Work and Pensions Committee - Minutes of EvidenceHC 768

Back to Report

Oral Evidence

Taken before the Work and Pensions Committee

on Monday 14 January 2013

Members present:

Dame Anne Begg (Chair)

Debbie Abrahams

Jane Ellison

Graham Evans

Sheila Gilmore

Nigel Mills

Anne Marie Morris

Teresa Pearce

________________

Examination of Witnesses

Witnesses: Jane Vass, Head of Public Policy, Age UK, Alison Bailey, Head of Policy, The Pensions Advisory Service, Craig Berry, Pensions Policy Officer, TUC, and Dominic Lindley, Financial Services Policy Team Leader, Which?, gave evidence.

Q229 Chair: Order. May I thank the witnesses for coming along this afternoon and for being patient? We were due to begin this session half an hour ago, but obviously with this afternoon’s statement in the Chamber on the state pension, we thought it was quite important, given that this Committee is about to conduct prelegislative scrutiny of those proposals, that we be there to hear it. As a result of the change of timing, some of our number has now gone off to other things as well, so it has been a bit of a pressurised afternoon, but thank you for your attendance. Before we start, please introduce yourselves and your organisations for the record.

Craig Berry: Good afternoon. I am Craig Berry, Policy Officer at the TUC.

Alison Bailey: Good afternoon. I am Alison Bailey, Head of Policy and Technical Development at the Pensions Advisory Service (TPAS).

Jane Vass: I am Jane Vass, Head of Public Policy at Age UK.

Dominic Lindley: I am Dominic Lindley, Head of the Financial Services Policy Team at Which?

Q230 Chair: Thank you very much for coming along. Obviously you represent the customers in all of this and so your input into our inquiry is very important when looking at how pension funds perform and how they are governed. Just very briefly-and perhaps you do not all need to answer this one-is it the case that trustbased schemes would usually offer better pension provision than contract-based schemes? If that is the case, if the issues of charging, transparency and investment strategy were addressed, would that actually improve the performance of contractbased schemes and make them more like trustbased schemes?

Alison Bailey: We do not have any information in our evidence base to suggest that trustbased schemes offer better governance than contractbased schemes. In fact, over the last six months we have had an increase in complaints about contractbased schemes. Our role obviously is to help the public with pension queries, but the main complaints have been about mistakes, which are usually due to poor administration or carelessness. The second main complaint has been about delays in paying out retirement benefits, disputes over the discretionary distribution of death benefits, late payment of contributions and those sorts of things. None of those are actually governance issues. We also recognise that the pensions industry has done a lot on the contractbased side to improve schemes and charges, and under the FSA’s Treating Customers Fairly regime.

Dominic Lindley: Certainly from our point of view if we look at pensions, the consumer is very weak in this market. These are complex, long term products and most consumers find it very difficult to know whether they are getting a good deal. In the trustbased scheme there is someone in there who has a fiduciary responsibility to all members, whereas in contractbased schemes you are almost relying on the employer to get the best deal for their employees. If that employer is a very large employer with a big pensions department, a big HR department and a lot of bargaining power they can probably exercise that and get a good deal for their employees. If they are a smaller employer or an employer who is not particularly engaged, then they are going to find that more difficult.

There is also still a conflict of interest. We have highlighted in our evidence that we are seeing an increase in what we call deferred member penalties. The insurance industry refers to them as active member discounts. While you stay with an employer you can pay a certain charge of 0.5%, for example, but as soon as you leave and change employer, your charges can double to over 1%. These are growing in prevalence in the market and this is picked up by the DWP’s recent research. The thing about engaged employers is they care the most about their existing employees, not necessarily people who have left and switched jobs. Particularly in the pensions market, we know that 50% of people have stopped contributing to a group personal pension, a contractbased scheme, within three or four years. There is a big gap, particularly for exemployees.

Q231 Chair: So you join the chorus of evidence that we have heard saying that any kind of deferred member penalty should be scrapped.

Dominic Lindley: The industry euphemistically calls them active member discounts, whereas we would view them as a penalty charge and they are growing in prevalence. Because the people designing these schemes are marketing them to employers, they see the employer as the customer, not the final member. That is where there is a big risk. In a trustbased scheme, though, you are going to find it very difficult to charge deferred members more because your trustbased fiduciary duty is a duty to all members, regardless of whether or not they are still with that employer.

Q232 Chair: You also seem to be saying that there are a lot of small schemes which are contractbased because they are offered by small employers. Would that be solved by finding some way of making all these contractbased schemes larger?

Dominic Lindley: It might be solved, as long as they all meet defined quality standards. Our argument, going back to 2008 or 2007, has always been that it might be better to be proactive and set defined quality standards for all schemes used for automatic enrolment-be they contractbased or trustbased-rather than expecting the regulator to be somehow omnipotent and know what is going on in the market at every point in time, monitor the entire market and then step in after there has been consumer detriment and high charges, and clean up afterwards. It is much better to be proactive and set defined quality standards for all schemes used for automatic enrolment.

Q233 Chair: The TUC feels very strongly that you cannot have good governance with contractbased schemes. Is that a fair reflection of your views?

Craig Berry: Yes, I think so. It is obviously not a straightforward issue and it is possible to improve governance procedures within contractbased schemes. Possibly the most important factor is the size of the scheme. Larger schemes tend to be better governed; large contractbased schemes are more likely to have some kind of workplacebased management committee in place and that is a positive development. Generally speaking, though, I think there is no way really to replicate the role that trustees can and should play in pension provision. There is no other easy way of replicating the independent role that they play in looking after members’ interests within the contractbased model.

Obviously we support the efforts of the industry to improve governance within contractbased schemes, but we certainly would like to see more employers choosing a trustbased approach. Some of the larger scale providers, the master trusts, entering the market as a result of automatic enrolment are a positive development. Trustbased governance is not a panacea. Assuming we can make sure that the master trust model works effectively too, and the independence of trustees within those schemes is assured, then we would certainly like to see more people being autoenrolled into those schemes.

Jane Vass: We have not taken a position on trustbased versus contractbased because, as Craig says, there is a lot of difference between quality in size and the activity of the trustees, and indeed of the members and the employers. One thing I would add is the risk of regulatory arbitrage. For example, with master trusts there is the risk of short service refunds being allowed with those sorts of schemes and the possibility that that distorts employers’ choice of different formats. I would agree with Craig that whatever option is used, the outcomes for individuals have to be the same level of quality. That will put more stress on the contractbased world and on the activity of regulators to act as a proxy for individual employees.

Q234 Teresa Pearce: I have a simple question first to each of you which could be "yes" or "no": do you think the Government should impose a cap on charges for autoenrolment?

Craig Berry: I am afraid I cannot give a simple yes or no answer, as much as I would like to.

Q235 Teresa Pearce: Okay, maybe that is a little unfair. Do each of you think that a cap should be imposed? If you do, should it apply to all schemes or maybe just smaller schemes? At what level should it be set? Or do you think there should not be a cap?

Craig Berry: I do not think that a cap on charges should be ruled out. We obviously need to learn more about the kind of schemes that people are being automatically enrolled into and what the DC marketplace looks like as we learn more about that process. Obviously there has been evidence of charges coming down in the buildup to automatic enrolment and you would expect that to continue to some extent. When you are thinking about a charges cap, you have to consider what is included within that cap. There are obviously different forms of costs that apply to pension savings, some of which are defined as charges and some of which are not. Obviously different providers have different charging structures and that is perfectly fine, generally speaking, if they want to market their products in different ways. It would be very difficult to apply a cap that has teeth and which is set at a low enough level.

Q236 Teresa Pearce: Do you think there should be a maximum?

Craig Berry: There is the risk then of levelling up. Again, I am not saying it should be ruled out on that basis. I just think we need to learn more. The DC marketplace is obviously going through a transformation with millions of people being enrolled.

Q237 Teresa Pearce: Are you saying it is too soon to say?

Craig Berry: Probably. If there had not been some encouraging signs that charges were coming down in some schemes, then obviously we would probably feel more strongly about it. At the moment, though, it is too soon to say. I do not know if we are going to come on to discuss things like consultancy charges and particular types of charges. We would like to see a more forensic approach where you explore the implications and to think about prohibiting certain forms of charges, like consultancy charges, rather than a cap on charges in general.

Alison Bailey: Stakeholder pensions already operate a cap on charges. Of course, the difficulty is that a large employer can usually negotiate a much lower annual management charge (AMC) than a smaller employer would be able to. In our role of providing information and guidance to the public on pensions I think I would see transparency of charges as being the key issue, rather than perhaps the amount of charge in itself. Certainly, the people we talk to do not understand why the disclosure requirements for charges are different for trustbased and contractbased products. For example, they might ring up and have two or three packs of information and they will disclose different information. To my mind, I think transparency is the key.

Jane Vass: Charges have come down, but in our view it is not enough just to have a good average. We actually need to act to deal with the outliers, particularly those schemes that have unreasonably high charges. We are very supportive of the Government having the power to cap charges. We think that is an important power. In using it, I think we will have to think about the experience of stakeholder pensions, where the stakeholder pension charge cap did actually bring about a big change in the market overall when it was first introduced. There was, however, also the risk of levelling up and, to encourage industry to take up stakeholder pensions, at one stage the initial charge actually rose.

We would like to see a twopronged approach, potentially, both incentivising the average to come down and incentivising low charge schemes through systems such as the NAPF1, pensions quality kitemarks, and that sort of thing, but also in terms of deterring schemes. Perhaps consideration should also be given to issues such as transparency, putting information in the public domain and requiring schemes with particularly high charges to justify them, not just to say "Here they are". Employers may have the purchasing power, but the individual employee very rarely does. We would also think it is really important not to forget legacy schemes, where there may be people who took out plans some time ago who may still be on those oldstyle plans with very high charges. It is very difficult to reopen a contract, but it might be worth considering transparency and introducing a requirement on those high charging schemes to explain their charges and perhaps to tell employees what they can do if they are in a high charging scheme.

Dominic Lindley: I would say that there absolutely does need to be a charge cap. There need to be strictly defined quality requirements for all schemes used for automatic enrolment. This kind of "wait and see" approach, "Let’s wait and see what happens and then if there is any kind of detriment we will clean it up afterwards" is going to damage confidence in pensions and damage confidence in automatic enrolment. Disclosure and transparency are absolutely great and we always support those. However, particularly for the Scheme member-the end consumer-if you are automatically enrolled into a scheme and then you are just given a document or a leaflet which says, "The charges are x", in practice there is absolutely nothing you can do about that. You can opt out, in which case you will lose the employer contribution or, if you are really engaged, you can go and negotiate with your employer to try and get them to go for a better quality scheme. In practice, though, most people are just going to be sold these schemes through inertia. You have to make sure that all of them offer value for money.

Yes, I agree about transparency and helping employers get a good deal, but I was certainly struck by the DWP’s own research in terms of the awareness amongst employers of charges. 59% of employers with a scheme size between 12 and 99 members said their employees did not pay any charges. That is a very low base that you are working off and these are particularly small and mediumsized businesses. Let us not pretend that they are going to spend days and days or hours and hours negotiating the best deal for their employees, because they are too busy running their own business. It is much better to be proactive, to set quality standards-including a charge cap-and to control some of these really damaging charging structures that we are beginning to see in the market now, such as consultancy charges. They have only just been introduced as a concept, but we are already seeing literature from insurance companies suggesting that scheme members could be charged £660 in their first year. That is a massive impact on the individual member and it means if you contribute to that scheme for four years, as most people do before they change jobs, and you are a low to medium earner, you are going to get out less than you and your employer have put into that scheme. There are massive, up-front, excessive charges and insurance companies are busy promoting to advisers the ability to levy these high charges. That needs to be stopped now with a proactive quality standard, rather than waiting for it to happen and then trying to clean it up two or three years later.

Q238 Teresa Pearce: Do you think that memberborne consultancy charges should be banned for enrolment?

Dominic Lindley: Particularly when it comes to the memberborne consultancy charges, if an employer wants to pay an advisor a fee for that advice, they are free to do that, but when it comes to bearing those charges on the employee, the employee has absolutely no say in it. They are getting no service. In some cases they might even be paying for a service provided to the employer. There is no requirement for them to be reasonable and there is no requirement for ongoing charges to be matched by any ongoing service. The potential for abuse is absolutely massive.

You are hearing from Martin Wheatley next: we have to see a strong and proactive approach from the FSA in this area, rather than follow its previous approach preMartin Wheatley, which was just to monitor the market, look at what happened and then intervene selectively down the line. There is evidence of insurance companies providing literature to advisers about charges that we would regard as blatantly excessive. At what point is the FSA going to step in?

Q239 Teresa Pearce: When you have not particularly small employers, but small to middlesized employers who have to make this major decision for their workforce and they need advice, where would you expect that advice to come from if not from consultants who may charge fees?

Dominic Lindley: If they want to pay consultants for that advice-again, going back to what would make it easier for employers-let’s have a clear list of pension companies and pension schemes that meet the quality requirements. If an employer picks a scheme from that list they can be certain that that meets the defined quality standards.

Q240 Teresa Pearce: So it is like a fair trade pension?

Dominic Lindley: Yes, rather than expecting this from the employer, who might be disengaged, quite confused and, particularly at the moment for small business owners, lacking time. They do not have days and days to sit down. They could choose one of the schemes from the quality list-which would of course include NEST-and be confident that they were meeting their obligations.

Q241 Teresa Pearce: Do any of you have anything in particular you want to say just on consultancy charges?

Craig Berry: I very much share the views of Dominic and Which? There is an enormous conflict of interest here for employers. To some extent, employers are expected to play this benevolent role in workplace pensions; that will always be the case, but consultancy charging is a mechanism that allows them to pass on the cost of complying with the law to their employees. There is no evidence that members are going to benefit from the advice provided to the employer in any direct sense. The Government’s position has been that members will benefit and I know that the Pensions Minister has written to the ABI2 seeking clarification on that.

I just think that, conceptually, members cannot possibly benefit from advice that is provided to their employers. Therefore, consultancy charges should not be part of autoenrolment at all for the pensions industry in general, but it certainly should not be something that is applied when you are enrolled through inertia into a pension scheme and you have no choice over whether or not to pay those charges. There is a difficulty with the solution to small pension pots as well and pot follows member, whereby if you are automatically transferred into a new scheme and you change jobs-which may be many years after this scheme was set up-a consultancy charge could still then be applied to your saving in that new job. This seems to me to be very much at odds with the idea of encouraging people to save.

Jane Vass: I just wanted to add that one reason why there are complex decisions is the restrictions on NEST. This was exactly why NEST was set up and we are concerned that some complexity has been increased in the market by having restrictions on NEST’s annual contribution limit and also the situation on transfer. We would rather that you actually concentrated on taking pensions out of the toodifficult box for small employers rather than allowing this potentially large cost, which is completely unnegotiable for employees, to enter the marketplace.

Q242 Teresa Pearce: I have just one last thing about information and transparency. There seems to be a different point of view; TPAS agues that pension scheme members are unlikely to respond well to more information, whereas the TUC advocates clearer annual statements. It appears that what you all seem to be saying is that transparency is good, but it might be transparent information to people who are not actually the purchaser in the first place; they are not the decision maker. What else needs to be done to help pension scheme members engage? Is there anything that is done in other countries that you think we could learn from?

Jane Vass: Shall I start with some experience that we had at Age UK? We produced our own interactive and free pension planner, which we marketed as part of the DWP’s pensions education fund project a few years ago. People liked the planner, but actually it was very hard to get people to engage with it in the first place and it took time. It is always going to be difficult; it probably will be difficult to get people to engage with pensions longer term and in a way that is one of the principles behind autoenrolment. You should not be reliant on people engaging to get a good outcome.

All these planners that we and TPAS offer are very necessary and important, but the one thing that we sometimes need to take into account is that actually many people are not starting autoenrolment with a clean slate. They have often built up pension entitlements elsewhere. It is often that they need that sort of interaction-they have a question-so giving people information that is specific to them and being able to answer their question is hugely important. That is why we think that organisations like TPAS are really essential in meeting that need and just keeping trust in pensions. As soon as people meet a barrier that is what disengages them.

Alison Bailey: We know from talking to people that a lot of people do not read the information that they are given about pensions because there is too much. We raised this point with the Committee when we gave evidence about automatic enrolment.

Q243 Teresa Pearce: Is it less, but clearer?

Alison Bailey: They need less and more relevant information. They need to be told to start saving as soon as they can, to save as much as they can and for as long as they can.

Teresa Pearce: And live as long as they can.

Alison Bailey: Yes. I agree with what Jane was saying about making communication methods relevant to your audience. We are looking to build some new tools into our website and develop social media and things that will help younger people and people who have been automatically enrolled engage with pensions better.

Craig Berry: This issue of knowledge among employees or scheme members about pensions is one of the things that underlines for the TUC the importance of trustbased governance: it is trustees. The information should absolutely be disclosed because it is pension scheme members’ money and they should know exactly what’s happening to it, but there is always going to be a limit to which ordinary scheme members can understand complex information about their pension investments. It is important that information is handled by trustees playing this independent role, where they only look after the members’ interests. That is not to say that the information should not be disclosed as much as possible.

Q244 Graham Evans: I think Theresa’s covered that larger point; she has done very well. I agree with everything you are saying, Dominic. I am familiar with a contractbased scheme. Nearly 25 years ago the very large company I worked for got most of us onto the scheme. That is fine, but then I remember being told what to do in terms of contributions and I remember AVCs3 coming in in the mid90s and I was told that I must go into AVCs. It was with Equitable Life and we all know what went wrong with Equitable Life, so I always find these conversations interesting.

I do remember a lone voice; this colleague emailed the personnel department lackey who was the person telling us what we should be doing. I remember to this day his saying, "I will make my own investments, thank you very much." I remember hearing that and thinking, "He must know what he’s doing". Is the problem that most people just do not know what they are doing and are really quite happy to go along with what the company is recommending because there is a combination of ignorance and trust that the employer does know what they are doing?

My question is: is this an opportunity for organisations such as yourselves to take a bit more interest in these things and actually give-I use this word lightly-an idiot’s guide or "Pensions for Dummies" type of document? You could offer a service-perhaps a freeofcharge service-just to give a very simple guide so that they could look and take an interest on a Sunday morning to see what the employer is actually saying, so when they go back to work on Monday morning, they can say to Fred, "This advice you were giving me, can I just clarify a few things?" Do you not think this is a real opportunity to educate the great British workforce so that we can take on some of the points that you were making, Dominic? As for these people coming in who are charging either the employer or employees for advice, rather than give the money to them, could they not give the money to an organisation like yourselves who, presumably could be trusted-a trade union, Which? or Age UK? There is a real opportunity for you guys to educate these people.

Alison Bailey: Could I just say that at the moment we are in the middle of a project to rewrite all of the material on our website to put it all in plain English and make it jargonfree. We are also building some video clips that employers can show in the workplace that are just 10 minute bites of information about the fact that if you opt out of a pension scheme, you lose out on your employers’ contribution, and that it pays to start saving as soon as you can. That is the sort of thing we are doing.

Chair: We have more questions on communications; we will hold on to them, but I think Nigel wants in on the previous thing, which was about charges.

Q245 Nigel Mills: I just wanted to ask Dominic, you seem to favour a cap. What level?

Dominic Lindley: Don’t think I am avoiding the question but, again, someone would need to do a proper study about what is a reasonable cap and then make sure that charges were not above that. If you take NEST, it has a 1.8% contribution charge and a 0.3% AMC, so that is roughly equivalent to around 0.5% over the longer term. The thing about a cap is that it would not just need to apply over the longer term because, as we know from the data, most people only stay in a contractbased scheme for three or four years before moving on. Therefore, you have to make sure that there are not charging structures that can have a really detrimental effect on those who are only in the scheme for a short period of time. That means minimising up-front charges, minimising these very high fixed charges that insurance companies are suggesting advisers levy.

Q246 Nigel Mills: So you think 0.5% is about right, but presumably we would have to set a cap a bit higher than "about right" to create some scope for a more expensive, more active or more aggressive fund, rather than a cheap and nasty "leave it all where it is and do not do anything with the money" kind of fund.

Dominic Lindley: Again, I think you definitely need to look at a cap on the default fund because-going back to the previous question-the vast majority of consumers will end up in the default fund. If consumers really do want to pay extra for that kind of fund manager-and I am certainly not convinced that it delivers you value over the longer term and I think all the evidence supports us-if they do want to make that active choice, if there are people who really do want to become engaged, we have that kind of material on our website. It is only ever going to be a small minority of consumers. We support making more people engaged, but the key point is that consumers are being automatically enrolled, so let us make sure that the default fund is high quality and does not have excessive charges.

Q247 Nigel Mills: So a cap for autoenrolled people, but maybe an optout if I really want to be doing something different. Should there be a cap generally for default funds for everybody or not?

Dominic Lindley: I would say that, again, if you are going to rely on the employer, some employers will be really engaged, but some do not have time. The lesson that I have definitely learnt and I hope the Government has learnt from the financial regulation of the past decade is that it is much better to be proactive and set clear quality standards rather than to sit back, rely on disclosure of information and monitoring the market. Let’s face it: regulators are not omnipotent. I have a spreadsheet back at the office that includes the interest rates on almost every single cash ISA ever offered, but I have not seen that information anywhere for workplace pension schemes. With this kind of "wait and see and monitor the market approach" it is not even clear to me that the Government and the DWP have enough data to properly monitor the market and pick up those schemes with really high charges.

Q248 Anne Marie Morris: I will try to be brief and keep this to one question in three parts. First of all, I was very impressed with what I have heard from Jane and Alison in terms of the steps you have taken to help in terms of overall communication and simplification. Part one of the question: in terms of communication you have talked about what you do and what would be good practice for external advisory bodies. What is it the employer should do? When we look at what NEST has done, they have used very simple language. Should it actually be a requirement that an employer and, indeed, providers of pensions should use very simple language? Should the Plain English Campaign set a standard that should be required, certainly for forms? Communication is not only something that is written words, but it can be pictures, which is where the NHS has gone with this, but clearly these days employers can communicate with employees through all sorts of technology. They can send them texts; they can do all sorts of things on blogs and whatever. Is there a clever way of doing it that will actually appeal? That is part one of the question about communication.

The second part of the question is about education. Without education, members, frankly, are disenfranchised. The member who is actually getting the benefit of this pension is without a real voice because they do not understand what they are talking about. Alison and Jane have both talked about steps they and their organisations have taken, but ultimately, whose responsibility is it to educate the employee? Who should be required to take first steps? Actually, it can go right back to school: we can ask whether the Government should include some financial training in its review of PSHE4. We can take it then to the employer and ask whether there should be an obligation of some sort to hold some sort of training or whatever once every so often. What is going to be effective, rather than employees thinking, "Oh, my goodness. Here we go. It is the usual ‘let’ssitdownandgetbored’ session"? How are you actually going to get them to engage? Again, is there something clever that can be done to achieve that?

Then the final part of this three part question is that education then needs to be used. You then need, as an employee, an individual, to begin to set a plan: "What is it you want to achieve for retirement?" When most employees get asked, "What is it you would like to have when you retire in terms of a sum to live on?" frankly you are going to get a blank look. They know roughly what they survive on now, but they have absolutely no idea what they are going to need when they get older. How can you do that? Again, whose responsibility is that? Is it the employer? Is it school? Is it independent organisations? Who is it that takes a lead and how might we do it differently? I would appreciate it if I could have views from each of you on that three part question, maybe starting with Craig.

Craig Berry: There is no rationale for why plain English should not be the industry standard in terms of communicating about pensions. I do not think it is an easy thing to implement and, obviously, large private sector providers want to be able to distinguish their services from their competitors. Their marketing departments will always encourage them to explain their products in different ways. I do not think that is easy to eradicate, but the industry probably has got better and, obviously, organisations like TPAS and the good work that NEST does is helping the language to become much simpler. That can only be of benefit in the long run, not only to employees but employers themselves.

You have talked about whose responsibility it is to educate people about pensions. I think employers should take responsibility for establishing and running workplace pension schemes-pensions law and new automatic enrolment expects them to-but employers also need help with understanding things like charges and the issues we have been discussing. Simpler language from the industry would help with that as well, but it has to be the employer’s responsibility for making sure that the scheme is running at low cost, is wellgoverned and so on. If they pass on that responsibility to a provider-if they join a master trust scheme, for instance, a multiemployer scheme-it should still primarily be the employer’s responsibility to make sure the scheme is wellgoverned. That goes all the way through to member communications.

In terms of how education should be used, particularly around retirement income goals, it has to be within a scheme. There is certainly going to be a value in creating a better knowledge base about pensions throughout society in general, but I do not think people are really going to start thinking about their retirement income until they are in a scheme and saving. That is where the focus needs to be. I suppose that puts the emphasis on providers to be engaging with members more. I think that engagement is more likely to happen and will be more meaningful if it is within trustbased schemes who are looking after the members’ interests. On issues like annuitisation, obviously the industry has improved, and the ABI’s new code on communicating with members as they approach retirement will hopefully improve understanding of the annuitisation process as well. In terms of communicating with members about their retirement incomes and the forecast for those incomes earlier on, I think that is only going to happen in trustbased schemes, where schemes have more meaningful lines of interaction with members about whether or not they should, for instance, increase their own contribution rates. I do not think you are ever going to get that kind of interaction between schemes and members in contractbased schemes.

Q249 Anne Marie Morris: I think you are looking at it from the view of the provider and the employer with the main responsibility. You did not seem to talk about Government getting engaged. I guess you are also really talking about something which is trying to make it simple and straightforward. There is no reason why you should, but I do not think you have necessarily come up with any suggestion for wacky news ways to actually make it more engaging.

Craig Berry: Yes, I apologise that my imagination has hung me out to dry. I think we have already done one big thing though, which is automatic enrolment. Enrolling people into pensions will create awareness and various stakeholders, including trades union, are obviously taking on that challenge of educating people who are going to be autoenrolled into a pension for the first time. We have already taken that huge leap forward and I am sure we will see the benefit of that over the next few years in terms of increasing people’s knowledge.

Q250 Anne Marie Morris: What exactly is the TUC doing? I am concerned about what happens on the floor with the individual workers. It would be interesting to know what it is you do. I note your distinction between trustbased and contractbased. Does it really matter? Should one not have an obligation as an employer, whichever route you have gone down, to just explain what on earth pensions are and why you have gone down one route or the other? Is there a broader, more generic responsibility?

Craig Berry: Yes, I think it should be the employer’s responsibility, whichever scheme they choose, to communicate to the employees they enrol into that scheme exactly how it works, what the charges are and, ultimately, what retirement income they can expect. That should be the employer’s responsibility and whichever type of scheme they choose, they should be responsible for explaining to members why they have made that choice.

Alison Bailey: I think education about saving for retirement needs to start in schools. It needs to be part of the financial education curriculum. Employers need to continually promote messages to their workers about continually reviewing your pension provision and that the fact you have been automatically enrolled into a scheme is a good start, but will not necessarily in itself provide you with the sort of comfortable retirement you might aspire to. We welcome the expected statement today about state pension reform, because I think that is crucial in helping people understand what they are going to get from the state and how much they therefore need to save. Certainly our experience is that people do not really have any idea how much money they need to be putting by for retirement.

Q251 Anne Marie Morris: Do you have any suggestions as to how you might help them begin to work that out?

Alison Bailey: We have had a programme in the past where we have gone into the workplace and given seminars about saving for retirement. We are now working to deliver the same messages via more costeffective means: videos, web bites and that sort of thing. Potentially, we will be working with employers on developing things like iPhone apps, whereby, for example, somebody could just go onto their phone; if they have a pay rise, they could get a message saying, "Do you want to put part of this into your pension?" Somehow, through an app, they could do it there and then on the spot.

Jane Vass: We have a great opportunity with state pension reform and we should use it. Government has a big responsibility to explain and invest in communications. However, there is a huge information gap out there. Recent research last year by the DWP found, for example, that 62% of women and 38% of men thought that they reached state pension age sooner than they really will. There are some really basic messages to get out there and hopefully interest in pensions will grow, and it will hopefully be a bit clearer to explain. This is a step forward.

However, other things that could be done are actually to ensure that pension statements are clearer and a bit more consistent. If somebody has had lots of different jobs and they are getting lots of different pension statements, making sense of it all is very difficult. Again, one of the opportunities we hope that state pension reform might allow us in the longer term is to look again at combined state and private pension forecasts, which would be a great opportunity.

Whether provider or trust, the schemes have a responsibility to ensure that any materials they produce are comprehensible to their members. There is a lot of information at the "putting the money in" stage, but only recently has there been much attention to the process of drawing it out again. At that stage, although ABI and PICA5 have done really useful work, there is lots that could be done to try and join up some of these pension decisions so that once you have received your warmup letter, you do not have a separate decision about whether or not to use an IFA6. There is more of a flow through and that might be where new technology could perhaps help us in the future.

Q252 Anne Marie Morris: Interesting comments, particularly the one about simplification because I agree with you. If it were simpler, it would be much more comprehensible. I guess the million dollar question is: how do you simplify what is that complex? I do not know whether you have any thoughts as to how possible it is to simplify. I was also interested in your thoughts about then looking at private and state coming together in some way so that you can understand your pension provision as a whole. Again, that seems eminently sensible, but also almost undeliverable given the differences between them in nature and complexity.

Jane Vass: Pensions will probably always be complex because of the legacy issues. A distinction has to be made about transparency in the public domain-it is really important that information is out there even if individuals are not using it, because, to be honest, we really do need to know what the level of charges are across the board, just as an example. Then we can potentially learn a lot from people like NEST and the communications approach they have taken of making sure that the basic information is clear and simple. There is a step up, though, and then, as I said earlier, it is absolutely essential that there are back-up systems such as The Pensions Advisory Service to go to for those particularly difficult problems about your own situation.

Dominic Lindley: I will just be really quick. Simple language-absolutely yes. Certainly there should be ongoing engagement, so when a consumer joins a scheme they are asked to think about how much they might need for their retirement in terms of income and then their annual pension statement reinforces that by showing them whether they are on track or whether they might need to increase contributions. It should also prompt them to rethink their needs if their salary might have gone up. Also, let us not just think about one or two years; let’s think about five or six years down the line and, absolutely, reviewing pension statements to make sure they are clearer. Why not give consumers their own control over their data?

The Government is trying to do this in some financial services with the MyData initiative, but certainly if consumers did have access to that kind of standardised data from all of their different pension companies it would make it much easier for outside developers to build applications that drew on all of that data and provided the consumer with a forecast across all of their pension schemes, including the state pension as well. At the moment, even if I can persuade someone who is 35, 30 or 40 to get beyond the stage of thinking about how much they might need in their retirement, the act of looking at how much they got from their existing provision is incredibly complex if they have had four or five different jobs since their 20s. If pension companies were all providing that information on a consistent basis, I am sure the tools would emerge, but in a sense you do have a bit of a chicken and egg problem.

We are certainly seeing this in retail banking, where the companies say there is no point making this information available because no one uses it, and all the app developers, the comparison sites and other people who might develop these tools say there is no point building a tool unless the information is consistent across the market. That is a process the Government does not have to lead, but it should certainly prompt, oversee and cajole the industry to get to that final destination.

Q253 Anne Marie Morris: It sounds to me that would be nirvana-wonderful. Who would pay for it in your view?

Dominic Lindley: Again, I think if you look at comparison sites, consumers probably would pay for that kind of holistic data. I am not sure how much they would pay, but if the information is on a standardised basis-I am sure this information does exist within companies at the moment, so they could all make it a bit more open-it might not cost them much more money. It would certainly be better value than all just going off and reviewing our written statements every year, which the industry does do occasionally. It does not particularly test them with many consumers and then someone who is about 35 will get five separate pension statements from five different companies at five different points in the year, and will never be able to put all that together to even get beyond the first stage, even if I can persuade them to think about how much they need in their retirement.

Q254 Jane Ellison: I just had a quick follow up on that, listening to the slight tendency to think that we can prescribe to consumers how they can react, and that we must make it simpler. We talk about that but actually these are people who in their working life are often dealing with great complexity, that includes even people who do not have complicated jobs. Think about how the travel market has changed over the last 20 years. People used to go to a travel agent to organise it all for them. Most people now organise their own holiday with lots of different products and put it together. Is the essential problem here not lack of interest and engagement? There will obviously be people who will never get their head around it, but the biggest problem of all is lack of engagement. In other areas of quite complex financial products, like insurance, and taking your point about being able to compare, as long as there is transparency and people can compare they actually make quite sophisticated choices. The problem with pensions is they are just not engaged. What do you think?

Craig Berry: You have to question how much choice employees can ever make in practice and how much choice we really want them to make. They obviously do not have much choice-they are either in or out of the workplace pension scheme that their employer provides. They cannot necessarily take their pension saving elsewhere and receive the same level of contributions because their employer contributions will be so important to them. If they did that they would be completely devoid of governance around their pension saving because they would not be an active member of the workplace pension scheme. It is always going to be difficult. Engagement will come from choice, but choice is not necessarily a good thing in pension saving.

Alison Bailey: I think plain language is important. I cannot recall whether it was in Australia or in the US with the 401(k), but there is some evidence that when they stopped using the word "pensions" and started talking about savings there was an increase in engagement. In America people are very engaged with their 401(k)s; you hear it talked about in Friends for example. I do not think we have all the answers, but I certainly think that automatic enrolment and the announcement today about the flatrate state pension are a good start.

Chair: So we know when it is discussed on EastEnders that we really have a breakthrough. We move on to questions about regulation.

Q255 Nigel Mills: Another hot topic for EastEnders. We currently have two regulators depending on what sort of scheme you are in. Can I ask the panel: do you think there should be only one regulator? At the risk of upsetting someone sat behind, which one of the two do you think it ought to be?

Dominic Lindley: At the moment we would say the deal the consumer receives should be the same regardless of whether they are in a scheme regulated by The Pensions Regulator or the FSA. At the moment we do have concerns about regulatory underlaps. Particularly around consultancy charging, that is clearly within the remit of the FSA, but then what happens if it is a scheme used for automatic enrolment? When is The Pensions Regulator going to step in? What is the difference between The Pensions Regulator’s DC principles and the FSA’s Treating Customers Fairly principles? There certainly needs to be much more co-ordination between the two regulators and, again, it is where the Government should be playing a role in getting the three people around the table-the DWP, The Pensions Regulator and the FSA-and all agreeing to set defined quality standards. That would probably be the best way of ensuring a good deal for consumers.

I am always hesitant to recommend just a reorganisation of regulators particularly because The Pensions Regulator at the moment has a very difficult and very expanded job. The FSA itself is going through some regulatory change in terms of splitting itself between the FCA and the PRA7. Rather than redoing them at the moment, let us get all of them together and make them set defined quality standards, and make sure that they are sharing information so someone somewhere, including the Government, has a picture of what the charging levels are within all schemes being used for automatic enrolment.

Jane Vass: I concur very much with Dominic, but I would also add that actually because autoenrolment is happening now, regulation has to work now. We are very keen that whichever regulator it sits with is adequately resourced and there is enough board level interest in what they are doing to ensure that it actually works.

Alison Bailey: We welcome the announcement today that providers have signed up to the ABI, NAPF and the regulators’ code of conduct on charging. We are hoping to host on our website a charges comparison tool that could be used by small employers to compare charges across different products. We are also exploring the possibility of hosting other tools. For example, we are working with PICA to explore the possibility of having a tool that will help employers pick an advisor.

Craig Berry: I agree with the other panellists. We have to remember that we have two regulators of pensions because we have two very different types of pension product, trustbased and contractbased. The Pensions Regulator essentially regulates the trustees at scheme level, and there are no trustees in contractbased schemes. The regulatory focus should be more on the transaction-the relationship between the provider and the end customer. That is the genesis of the system, but I do not think it is working perfectly. As Dominic says, I think there does need to be a lot more collaboration between the two to make sure that, whichever type of scheme you are in, there is a standard of quality which both types of schemes meet and both regulators are geared towards upholding.

Dominic Lindley: Can I just highlight one extra regulatory gap at the moment, which is the advice given to employers? At the moment it is not regulated by anyone. As long as you do not have any contact with the endscheme member you could give advice to employers at the moment and you do not have to be regulated. In terms of what we want to hear from the FSA-and I hope you ask Martin Wheatley these questions next-we would like to hear Martin Wheatley disown the FSA’s previous comments that consultancy charges of up to 35% of the first year’s contributions to a workplace pension are absolutely fine. That is excessive; it is ridiculous, and these are not the things the regulator should be saying. With the move to the FCA, there is this real chance to take a more proactive and robust approach. We have definitely heard that from Martin Wheatley so far and we really hope he follows through in this area.

Craig Berry: The 35% is just an outrageous level of consultancy charging, particularly since that consultancy charge could be paid to an unregulated advisor. It is one of the anomalies of the system that the FSA does not regulate advice provided to employers, only to end consumers. This is indicative of some of the gaps within the regulatory system around workplace pensions.

Alison Bailey: I realise I picked up on Jane’s comment about charges and neatly side-stepped your question. I do not think it is for us to comment on which would be the appropriate regulator, but we would want to ensure that the regulator has adequate resources to properly fulfil their commitments. I do think it is important that the regulation is aligned because at the moment the requirements from the FSA and the requirements from The Pensions Regulator are so different.

Q256 Nigel Mills: I am sceptical about the chances of getting two different regulators to try and do the same thing in the same way. Can I just take you to selfregulation? Obviously we have had the NAPF code of conduct and we have had the ABI announcement today, I think it was. How far do you think selfregulation can play a role in getting to the right answer here? Do you think we actually need to have more in the actual full regulation pot?

Dominic Lindley: From our point of view we absolutely encourage any form of selfregulation, but let us not pretend it can be a substitute unless it is comprehensive and everyone signs up to it. We were involved in discussions with the NAPF in terms of disclosure to employers and trying to improve that. Then again, we have heard this announcement from the ABI but it is basically committing them to do it by summer 2014. Certainly by that time a lot of people will already be in schemes for automatic enrolment. Also, the other thing that we have certainly learnt, because Which? has introduced automatic enrolment into its pension scheme, is that you really have to start early when it comes to automatic enrolment. You cannot just leave it until three or six months before you are going to implement that kind of project. By the time the ABI gets round to simplifying pension charges, it might be too late. We absolutely welcome those kinds of initiatives, that kind of commitment and anything that can be done to speed it up, but again that is why there might eventually be a role for the two regulators to get together to make sure that disclosure is consistent between the two different types of pension scheme.

Jane Vass: Selfregulation tends to be quite good at incentivising better parts of the market. ABI and NAPF have done very good work, but actually selfregulation tends to be weaker. They may find it more difficult with the more resistant parts of the market and that is where regulatory action is needed to back up and strengthen the selfregulation that exists.

Craig Berry: I would say it is impossible really to determine the extent to which there will be behavioural changes as a result of selfregulation efforts the industry has made in the last year or two. I am encouraged that it probably helps us with accountability because if trade bodies are setting a standard, even if they are not making the new codes and guidance mandatory for all of their members, they are setting a standard and then people that take an interest in pension provision-and ultimately the consumers are pension scheme members themselves-have a standard against which to judge the industry. If it is not meeting its own standards then we can say, "You failed on your own terms".

Chair: There is a final very quick question on small pots.

Q257 Jane Ellison: Yes, very quick. You have actually all said that you have concerns about the pot follows member approach, so I was just going to ask two direct questions to the TUC and Age UK, if that is alright, and anyone else can chip in. The TUC has said that it actually thinks that the impact assessment modelling that DWP has done on this is flawed. Do you want to just comment on that and expand on it?

Craig Berry: The Government case for pot follows member is flawed in some ways. Certain aspects of the modelling, when they compared pot follows member to an aggregator approach, were speculative and limited. We have not had an assessment of the impact on individuals in particular circumstances-the kind of things that the TUC and others have campaigned on-and the possibility of consumer detriment when you are automatically transferred into a scheme that has higher charges, poorer governance and so on. We do not know exactly how many people will be affected like that and to what extent.

With the Government’s case for pot follows member-and to some extent its interpretation of the modelling results was based on this highly contentious concept of market monopolisation-we do not really believe the DC pensions marketplace is a true consumer marketplace. We have established a body like NEST because we recognise that the Government should back a provider that sets a benchmark for the rest of the industry. If that has been done for automatic enrolment, could something similar not have been done for automatic transfers as well? I do not think it is fair to say that that body would monopolise the marketplace. That misrepresents the nature of the marketplace in the first place.

Specifically on the modelling, I think the DWP actually admitted in the document they published that they had not come to an accurate figure of exactly how much it would cost to administer a dormant or a deferred pot within an aggregator system. They had a rough estimate based on how much it cost to administer a dormant pot in the existing system of transfers, but you would like to think that with a larger scale aggregator approach that cost would come down, so their modelling remains incomplete until we have more information in that regard. They did not model a hybrid approach as well, where you might have certain schemes which are allowed to be aggregators generally within a pot follows member framework if they met certain quality standards.

Q258 Jane Ellison: Just because we are a little bit short of time, is there any comment specifically on that evidence that other panellists would like to make? Do you broadly share similar concerns?

Alison Bailey: At The Pensions Advisory Service a lot of our dispute resolution work is around things that go wrong with employer to employer transfers. I would be happy to share with the Committee in writing some of the evidence from our evidence base.

Jane Ellison: That would be very useful.

Dominic Lindley: I have just one final point in terms of admin costs. If you are transferring to an aggregator, you are transferring to a known place at a known point in time, like 30 days after the consumer has left that employment. If you are doing pot follows member you could be transferring to any other scheme in the entire country at any point in time over the next months and years because the consumer might be unemployed for a period before getting another job. That in itself seems like a much more complex admin process, yet in the Government’s modelling both of those processes cost exactly the same. That just does not seem right.

Q259 Jane Ellison: Can I just pick up a point? You have recommended that minimum standards should apply to any scheme that accepts automatic transfers. Can you say what those would be?

Jane Vass: Yes, because of the risk of consumer detriment we think it is quite important that, if the Government does proceed with pot follows member-which certainly was not our preferred option-the minimum standards in this case should encompass charges and a maximum charge; it should encompass governance to ensure that the members are at the heart of the scheme; it should encompass default options, member communications. Also one issue that sometimes gets forgotten is the processes and help available to people at the point of drawing the pension income.

Chair: Thanks very much. That exhausts our questions. Thank you very much for coming along this afternoon. It has been getting darker in the time that we have spoken, but thank you very much.

<?oasys [pf10p0] ?>Examination of Witnesses

Witnesses: Martin Wheatley, Managing Director, Conduct Business Unit, Financial Services Authority, and Chief Executive Officer Designate, Financial Conduct Authority, and Bill Galvin, Chief Executive, The Pensions Regulator, gave evidence.

Q260 Chair: Can I welcome you as our second panel of witnesses this afternoon and thank you for being patient and waiting for slightly more than half an hour longer than we had originally anticipated? I think you understand that it was because of the announcement in the Chamber of the reforms to the state pension, and we felt we had to be there, especially as this Committee is the one that is going to be conducting the pre-legislative scrutiny of the Bill. Thank you very much for coming this afternoon. Hopefully, we will manage to keep our questions to around about an hour, but you never know with my colleagues. We are going to start with a few questions on the whole issue of regulation, because that is very important to this inquiry, but first please introduce yourselves for the record. Bill, do you want to start?

Bill Galvin: Bill Galvin, Chief Executive of The Pensions Regulator (TPR).

Martin Wheatley: Martin Wheatley, Managing Director at the FSA.

Q261 Chair: But you are also in the new organisation. Have you got two titles?

Martin Wheatley: Yes, I have two titles: Managing Director at the FSA, and then I am CEO Designate of the FCA, which will be the successor body, which launches in April this year.

Q262 Chair: Thank you very much. Can I just ask you individually what your objectives are when you are regulating contractbased workplace pension schemes?

Bill Galvin: Our objective is the same for trustbased and contractbased schemes. That is, except where the employer wants to take an active role and where they have the resources and the capability to do that, then members are enrolled into well governed schemes. That means that unconflicted and capable people are making the key decisions in the interests of that member, and that is what has been guiding all of our efforts.

Martin Wheatley: Maybe if I can talk about the FCA objectives, because that is the forwardlooking part, rather than where we are currently. We do not have objectives that are specific to pensions. The way that we are structured is we have a number of overarching objectives-which are included in the Financial Services Bill-which talk about the appropriate level of investor protection, maintaining market integrity and ensuring that competition functions effectively in markets. Our broad remit is consumer protection with those three banners, and then we interpret those in the different aspects of our regulated space, which covers contractbased pensions but a very wide spectrum of financial products as well. Our objectives are much broader and much more general, rather than being specific to pensions, but we then interpret those insofar as the elements of pension production and sales that come under our jurisdiction.

Q263 Chair: You are looking ahead but can I ask you, Bill: do you think that the TPR really are achieving their objectives in terms of contractbased?

Bill Galvin: Specifically in terms of contractbased pensions, our remit is quite specific. We have an overall objective for workplace pensions that protects the benefits of members and promotes good governance and administration, but the powers and functions that we have been given under the various pieces of legislation focus us particularly on trustees and employers. Our role in the contractbased space includes an element of promotion of good administration and specific regulatory duties in the space where employers interact with providers and pay money across-to make sure that that administration function works well. The primary duties around the delivery of contractbased pensions and the regulation of the providers of those sit with the FSA. The two regulators have complementary responsibilities in that space.

Q264 Chair: While things do go wrong in trustbased schemes there seems to be a confidence that the trustbased schemes will be run for the benefit of their members. That confidence is not there with contractbased schemes. In fact, the TUC thinks it is almost impossible for contractbased schemes to be as good as trustbased schemes. Surely it is your role to make sure that there should not be any difference between these types: that whatever type of pension scheme a person enrols in, they get the best deal possible.

Bill Galvin: We have laid out, as clearly as we can, the principles that we think should apply for wellrun pension schemes and a number of features that we think should be present in order for schemes to fulfil those. Those schemes should give guidance to providers and also help the market by allowing providers, whether they are trust or contract, to say, "Yes, we do all of that"-a simple statement that an employer can take some comfort from. That is what we have been aiming for.

There is probably no inherent sense in which one form of pension provision is better than the other. An awful lot is dependent on the circumstances. Large, engaged employers- the ones that are automatically enrolling their people right now-have shown how both trust and contractbased arrangements can work really well.

We have seen really low charges in both forms of pension provision at the early stages of automatic enrolment, and we have seen a really strong, increased focus on governance arrangements in both the trust and contractbased spaces, and some innovative governance arrangements in the contractbased space at both the employer side: innovations around the empowerment of management committees in terms of the contractual arrangements they have on behalf of members and the contractual arrangements that they have with the providers to take a more quasi-trustee-type role and do things like move funds around where they see they are not performing and they do not think the members will do that on their own behalf. There are some providers coming to the market with innovative governance arrangements sitting on the provider side in the contractbased space, where they are demonstrably saying, "These are the people who are making decisions about whether this product is suitable", and there is an independence there in terms of looking after the members’ interests. So far, I think both trust and contractbased schemes have provided good outcomes.

There are risks in both spaces as we move into the midmarket. I think there are going to be some real challenges as we move into the midmarket, because a lot of people will want to provide for that market, and employers will have to be able to distinguish the better from the less good, in both trust and contractbased spaces. The large master trusts, for example, which are being set up and that are quite likely to get quite a lot of provision-there are about 50 of them at the moment-do not have a huge amount of money. There are, I think, about 300,000 employees in these master trusts at the moment and about 5 billion quid.

After automatic enrolment, we could see 4.5 million people or so in those, depending on the choices employers make, and an awful lot of money going into them every year. It is important, in those circumstances, that the people running those master trusts are unconflicted and capable. We have a clear remit in that space and we have laid out a structure by which those people can go to the marketplace and say, "We are compliant with the regulator’s six principles, we do all the things the regulators require and you can have confidence putting your money with us." There is no reason why a contractbased provider cannot do the same thing, cannot make the same assertions to an employer. Many of them are doing that. Those are the critical things that we have to get in place for the midmarket.

Q265 Chair: You said that many are doing that, but what about the ones who are not? What proportion of your staff and how much of their time is spent on regulating contractbased schemes?

Bill Galvin: On regulating contractbased schemes?

Q266 Chair: Yes. The ones that are not doing it-the ones that you have to take action on.

Bill Galvin: What we have done is try to facilitate the market as much as possible by saying we believe there is no reason why our principles and features cannot apply to both trust and contractbased schemes. However, our primary focus in terms of engaging with the providers and talking to them about what they need to do is of course in the trustbased space in most of those areas, because that is where we have the locus, the regulatory authority and the functional and legislative support. We engage right across the market. I went and sat down with the CEOs of all the major insurance providers who would be providing into this space as well, to talk to them about what we wanted to see happen in the market, but of course there is a limited extent to which we can require them to do certain things, whereas with trustbased providers we can require them to do that. That is the way the legislation is laid out.

Q267 Chair: In terms of what the FSA does with regard to contract, what proportion of your time is spent regulating them?

Martin Wheatley: You need to understand we are organised quite differently.

Q268 Chair: That was going to be my next question: how can you work together?

Martin Wheatley: Pensions are clearly one of a number of financial products that are provided for by the industry and sold by individuals or advisers within the industry. Within our format, we have a relatively small policy team that look at pensions, a very large supervision team and a very large enforcement team who look at banks, insurers, IFAs, equities and funds-a very broad range.

Q269 Chair: Can you not separate those individuals out?

Martin Wheatley: No.

Q270 Chair: There is nobody that specialises in your organisation: that is all they look at?

Martin Wheatley: There are teams in terms of supervision that specialise in looking at the big insurers, who are clearly the big providers of pensions, but we look at those big insurers across their business, so we look at the full range of business. We identified in our risk report earlier this year some of the risks that we saw in the industry. In our 2012 report, we identified aspects of the pension industry that we would be giving particular focus to. We focus on those things when we go into those major insurers but I would not say that we have a supervision pensions team that just does that. We have a team that look at the big insurers and, as part of the modules of things they look at when they inspect, they would look at the provision of pensions and the governance around those pensions at the same time.

Q271 Chair: Not only do we have two different regulators, we have two different regulators that regulate totally differently, but they are still regulating roughly the same type of organisations. Is that a fair reflection of your two organisations and the work that you do?

Martin Wheatley: I think it is fair to say that we have two different regulators, with two sets of regulatory frameworks that we operate in, and two different organisational philosophies; that is a reality. However, we work extremely closely at trying to make sure that, despite those differences, our teams understand each other, that we meet regularly and we share and discuss priorities.

Bill Galvin: I must say we have worked very closely with the FSA and the people working in there, in the pensions area, in the development of our products. Indeed, we put out a suite of products last week about how we believed trustees should behave in terms of the delivery of automatic enrolment products. We also mapped that across to the FSA’s handbook, rules and policy statements and found that we were looking at very similar issues across the trust and contractbased space. We made it clear where there were areas that they were not quite the same, and we are working together to deal with that. Of course, the structure of accountabilities across trust and contractbased provision is quite different, so it is inevitable that there will be a different approach and regulatory activity, because the landscape is different.

Q272 Chair: You knew my question was going to be about how you manage to work closely-and of course you are going to say, "Yes, we do"-but I still get a sense of the differences you have already described this afternoon, in that there must be gaps, of areas of pensions that are not being regulated, because they do not fall into either of your remits and there is nobody in the middle there to pick up that, or, indeed, because the way you are operating is so different, it is very difficult to get a complete match from one across to the other in order to do the liaison. Is that fair?

Martin Wheatley: It is fair to say that we have to work harder at it. That is the reality of it. We do have different structures, different sets of objectives and different ways of working; it just means we have to work harder. We put a lot of effort and resource into the liaison across the two organisations. I should say-and not to want to complicate things further-that, when the FSA does break up, we then split yet again, because the PRA will have the prudential oversight of the major insurers. We will have not two but three regulators then that have different aspects of oversight of the provision of contractbased pensions.

Q273 Chair: Just at the point we were going to say should you not be coming together? Maybe there is an element, particularly perhaps in the contractbased schemes, that there is one regulator rather than split between two.

Bill Galvin: I suppose, from my perspective at least, the key question is: what are we trying to achieve and how can we best work together to achieve that? In our book, it is that members get good outcomes, whether they are in trustbased or contractbased schemes. We have laid out what needs to be in place to make it most likely that people will get those good outcomes. We have looked at what we do as a regulator and how we go about it; we have looked at what the FSA do as a regulator and we believe we are focused on quite similar things across the piece. There are differences in approach, there are differences in organisational structure and there are differences in accountabilities, but there is a fair amount of similarity between the things that we look at across both trustbased and contractbased schemes.

Q274 Chair: This just occurred to me: how often do either one of you get letters and you have to reply back saying, "Sorry, that is not me. That is the other one"? You have to say, "Sorry, we are not responsible for" whatever it is, "it is the FSA", and the FSA say, "Sorry, you need to go to The Pensions Regulator".

Bill Galvin: I think that is pretty straightforward, and the answer is: not terribly often. On an operational level, dealing with individual providers or individual trustbased schemes, it is pretty clear, if there is an issue in terms of investment management, for example, it is most likely to be in the FSA’s regime. If there is an issue in terms of the governance arrangements in trusts, then we will deal with it. For the most part we work very well together operationally and we pass things across and deal with things where we need to work jointly on it. That does not tend to be a problem. Where providers or others have said that they would like greater clarity has generally been around the overarching policy remit and the sense in which we are requiring the same standards in particular areas.

Q275 Debbie Abrahams: Following on from your question, Chair, has there ever been an occasion when you each thought-according to your interpretation of the legislation of your responsibilities-that the other was responsible for something and something has fallen through the crack?

Martin Wheatley: Not to my knowledge. There may well have been but I am not aware of it.

Q276 Debbie Abrahams: Do you do joint risk assessments, or do you share each other’s risk assessments?

Bill Galvin: We do separate risk assessments but then we sit down and explain them to each other and look at the analysis that underpins them. For example, the FSA’s conduct outlook in Martin’s area-the risk outlook-has 15 risks. Three areas call out specific pensions risks: automatic enrolment issues, SIPPs8 and the issues around those, and pension transfers. We have sat down with the FSA and understood the analysis that sits behind the decision that there were critical risks in those areas and the proposals that they were going to take to the marketplace to deal with those. Likewise, in terms of our analysis of the risks in DC pensions, we have sat down with the FSA and DWP-and Treasury, indeed-and explained exactly what our concerns were and how we were going about mitigating them.

Q277 Chair: I think we might have more questions on that. Before I leave it, can I just ask you, Martin: you said that you do not specifically have a pension section; you look at the different types of organisations. However, do you have a pension strategy that is overarching, where you say this is a strategy of how you will deal with pensions?

Martin Wheatley: We have an overall business plan that we publish on an annual basis-a three-year rolling business plan-that sets out the risks we see in different areas and what we will do in those different areas. Where we identify risks-and, as Bill said, we did in our risk outlook-in specific aspects of the pension industry, that then informs our threeyear plan, which we will discuss and we will discuss how we apply resources to that. We then publish that to the industry and ask for comment. It is not a single pension strategy per se, but, as part of our overall strategy as to what we see as risks and how we will address them, we address pension risks within that, alongside other risks we see to consumers.

Q278 Nigel Mills: I was listening to your answers on how well you work together and I was just trying to square that with what the NAO9 came out with when they had some concerns about some of the overlap between you. Do you think those concerns of the NAO were fair or do you think you have managed to address the issues they raised?

Martin Wheatley: I think the NAO raised some valid issues. I do, actually. Just as the questions here are questioning how you deliver integrated regulation for consumers from a fragmented structure, the NAO raised some areas where they felt we were not as well joinedup as we should have been and we have made some changes as a result of that. I think their intervention was very helpful. I think they said we were doing some things very well. I think they have suggested other areas that we need to work harder at and we have made changes since then.

Bill Galvin: We accepted the NAO’s report and we said that we would take steps to deal with the issues that they raised. Since then, I think that we have been working very closely with DWP and Treasury to help support an overarching policy objective at a Government level for the protection of members across all types of pension schemes into which people will be automatically enrolled. We have worked very hard, subsequent to the NAO’s recommendations, to make sure that we, the FSA and DWP understand the measures that we use to measure risk and the extent to which outcomes are being delivered and our regulatory performance in that context. I think we have worked on the areas that the NAO recommended and, indeed, at the time, we had a very good relationship with the team that did the NAO survey. They said a lot of complimentary things about us in that report as well.

Q279 Nigel Mills: One thing they did suggest was there needed to be somebody with an overarching responsibility. I am not aware that is a recommendation that has been taken up yet. What are your views on that?

Bill Galvin: They said that there should be an overarching objective for the protection of members of DC schemes. In our view, that is a Government objective, and our two sponsor departments are DWP and Treasury. Back in 2009 or 2010, I cannot remember which, we wrote to DWP and said, "We think you should set up a body to look across the piece" and they set up a body which brings themselves and Treasury together as well as the FSA and ourselves. The objective of that is to ensure that there is an overarching objective for the protection of members in schemes that will be used for automatic enrolment.

Q280 Nigel Mills: I am struggling to see who gains by there being so many people with a finger in this pie. Aside from the downsides of change and the complexity of that, is there any advantage to having both of you doing a bit of this, or would we better off with just one body doing it?

Martin Wheatley: I think it depends on the perspective. When you say "just one", from the perspective of an insurer, there is not just one, no matter how you cut it. From the market’s perspective, if you were to say, "What we need is a single integrated pensions regulator", what the insurer sees is somebody coming to talk to him about pensions and then the FCA coming to talk to him about how he has structured his fund and governance, and then the PRA talking to him about how he structures capital and liquidity. It depends on the perspective you are looking from. If you are looking from the individual pensioner’s perspective, then you might achieve a single regulator. You do not achieve that from almost any other perspective, under almost any structure that recognises that there is different expertise and capabilities.

Bill Galvin: I think I said the last time that I came to speak to you that you could draw the line in different places, and indeed you could, but you would still have problems of needing to work across that line. For example, if one regulator was looking at all pensions delivered through the workplace, insurers, as Martin said, deliver those from the same platform that they deliver personal pensions that they sell through the retail market. They would find that difficult. If you said that there should be one regulator only looking at all DC issues, whether they were trust or contract, then of course a lot of DC pensions are delivered by the same trust organisation that delivers a DB pension scheme-either an open or a closed one-and the trustee responsibilities have parallels across DB and DC. You could draw the line in different spaces. I am not so sure you would end up with a clean cut and the necessity for people to work closely together, wherever you drew it.

Q281 Nigel Mills: Do either of you think, "If only I had that power, I could be much more effective at this"? Is there anything that either of you think that you need to have that you currently do not have?

Bill Galvin: Asking a regulator what powers they would like is an open invitation. Last week, we published sets of documents that outlined, in our view, how trustees should go about ensuring that they were delivering the best pensions they could for their scheme members. We put it out in two sections: a code, which was the things that were underpinned directly by pensions legislation-and the code explains how we think trustees should go about that-and some guidance. The guidance covers things like communications, the value for money assessments that trustees should do, and some challenges around the retirement processes that we believe schemes should operate. That is guidance because there is no direct legislation underpinning it.

The implication of that means that we have more locus, more remit and a bit more authority, I suppose, in the areas that are covered by our code of practice and less in the areas that are covered by our guidance. Do I believe that the areas in our guidance are less important than all the areas we have put into the code of practice? No, I do not, because value for money assessments, for example, for trustees, and assessments of the level of charges and what is being delivered for them, are very important.

Of course, while we will do a lot of nudging, a lot of promoting and a lot of supporting of the industry, when it comes down to serious discussions with that part of the industry that are reluctant to make improvements, it is always better to be doing that from a firmer base.

Q282 Nigel Mills: Do you think you should have the power to cap charges and consultancy fees?

Bill Galvin: I think charge caps are a blunt tool. You had a good discussion-I listened to some of it-in the last session. Some of the points that were made there, I think, are quite valid. There is a risk of levelling up once you put a charge cap in place and that that becomes a standard, so some of the real progress that has been made in terms of people asking difficult questions is lost in the fact that this is some kind of established level. That is a risk. What you would get is perhaps removing the risk of some of the more egregious practice in some of the corners of the industry. My view now is that there are two things that we must absolutely focus on: transparency and accountability. The tools that the IMA10, the ABI and the NAPF have delivered at various stages of the investmentgovernance chain-the fund management, the disclosure to employers about costs and charges and the disclosure to members about costs and charges-I think should increase transparency right through the governance chain of pensions. We want to see them adopted by the whole of the industry, clearly.

Then the key thing is the decisions that are being made on the back of that information by employers and by members in particular. We think the market is working well now; I have some concerns about how that is going to work in the midmarket, but it is a very different world now in automatic enrolment than it was. We probably should not make the mistake of assuming that some of the challenges of the past will still be there as the mid-market employers start to make their decisions. There are some areas of risk-you have mentioned consultancycharging, I think there are some risks in that space that need to be monitored-but, right now, I think it is probably a bit too early to say whether a cap is necessary, whether the balance of risk justifies a cap in terms of pushing out the most egregious practice versus potentially saying that that level of charging was all right.

Q283 Nigel Mills: Would you like to have the power to cap in your back pocket, so you could say not just, "Thou shalt be costeffective and, if you are not, then we will be really stroppy with you", but, "If you are not costeffective, we will take this power out of our back pocket and start to use it"?

Bill Galvin: Of course, Steve Webb has that power in his back pocket-

Q284 Nigel Mills: But you do not, do you?

Bill Galvin: And he is waving it around. I think we will provide the Minister with as much analysis and evidence as we can from how this is panning out in the market, so that he might decide when and if to use that power.

Q285 Nigel Mills: Martin, have you got any more powers that you wish you had?

Martin Wheatley: Because we have just come through a fairly lengthy rewrite of the Financial Services and Markets Act, that debate has been very well trailed, and the Commission on Banking Standards is still looking at certain elements in relation to banks. There are some areas that we said we would rather have additional powers. Primarily, it relates to our approved person regime, where we can take action against the subset of people who are approved persons, but the people who work in the industry is a much broader group than that and, under the current structure, we are quite constrained in terms of our ability to take action against people who are not identified as significant individuals within firms. That is one of the areas, but that is a more general power rather than a specific power in relation to pensions.

Q286 Graham Evans: How would you ensure that contractbased DC schemes will abide by the six principles?

Bill Galvin: I very much hope that they do and, in my discussions with the providers, many of them have come to us and said, "Yes, we agree completely with what you are trying to do and we intend to go to the market and say that we are compliant with the regulator’s six principles and would be prepared to demonstrate that." Our vision is a relatively straightforward one in that we think employers, when we get to the midmarket, will need something that is relatively straightforward and that allows them to get comfort when they are choosing a pension scheme off the shelf for their employees. We cannot expect them to go through lots of due diligence. I would like it to be a simple thing that says, "Yes, we do everything in compliance with the regulator’s six principles" and we either, as NEST did last year, comply or explain against that or get independent assurance that we are in that space. We would like everybody going to the market to be in a position to say that. I think it would make the employers’ choice a lot simpler.

We are writing to employers-all of the 1.5 million that are going to be affected over the course of the next four years-and our communications to them are going to go along the lines of, "Here are all the things you need to do to get ready for automatic enrolment". In the 18month or 12month letter, we will flag them to an area on our website where they can get advice about choosing a pension scheme. Then, once they provide us with their person who is responsible for this in their business, some of the nudge communications that we will send to them will talk to them about how, when they go to choose a pension scheme, they should ask the simple question, "Are you in line with the regulator’s six principles?" I think many of the insurers will want to demonstrate and will want to be able to say, "Yes". It is, then, a kind of demandled strategy for us in the contractbased space. I think it can, in fact, be quite effective.

Q287 Graham Evans: Looking at the six principles, I do not disagree with them at all, although, where it says you have a "good member outcome", I would like to see the words "outstanding member outcome", because "good" is not good enough if you are looking at comparing it to public sector DB schemes, for example. You would want to make sure you get the best possible return for all members. How will you help, support, advise and enable small and mediumsize enterprises to spot the slick salesman coming in with his offtheshelf pension provision, to spot the signs that perhaps you need to shop around more? Do you understand what I am saying? There are going to be hundreds of thousands of pounds-large sums-coming out of what seem like relatively small companies and all of a sudden the financial salestype people will be there thinking, "This is a good one. These look like people who are new to this. I can get a nice killing in there." Will you be able to advise these people on how to shop carefully?

Bill Galvin: That is where we have been going. We have been worried about the risk-I do not think it is an enormous risk-that the man in the nice suit is able to engage with fully informed employers and that the barriers to entry in the master trust part of our landscape are quite low. Obviously you cannot become an insurer and sell group personal pensions unless you go through a fairly extensive authorisation process with the FSA, but to set up a master trust, the barriers are very low. We have seen various different people-existing service-providers and people from other countries, such as the Danish NOW: Pensions scheme-and various industry affinity-type groups and unions set up these mastertrust arrangements.

That is why our focus in the material we put out last week was on setting very explicit standards that these people should adhere to. We would expect them to get independent assurance that they adhere to our standards, so the risk that an employer can be sold something that really should not be on the market, I hope can be addressed, to some extent, by getting every employer to ask the simple question, "Are you consistent with the regulator’s six principles? Can you demonstrate that you are?" We will have to keep a close eye on the market to make sure that there are not more of these master trusts springing up in an unhelpful way.

Q288 Graham Evans: That brings me on to my next question: in terms of contract DC scheme members, members or employees would like more help, advice and guidance from the employers, but the employers are somewhat reluctant because of, perhaps, legal consequences of giving inappropriate advice. How can you provide safeguards against, perhaps, legal claims to employers?

Bill Galvin: We have produced a leaflet for employers called Talking to your employees about pensions. Employers have very specific duties under automatic enrolment to give information to their employees. It is in the legislation. They have to do it. That will be done by employers, some of them on their own behalf, or by providers or advisers acting on their behalf in other cases. Employers, particularly at the lower end of the market, have been concerned about what they might or might not be able to say, and the introduction of this prohibited recruitment conduct legislation around automatic enrolment-where employers are not allowed to induce people to opt out of the pension scheme-has added another level of concern, I think, about employers talking to their members. They worried-if they talk about their pension scheme at all-that it will be seen as an encouragement for the employee to opt out in certain contexts.

We wanted to be clear, then, about what employers could and could not do in that space, and it is relatively clear. It is about providing the facts. We have given lots of tools on our website that they can just use to provide these basic facts and the DWP has provided a lot of communication templates that they can use. Hopefully employers will find that this area, which is a little complex, is made as simple as possible by fairly standard communication tools and templates.

Q289 Graham Evans: Why is the provision of advice to employers unregulated?

Bill Galvin: To employers?

Graham Evans: Yes.

Bill Galvin: Why is the provision of advice to employers unregulated? It is not regulated. There are lots of things that are not regulated. I think advice to employers is a complex space. I have had, some time ago, people sitting within employee benefit consultants advising the large employers sitting in front of me and saying, "We advise employers on lots of things that determine whether members get a good outcome or not from their pension. I think it should be regulated." They say that to my face.

However, advice to employers, as is commonly understood, is now a very broad thing. You have heard your previous guests talking about the set-up of automatic enrolment pension schemes and the fact that this involves a lot of communications work from the employer to the member and payroll systems work. A lot of the corporate IFAs and employee benefit consultants in this marketplace now are providing a huge range of services to employers, from advising them about how to change their HR systems, to talking about how that communicates with their payroll systems. Choosing a pension scheme for their employees is part of it, and perhaps giving advice to their members is part of it, which is a regulated activity, but there is a very wide spectrum of things. To say "advice to employers should be regulated", I think, is a very broad statement and would cover a huge range of activities.

Q290 Graham Evans: Let me just put the scenario to you that you have the slick salesman-there is nothing necessarily wrong with a slick salesman-and he does a great job, sells the pension scheme to this employer and charges a very nice, handsome commission on that. How will you be able to monitor and control so that that handsome commission that he gets paid does not end up being taken out of the individual employee’s pension pots? In other words, the individual employee’s pension pot gets off to a dreadful start because it has his consultancy fees and, indeed, commission on it. How will you monitor that?

Bill Galvin: The challenge in this space is where it might be in both the employer’s and the adviser’s interest to put some of the set-up costs into a consultancy charge that is recouped from the member. I think we have to remember, first of all, where we are coming from in this, which is that the set-up, post the Retail Distribution Review, is a significant step on from where things were before, where commission could be charged that the employer did not even know about and which would be paid to the adviser.

In these circumstances now, you at last have to have the employer, first, aware of the amount that the adviser is being paid and, second, signing off on that amount. We have made it clear that we do not believe, in trustbased arrangements, that trustees, for the most part, will pay a consultancy charge arrangement for set-up. Most of the larger trustbased schemes have said that they will not, and we have made it clear that trustees, if they do consider it, need to make it very clear how this is in the member’s interest to pay this, or what service is being delivered to the member. DWP and the FSA have made it clear, also in the wider perspective, in the contract-based space, that it needs to be clear that any consultancy charge taken out of the member’s pot is for services provided that can be demonstrably of value to the member. It does depend on the employer.

Q291 Chair: Can I just interrupt? How can the FSA judge that, if it is not regulated? How can you make the judgment about what has been taken out of the member’s pot if it is not regulated?

Martin Wheatley: A couple of points: I may need to come back to your earlier question, which was about the six principles, and then I will come back to that. We do not impose or regulate the six principles, so we will not be supervising against the six principles; they are The Pensions Regulator’s principles. Two things, however, will happen: one is I think the industry will want to demonstrate, voluntarily, that they are compliant; secondly, our broad set of principles cover pretty well the same ground. They are slightly differently worded but, if you look at them and map the two against each other, they cover the same ground.

We have made it clear that we would expect there to be a clear benefit for a charge. Even though we do not regulate it, which comes back to your point, we still have the scope that, if we feel that there is abuse within the market, then, under our broad principles, as we have done in a number of areas, we have ways to go in and look at what people have done. It is not as if we have an ongoing supervisory role to say, "Is that too much? Is it consistent with the benefit being delivered?" If there is cause, however, for us to investigate, then, under our general principles, we can investigate.

Q292 Chair: I think we have some more questions coming up on consultancy charges. Can I just move on very quickly, Graham, if that is alright, just to ask you, Martin, about active member discounts? TPR does not believe that they are acceptable in trustbased schemes. Should they be acceptable in contractbased schemes?

Martin Wheatley: Our view on active member discounts is that it is a fairly complex space. There are situations where they can be justified. They can be of benefit both to departing members and to existing members, and we would be very wary about coming out with a very strong statement, one way or the other, that they should be banned or should not be allowed.

Bill Galvin: I think the policy position that DWP prescribe around the automatic transfer of small pots will have a significant influence on whether this continues to be a significant issue going forward. We said some time ago that we felt that they were difficult to justify for trustees, and the main reason for that was because they can very often take advantage of member inertia and lack of understanding in terms of the process of leaving an employer and understanding what is happening to their pension scheme, and their tendency to act. The extent to which it is a problem going forward, however, I think will depend very much on the final position that the DWP arrive at. We have not, then, subsequently followed up on that in any definitive way.

Chair: We have heard quite strong evidence against them, I have to say, but I am going to have to move on very quickly, so on to you, Anne Marie.

Q293 Anne Marie Morris: I will make it one question. Do you think that larger schemes would deal with the governance deficit in contractbased schemes?

Bill Galvin: If there is a governance deficit in contractbased schemes, I think there are ways in which it can be addressed. I was very interested: one of the larger employers to go earlier into automatic enrolment in this country was very keen to talk to us about how they had put a management committee in place that had real-I think I said it earlier-quasitrusteebased powers: contractual power to change the investments on behalf of the members if they felt that they were not working, and a duty. There are some challenges around how we make sure that those people on that are capable or engaged, but, with larger employers, that does not tend to be a problem. Some of the providers have come to the market with some innovative ways of demonstrating that the key decisions that they are making are made in members’ interests.

The FSA’s requirements require that providers who are accountable to the FSA for the key decisions being made in the interests of members have made it clear that it is the provider who has this accountability and the backstop, regardless of what employers or advisers do in this space, is that the provider has accountability. Many of the providers are looking now at ways of demonstrating that they are making these key decisions in the interests of members. If there is a governance deficit, I do not think it is one that cannot be filled in a contract-based space.

Q294 Anne Marie Morris: You do not think, then, that the style of the scheme is in any way relevant because you do not think that it is really a big issue.

Bill Galvin: Sorry?

Q295 Anne Marie Morris: Sorry, to conclude and summarise what you are saying, you do not think a bigger scheme is needed or will make a difference because in a sense, I think your argument is you do not really think there is much of a governance deficit.

Bill Galvin: We do believe that, in the trustbased space in particular, some of the smaller schemes, based on our evidence and our regulatory experience, are not terribly well governed and do not have the economies of scale to generate good value for their members in administration and investment services. We would not like to see too many of those set up in the future, and, indeed, we would like some of the existing ones to consider whether they are the best vehicle to deliver good outcomes for their members.

Q296 Anne Marie Morris: What about with a contract scheme?

Bill Galvin: There are a relatively small number of contractbased providers, so the economies of scale in terms of investment management and administration and all of those things should be there already in the contractbased space, regardless of the size of the employer. The key issue then is the extent to which the scheme that is being sold is demonstrably suitable for the population that it is being sold into and that it provides value for money. In the smaller population of employers, there are challenges because the distribution costs are higher. It is a higher cost to serve, and the set-up costs per member are going to be higher, so delivering value for money can be more challenging in that space. In general, however, the economies of scale that you would expect to find from the robust governance of administration and investment services are already there in the contractbased space.

Anne Marie Morris: That is helpful. Martin?

Martin Wheatley: Sorry, I am going to have to go back to the question.

Anne Marie Morris: Sorry, governance deficit.

Martin Wheatley: Yes.

Q297 Anne Marie Morris: One, do you think that it exists, particularly within contractbased schemes; and to the extent that it does exist, does the size of the scheme make a difference? Would we better off trying to have bigger schemes?

Martin Wheatley: Other things being equal, bigger schemes have the economies of scale to put in place the appropriate governance structures and to attract the right people. It is not to say that there has to be a governance deficit, but the greater the size of the scheme, the more capability you have to put in place, the infrastructure, and get the right people in to act within that infrastructure.

Q298 Anne Marie Morris: Is it your view that there is a governance deficit within the contract schemes?

Martin Wheatley: I was trying not to be drawn on that. As I was saying, other things being equal, it would be better. I would not be drawn on whether there is a deficit in smaller schemes. I just cannot give a view on that. I do not think there is, but I would need to, I think, get more information.

Bill Galvin: If I could just chip back in, if you do not mind: I think governance arrangements can exist on the employer side or on the provider side, in either trust or contracttype arrangements. I think the challenge should be that employers should only take on some of the governance challenges on the employer side if they have the scale and capability and if they have their in-house departments with dedicated people to do it. Otherwise, they should look for a scheme-trust or contract-that can demonstrate a very strong governance arrangement on the provider side. That is a relatively easy thing to demonstrate in the trustbased space, because you look at the trustees and they have a duty. It is not impossible for contractbased providers to demonstrate that either. What we will be trying to encourage smaller employers to do is to look for that good governance arrangement on the provider side, if they are not going to go to the challenge of setting up their own arrangements.

Chair: We are going to move on to charges now, and Jane.

Q299 Jane Ellison: Just one question, I suppose: there is a bit of a view emerging that changes in the marketplace itself, with the appearance of NEST and some other new providers on the scene etc., and a greater push to transparency are having a downward effect on charges, to the extent that certainly the CBI and others have said that it might be that the market alone will, if you like, make that correction. Do you share that view? Are you monitoring it, and what single additional factor or intervention do you think would make a positive difference in this regard?

Bill Galvin: We cannot look at the automatic enrolment market as a homogenous space. Large employers have a different dynamic than mediumsized employers, where much of this will be intermediated by different people. The mediumsized employers will have a different dynamic from the small to micros, who probably will find it difficult to get advice and help in terms of putting these things together. That is a separate issue that we are working on as well. The challenges, then, to deliver value for money in charging are different in each of those areas. All we have seen so far are the large employers and one would have to say the early evidence is of low charges and good governance arrangements, at least from those people who want to talk publicly about it.

When we get into the midmarket, the challenge will be around the remuneration of advisers and how that works. When we get into the lower end of the market, the challenge will be around the cost to serve these small employers will be-

Q300 Jane Ellison: Sorry to interrupt: are you hinting, therefore, that, in a way, the industry is on its best behaviour because it is a period of extreme scrutiny at the moment, particularly after the set-up of NEST, and that the feeling is that the early entrants into the autoenrolment market are going to be more monitored, but that you fear it might not all be so rosy down the line?

Bill Galvin: The industry is being set very high standards by the employers who are purchasing pensions for their employees at the moment, because, for the most part, they are engaged and knowledgeable, and know what they are doing.

Q301 Jane Ellison: And they have their own specialists.

Bill Galvin: They have their own specialists on board and they are advised by employee benefit consultants and all of the others. The dynamic in the midmarket, I think, will be very different. I think, when we get down to the midmarket, the challenge will be for employers to understand how much they are paying in consultancy charges to advisers, to make sure that that is in the interests of their members, and that the charges are kept at a meaningful level and good-quality schemes are being purchased through those channels. When we get down to the lower end of the market, I think we are going to need much simpler signals for employers to operate on, so that they can buy schemes with comfort, off the shelf, that have relatively low charging levels. I think the good thing in that space is that NEST is out there, it has said what it is going to deliver in that space and it is the default option for employers. I would hope that it is the standard against which other providers who want to operate in that space have to measure themselves.

Martin Wheatley: I think there is separate part to your question, which is: are natural forces driving this? We are in an environment where, frankly, equities have been flatlining for 10 years and gilts are at record low yields. In that environment, you focus much more on what you can measure. Therefore, if contractbased schemes or any schemes cannot promise you the suggestion of 7%, 9% or even 5% growth anymore, then there is a natural focus on, "What is the charge that is being taken out?" I think, cyclically, we are just at a part of the cycle where people will naturally focus much more on charges, not just because of NEST and because of other changes.

Chair: Our final section is on something we have already touched on, which is consultancy charges, and Teresa has some questions.

Q302 Teresa Pearce: Mr Wheatley, in a policy statement from the FSA in 2010, where commission rates were discussed in the range of 10% to 35%, the FSA said, "We see no reason why consultancy charges at these levels cannot be deducted from the first year’s contributions". Do you stand by that statement?

Martin Wheatley: That was a comment made while I was sitting there, and I was horrified. I made a note to myself and said, "I had better go and check". Clearly, we did make the statement. You have the record there.

Teresa Pearce: It is in the document Delivering the RDR.

Martin Wheatley: Okay. I think it would be quite hard for us today to stand by a statement that said "charges of up to 35% are likely to be justifiable". The problem is, if you make any sort of comment on charges, you are immediately drawn into, "What is justifiable?" We have said charges are justifiable if there are clear benefits to the member, and there have to be clear benefits to the member. I think, in today’s environment, if they were the level of charges, we would want to look very carefully at what sort of benefits were being delivered for that type of charge.

Q303 Teresa Pearce: Do you approve of autoenrolment and who do you think it benefits?

Martin Wheatley: Yes I do, and I think it benefits primarily the people who would not otherwise be saving.

Q304 Teresa Pearce: Talking about consultancy fees to an employer that are then passed on to an employee, can you think of any other area of finance, or anything else, really, where somebody who gets the advice passes the cost on to somebody else? I have been wracking my brains and I cannot think of one. It would be highly unusual, do you not think?

Martin Wheatley: I cannot immediately think, so I cannot tell you how unusual it would be. I would have to think about that and come back to you.

Q305 Teresa Pearce: In your role protecting the consumer, in most ordinary people’s lives there are two major financial decisions: one is mortgages and the other is pension. Given that there has been, most people would agree, quite a failure in the mortgage market over the last few years, which has resulted in the situation many countries have found themselves in, do you not feel that your organisation should have a bigger team looking at pensions, as this is the next possible big misselling problem area, given your consumer role?

Martin Wheatley: Can I clarify again-maybe I did not make the point clearly enough first time round-we have a relatively small team that looks at pension policy, the development of new rules and the interface with Bill and his team. We have a very large group of people who are part of our supervision function and part of our enforcement function, and the areas that they focus on, frankly, are the areas where we see, at any given time, the biggest risk. That group is a relatively fluid group that would be allocated to asset managers and to banks-at the moment, as you can imagine, we are spending a lot of time on banks-but will move to where we see where the biggest risks are at any given time. I would not, then, take the fact that we do not have a dedicated pensions team in terms of supervision as a reason to suggest that, when we need to have the resource, we do not have the resource available to it. Our approach is a riskbased approach and where we feel that the biggest risks are arising to consumers is where we put our resources.

Q306 Teresa Pearce: In past years, however, the people who we have agreed are the people who are going to benefit from autoenrolment-people who would not normally be in that marketplace-were not catered for, because the industry said they did not have "attractive lives": they did not earn enough. Because of the number of people coming in, however, they are now a market in themselves. Do you not feel that the FSA and the FCA should be looking more actively at that market to make sure that these people-who to a large extent are not that financially educated-are not going to be ripped off, basically?

Martin Wheatley: Yes, I do, absolutely. This is a large group of-

Q307 Teresa Pearce: Do you need more resources in that area, do you think?

Martin Wheatley: Again, if I come back to the question, we have an overall level of resources, and that will change, year in, year out, but within that overall level we will apply that resource to where we consider is the biggest risk to consumers. With this creating a large body of relatively less sophisticated consumers, there are bigger risks in that space and, therefore, we will spend more time and more of our resources looking at that area. That is not, however, the same as saying-in fact, I would be resistant to saying-we need to create a very big pension supervision team.

Q308 Teresa Pearce: With an unsophisticated market, however, there is a potential for abuse, so how would you intend to tackle that abuse? Is it just riskassessing as we go along, or do you have any thoughts as to-

Martin Wheatley: In terms of assessing, one of the things that-

Teresa Pearce: You do not regulate advice to employers, so it is difficult.

Martin Wheatley: No, that is right. One of the changes that we are making is very much moving our intelligencegathering from simply being regulated returns from firms, which is typically what the FSA would have done, to a much broader view of where we can gather intelligence about what is going on, including from the consumer groups. We are spending and will continue to spend more time talking to consumer groups and to people who represent those vulnerable groups, so that we can calibrate our response accordingly. There are quite a set of changes that we are making as we move to the FCA.

Q309 Teresa Pearce: My last question is that-given that we discussed earlier how we could not think of any area where a person getting advice would pass on the cost of that advice to somebody who had not got the advice-do you think that memberborne consultancy charges should be banned for autoenrolment, where you have this unsophisticated audience? Do you think the passing on of those consultancy charges should be outlawed?

Martin Wheatley: The policy question would probably be one for Bill. I would find it hard to say that they should be banned absolutely, because there may be occasions, I am not saying very often, when they are valid. I think the levels of charges that you mentioned at the start would be very difficult to justify.

Q310 Teresa Pearce: Given the 10% to 35% that was said in 2010 and the fact that you now feel that that seems quite high, do you think that is because everybody has moved in this area in terms of understanding the level of charges? Do you think that that was said in 2010 because that seemed reasonable at the time and now it does not?

Martin Wheatley: I cannot comment on why it was said in 2010. It sounds quite excessive in today’s environment.

Teresa Pearce: Maybe that is a good point: that we have all moved quite a long way from there, maybe.

Q311 Nigel Mills: I was just going to perhaps express a concern that, when we asked about deferred member charges and now we have asked about these consultancy fees, the answer we get is, "It might be justifiable. I am perhaps not convinced". I think what we would like you to be saying as regulators is, "Those kinds of behaviours are just not appropriate. If we see them, we are going to take some kind of action to stamp it out and we are going to be really coming down on where we see exploitative practices". The feeling I am getting is, "Maybe, perhaps, but it might well be okay". I am not sure that a lot of people who are getting autoenrolled into these pensions-never mind the existing customers-are going to be very keen to hear that. Do you think you are strong enough in this market, leading best practice rather than just seeing it happen and applauding it from the sidelines?

Martin Wheatley: We have not spoken too much about it here because it is less relevant specifically to the discussion today, but one of the big structural changes that we are introducing into the market is the Retail Distribution Review. That was, in a sense, consultancy charging in a different form: the costs were passed on to the members. We are banning that as part of the RDR. I think the environment we have moved to is one where all of us are much more conscious about behaviour in the industry, what charges can be passed on and what cannot. In one area we are moving to ban that, so we are taking a very direct intervention. If we need to in other areas, I do not think we would shy away from doing it, but, at the end of the day, we are implementing policy and, in some of these areas, the policy is either from the Government or from The Pensions Regulator.

Bill Galvin: I do not think that we have been equivocal about any of these things. We have said that we expect trustees to perform value for money assessments and to look across their entire membership. We believe that there will be greater transparency in the marketplace to aid them to do that and we will be looking carefully at what trustees are doing in that space. Where there are areas where we think trustees are not performing their fiduciary duties, we will tell them that we think they should be doing something differently, and we have powers to take further steps if they do not. I can say value for money being delivered for members is one of the key things we would be looking at. It is one of our principles. It is a core component of all the guidance that we have put out recently. We have explained what we expect trustees to do and we expect them to do that.

Q312 Nigel Mills: We are hoping that members in contractbased schemes will end up in a similar position but you cannot expect or require that.

Bill Galvin: It is the case that, in the distribution of contract-based pensions, IFAs have played a significant role and some of the challenges that have been there in this space in the past have been because of their activities like churning and other things. However, they also play an important role in terms of engaging with employers and helping employers understand their duties, getting employers set up for automatic enrolment and helping them to engage with the pensions industry and get things set up in the space. The critical thing for us, I think, is to try to make employers understand how much that is costing and to understand how much of this they might reasonably have to pay for themselves; it might be the case that they can make the case that money should be taken from members’ pots to pay for it.

Q313 Sheila Gilmore: I have a bit of general question about where we are at the moment. Clearly, a huge difference is emerging between this first phase of autoenrolment that is going to be happening-and it would appear, at least from some of the evidence we have had, that, in this first phase with the bigger organisations, people are autoenrolling their employers into schemes that they already have some connection with or are already probably quite well recognised and understood. The next phase and the one after that are going to be moving into a smaller number of employees altogether and an awful lot of employers. Is there not a case for some clear, independent requirement for truly independent advice for these small employers, rather than waiting to see if there are problems with some of this-are there going to be consultancy charges? Are there not? Is the answer, maybe, perhaps, or will they simply be passed on? Would it not be simpler to make it a requirement that they get something that has no connection with any of the providers?

Bill Galvin: Of course, that is the principle behind the Retail Distribution Review. I think some of the challenges in the pensions distribution space in the past is that advisers have been operating on both the demand and the supply side, if you like, so they have been advising employers about what they have to do to comply but they have also been the distribution arm for corporate pension arrangements. That creates a conflict, but that is exactly what the FSA have introduced the Retail Distribution Review to counter. The key challenge under the current framework for the Retail Distribution Review is whether employers will make sensible decisions about how much and in what manner they will remunerate their advisers in the context of consultancy charging. We will provide as much information as we can to employers to help them understand how they might make sensible decisions in that space, but the idea of a Retail Distribution Review to take the remuneration of advisers out into the open and remove it from being a commission charge is a significant step, I think, down the road that you were outlining.

Martin Wheatley: And to make it genuinely independent. That is the thing that we are trying to get to: to move away from a situation where, one, people thought they were not paying and, secondly, they thought they were getting independent advice, where they were getting neither of those. They were paying, and they were paying for sales, not independent advice. That is the big change that we are now delivering.

Q314 Sheila Gilmore: Will that be fully delivered in relation to employers in schemes like this?

Martin Wheatley: The employers rely on that advice and, as you say, as you move down to the smaller chain of employers, these are typically the community that the RDR is primarily aimed at.

Q315 Nigel Mills: I am just a bit worried: if I am an employer and I have 10 people, and I have never had a pension scheme, at some point I am going to get through auto-enrolment. I am going to probably ignore the first two letters I get, and then finally I get the third one and it tells me I have to do this on pain of death. I am going to have flyers coming through the door from various pension firms. I am just going to pick one, one day, and just sign up to it because it meets my legal obligation. I am not sure I am ever going to be sat there and go, "Can you tell me whether this meets the six key features of a good pension scheme?" Even if I asked and they answered, I would not have a clue whether they had told me yes or no. How do you get something clear and simple to those people in that situation, which says, "Just sign up to NEST or something similar. Do not go and pay fortunes in fees to someone"? Otherwise, I think they will just take the flyer that looks the prettiest and just sign up to meet their obligation.

Bill Galvin: When we write to employers, we will say to them, "You can choose different pension schemes for your employees. NEST has a public service obligation and must take you on board. If you want to investigate others, here is a link to the ABI website, where there is a list of insurance-based providers, and here is a link to a website where you can find an adviser, if you want to do so." That is the information that we will give them, but accompanying that there will be a leaflet which says, "Ask your provider these questions."

Yes, it requires a small bit of work on behalf of the employer, but automatic enrolment requires more than a small bit of work on behalf of the employer. Even for smaller employers, there is quite a significant amount of work they have to do to assess their workforce, to make sure that they are provided with the right communications material and make sure they are providing the pension provider that they choose with the right information. We hope that, on top of that, they will also make sensible decisions about the type of pension scheme, and we will do our utmost to provide them with as much nudging and supporting information that will direct them towards the ones that will be the better ones in this marketplace.

Chair: We did have more questions but we have run out of time, so you will be pleased to know we are not going to put them. Thank you both for coming along this afternoon. It has been quite a long time, but your evidence will be very useful when we come to write the report. Order. The meeting is now adjourned.


[1] National Association of Pension Funds

[2] Association of British Insurers

[3] Additional Voluntary Contributions

[4] Personal, social, health and economic education

[5] Pension Income Choice Association

[6] Independent financial adviser

[7] The Financial Conduct Authority and the Prudential Regulation Authority

[8] Self-invested personal pensions

[9] National Audit Office

[10] Investment Management Association

Prepared 11th February 2013