see an argument for a small adjustment to a deferred member just to keep the pounds and pence cost the same. To give you an example: if someone is paying £1,000, then at 0.5%, you are looking at £5 for that. If they leave, that will stay at about the same charge, but someone that continues on into that plan may get up to a much higher figure and they would be paying more for that. So you can see that there might be an argument for slightly increasing that charge, but what we saw in the market was an increase from one price to another that was way off what you could expect perhaps for a similar priced personal pension in the market. The argument is there; we understand the argument, but we just felt that it was not being used in the right way for the market as it stood, and it was not aiding transparency to our customers. That is why we did not support that.

Q123 Jane Ellison: So you are basically saying you could see there might be an argument for a small adjustment but not some sort of large-scale offsetting if deferred member charges were actually abolished.

Ronnie Morgan: Absolutely.

Q124 Jane Ellison: Do the other witnesses agree with that?

Richard Parkin: Yes. There is a very important point here, and one that goes to the heart of a number of the discussions around charges. With any form of collective DC provision, or any form of collective pension provision, there are significant crosssubsidies that exist between different groups of members, particularly where you have a single fund charge that has, from a social point of view, the good effect of those with a lot of money subsidising those with not very much money. The use of active member discount and indeed the design of any charging structure, is a decision by a provider about how those crosssubsidies are structured. As Ronnie says, we just cannot be comfortable that that decision about cross-subsidies reflects the way that costs occur for us. We think other crosssubsidies are fairer, and in particular the transfer, or that those with more pay more, because that works in terms of the policy objectives. That one does not.

Steve Groves: It is pretty simple actually, because the role of the regulations and rules is to protect the weakest and the least financially able. If you put in place the rules that protect those deferred members, those with small pots, then you have done your job. I think you can trust that those with larger pots will find a solution that works for them. But it is the role of the regulator and the rules to protect the weaker and less able.

Jane Ellison: Can I ask the next question, Chair? Have we got time?

Chair: Yes.

Q125 Jane Ellison: Just on annuities very quickly, there has been some evidence of more shopping around in recent years, but it is still less than half the people who could be doing it. There is particular evidence in the area you work in that people who really should be shopping around are not doing it. So could I have a quick comment on what more could be done to increase that? We have had the idea pitched to us in a previous session of effectively a clearing-house for annuities, and I just wondered what you think about that.

Ronnie Morgan: I agree; people have to shop around. The difference between someone that just takes an annuity that might be pitched to them and someone that shops around and gets the best annuity in the market is stark. I think the OMO code through the ABI is absolutely heading in the right direction. We are fully on side with that and are compliant with that code. It gets to some good places in there, not just about shopping around but where to get information and advice that is absolutely essential, and that really has to be highlighted, because it might not just be about annuitisation; it might be about not having an annuity at all. One extreme might be you should be going to a drawdown product because that suits your circumstances much better. At the other scale, it may be that you are entitled to commute the money that you had to get a lump sum. Advice and information is absolutely essential in this market, and people must shop around to get the best deal for the right outcome. You could be in a great scheme for years, whatever the charge, and really cause yourself significant detriment in retirement if you do not get the right advice and information.

Sean Lloyd: That is right, and the OMO code is going to be a real step forward. The ABI best practice has been there for some time. There has also been ongoing customer research that has tried to improve that process, but the ABI code really is a step forward. The other thing to remember is that probably one in five of our customers have guaranteed annuity rates. Some of those are as generous as a 10% yield. You look at, say, a £10,000 pot returning a £1,000 annuity. So absolutely we endorse the code. We have actively been involved in the development of the code alongside the ABI, but we would also echo Ronnie’s comments about advice, and also being very conscious of some of the valuable benefits that might already be in place on your existing product.

Steve Groves: From my point of view, an average customer gets 20% to 40% more than they were being offered from their seeding scheme. We reckon less than half the people that should be shopping around and coming to organisations like us do. Why? Actually I do not think it is massively different to the same issues you have in the accumulation phase. You have a lack of engagement and understanding, and people get to retirement. They were probably unaware they needed to buy an annuity. They probably received a form that says, frankly, "If you want an annuity from us, sign here." It is sort of easy.

The ABI code is a step forward, but I do not think it will change anything overnight. In reality, you will see continued incremental change. We have worked back to see how customers get good outcomes. The answer is they see good advisers. The cost of advice is increasing, and we talked about a cross-subsidy that exists currently within a sort of commission system, where people pay a percentage of their fund. Post-RDR they are going to be paying fees, and I think that will make it harder for people with small pots to shop around. That is a material concern of mine-that we will price them out of that advice market.

So do I see a clearing-house as the answer? No, because I think this is about more than just rate. Rate is important, but let me give you a simple example. The majority of annuities bought in the UK are bought by married men, who mostly buy single-life annuities with no protection for their partner. I do not think that is the right answer. I suspect if we really looked at it, we would conclude it is not. So what they need is some form of access to advice, and we need to make that advice much more cost effective and much simpler to access.

Sean Lloyd: It is definitely an individual consideration, is it not?

Steve Groves: Yes.

Richard Parkin: Fidelity is not in the annuity market itself. We were very pleased to be part of developing the ABI code. However, I think Steve’s alluded to some of the customer attitudes and behaviours that make it difficult, and no matter how hard you push, you still will not get them to move. We have had customers complain to us that in promoting the Open Market Option to them, we are trying to get rid of them; having had their money for 20 years, when they need to take an income, we are throwing them out of the door.

We took a decision that we could not just take the horse to water, we had to make it drink, so in July of this year we introduced a service, which we call RetireWise, which helps customers and members understand what it is they need to do in terms of income, but more importantly then passes them over to effectively an IFA who will guide them and where necessary give them advice to help them get the right product, so we can be confident that all of our retiring members end up with a product that is not just the best rate in the market but is the best shape for them. Again, the way the cost of that service works means there are crosssubsidies in there, so we can make sure that even those with very, very small pots get good value out of it.

Q126 Mr Burley: Like so many areas in life there is evidence that there has been a proliferation of regulations in your industry. So the question is how could that level of regulation of those pensions be reduced without reducing the quality of pension provision?

Steve Groves: The single biggest area I would look at is communication. From a customer point of view, I think that the regulations were put in place with all of the right intentions, but actually they mean that the communications that customers are receiving are close to incomprehensible. I will be honest: I run an annuity company, but I have a personal pension and I sometimes get my 37-page annual statement, look at it and it takes me ages to work out what it is actually telling me. It is completely compliant and does exactly what the rules say, and providers who did not send it would be in trouble. But what I really want is one page that says this was your fund at the start of the year, this is what you paid in, this is what came out and this is where it is.

I think we have to move away from a model of the requirement of disclosure and communication being that you have to tell everybody everything just in case they wanted to know, to, "Let’s write something that works for 99% of the population, and if you want the other bits of information it is on the website, or ask".

Sean Lloyd: It is certainly encouraging to see some of the more principles-based regulation that is coming through now both from The Pensions Regulator (TPR) and from the FSA. Probably in the past, you would err on the side of caution and ensure your communications were compliant. Unfortunately, you would then probably have to spend another five pages trying to explain in a jargonfree method exactly what that means, which is why you would have to include the jargonbusters and things like that.

Q127 Mr Burley: Do you think that stems from regulation coming from different sources like the DWP, the FSA and TPR?

Ronnie Morgan: I appreciate what TPR and the FSA are doing, and they are working together, and they are engaging with industry very well at the moment actually. The TPR six principles, for example, I fully support exactly what is going on in there. They are engaging and they are getting into the right place, but I think there is a danger, because when you look at the FSA and the TCF principles there is a lot of crossover between what is happening in there. Again, if you look at some of the things in the DWP guidance on default funds, they are getting into a lot of the same places, so I think it is just important to make sure that they communicate with each other and get some kind of overarching principles that we can all abide by. If we keep trying to look at all these different places we will say we have to do a bit for that one, a bit for that one, a bit for this one, and then we will make our communications longer and longer, just to try to hit them all. Or we will put controls in place to try to make sure we are hitting all these different bits and pieces, which may end up costing the consumer in the long run.

Q128 Mr Burley: Is there a consistency between the regulation of contract- and trust-based schemes?

Ronnie Morgan: I do not think they are inconsistencies; they just are different things. Obviously, TPR regulate the trust-based schemes, but have now got a responsibility for automatic enrolment as well, in the workplace. The FSA are there to regulate contract-based schemes.

Sean Lloyd: Yes, I do not think there is confusion; there is just an overlay and possibly, to a degree, an element of duplication, probably in some key touch points which are your disclosure at outset for the trust-based and contract-based schemes, and then it is very much about the annual statements.

Q129 Mr Burley: What about larger versus smaller schemes? Does larger tend to have higher-quality regulation?

Richard Parkin: I am not sure it is about higher quality regulation. Certainly, larger schemes tend to have more resources, and, should they choose to, can direct those at having a higher degree of governance. The point was made by Otto earlier on that certainly, as providers, we are all operating at scale, and we would consider we are large multiemployer schemes, in many cases, in the way we run our operations. Particularly with regard to the FSA element of our regulation, we have a lot of internal governance committees to make sure we can deliver TCF, so I think we are effectively delivering large-scale governance even to some of our very smallest clients, and evidencing that.

One of the big challenges we have is this rather sort of sterile debate between "trust is good; contract is bad." The work that TPR is doing is very useful in terms of setting out what makes a good pension scheme. At the end of the day, that should be on what the outcome is for the member. What they are doing is a fairly technical piece of mapping the various bits of regulation against those outcomes to make sure that all the bases are covered, so that whether it is under an FSA Treating Customers Fairly credential regime, or whether it is under TPR regulations, we are making sure that those things exist.

If you were going to centralise regulation, I agree that most of it is around consistency. We would see it as very difficult to move everything to TPR; especially given the consumer nature of DC pensions, it would be much more likely to consolidate it under the FSA, but within that then you have got to look at exactly the level of communication, disclosure and so on that Ronnie, Sean and Steve have highlighted.

Ronnie Morgan: Picking up on the larger schemes point, I think you can see an argument where in the trust-based environment there are some very, very small schemes, and they do not have the scale or perhaps the experience to have good governance and so on. But as contract-based providers, we have investment advisers on the committee in place to make sure that we have given governance to all of our schemes regardless of size. If anything is done to try to force scale into the market that could be at the detriment to all because we need every kind of proposition to cover the whole of the target market at the moment.

When you look at the staging profile it is actually quite frightening from a personal point of view. My background before I worked in policy is in company pensions implementation; I ran a UK-wide corporate pensions implementation team, and I have been at the coalface trying to work out between payroll departments and HR departments and all the governance inside a company to make sure that pension schemes actually work. And that is for people who want to come to us for pensions. Once you start getting into that sort of semicompulsion point of view and you are talking about millions of employers, we need every single person and every bit of skill that we can get, and every provider in this market to be focused on the Government’s policy. If we do anything just to get scale, you will get commoditisation, get people to rip services out that would be really valuable to the Government’s policy, and everything would just go down to cost. So we believe in a fivestar service, fantastic implementation and great governance. That is what is important, and everybody should focus on getting that for the customer, and every company should make sure they are doing that, and the market will out. If you are doing those good things the market will select you, and if you are not then the market should deselect you.

Steve Groves: I can speak pretty freely here as somebody who does not have any accumulation business. I think the trust versus insurance company-provided scheme debate is at very best about fourth order, and it is way off in terms of what matters to consumers. I personally think if you look at this you have got things like expenses, engagement about contributions, understanding, and communication way above it. When you get beyond all of that, I actually would say, on contract versus trust, that I would not go just down the side of trust and I would not go down the side of contract. Trust works for some people. We have had debates earlier in this Committee about things like risk sharing, but actually contractbased, where you have insurance companies with capital, will lend itself better to the evolution of a risk-sharing market in future because it is frankly what large, wellcapitalised insurance companies are there for. So I think you have to be slightly careful not to jump down a "trust is good, contract is bad" notion, because at the moment the challenge is fourth order, and in the future I can see areas where contract will have a value.

Q130 Teresa Pearce: The Government is proposing that the pot follows member. Each of you, do you think that is the best way to deal with the problem of small pots?

Richard Parkin: We have been a proponent of the pot follows member position from the outset. A small pot is a small pot. If you move it to an aggregated scheme, it is still a small pot, and there is no reason to believe that individual will ever become a member of that aggregate scheme in any other right. It may be they have other small pots. If you have multiple aggregators, then it just gets even worse because you end up with multiple pots with people you have no relationship with.

Looking at it from a business point of view as well, running a business where all you are doing is picking up small pots and not having any other ongoing interaction with the member will result in very high costs. If you are talking about a £5,000 pot and I am charging fifty basis points, that is probably not going to be enough to cover running costs realistically. So we would argue about whether anybody would want to be in that market anyway.

Q131 Teresa Pearce: So you think it is a good idea?

Richard Parkin: We think it is a good idea. I am sorry; I just do not buy the detriment argument. I think that is probably a shadow for certain other interests that are there.

Q132 Teresa Pearce: Does anybody disagree?

Steve Groves: I come in here from a consumer viewpoint with one area where I do disagree slightly. Largely I am completely with Richard-pot follows member. I actually think the detriment argument is largely second order. What is the issue here? People do not understand their arrangements and they are not engaged; let’s just make this easy. And whether a specific scheme has a five basis points higher expense or a five basis points lower expense is not the big factor. It is about getting the member engaged, keeping them saving and making them understand what they have.

The one area where I am slightly concerned is there are some historic liabilities in force, and Sean has got some of them, where there are quite valuable guarantees. To be fair to Sean, if he sat here today and said, "No, I think pot follows member is great and these customers should all transfer off on a surrender value," it would make his company a fortune, but it is not the right answer. So we have to put some protection in place for some of the liabilities that have been written in the past to make sure that customers are not-

Q133 Teresa Pearce: So are you saying that after the date of autoenrolment fair enough, but prior to that not?

Steve Groves: I am saying after the date of auto-enrolment, yes; and before the date of auto-enrolment actually I think it is fair enough for the vast majority, but there are two or three technical things that if they existed should be triggers to say either, "This does not automatically move," or "You have to make the customer aware of the risk from automatically moving and the loss that they are going to incur." So it would just be a slight variant, largely unsupported, but we do have to make sure we do not end up with people losing out.

Sean Lloyd: I think that was the key in our submission of evidence. Effectively, there were really two parts to it. One was those that are entering auto-enrolment, and those that are in a legacy pot. And it is absolutely right that there are historic guaranteed funds and the likes that could potentially be lost. That is why we felt there had to be a lot of information, or advice even, on those particular issues where you could lose a guaranteed annuity rate or a guaranteed fund value.

You will see that our opinion was slightly different in terms of pot follows member. That was probably more on the basis of the fact that we have over 100 legacy brands effectively, so with the aggregator approach, when it was originally presented back in about November 2011, these were the three that followed. With the aggregator model, it was more of a case that providers could come in if they felt their business model actually supported an aggregator approach from multiple aggregators. Our view was around the question of, if your business model changed and you had an aggregator, what potential issues that would then create.

Ronnie Morgan: Yes, I support the Government’s policy on pot follow member, but there is a big "but" coming here. I only support it up to a particular point and a particular cap, and there is a reason for that. When the Minister started he called it small pots, and since then he has said, "I wish I had not called it ‘small pots’ in the paper because I mean all pots now." Our support for pot follow member is definitely in the small pots for me, up to a cap of say about £3,000. That creates efficiency in the market and makes sure that all these pots are brought together and can be administered efficiently, but I think if you start raising the pot follow member up the scale, you will start encouraging behaviours from the providers because they are making money on those pots. So you could end up with people trying to put in guarantees. You would obviously have a carve-out, so that you could not have guarantees, so this little bit would not follow. Then you might put teams in place to say, "We want to keep that money so we will encourage people to opt out." Or you could end up with a situation that people find, if they have a multi-aggregator coming in, they might end up just saying, "Okay, we will set up an aggregator to make sure these bits and pieces do not follow."

So I think there are a number of things that can work together. Pot follows member is really good up to a limit, but there are a lot of initiatives going on to try and create a data hub, if you want to call it that, that can bring all the information together on everybody’s pensions, so you can see it all in one place; you can look and see, "Scottish Life, Standard Life or Fidelity: this is all my mix, is it the right thing to transfer all of this money to bring it together physically?" Once you have got that mechanism in place you could maybe bring in government information, the stock of all the past pots as well as the automatic enrolment floor, and you could start to put tools and other mechanisms in place to create the conversation that we need about getting more money into pensions. So I think pot follows member plus a data hub would be an excellent solution.

Sean Lloyd: I think that data hub idea is a really good idea, because that is where you are getting to the stage where you have got this virtual world where you can go in, and hopefully that would help with the whole engagement piece as well. So you know where everything is, you could potentially have a value, you could be told if you have valuable guarantees and things like that. It is all in one place, and hopefully that would promote the engagement as well effectively, in terms of retirement. There is probably more you could do on top of that as well.

Q134 Teresa Pearce: The point about small pots is interesting because NEST is the provider that will have a lot of small pots by its very nature. And yet there are restrictions on transfers in and out. Do you think that is fair?

Ronnie Morgan: I think the restrictions on NEST are obviously there for a reason.

Teresa Pearce: We are told that is what the industry wants.

Ronnie Morgan: Obviously, NEST has been given state subsidy to set up. We cannot get capital at that kind of rate, so it was there to deal with a particular market failure, a supply side failure, where we could not supply a solution for automatic enrolment to absolutely everyone. I think because of that, the NEST restrictions have to stay on until 2017. Doing anything that might discourage people from moving into the automatic enrolment market, or remaining in the automatic enrolment market will just take a lot of skilled people away from being able to deliver the Government’s policy, which is getting a million employers actually signed up, implemented and actually getting into a great scheme.

Q135 Teresa Pearce: So are you saying that, come 2017, there would not be an objection from the industry, or less of an objection?

Ronnie Morgan: I think so. When it comes to 2017, NEST will have a track record. At the moment, I have a good relationship with the people at NEST; there are great people in there, and they have done some good research. But until you actually experience this market you are coming into, you need to keep these restrictions on because I can see it coming. I have been there; I hope you don’t take this as a policy perspective. This is a personal experience. It is really expensive, timeconsuming and tricky. It needs skilled people to get in and to get people on-boarded into pension schemes. And NEST, even just focusing on their target market at present, is going to have a significant problem in getting all those people onboard. And with the greatest respect, this is a massive challenge, and you need to remain focused on the target market.

Q136 Chair: How can the pot follow member if tomorrow somebody gets auto-enrolled into NEST and they’ve already got one pot?

Ronnie Morgan: I think that is a great point.

Richard Parkin: Certainly, Fidelity’s views would be that NEST, to the extent that any transfer arose from an automatic transfer of a small pot, then you would have to except those from the current restrictions.

Q137 Chair: So you would have to change the current restrictions?

Richard Parkin: Yes.

Steve Groves: I think ultimately, again, I do not have an accumulation business, but you go back to what is right for the customer here. So why does NEST exist? NEST exists because the industry has not been very good at serving customers with small and even average pots. I think the restriction was put in there because of the fear of competing with the state subsidised piece, and over the medium term that is a fair fear for an industry to have. So I would say that the ideal would be to allow NEST the time to build. I would remove that restriction, but I would also be looking for NEST to be self-financing around the time the restriction was moved. So you have got it off the ground-it is there; it exists-and frankly what you have then got is a relatively large provider focusing on customers who were not well served by the industry. If the industry wants to compete with that then it needs to offer something better.

Q138 Teresa Pearce: So we need to be putting the customer at the centre?

Steve Groves: Yes, absolutely. Not the industry’s interest, not NEST’s interest.

Ronnie Morgan: That is right. It is for us to compete at that particular point, when NEST has got experience, can prove it can on-board everyone, the investment experience is there and the backing service is there. The market will either compete with that effectively or it will not.

Sean Lloyd: It gives you that period of reflection as well. There is a substantial amount of change; what you want is to give that sufficient time, as Ronnie quite rightly says, to get the experience and then, when you have that had period of reflection, to then look back at the situation again.

Q139 Chair: Can I just put one final question: I know you may not have had time to have a proper look at it because it was only published overnight, but will you use the code of conduct for pension charges that we were talking about? Is it good from what you have seen?

Ronnie Morgan: I have not had the opportunity to read it this morning, but we did respond to the consultation that the NAPF put out on this. I think it is heading in the right direction. Anything that can improve the transparency and the understanding of the customer we would absolutely support. The only reservation that we had, and I would have to go through the document to see if this has been reflected, is that they do not layer up different types of disclosure on top of what we already have to do for the FSA, for example. So I think we have to make sure we get the right documents to make sure that transparency is there, but not build them on top of each other; that is just going to increase costs. But yes, we would support anything that helps transparency.

Q140 Chair: Is that the general view of you all, or is there anything different?

Steve Groves: I will use it as a customer. My role in the accumulation space is a customer. I will use it and I will use it to challenge the provider that we use for our staff pension scheme. It is helpful for me in that position and it will allow me some comparability across them that I do not currently have.

Q141 Chair: You were the one that said that what you want is single page that shows how much has been paid in and out. How far away are we from the industry providing that?

Steve Groves: I want a single page in and out for the individual customer. So if you think about my role in pensions, part of what I do is in annuities; I am a customer of a pension scheme and I get a statement from it, and I found it baffling, frankly. But I also am the chief executive of an insurance company that has a pension scheme for our staff. I am involved in the choice of pension provider that we use for our staff. That is where I will use this code. At the moment, we benchmark on things like performance, cost and service. We have now got greater transparency when I am holding our scheme providers to account. So frankly, when some of these guys are in pitching for our business as a scheme, this will be helpful. But it will be me that uses it more than our members.

Q142 Chair: And what about something like whatpension.com or pensionsupermarket.com?

Richard Parkin: The disclosure code certainly will be used. I think it is somewhat onedimensional in trying to summarise what impact the charging structure has. One of the challenges you have with some of the new entrants to the market is that they have adopted a multi-layered charging structure, so following the introduction of stakeholder pensions our industry has moved to a monocharge where we just have a charge on the fund and that is it. It is the introduction of NEST, with its contribution charges, and NOW: Pensions, with its flat rate, that actually make it much more difficult to compare those charges and, in particular, the impact of those charges on people on different levels of contribution. You really have got to have something like whatpension.com, so you can go on, or rather have an adviser probably, to help you do a full analysis of your workforce, because the impact of NOW’s charging structure when I am on £15,000 compared to when I am on £30,000 is significant. So it is great what the industry has done, but trying to capture that level of detail when you are looking across your entire workforce and multiple charging structures is difficult to do.

Q143 Chair: So you think all the charging is still too complicated to have something as simple as the equivalent of an insurance industry online comparison site?

Richard Parkin: I think it is something that is often missed about the insurance industry. They are very simple charges; you can argue about the level of the charge, but it is a very simple, single charge that requires us to put significant amounts of capital behind it in order to develop that. The charging structures adopted by NEST and NOW and others reflect the fact that they do not have capital behind them, and are having to recover costs. They do have a detrimental impact on those on low levels of contribution and those with a short time to retire compared to others. They are held out as lowcost providers when in fact, for many people, they simply are not. I think that is something we really need to get clear about.

Chair: Okay. I had better finish now because we have got Prime Minister’s Questions, but thank you very much for coming along this morning.


[1] The Pensions Regulator

[2] The FCA will replace the Financial Services Authority —Pensions regulator in 2013.

[3] Independent Financial Adviser

[4] Additional Voluntary Contribution

[5] Tax-exempt Special Savings Accounts, which preceded Individual Savings Accounts

[6] Note by Witness: Ev 120-125 and The full survey for Q2 2012 can be found on the ABI’s website at this link (with the question above found at the bottom of page 11): http://www.abi.org.uk/Publications/63055.pdf

[6] Our most recently published consumer survey is for Q3 2012 and can be found here: http://www.abi.org.uk/Publications/64203.pdf

[6]

[7] Retail Distribution Review, launched by the FSA in 2006 to examine the quality and standard of advice available to consumers in the financial services sector.

Prepared 11th February 2013