CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 768-iii

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Work and Pensions Committee

Governance and Best Practice in Workplace Pension Provision

Wednesday 12 December 2012

Neil Carberry and Tim Thomas

Andrew Vaughan, Kevin Wesbroom, Jim Doran and Will Aitken

Evidence heard in Public Questions 144 - 228

USE OF THE TRANSCRIPT

1. This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2. The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Work and Pensions Committee

on Wednesday 12 December 2012

Members present:

Dame Anne Begg (Chair)

Debbie Abrahams

Mr Aidan Burley

Jane Ellison

Sheila Gilmore

Glenda Jackson

Nigel Mills

Ms Anne Marie Morris

________________

Examination of Witnesses

Witnesses: Neil Carberry, Director for Employment and Skills, Confederation of British Industry, and Tim Thomas, Head of Employment Policy, EEF The Manufacturers’ Organisation, gave evidence.

Q144 Chair: Thanks very much for coming along this morning. You are welcome again. Could I just ask you to introduce yourselves for the record?

Neil Carberry: Neil Carberry. I am Director of Employment and Skills for the Confederation of British Industry.

Tim Thomas: Tim Thomas. I am Head of Employment Policy at EEF The Manufacturers’ Organisation.

Q145 Chair: Thanks very much indeed. You are both very welcome this morning. We have rather a lot of questions and we have two panels so, if you do not mind, we will just get started. There are a couple of questions on scheme governance. While contractbased schemes do not have trustees acting in the best interests of members, internal governance committees can go some way to improving member outcomes. How can employers that offer contractbased schemes be encouraged to set up governance committees?

Tim Thomas: The fundamental difficulty we have to overcome is that employers have a fear of the liability they will incur the closer they get to the administration of pension schemes. It is not an irrational fear, but one must bear in mind that many employers have a very limited understanding of pensions products and the running of pension schemes, and access to information and advice is costly. What we could look at in terms of governance schemes, particularly for SMEs1, is to graft or craft governance schemes on to existing employment and staff engagement methods that SME employers will be familiar with. They will be familiar with staff engagement committees that deal with a whole host of workplace issues. It may be that, if we do it in a softer way in that sort of guise, SMEs will be more inclined to take on pension governance as part of workforce engagement.

Q146 Chair: Would it not frighten them to add pensions governance on to a whole load of other things in the workplace?

Tim Thomas: It is a matter of providing guidance. Staff engagement committees are things that they are familiar with, so we are dealing with a position that SMEs may be more comfortable with that particular type of vehicle. Also for example in the employment sphere, ACAS2 provides advice, codes of practice and guidance to employers. If they could be given similar reassurance for how they would deal with pension governance, then that may be a way that particularly smaller employers would be willing to take on a greater burden.

Neil Carberry: I think governance committees have come a long way in the last couple of years. We are starting to see at the larger end of the business community some really good structures being put in place, often written into the contracts with the scheme provider. For contract schemes, largely like trust schemes, the quality of scheme governance is often associated at the moment with the capacity of the employer to give resources to it. The smaller the employer gets, the less time there is to commit. It is right to expect that, when an employer chooses a pension scheme, they have informed themselves of both the needs of their staff and the demands of the autoenrolment regulations. The smaller a scheme gets, the more the expectation needs to pass to the scheme provider that, particularly through the Treating Customers Fairly rules, some of the engagement is being taken on by the provider rather than by the small business.

Q147 Chair: You have illustrated my next point, which is that you can probably only get proper governance of contractbased schemes if it is a big scheme and a big employer. It is very difficult in terms of small employers. How might that be solved? It has been suggested to us that perhaps now is the time for a lot of smaller schemes to be amalgamated in some way, so that you end up with the economies of the big scheme, but also the more likely tightness of the governance that can be put in place when it is a bigger scheme.

Neil Carberry: The important thing about governance is not that it is done by the business; it is that it is done by someone and someone owns the requirements of the scheme. I think it is perfectly plausible to run a small scheme effectively with the right structure from the scheme provider. It does require some investment from the business when the scheme is set up. Over the long term, it is clearly the case that economies of scale can be delivered by bigger schemes, and facilitating the development of larger schemes, particularly for smaller employers to participate in, is a good thing. To a certain extent, we are seeing that in a way through the autoenrolment regulations. We have NEST, but we also have a couple of similar large providers, whose offer will be attractive to businesses that do not want to set up their own scheme. That is to be welcomed.

The one note of caution that I have about consolidation of schemes is that pensions are a part of the remuneration package, and there will be businesses, even quite small businesses, that will want to set up a pension scheme that is particular to the needs of their workforce, for instance if they are going to use a wrapper product that puts together longterm saving plans, corporate ISAs3, with pensions. Anything that forces smaller schemes to move into larger schemes would be a problem for a proportion of the small employer community.

Q148 Chair: So encouragement rather than force. From what you are saying, you are not averse to what NAPF4 is suggesting in terms of looking at consolidating a number of smaller schemes.

Neil Carberry: We should not get too hung up on one model. NAPF has long been a fan of the super trust. There is clearly a case to encourage consolidation. It is not clear to me that a super trust, per se, will necessarily solve all of the governance problems. We should recall that there are some fairly poorly run trustbased schemes in the country. It is about the behaviours that take place around the scheme, not about the size. That is the critical thing.

Chair: I think we will move on to transparency of charges.

Q149 Nigel Mills: I guess many of your members will have started enjoying autoenrolment in the last few months and many more will have it coming up. Do you think the Government should impose a cap on the level of charges for autoenrolment schemes to try to protect members and, I guess, employers as well?

Tim Thomas: The first issue is to identify those scheme members who are autoenrolment scheme members, which may be something of a challenge in the first place. Perhaps behind your question is the fear that, for some on low and moderate incomes, their contribution to their pensions may be depleted quite significantly by the level of charges that they will pay. The thing to bear in mind and the solution to this is transparency of charging, so that individuals clearly know what it is they are contributing, what the charges are and the effect of those charges on their savings as they go along.

We are dealing with workers who, in many cases, have a limited degree of sophistication in terms of pension products and what they mean for them in the longer term. Some employers have a similarly limited degree of sophistication, in terms of what a pension scheme is and what it will deliver. Certainly there is a high degree of misunderstanding of the differential level of charges and how they affect the pension pot in the longer term, so that quite small differences in charging can have a very significant difference on the value of the pension over a long period of time. My answer is a cap on autoenrolment. Perhaps the better solution is one of transparency of charging to make it clear what charging is. In the longer term, yes, there could be a case to make sure that autoenrolment works, otherwise some workers will be disincentivised to continue with autoenrolment, if they see the value of their pension scheme not rising as they would expect it to be.

Neil Carberry: I would agree with Tim that there may come a time when a cap on charges for autoenrolment schemes is necessary, but we should not hide from what are goodnews stories. If we were sitting around this table at the time of the Turner Commission, we would be talking about charges of 0.7% being fantasy land in terms of contractbased schemes. In fact, the average charge is now down to just over 0.5%, and that is largely driven by the effect that the existence of NEST has had on the market and the economies of scale that autoenrolment will deliver. Most new schemes are actually delivering at very effective charges.

We do have an issue with legacy schemes that have higher charges. Our inclination is, in the first instance, to try to reach out to the employers who are offering those schemes and make them aware of the impact of high charges, as Tim says. If there is no movement towards lowercharge schemes for autoenrolment over the period of the first couple of years of the scheme, then the case, when we get to the 2017 review, for a charge cap is much stronger. At the moment, progress has been so strongly in the right direction that a charge cap seems to be unnecessary.

Q150 Nigel Mills: The issue with transparency is that the members or the employees get autoenrolled and they do not really get a choice. Transparency to them is probably useful, but where can they go? Presumably it should be clear to the employer which scheme they are signing their employees up for, so that they understand the charges and can equate the level of charging to the level of return, expertise or value or something. Really, it is getting the employers to understand that they can materially affect their employees’ pensions by going for one that is too expensive.

Neil Carberry: The Regulator’s six principles are very helpful in this regard. Certainly from the discussions we have had with the Regulator, they would expect the employer to bear in mind the idea of communications based on the six principles of what good provision looks like when selecting their scheme, and that seems to us to be quite a positive way forward. While the Regulator does not have name recognition in a lot of this community yet, because clearly it has been used to dealing with companies that sponsor Defined Benefit plans, that alone will drive reassessments and changes in behaviour in some of those legacy schemes.

Q151 Nigel Mills: If I am a small employer with 10 employees, I am not going to have the knowledge or probably the time to engage with all of these funny six principles. I am going be told I have to be autoenrolled by X date; I will have fliers coming through my door from various people. I am going to pick one, one day, because I feel obliged. Do you think the situation is a bit different for schemes for smaller employers, where there may be a stronger case for having a cap, because we know we are in a world where information and regulation might not just fit down far enough for them to follow it?

Tim Thomas: The better way forward is that those sorts of employers and that type of size of employer can easily compare different products, and that the information is presented in a clear and transparent way. In the same way as I can compare car insurance at the moment, or house insurance or insurance in general and different financial products, employers of that size with that level of understanding should be able to compare different products in that sort of way and at that sort of level, so they can clearly see what the charges are and what the effect on the workers is in a longer period. They can make an informed choice. The key to this is an informed choice, as opposed to a choice.

Neil Carberry: Of course, you would expect the very smallest employers overwhelmingly to choose one of NEST or the NESTlike products, like NOW: Pensions or the People’s Pension, because of the scale of the support that those products have, because they are designed to reach out to those businesses.

Q152 Nigel Mills: Can I turn you to consultancy fees? The concern that is out there is employers engage some consultants and incur some fees, and that cost ends up being borne by the members of the scheme. Is that a concern that you share? Do you think that should be allowed?

Tim Thomas: It is a similar issue to charges. There are some employees who might find the level of consultancy fees and charges are such that they outweigh the benefit of actually saving at all. Given that we want to encourage autoenrolment and reduce the optout rate, it is a considerable issue. The answer is the same: it is clarity; it is simplicity; it is transparency. It is making it clear to both scheme members and small employers what the level of consultancy fees is and the impact upon saving. In the same way as I can see on a receipt the amount of VAT that I pay, I should be able to clearly see what level of consultancy fees I am paying and how they are going to impact upon my level of saving. Individuals can then make a choice. You can assess what the benefit of the advice you are getting is, what you are paying for it and what you are paying into your pension, and you make an informed choice about whether the consultancy fees are worth the advice you are getting.

Q153 Nigel Mills: I take you back to the point that, for an autoenrolled scheme, I do not really have a choice, do I? My choice is to stay in the scheme or leave.

Tim Thomas: From a member’s point of view?

Nigel Mills: Yes.

Tim Thomas: This therefore is educating and assisting the employer.

Q154 Nigel Mills: You would not favour a ban on consultancy charges for autoenrolled schemes.

Tim Thomas: No, I would favour transparency.

Q155 Nigel Mills: Mr Carberry, in your submission, I think you have warned against conflating low cost and value for money. I guess I can understand the point that I would pay a bit more if I knew I would get a higher return, but I suppose I do not know I will get a higher return but I do know I will be paying a bit more. How do you handle that issue? What is value for money in this?

Neil Carberry: This comes back to where the Chair opened the session, which is where a member is faced with two schemes-one which charges perhaps 0.4% and one which charges perhaps 0.6%, but the one that charges 0.6% has governance advantages in terms of how the investments are run-the latter may well be the better longterm choice for that individual. The point we were making was not to defend schemes that were charging fees of 0.2%, 0.3% or 0.4%, but rather to say that there is a complex interaction between the level of the fee and the governance structure that the scheme has in place. I, for instance, could legitimately see one of our larger members opting to autoenrol people into a scheme that charged maybe 0.1% or 0.2% more, if that was the provider that was willing to sign up to the arrangements for a governance committee that was really effective. That was merely the point we were trying to add.

Q156 Nigel Mills: Mr Thomas, in your submission, you set out that the Government should put obligations on the pensions industry to improve transparency. Could you just talk us through what you mean by "obligations" and how you think that could work? It is unusual for your organisation to want more obligations from Government on businesses.

Tim Thomas: The starting point is the level of awareness of most employers and workers over the products that they are investing in and buying. That level of awareness is very low, in our experience, with some of our members. Therefore, proportionately, the obligation on providers to make members and employers aware of the products and the differences in the products is higher because we are dealing with an audience that does not have any great degree of assumed knowledge. We would like to see providers providing information, such as what the product costs and what the benefit will be over an extended period of time, in a way that allows clear comparisons to be made with other products. Back to my point about buying insurance, another financial product or a loan of some kind, it enables someone to assess what it is the product is going to cost and what benefit it would provide over an extended period of time. Similarly, it picks up on Neil’s point: charges alone are not the entire part of the jigsaw, because governance is an important factor. Ultimately, that then allows people to make an assessment of what the member outcome is going to be over an extended period of time.

Q157 Nigel Mills: By "obligations", do you mean law, regulation, code of practice or voluntary agreement? What would you have in mind by "obligations"?

Tim Thomas: It would have to be something that would provide a significant degree of compulsion upon the pensions industry and providers.

Q158 Nigel Mills: Have you seen the NAPF’s new Code of Practice?

Tim Thomas: Yes, very quickly.

Q159 Nigel Mills: Do you think that goes far enough?

Tim Thomas: It goes in the right direction.

Q160 Debbie Abrahams: The impression I have got, as the questioning has been going on-and please correct me if I have got the wrong interpretation-is that you are suggesting that risk in investment terms is equivalent or equated to the governance mechanism. The cost associated with having good governance schemes relates to the investment and the risk of the investment of a particular scheme. Is that what you are saying?

Neil Carberry: Good governance arrangements, to give you an example from a report that we published a couple of years ago, were where the governance committee had whitelabelled the funds. They had looked at the workforce in the firm and they had riskprofiled the different funds, and said, "Okay, so if you are in your 60s and heading for retirement, you will want to be at number five. If you are in your 20s and have a big appetite for risk, you can be in number one. This is roughly what the funds will do. Behind that, we, the governance committee, will work with the scheme provider to make sure that people are providing investments that are performing next to the benchmarks." That is very much what a traditional board of trustees would do, and that is the kind of thing you can achieve in a larger firm with a governance committee. That will have material impacts on the outcome for members.

Q161 Debbie Abrahams: The impression I have got, and again please correct me if I have got this wrong, is that governance is equivalent to the risk of the investment. Is that what you are saying?

Neil Carberry: No, what I am suggesting is that effective governance has the capacity to have a substantial impact on the outcomes for members overall, in the same way as the level of the charge has a significant impact on outcomes for members overall. The main thrust of our point is that cost alone is not the only determinant of the quality of a pension scheme offer. A scheme that offers 0.3% is not necessarily always better for members than one that charges at 0.5%, if the scheme that is offering charges at 0.5% has advantages in the way the provider operates the fund and in the level of governance and interaction with the employer and the members of the scheme.

Q162 Sheila Gilmore: Have we not just got a system that is overcomplex, with too many products? This is not a supermarket, where you can go in and have a look at the packaging very easily, and say, "I want that brand or that brand", or "I want that red dress rather than that blue dress." The problem is we have a plethora of small schemes, all slightly different. Is that actually helpful to the consumer? What you are saying is that one might have lower charges, but another might invest better in the long term. The trouble is that is such a long term, how would you tell now? What we have seen in the last 10 to 20 years is that all bets were off on investments, which is not what people would have been told. Actually, should we not all be looking for something that is much more straightforward?

Neil Carberry: There are two points there. One is if we are good at giving consumers information in contractbased schemes. No, we are not. The confluence of FSA5 regulation and the way customer relations developed in the industry means that the experience of being a member of a contractbased scheme, and I speak as one from personal experience, is not that you do not get enough communication from your scheme provider; it is that you get far too much of the wrong sort. The provision of meaningful communication that helps scheme members make the right decisions is the critical area. I am not sure that is something that can be resolved by regulation. We were involved in the NAPF work on charges, and I think their work has moved us very strongly in the right direction. A lot of this is about transparency and simplicity across not very many factors. I come back to the six things that the Pensions Regulator (TPR) has set out. We should get to a world where we say to employers and scheme members, "These are roughly the six things you need to judge a pension scheme on and, if they are doing that, you will be alright." That is roughly the message that TPR has worked up and I think it is the right one.

Chair: That leads us neatly on to our next section, which is about communication.

Q163 Ms Morris: Indeed it does. I have two groups of questions, the first to Mr Carberry with regard to communication. You have very much made the point that, in terms of communication and responsibility, there is a difference between a large employer and a small employer. In a sense, you have also talked about the difference of responsibility for communication between the provider, employer and employee in this context. I would very much value your view as to how we would look at articulating who should be responsible, if you believe it is a difference of responsibility at these different levels, why, and, having taken on that responsibility, how you measure that it has been successfully delivered and what we might do differently.

Neil Carberry: I would encourage the Committee to look at the work of the Investment Governance Group (IGG) on this, which was done a couple of years ago now. We got involved in that because, as is occasionally the case when dealing with the financial community, what we saw was a list of responsibilities and next to every box was the word "employer". That clearly does not work for the smallest employers. When we engaged with the IGG, the agreement that we came to as a group was that there are essentially a few things that we need to make sure happen in every scheme, in the interests of the members. What is important, actually, is not whether the scheme provider takes responsibility for that, which would typically be the case in smaller schemes, or whether the employer or the governance committee takes responsibility for that, but that it is clearly set out and recorded who, in that scheme, is responsible for that particular aspect of scheme governance and that members understand that.

Q164 Ms Morris: How do you test whether they understand it?

Neil Carberry: Ultimately that has to be a feedback mechanism from the scheme members to the provider and to the employer. I think that IGG work has a lot of value, and that certainly would be our starting point.

Q165 Ms Morris: In terms of the need to understand, one of the points you made earlier was that, effectively, a pension is part of a remuneration package, and therefore, in a sense, provided the employer-and I do not mean excluding the employee-really understands how this works, that is sufficient, in most cases. My concern is that the employee, particularly in a very small organisation, is not only vulnerable to the lack of understanding further up the food chain-i.e. his employer-but is in a very different position. What he wants to achieve, at the end of the day, is probably more about survival when he is old, rather than somebody further up the chain in a large organisation, who is looking at a quite different level of lifestyle comfort.

With regard to the employee, and I think this goes back to the points that Debbie and Sheila have raised, if you really want these individuals to understand, because this is about their future, then should we not be putting pressure, whether that is from the Government or elsewhere, on providers to simplify the offering? Six points are a lot for somebody who is working as a plumber, and I do not mean that adversely, but those six points are complicated points. Should there not be some pressure to simplify the offering, so that it is an easy choice to make and we do not end up in the same place as energy prices, where there are so many options out there that nobody has any idea? The Government has stepped in to do something about that.

Neil Carberry: The industry is cognisant of this challenge. I made the point earlier about the nature of communication with GPP6. Certainly it is not for me to speak for the ABI7, but there is a sense that the coalition of existing schemes and new FSA regulation in the last decade did not help with the complexity of the communication challenge. There is a willingness, certainly among the providers who are in our membership, to look at how to improve scheme communication.

Linking it into one of the other things that you are interested in, if we are in a debate about Defined Ambition and how to make pension schemes more meaningful, the key thing is to work out the ways in which we can make Defined Contribution more effective. One of the ways we can make DC more effective is understanding the customers better and changing the nature of the scheme to meet their specific needs. That is something that certainly the providers we have talked to are aware of and ready to work on. I suspect that the history of pensions suggests that a legislative route will not be particularly successful in this regard, so the challenge is how to build up a head of steam as a community of business groups, provider groups and representative employees about things that will help.

Q166 Ms Morris: My final question for you, Mr Carberry: you have talked about a plethora of ineffective communications, but what you have not done is give us any sense of what good communication looks like. What would you, because you are, as you say, a member of a contract scheme, like to receive that would be helpful, and how and when would you like to receive it?

Neil Carberry: We set out a report a number of years ago now on good DC, which I can let the Committee have after this meeting. For us, clearly clarity about charging structure is important, as is clarity about investment, but not in terms of, "You are in this fund, that fund or the next fund." It is more, "Broadly you have told us that this is your appetite for risk and this is the scheme that you are invested in, which roughly matches your appetite for risk, and this is how it has performed, next to what we expected." Finally, there should be a reasonable expectation of what the levels of saving you are making will provide, with some accurate allowances for different investment outcomes.

Q167 Ms Morris: That is helpful. Mr Thomas, one of your concerns coming through your response has been the exposure of the employer if that organisation makes a decision that, as it turns out at the end of the day, does not deliver the expected results. You have suggested the concept of a safeharbour arrangement. Could you just give us a little bit more background as to what your fears are and why you think this safe harbour would solve it?

Tim Thomas: The problem underlying the question is that employers are naturally cautious about providing information on pensions. They are unsure where the dividing line is between the provision of information and the provision of financial advice, and I come back to my point made previously that the level of sophistication amongst employers is fairly low, so they are naturally cautious, and that caution may manifest itself in the provision of less advice than they are safely able to give within the existing laws and frameworks.

What we would like to see is employers being provided with that clarity of what advice is and what information is, and what level of information they can safely provide without incurring any potential liability. That is the safe harbour. It is clarity over what I can provide my workers with in terms of information before I transgress and before I am potentially providing advice that means I may be liable at some point in the future. There is a clear dividing line. Employers, we believe, will provide staff engagement; they will provide access to workers. They can act as a channel of communication and they can provide some basic level of information. It is then really for providers and advisers to provide that financial advice to scheme members, upon which they will base decisions. It is a clear dividing line that provides employers with a side of the line to operate on, and that is what we would call the safe harbour.

Q168 Ms Morris: Can I then ask you how you might see that line being drawn? As a corollary to that, if there are lines drawn, would you also be suggesting that employers should be allowed to set up a fund of some sort, so that, if there is a problem, there is a pot out of which sums can be paid? Where do you draw the line and how, if there is a transgression, would you expect that to be dealt with? Is it through a pot, through other legislation, or how?

Tim Thomas: It depends who would be funding the pot. Your idea of a pot very much sounds like a sort of insurance scheme in case things go wrong, and that probably is going to make employers nervous. Employers would be nervous, if there is a liability, about what it is going to cost and if they are going to end up funding that. The underlying concern of many of our members is that, having had a long and proud tradition of providing DB pensions over a number of years, they now find themselves with considerable liabilities as a result, which has led to schemes closing and the move to DC, which we are all familiar with. The idea of some safety net would make employers as nervous as they have been historically and possibly make them more riskaverse, if I can put it in those terms. In terms of who is going to define the limits, that needs to be done clearly for employers. Whether it is a regulation or a code of practice I do not think particular matters; employers just need to know where they stand. At the moment, our members do not, in many cases.

Q169 Ms Morris: Would this be for the successor body to the FSA to set out?

Tim Thomas: Yes. The primary fear is what is information, what is advice and where the line is between the two.

Q170 Glenda Jackson: Apologies to everyone for my late arrival. Can I just go back to the communication issue that you were talking about, Mr Carberry? You seem, in the main, to be talking about large companies, large employers, and one of our concerns is the very small employers, which after autoenrolment will be in the situation of having to look at pensions. Is there not an elephant in the room here, inasmuch as there is no obligation upon an employee to participate in a pension scheme? To go back to the point that Sheila made earlier, in this vastly complex area that is the provision of pensions, surely it should be the responsibility of the pension industry to provide the clearest possible communication.

Neil Carberry: The point I was making earlier with regard to the Investment Governance Group guidance is that good communication should always take place. It is likely that, in larger firms, businesses will be more involved. Among the smaller firms, it has to be the responsibility of the scheme provider and the pensions industry, because the smaller business will not have the capacity to be involved.

Q171 Glenda Jackson: How would one push them to make faster steps in this area?

Neil Carberry: Coming back to the statement I made earlier about the FSA, the first thing is an approach from the regulatory bodies that focuses more on quality of information rather than the volume. Secondly, there is amongst the provider community a realisation that communication does have to improve. There has been significant investment amongst the providers, and I suppose the most important thing for this Committee and others to be focused on is ensuring that those people in the industry who are pushing this agenda are supported by the regulatory system to spread that good practice.

Q172 Glenda Jackson: I am sorry, but are we still not missing the first step here? How do we encourage the vast number of people who at the moment are not in a pension scheme at all to participate? They are probably not earning enough given the present economic climate to put money into a scheme that they cannot use for decades. Surely it is the responsibility of the pension industry, which has markedly ignored this whole section of the populace for decades, to realise that it is in everybody’s interests that they have a pension of some sort. I am still pushing: how is that made attractive to people who have read nothing but bad news about pension schemes, who are short of money, and who, as we have all established, find the system too complex to be bothered to try to understand?

Neil Carberry: The principle at the moment would be that the combination of autoenrolment for all workers plus the phasingin of contributions would make it easier to scoop up that group. The third leg of that stool is to improve the quality of communications, as we have just discussed, so that when they do interact with the pension scheme, what they read is something that they understand and can see the value in, rather than 10 different letters on 10 different aspects.

Q173 Glenda Jackson: Surely that is the very first step. Surely that is the very first step to engage these people.

Neil Carberry: I think the three have to run in parallel.

Q174 Glenda Jackson: Who should be responsible for that?

Neil Carberry: That primarily is a responsibility for the industry.

Chair: We will move on to some questions on regulation.

Q175 Sheila Gilmore: This is probably for Neil. If I read your submission correctly, you seem to be suggesting that the death of DB schemes was overregulation and that all these very kind employers would have been happy to continue providing the schemes if only nasty government had not stepped in and set lots of regulations. The reason you are saying that is to say, "Don’t start overregulating DC schemes, because employers might just walk away from them as well."

Neil Carberry: I would put a slightly different spin on it, as you would expect. Fundamentally, Defined Benefit schemes are a bit like Bistromathics in The Hitchhiker’s Guide to the Galaxy. The figures in DB schemes’ funding statements are defined to a certain extent by the likelihood that the actual figure will be anything other than the one that is currently in the book, because of the lack of knowability around mortality, investment return and a whole range of other factors, which makes providing-with apologies to the actuaries in the room-these schemes for an employer an act of educated guesswork. That does mean that sometimes you will be right and get it about right, and sometimes you will be wrong in one of two positions. Either the scheme ends up in deficit and you have to make additional contributions, or the scheme ends up in surplus.

What is important in that scenario is that the scheme can right itself. Now, firstly, mortality experience in the UK, longevity, has been improving at a significant rate for materially longer than anyone expected, and that has increased the liability of schemes. That is the primary driver of scheme positions. These schemes were set up on the basis of: "Here is a trust. This is the aim. If we do not meet the aim for legitimate reasons, the trustees will have to get around it and we will work out how we cut the cake so that everyone gets something, but it might not be what we originally set out." However, what legislation did throughout the period from about 1968 through to the 2004 Act was take the schemes from that into a world in which what people get in Defined Benefit schemes is a castiron legal guarantee from the employer. The employer moves from a world where there are safety valves for the scheme to a world where there are no safety valves. Dutch schemes are a good example. Look at the proportion of Dutch schemes that have had to cut core benefits over the last five or six years to preserve their solvency position. That is not something that is possible in the United Kingdom. When you get to a position where you are saying to an FD8, "This is a oneway bet; this is what we have promised and we have to pay it," that is very uncomfortable, and that is one of the major drivers for the move away from Defined Benefit.

Q176 Sheila Gilmore: For the people who entered these schemes, I do not recall, for example in the early 1970s when I was doing some work around pensions, that being part of the debate-that people were going to get less than they expected. That was not how they were being sold.

Neil Carberry: That was the way the system was structured.

Q177 Sheila Gilmore: I don’t think that was made very clear to people then. Perhaps employees knew that; I am not sure they did.

Neil Carberry: It was a slightly utilitarian approach, which was, "We’ll do the best we can." The political decision that was made in this country was that was not acceptable, and different bits of benefit design were changed throughout the period, and for lots of very reasonable reasons. I use a hotel analogy. Essentially what British law says is that you can operate a hotel, but it has to be a fivestar hotel under all circumstances. If you don’t want to offer a hotel, that is fine but, if you are offering a hotel, it is at the top end of the market. Businesses have looked at that prospect and said, "That is not for us. We will move to DC, where we have cost certainty." It is a combination of the two: regulation locking in what a scheme costs, and then the massive increase in scheme costs associated with, in particular, longevity changes.

Q178 Sheila Gilmore: Why did so many schemes, probably around the late 1990s, take contribution holidays?

Neil Carberry: Because the Government thought that my members were hiding money from the tax man in scheme surpluses, and applied significant tax penalties against companies that did it. There was a completely strong incentive for companies to take payment holidays because, if they did not and they maintained massive surpluses in the scheme, they would face a significant tax penalty. Of course at the time, the longevity messages that we were receiving from actuaries were significantly more positive than the ones we receive today. While these schemes were reporting surpluses, they may well actually have been in deficit.

Q179 Sheila Gilmore: Retrospectively that would appear to be the case. Instead of regulation, the suggestion perhaps is to use codes of practice, and there is a phrase "having at their heart a comply or explain premise". Could you explain that a bit more?

Tim Thomas: Sorry; could you say that again?

Sheila Gilmore: There is this suggestion that we should have codes of practice, perhaps not regulation, and there was a phrase I think you used: "having at their heart a comply or explain premise".

Tim Thomas: This goes back to what we talked about with governance committees and the way that staff engagement is dealt with in spheres other than pensions. In our mind, we had the concept that you have an ACAStype code and that governs the level of engagement between the employer and the worker. The level of information could be specified within the code, for example what the employer is expected to provide by way of information and guidance, and then if the employer did not actually provide what the code specified, he would have to explain why it is he did not do that and why it is he had not provided that level of information. A code for smaller employers is a better way to encourage good scheme governance than regulation.

Just as a side point, we have all in this conversation spoken about small employers, and we perhaps think of small employers with a headcount of 25 or so. In our experience of dealing with our members, small employers, and that level of information, sophistication and knowledge of pension awareness, might go up to headcounts considerably above that. These could be companies of maybe 250 employees, where actually the level of administration in the company is that you might have just one HR manager and a couple of assistants dealing with pensions and everything else that constitutes workforce issues. In terms of small employers, in my mind, "small" is companies that have perhaps 250 employees, which may not necessarily be what was in your mind.

Q180 Sheila Gilmore: I am still not sure I am clear what this "comply or explain" means.

Tim Thomas: The employer would actually have to demonstrate compliance with the code or, if they had not done so, they would be called upon to explain why they had not done that. It happens in other spheres at the moment, and there could be good reasons why they could not comply with the code.

Q181 Glenda Jackson: Just briefly, again, Mr Carberry, you were talking about the changes that came about. We have touched on pension holidays and big surpluses, but I am not clear. In many instances, participation in a pension scheme was part of the whole employment package. We know how that reflected in the public sector. Again, they must have been very big, were they not, because presumably it was the trustees, who were also part of the business, firm or whatever, who chose the scheme and actually monitored and managed it? We are not talking about that now; this is a different situation. I am trying to clarify where the responsibility is here. In that instance, it was entirely the responsibility of the employer. We are now moving into a situation where the employer, even if he or she has 250 employees, is not going to be in that situation. Where again does the responsibility lie here?

Neil Carberry: Even in the days of Defined Benefit, you had some very large schemes and also some very small schemes. Some of the practice in very small schemes was not as good as it should be, so it comes back to the same point we discussed a moment ago. Larger businesses with resources have the capacity to do this, whether it is DB or DC. Smaller schemes do require additional support from the pensions industry for contractbased schemes and additional oversight from the Pensions Regulator for Defined Benefit schemes. That is a message that both the industry and the Pensions Regulator understand and buy into. Certainly in my discussions with the Pensions Regulator on DB schemes, they have said that one of their major concerns is that we have 7,000 DB schemes, but a significant proportion of them are actually quite small.

Chair: I am going to move on to something that has been exercising the Government quite a bit, and that is small pots.

Q182 Mr Burley: Really the first question is just on your view of the Government’s decision to adopt the pot-follows-member approach to tackling the problem of small pension pots. What is your view on that conclusion?

Tim Thomas: We are not favourable of that approach. Our starting point would be that actually the pot should be automatically transferred. We have suggested in our submission a limit of £10,000 for that automatic transfer mechanism.

Q183 Mr Burley: Why did you suggest that limit?

Tim Thomas: We did some work with our members to ascertain the size of the pension pots of their workers, and in our survey we found that 40% of our members who responded had members with pots of less than £10,000. 10% had scheme members with pots of less than £1,000. The subtext to this particular part of the debate is that a small pot should be aggregated into a large pot providing some member benefit. If one adopted a limit that was £1,000, that only addresses 10% of the smallpots issue on our survey data. If we adopted the £10,000 limit, then actually we will then aggregate 40% of the smaller pots. In order to have an effect on the issue, we came up with the £10,000 limit, because from our survey data, that would address 40% of the small pots. That is where the £10,000 came from.

What we recognise is that there will be, nevertheless, some pots where transfer would not be in the member’s interest, because of the rights that are built into the size of the pot, so we need to do some work on ascertaining those pots where aggregation would not be in the member’s interest, as against those where it would. Potentially, we would like to see NEST as the aggregator. So NEST, subject to the current consultation on lifting restrictions, could potentially be the aggregator where small pots could be placed.

Q184 Mr Burley: I am a bit confused. I thought you supported automatic transfer for all pots, but actually you are saying that some pots may have a more favourable legacy.

Tim Thomas: We recognise that.

Mr Burley: So you would not support automatic transfer for all pots.

Tim Thomas: We support automatic transfer, subject to some restrictions. For example, it would be for the employer who wanted to transfer that pot or be responsible for the transfer to bear the obligation in ensuring that the transfer did not then disadvantage the member.

Q185 Mr Burley: You say you obviously don’t support the Government’s conclusion. Why is that?

Tim Thomas: We don’t believe it would provide sufficient member benefit.

Neil Carberry: We have some sympathy with that point of view. In principle, it is difficult to argue with the starting point the Minister has, which is that it is better for people to have one pension than to have 10 or 12, not least because, if people have a limited amount of time with which to engage with their pension saving, it is easier to do it in one place. Automatic pot follows member does have some issues around whether that automatic move is necessarily in the member’s favour. Tim has just mentioned the example that there may be some provision associated with the existing scheme that is valuable. Perhaps they are forced to move to a highercost scheme. There are some difficult issues that need to be worked through before we move forward with this. Of course, with autoenrolment only just starting and only for the very largest firms, we do have some time to get this right.

It is actually quite difficult at the moment to shift money between DC schemes. It takes a lot of letter writing. In the short term, were someone to move from the CBI to the EEF, for instance-not that anyone would ever make that decision, I am sure-one of the things that the industry could certainly help employers with is making it easier for that person to move their pension saving from our GPP to the EEF’s scheme. At the moment certainly, our experience even when we changed our own scheme was it took three or four letters. This should be a relatively simple transaction. There are some shortterm wins that could be achieved there.

Q186 Glenda Jackson: Why should there be any change at all? If you are in a scheme, it is your job that changes. Where is the problem?

Neil Carberry: If you move between different employers with different schemes, it would make sense to move your saving with you to the new employer’s scheme.

Q187 Glenda Jackson: Again, I am talking about small people. As far as the scheme is concerned, that is being provided by the pension provider, isn’t it? What changes with them?

Neil Carberry: It is a complex process, though, for the individual to navigate at the moment.

Q188 Glenda Jackson: Why? Surely the complexity is being imposed by the provider.

Neil Carberry: Yes; that is my point.

Q189 Glenda Jackson: That is your point, but what I am trying to say is surely in that instance the responsibility is on the provider, which is the pensions industry, so there should be no problem in changing their job for the individual who is paying into a pension scheme. It is the responsibility, surely, of the pensions provider.

Neil Carberry: The individual should say, "I’ve changed job."

Glenda Jackson: "I’m staying in this scheme."

Neil Carberry: "This is the provider for my new scheme, and I would like to bring this money across to it from my previous employer’s scheme."

Q190 Glenda Jackson: Why can’t he stay with the original provider?

Neil Carberry: Then you would end up in a situation where businesses would have staff in manifold different schemes and be paying out, for instance in a business with 200 staff, on payroll to 50 or 60 different schemes in a given month, instead of one. That has some significant complexities.

Glenda Jackson: I see that. Okay, I will leave it.

Q191 Ms Morris: I am going to make this speedy. This is back to risksharing and Defined Ambition. I really just have two questions. Could I have thoughts from both Mr Carberry and Mr Thomas? First of all, where is your evidence that the employer appetite for risksharing is low and, secondly, were we to look at this going forwards, what do you think of the Defined Ambition scheme? I think there was a suggestion that a nonlegislative option might be better, which I think was Mr Thomas’s suggestion.

Neil Carberry: In terms of evidence for risksharing being low at the moment, there are fundamentally very many new schemes being set up and there are some issues with the legal framework that prevent that. We should be clear that, coming back to my analogy earlier, the law is very clear that something is either a DC scheme or a DB scheme. If you try something in the middle, it is reasonably likely you will get taken to court and be deemed to be a Defined Benefit scheme. We have had a couple of cases-the KPMG case and the Bridge Trustees case-where things that were thought to be a mix or a DC turned out to be Defined Benefit, so there is a lack of tolerance in the law for things that exist between that. Having said that, even if you resolve that, appetite for risksharing that looks like something built down from Defined Benefit is likely to be limited to a few very large companies.

Q192 Ms Morris: Is this because of the point you made earlier, which is that the reason for the shift between Defined Benefit and Defined Contribution was the huge bill, if you like, the employer was left handling, and therefore there is a fear of moving back in that direction in any shape, size or form?

Neil Carberry: Quite so, but what you can do for the mass market is move on from DC. We have talked about Defined Contribution in terms of governance and scheme size today, but how do you manage a Defined Contribution fund in a way that gives members greater predictability about their outcome? Lifestyling is the classic offer at the moment, which means you have told the provider your retirement date when you are 30, and they will start to move from one set of asset classes to another. There are a number of things you can do that try to target incomes. Some of our members have started to think about looking at something like DC banking, where each year they will take a portion of the pot and say, "That is staying over there and will form part of a stable base of the fund that we will use to purchase an annuity," so we can now say that the "guaranteed" or a secure portion of your pension is roughly this and the atrisk bit is roughly this, and then change those proportions over time as people move into retirement. A more active management of people’s exposure to risk would be helpful.

Q193 Ms Morris: In terms of the Governmentspecific Defined Ambition (DA) scheme, as it is set out, what you are saying indicates that you would not really be in favour of that. Would that be correct?

Neil Carberry: We tend to come at this from the attitude of let a thousand flowers bloom. If businesses want to set up-and there are a few-within a new legal framework something that shares risk, as long as it is not fraudulent and the risks are clearly explained to members, we do not see a clear reason why Government should prevent these schemes being created, as it currently does. What we are saying is, "Don’t expect this to be the rebirth of DefinedBenefit savings, because it won’t be."

Tim Thomas: I share that. If this is a mechanism that some employers wish to take advantage of, then we should support it, but we have a situation at the moment where we are really talking about a few things. We are talking of risk uncertainty. In terms of one set of schemes, the risk is all with the employer. With the other, the risk is with the worker.

Why might DA be better? It could provide a better sharing of that risk between the two, so it is not just the switch being turned on or off on one side. It provides some collaboration. It could provide better confidence in pensions. It could assist with takeup and reduce optout rates, but also it could perhaps reinstall some trust in pensions, whereas, at the moment, from an employee’s point of view, what they cannot be told is what it is they are going to be getting at the end of the saving period. It is very difficult from an employer’s point of view to trumpet the benefits of pensions if someone does not know what it is they are buying. Many of our members have supported pensions for many years because they think it is the right thing to do. That goes back to our point about providing information, not advice. They would wish to see most of their employees and workers take up pension saving. DA might be a way of doing it.

Q194 Debbie Abrahams: Can I just ask what percentage of employees is aware of whether they are in a trustbased or a contract scheme?

Tim Thomas: I am not sure we have data, because we survey our members, who are employers.

Neil Carberry: All members of a scheme will have been told the nature of the scheme that they are in. I have not got any survey data, but it would simply be the level of individual recall.

Tim Thomas: It is whether they understand.

Neil Carberry: And the effectiveness of the communication. Typically, people know they are in a finalsalary DefinedBenefit scheme if they are in one, and those are always trustbased. Trustbased DC is quite limited to large companies.

Q195 Chair: I suspect that they probably don’t know. They will know if they are in a DB final salary or if they are not.

Neil Carberry: The challenge we have identified in the transition is that people, if they are in a DB scheme, know that there are these things called trustees, because occasionally they have voted for them. The challenge, for our members who have moved to DC, has been to communicate to the people that those people no longer exist.

Chair: Or indeed who is doing the function that the trustees once did, in looking after their interests.

Debbie Abrahams: Absolutely-that is the point.

Chair: We will go on to our next panel, where we will be starting with questions on exactly that. Thank you very much for coming along this morning. If I can ask you to move out and the next panel to move in, that would be great. Thanks very much.

Examination of Witnesses

Witnesses: Andrew Vaughan, Chairman, Association of Consulting Actuaries, Kevin Wesbroom, Partner, Aon Hewitt, Jim Doran, Principal, Mercer, and Will Aitken, Senior Consultant, Towers Watson, gave evidence.

Q196 Chair: We just left off with our last group, and I think some of you saw all of the last session, but I know others just came in. If I can begin by asking some questions about governance and ensuring good governance. Obviously the most important thing for the members of pension schemes is having a good outcome and maximising their income in retirement from what they have put in. How do you ensure that, even for small schemes, there is proper governance and good outcomes for the members? I don’t know who wants to start with that very general question.

Jim Doran: I think the Committee is right to have a focus on governance, because that is the very thing that makes a difference between good outcomes for members. I would highlight the contrast between trustbased schemes and contractbased schemes, because in contractbased schemes often there is a lack of an explicit governance tier. That is not in any way to suggest that there is no room for improvement in trust-based schemes, but it is quite a common observation that the number of contractbased schemes and legacy schemes with high charges are almost the equivalent of a pension wasteland, where members are basically left in those and have no idea of the charges that are coming off or of the opportunities for better investment vehicles and lowercharge vehicles. The reason for that is the lack of an explicit governance tier.

Q197 Chair: From the evidence we have taken so far in this inquiry and the role that NEST has played in driving down charges, there is now competition in the market at that lower end of the charging spectrum. Do you think that the legacy schemes might start to look at their charging themselves and start to compete? Or are other companies going to come in and try to poach that business from the existing legacy schemes?

Jim Doran: I think the downward trajectory in charges will continue. If we go back to 2000, when stakeholder pensions were introduced, and the requirement for stakeholder accreditation was a maximum charge of 1% of the fund value, that was deemed to be revolutionary only 12 years ago, whereas now that would be seen as very much at the top end of the scale of charges. I think that will continue to apply. Low charges-or, I should say, competitive charges-is just one of the outcomes of good governance. The whole idea of scrutiny, oversight and people having a body responsible for managing risks is very important. The Regulator, in their six principles, emphasises accountability: who is accountable ultimately for ensuring the efficacy and the "ethicacy" of the pension scheme? That is core. The members, the participants in the pension arrangements, should ultimately know who is accountable for good governance.

Will Aitken: I was just going to ask if we could return to the issue of what is a good outcome in a DC scheme, because I think it is quite a thorny issue. To my mind, a good outcome is one where an individual arrives at a retirement income they were hoping for at a retirement date they were hoping for, with the journey between now and that retirement date that they were expecting to see. The thorny problem is that, for every single individual, those three numbers-the amount of pension, the date of their pension and the journey from now to pension-are different. How members get to that point-the right amount of income, at the right time with the right experience on the way-is a problem for people, but that is how we should be looking at good outcomes for DC schemes.

Q198 Chair: How do we achieve that then? What is it that needs to be in place in terms of governance?

Andrew Vaughan: I was going to pick up on the outcome point and how to achieve a good outcome. Clearly, achieving a good outcome is dependent on the contributions that are going in, both from the employee and the employer. The quantum that is going in, in the first place, will dictate the actual outcomes, as well as investment decisions. Equally important is the engagement of the employer and the employee as they go through the period through to retirement. Actually, if you have engagement, that itself should help with the governance arrangements, because if you have clear engagement, you will have clear oversight of whatever the arrangement is, whether it is contract-or trustbased. Input is important and engagement is important.

Q199 Chair: In terms of achieving the good governance side of things, the CBI mentioned the six principles that the Pensions Regulator (TPR) set down, but is it not the case that the Pensions Regulator cannot actually enforce those six principles? They are just guidance? Is that right?

Jim Doran: They are just guidance but, if you look at the world of DefinedBenefit pensions, my own view and my firm’s view is that Regulator guidance has been responsible for a very significant upward shift in the quality of governance, so I would not underestimate that. Even though they might not be enforceable, the mere fact that they are out there and they have a profile will, in itself, gradually result in improvements in governance.

Will Aitken: There is an interesting element to look at here in the fact that the Pensions Regulator regulates trustbased schemes. In relation to contractbased schemes, it is guidance. If you look at something like active member discounts, where former employees pay higher charges than current employees, the Regulator has said that is not acceptable in relation to trustbased schemes. That guidance has absolutely no jurisdiction over contractbased schemes, so you have a mismatch in how the regulation applies to different styles.

Kevin Wesbroom: In the contractbased scheme, one of the problems with regulation is it often comes down to the individual to take a decision. If you look at individuals in contractbased schemes, where they have to tick a box to change their investments, the experience overwhelmingly is that most of them do not. A lot of people are left in investments that might have been very good when they were put in by the employer 15 years ago, but nobody-neither the employer nor the insurer-can force that member to move. Apathy means that a lot of them are left in poorly performing funds.

Q200 Chair: Whose job is it to highlight to the member that that is a problem and they should be taking some action? Is that all of your jobs?

Will Aitken: In a contractbased environment, you have hit on a real problem for us and for fiduciaries, governance organisations, which is financial advice. People are terrified of being seen to be giving people financial advice, because you have to be regulated; you have to understand the person’s needs before you can give them advice. We have this conundrum: you want to give the person a message that says, "You should switch out of this fund," in a way that that message is reasonably expected to be acted upon, otherwise why bother, but is not interpreted as being financial advice. That is very difficult to achieve.

Q201 Chair: That is where you say in your evidence that there should be greater levels of protection from the legal reprisals on fiduciaries that are actually giving that kind of advice.

Will Aitken: To come back to something that was talked about earlier, that is safeharbour status-if you are trying to do the right thing and you can demonstrate why you think Fund A is no longer appropriate and Fund B might be more appropriate. If you could give people some safe harbour to say they are immune from prosecution over issues of financial advice, that would help people to take more effective governance. The alternative is to have a very small range of funds that are unlikely to outperform but, equally, are unlikely to underperform and necessitate the need to have this "not quite advice but we hope you are listening to what we are saying", which is not really ideal.

Kevin Wesbroom: A lot of employers would want to go down that route as well, would they not? A lot of employers would want to give help and guidance, but they are terrified of crossing this line into advice. There is precedent for this safeharbour thing in the US: 404(c) of the Internal Revenue Service code over there. If you do a certain number of sensible things, like give people a reasonable choice, give them information and the ability to change their mind, you as an employer will not be subject to litigation. They obviously have a lot more of it than we do, and that sort of model would go a long way to getting the employers involved in helping people.

Q202 Chair: Why is that restriction there at the moment? Presumably it was brought in so that people had some kind of comeback if they did get the wrong advice. Are you saying that the pendulum has swung too far the other way, to the extent that advisers-that is your job-are too riskaverse to give advice?

Will Aitken: For contractbased schemes, the legislation and the communications that are sent to people are really assuming that a man walks in off the street with £50 a month that he wants to save: should he save it in an ISA, a bank account or a pension? That legislation is not really designed to cope with workplace pensions, where someone might reasonably want to encourage someone to move from Fund A to Fund B, because they think Fund B is better. It is designed to protect someone from a financial adviser taking advantage of them and switching them into something that they should not do. The framework is really aimed at individuals rather than workplace pensions. If there was one thing that could help people understand better how to operate these schemes, changing the legislative structure around contractbased schemes would be a good win, I think.

Q203 Chair: You all agree with that. What about awarding kitemarks to the better performing schemes? Would that be useful or helpful, and something that could be introduced?

Jim Doran: A kitemark based on investment performance could be dangerous, because we know that investment performance is a very variable thing.

Chair: It could go up and down. It is the small print.

Jim Doran: Indeed, awarding kitemarks based on the lowest charges might also be similarly dangerous, because sometimes higher charges are justified because of the extra governance that comes with it. Perhaps a kitemark based on the quality of the governance in the pension scheme, or at least the governance resources that back the pension scheme, might be a useful thing.

Kevin Wesbroom: I think the NAPF one covers, from memory, contributions, governance framework, investment options and communications, which sounds pretty good. That covers most of the bases, if you could pick that up and have a uniform system. What you really do not want is one lot coming up in the contractbased world and another lot in the trustbased world, because everybody gets confused again. It should be just a single process.

Chair: We have some questions on responsibilities coming up later, but before we move on, Debbie, you want to ask something.

Q204 Debbie Abrahams: You have probably answered this; it is about the kitemark. Although we have the six principles that have been recommended, the monitoring is openended. Would a kitemark to say that you subscribe to those six principles be a way forward? I think you are nodding in agreement that it might be.

Kevin Wesbroom: Yes. Six or four-I don’t mind. It is the sort of thing we have been saying. There are important things that lead to good outcomes: the amount that goes in, where it is invested and those sorts of things. It would help if you could shortcut them on behalf of members and say, "Do you know what? This scheme has done quite a lot in this area. This one has further to go."

Chair: Let us move on to transparency of charges.

Q205 Debbie Abrahams: I just wanted your comments on whether you think more could be done to ensure that employers understand the fees and charges that apply to their employees.

Will Aitken: The NAPF’s new Code is a huge step in the right direction in that respect. Stakeholder legislation meant that most pension schemes work on an annual management charge basis, which means those charges are easily comparable: 0.3%, 0.5%, 0.6%. You can see what they are. We are seeing now with NEST and NOW: Pensions more complicated charging structures. We are seeing the emergence of active member discounts, so former employees pay more than active employees. All of that is laid bare by the NAPF’s approach to charging, which allows employers and, assuming that the website will be available to everyone else-and I cannot see why it would not be-employees as well to see what the charges are, both when the scheme starts but also if they leave service after five years or 10 years. Now they can understand what they might pay later on in life. That is a huge step in the right direction on transparency.

There has been a lot of talk about transparency of transactional charges, and we need to think about how transactional charges are incurred and why. At the moment, transactional charges are effectively part of the investment returns. If a manager produces an investment return, any transactional charges will have suppressed part of that return. If we ask them to spell those out in pounds, shillings and pence to individuals, that is going to have a cost. That is work they are not doing at the moment-to give individuals that memberlevel data. They have to spend some money understanding that. Those charges would be passed on to members. All other things being equal, you would not expect a fund manager to be incurring those charges unnecessarily, because it is a drag on their performance. If you are managing passive funds, you want to keep the return of that fund in line with its index as far as you can. If you are transacting unnecessarily, you are reducing your performance, and fund managers tend to compete on performance. Before we start asking people to spend huge amounts of money on explaining what these transactional charges are, we need to understand what the costs of doing that might be and whether it will actually deliver any benefit to individuals.

Q206 Debbie Abrahams: Surely there would be a startup cost. If it is not done already, the initial cost is more. Obviously if it becomes routine, then that charge goes down. We are after openness and transparency for all charges.

Will Aitken: Absolutely. I am not for a second advocating some sort of opaque charging. The new IMA9 Code says that people will have to show what their transactional charges have been for the last three years on fund fact sheets, from April next year. That is probably what we need to see, because I suspect we will see that those transactional charges are not outrageous. To get to the level of what a member has paid in pounds, shillings and pence is going to create a lot of work in terms of systems and monitoring, which will form a big oneoff cost. Yes, once it is done those costs are absorbed, but it will not be a simple exercise.

Jim Doran: I agree with Will that the joint industry Code of Conduct is hugely helpful in that regard, not only for the exhortation for providers to disclose charges, but the graphical way in which it is portrayed as well. If you look at the paper, the pie charts showing the impact of charges on your pension pot when you retire is just a very useful way of communicating that for members. That is probably more meaningful than disclosing in pounds the amount of charges that have come off the fund, which will obviously vary with the size of the fund. To actually project forward and say, "At retirement, we would expect this amount of your fund to have been utilised in charges," is a very good way of achieving transparency.

Andrew Vaughan: A lot of work has been done to improve the transparency of charges, and that will continue. You could, and this is just a personal view, perhaps consider developing some form of independent oversight organisation that looks at charges and collates information on charges. You do not want to create a whole lot of work for the industry, in terms of producing extra information, but if you could somehow have independent oversight of charges, you could conceivably rank those charges between highcharge, mediumcharge and lowcharge products, and actually try to improve the simple communication that goes to individuals. Charges, though, are only one part of the question, because you could have a highcharging product that is not very good or you can have a lowcharging product that is equally not very good. It is part of the answer but it is not, by any means, the whole of the answer because, in theory, if you are paying high charges, you should be expecting to get higher returns and higher growth. It is part of the overall equation but, as I say, I take a very simplistic view on many things. You could try to boil it down. You could set a benchmark: 50 basis points is an acceptable charge. If you are below that line, you are a lowcharging product. If you are 50 to something else, you are medium charge, and above that, a high charge.

Q207 Debbie Abrahams: You are suggesting a new organisation.

Andrew Vaughan: You could conceivably have it with TPR, or we could have somebody looking at doing some numbercrunching around the charges. It could be somebody completely independent. It does not have to be a governmentrelated body.

Kevin Wesbroom: The high charges, to a large extent, are a historic hangup as well. A lot of the worst practices that you see, the really expensive ones, are where there was commission involved in selling that product in the first place. The Retail Distribution Review is not going to stop that, but it is going to make the worst cases disappear pretty quickly.

Jim Doran: There is still quite a lot of pension money in those vehicles, with no one responsible or accountable for the oversight of that. That is an area that maybe should be addressed, as to how we actually alert members to the fact that their money is in what, by today’s standards, is a very highcharging vehicle.

Q208 Chair: Whose responsibility is it to alert members in that case? Who should be taking that role of alerting members?

Jim Doran: Currently it is no one’s responsibility, in the case of a contract vehicle where there is no governance oversight. Again, one of the regulatory tiers should, initially at least, urge employers to make that information available to the participants in the pension scheme that that employer has sponsored.

Kevin Wesbroom: There is an interesting idea in Steve Webb’s Reinvigorating Workplace Pensions paper about economies of scale, which he has borrowed from Australia, that says for the fiduciaries of a scheme or the person responsible for the scheme, are you sure the scheme members are not being disadvantaged by being in a scheme of this size? If you pick the same analogy and you tried to say that to people who have sponsored some of those historic schemes and had that as part of their obligations-"Are you sure your members are not being disadvantaged by staying in the investment product they are in?"-that would be a big step forward.

Q209 Debbie Abrahams: Can I ask specifically about consultancy charges as well? Is there anything that you want to add, in terms of how that would be reported to your members or to the employers?

Jim Doran: Where consultancy charges are deducted from a member’s fund?

Debbie Abrahams: Yes.

Jim Doran: Again, I think the NAPF Code of Conduct covers that. Whilst it treats it separately, ultimately it proposes the same medicine: open disclosure.

Will Aitken: It poses an interesting choice. Let us say, for example, you have a scheme where the contribution is £100 and the consultancy charge is £20, meaning that £80 is ultimately invested. One way of working is to operate like that, so that £80 is invested and £20 is shown as consultancy charging. Another approach might be for the employer to say, "Well, actually we are only going to pay £80 for maybe the first two years. That other £20 we will use to pay for the adviser." Both of those methods get exactly the same jobs done: £80 gets invested; £20 is used to pay for advice. One looks different to the other and employers need to take a view as to which of those approaches achieves their aims. Is it better to show £100 as a "now you see it, now you don’t", perhaps, to the way contributions are paid, or to be upfront about £20 is paid and £80 is invested? There is a choice.

Q210 Debbie Abrahams: The definition of what is involved in that charge is important.

Will Aitken: Yes.

Debbie Abrahams: Can I ask how aware you are of information around charging being cascaded down to employees? Do you think that happens and, if it does not happen, what can we do to make sure it does happen?

Will Aitken: In contractbased schemes, charges are part of the initial information that people are passed. In trustbased schemes, my experience has been that trustees want to be open and transparent about what the charges are where they have managed to negotiate charges down, which happens on a regular basis. I have been in cases where we have halved charges. That is a goodnews story that they want to pass on to their members. By and large, that information is not hidden from people, because there is no incentive. In contractbased schemes, you have to do it. In trustbased schemes, there is no incentive for the trustees to keep that information from their members.

Jim Doran: The typical trustbased explanatory booklet or literature that is issued by trustees to members will, in describing the funds and their risk and return characteristics, also mention their charges as well. I agree that that forms part of the standard fare of trustees’ disclosure to members but, in terms of the sort of information that is envisaged in the joint code of conduct, I do not think that is yet part of the mainstream in trustbased schemes. For example, every year members get illustrations, the statutory money purchase illustrations, of what their pension will be when they get to retirement. That just tends to have a return net of charges, with no explicit coverage of charges in that.

Andrew Vaughan: There is a dilemma in a sense, because in a trust or contractbased scheme, where you have got an employer contribution going in as well as employee contribution, ultimately it should be the employer, in selecting the scheme, making sure that they are getting the right value for money in terms of the charging structure that is in place. There is no incentive in the employer putting in a high charging structure. They need to get the right advice for that scheme. There is no incentive for the employer in doing that. What you do not want to do is arguably put off the individual by putting in a scare story about charges, because you want them to be in the scheme and benefitting from the employer contribution that is being made to the pension arrangement. There is a balance. A focus on charging is absolutely right. Making sure the charging structure is right is absolutely right. Encouraging employers to make sure they look for the right charging structure for their pension arrangement is absolutely right, but there needs to be a balance because, actually, you want people in the schemes benefiting from the employer contribution.

Q211 Debbie Abrahams: The final question from me: should memberborne consultancy charges be allowed for autoenrolment qualifying schemes?

Jim Doran: I don’t think they should be expressly prohibited. Again, I would not make a distinction between consultancy charges, investment charges and administration charges, as long as there is open disclosure on charges. I am not sure I would make a distinction between to whom those charges are payable.

Will Aitken: As I mentioned earlier, there is a choice of how you present these charges or how you address this issue. There is a way of going around it that means that the contributions are paid and you do not explicitly say what the charges are. To prohibit them I do not think would actually change what happens. As long as the contributions are at least as much as need to be paid to meet the legislation after consultancy charges, that is the hurdle that we should be aiming for.

Q212 Sheila Gilmore: In some ways, I think autoenrolment is a bit of a gamechanger, because if what you could argue before was that people were making their choices, in some sense they are no longer in quite the same position of making their choices; the employer would be making a choice for them. The last thing anybody wants is to be in a position 20 years on where a Select Committee is sitting in here saying, "What a disaster all that was." Although it is correct to say that there is a balance between trying to get people into these schemes and frightening them about charges, there is a responsibility. In particular, there is a responsibility for Government, which has set up the autoenrolment arrangement, to ensure that people get best value for money. That is why surely charging is really important and it is important that people know about that. Does that not outweigh the risk that people don’t take part?

Will Aitken: It depends upon what you are trying to address. If you are trying to address the problem that has been talked about of these legacy schemes, schemes that were set up 15 to 20 years ago with high charges, that could be addressed by imposing a charge cap of the order of 1.5%, for instance, which would not stop any innovation happening in the schemes that are left but would effectively outlaw the worst excesses of 20yearold schemes. If you want to bring charges down further from there, you are then perhaps starting to stop people using innovative investment approaches, stop them funding communication and you are starting to eat into what can be achieved within a scheme. It is about understanding what the aspiration is with a charge cap. If it is to curb the worst excesses of the past, that could certainly be done.

Kevin Wesbroom: I have never been convinced that charges are the things that stop people investing. I do not think people say, "Shall I save into a pension? Well, I don’t know what the charges are," or "the charges are too high." I don’t think it is that. It is more basic things like, "Have I got enough to get through the week on?" particularly for the target audience for autoenrolment. That is not to say, when they get in there, you should not be doing everything you can to make sure they are getting decent value for money. Most of the schemes that they are going to be going into, NEST, NOW: Pensions and People’s Pensions, are seriously lowcost schemes. Jim, you said a 1% cap on stakeholder; these are half that cost. They are good value for money. The vast majority of people, if they are going to be autoenrolled into pensions, i.e. pushed into it rather than volunteering for it, will be getting a pretty good deal.

Q213 Sheila Gilmore: I am not convinced that will necessarily put people off, but there is an even bigger onus to get this right. The reason people do not necessarily query the charges, to some extent, is the longterm implications of what that means. It is not just what you have been charged this year, but how that affects you in the long-term. That is why it is complex, but when you are doing autoenrolment it becomes particularly important that somebody is watching out.

Jim Doran: I agree with that; I agree with Kevin. A member’s reluctance or an employee’s reluctance to participate in a pension is rarely articulated in terms of the charges being too high, but sometimes there is a general feeling that pensions do not deliver good value for money, and that will be a conflation of various things, including charges. Anything that highlights that the industry and government take charges seriously and want to be open about charges will, at the very least, improve the reputation of pensions and better ensure the success of autoenrolment. Autoenrolment is a bold experiment, is it not? Just as the Government is saying, "Let’s not compel people to join pension schemes; let’s see firstly if soft compulsion works and take it from there", I think a similar approach should be adopted for charges as well. Let us adopt this approach of open disclosure. That will of itself continue to drive down charges and make the industry more competitive.

Kevin Wesbroom: I would like to tie it back to the previous comments about kitemarks. The other thing is most people would have no idea whether 0.3%, 0.5% or 1% is a good number or a bad number, because they have nothing to benchmark it against. How much do you pay for your bank account? Nothing? Really? Do you think you get banking for free? For most people, there is no process to say, "These charges are reasonable." On the other hand, if you had some sort of simple kitemarking-bronze, silver or gold level of charges-that is going to go a long way towards helping people.

Andrew Vaughan: That is my point, Kevin, about just being able to map the charges to high, medium and low.

Kevin Wesbroom: A nice simple area.

Chair: The bottom line is that the member does not feel they are being ripped off by whatever it is at.

Debbie Abrahams: Absolutely. It is about trust.

Chair: Nigel has a question on charges and then he is going to go on to a section on communications.

Q214 Nigel Mills: I am going to drift slightly and maybe broaden it slightly. I should confess I was a consultant once. If I am a small employer with 50 employees, say, do I need your services to do this or should I just sign up to NEST, NOW: Pensions or something and just get on with it? What is the level at which some consultancy charge adds value and below which it is just boxticking?

Andrew Vaughan: It is a new market. It is a new area. If you are a 50person employer with no pension arrangement at all, that is completely new territory. The typical consulting firms have not typically been advising-well, they have not been advising in that area, because they do not have a pension arrangement in the first place. How that will pan out is going to be a very interesting challenge and there is a question mark over whether there is capacity in the market to help that type of organisation. It may well be that the default is to turn to NEST and that is the right solution.

Will Aitken: The likelihood is that, by the time that a company of 100 employees stages, it may have little choice but to go to NEST, because the tens of thousands of employers that are going to ask for support from other providers will mean that there is probably very limited capacity amongst providers, I suspect, whereas NEST cannot turn people away.

Jim Doran: Certainly for an employer of that size, their objective will be to comply with the regulation, and they would not necessarily want to say they want to build a governance tier to further improve member outcomes and communicate the joys of pension scheme membership. Yes, I guess NEST or something similar would be the right solution.

Q215 Nigel Mills: You guys are not planning a big marketing exercise at further stages of autoenrolment to say, "Come and hire us; we will sort it out for you."

Jim Doran: Amongst the community of employers employing 50 people, no.

Q216 Nigel Mills: There is a cutoff somewhere in size, I presume.

Jim Doran: There is somewhere.

Andrew Vaughan: There is more work to be done in that area around how that type of employer does get the right support to direct them to the right solution for their business, and that is something we have been talking with DWP about. There might be some form of panel that you come up with, which has a number of different firms on it that are recognised for giving you a practical, efficient, effective solution to help you through NEST or anything else for that matter. It is going to evolve. It is a way off. There is a capacity issue, so it does need to be streamlined and made easier for smaller employers.

Q217 Chair: Can I just be clear? Are you saying that either your members or basically anybody in the consultancy or advice sector is not going to be rushing around chasing all this new business, by saying to employers, "It will be so difficult; you really need to employ somebody like me in order to hold your hand through this, otherwise you might get it all wrong and we can help you. Really our charges are very modest"? In the scheme of things, they actually end up being quite a lot for you.

Jim Doran: It is not often a consultant walks into a room and says, "You don’t really need me round here. I will just leave, thank you very much." I was referring to the larger actuarial firms and who we would regard as our marketplace, if you like. The question was framed specifically in terms of an employer employing 50 people. I was merely saying, for smaller employers of that size, typically they are not within the sights of larger actuarial firms. I daresay there will be firms of advisers chasing those employers.

Will Aitken: I think you have raised an interesting point that the numbers of firms staging from about this period next year onwards are such that some of those firms are probably going to find it hard to find advisers who are able to advise them, because there are so many people. Tens of thousands every month will be staging. Unless that service is very much automated, it is not going to look like the sort of consultancy that we would normally engage in.

Q218 Chair: Will that be the role of NEST, NOW: Pensions and these that are actually designed to be part of that market? Will it be the role of them to actually say to these small employers, "Don’t worry; we’ll do it all for you. You don’t really need professional help. We are simple enough that we will hold your hands through all this process"?

Jim Doran: That is essentially their pitch. The thing for employers of all sizes to realise is that, whilst autoenrolment requires an employer to have a qualifying pension scheme to autoenrol employees into, there are still quite a lot of internal processes an employer has to grapple with, like assessing employees, whether they are the relevant age and the relevant earnings bands for autoenrolment. It is not always an external provider, a master trust or NEST that can assist with that side of autoenrolment. Still, most employers of whatever size will need help to comply.

Q219 Nigel Mills: I am going to move to the topic of communication with employers and with scheme members. I guess many of us have had long complicated communication documents, which no doubt tell me everything I need to know, but I don’t feel greatly the wiser having opened the envelope. One of your submissions suggested what we needed was not long and detailed communications, but actually some education, so people knew what they were looking for and what they were trying to be told. Is that the sort of thing that you think is needed? Can it be done or are we just stuck with long and detailed things that I don’t understand?

Will Aitken: If we look at how we communicate with people at the moment, every year, every member of a Defined Contribution scheme, or pretty much every member, is given a statement showing how much pension they are on course for, based on the fund they have at the moment and the contributions being paid-every single person. That really ought to be a call to action. That ought to be the piece of paper that says you are on track or you are off track and, if you are off track, here are some steps that you can take. For most people, the most logical step for them to take is to think about paying higher contributions. As they get older, it might be thinking about retiring later. As they get much older, it might be about accepting a lower pension. What we have tended to do is bamboozle people with choices of 200 different investment funds to choose from, and that has not helped people.

We know from autoenrolment that, of people who are autoenrolled, 80% of them plus will end up in a default fund. Most people do not need that investment choice. What they need is some guidance about how they can get to retirement. "Give me help about what it is I need to do." For younger people, people up to age 50, the information they need is how much they should be saving. We could do this quite simply by saying, "Based on where you are and where you would like to get to, you need to think about paying another 5% a year." It is sailing a ship across the Atlantic. You might set off in one direction, but if you get buffeted around, you need to change direction. That is how DC works; you need to be able to change course on a regular basis, but we have given people more information, rather than better information, to date.

Andrew Vaughan: The information that typically is provided will stem from the disclosure regulations. It will stem from the legislation. People, in producing volumes of information, are tending to try to comply with the disclosure requirements. You could argue that you should still provide that information to those people who want that information. There are some people out there who do want the detail of the pension arrangements. I would argue you should not switch that off, but actually what you could look to do is add to it with a onepage statement at the front that distils that information into some key points and some key messages. What is your current fund value? What is it likely to be or projected to be at retirement? What is your pension expectation as a consequence of that? You can distil that into one page, but still provide the detail that is necessary to meet the disclosure requirements behind that. You could envisage a twostage communication process. There is a high level, for people who want the high level, and more detail, for people who want the detail.

Kevin Wesbroom: There is quite a small group that wants the detail. Bouncing around this internally, I am saying that the trouble is it is like supposing we were sending out information about cars to people. We are sending them out an annual statement that says, "Do you know your car has got six carburettors and 14 valves?" I don’t know if cars have valves nowadays; they probably don’t. We are getting into the really nittygritty. Actually, all they need to know is the car has got a steering wheel that you can turn that way or that way, and it has got an accelerator and a pedal. Put your foot on the accelerator, pay more money in, and you are more likely to get where you want to go. It is that simplicity that is missing from the regulations. With all the best intent, people are trying to give information, but it is way beyond what people will absorb.

Will Aitken: There is also an issue here about where this information comes from, because we know that employees trust their employer much more than they do the pension industry. It pains me to say it, but it is true. If this message is owned by an employer, if it is an employerbranded piece of literature that comes out helping them to understand how much more they might need to pay, it is far more likely, we have found, that that has some sort of impact and engages people, than if it comes from an insurance company that that person does not necessarily feel quite so connected to.

Jim Doran: The other thing that is missing, as we began at the start when we were asked what the good outcomes were, there is a suggestion that good outcomes are achieving your target pension. One of the things that is missing is this notion of each individual member having a target pension. The current Statutory Money Purchase Illustration regime just projects forward your accumulated funds, your expected future contributions, and says, "This is what we expect your pension to be." If we could somehow get our members to be engaged by those members, and have scheme members articulate what their expected pension is, and perhaps every year show where they are relative to that expected pension, that would make it more personal. It would achieve more member engagement and would maybe underscore the idea of scheme members being responsible for their retirement outcomes.

Q220 Nigel Mills: There is clearly an issue about language and using terms that are just too complicated. Do you think that things like NEST’s approach to using plain language should be rolled out across the industry, so if I actually do try to read the thing that they send me, I have a chance of understanding most of what is in there?

Will Aitken: The short answer to that is yes. By and large, NEST has done an awful lot of good work in introducing a new pensions vocabulary. It is something that should be adopted more widely.

Chair: No more "annuities", or we will still have them but not the word. Nigel, have you finished?

Q221 Nigel Mills: The last question was on how we handle annuities. People just do not understand what they mean, what they get and probably what happens if they die younger than they are hoping to. I think one of you said that people think that is just a nice profit for whoever you bought your annuity from, which is not quite how it works. How do you think we can best get people to understand what that decision, when they come to retire, really means, how they understand what that choice is and how they should make it?

Jim Doran: I wonder if members are allowed sufficient time to ponder those choices as they get nearer retirement. A typical trustbased scheme-I can’t speak for all trustbased schemes-will write out to members with illustrations of what their pensions might be, typically six months to one year, I would say, before their designated retirement age or their normal retirement age. Perhaps that process could start earlier, so people start thinking earlier about the different variations of annuities that they might be capable of having.

Kevin Wesbroom: A nice idea as well, and another one in Steve Webb’s paper, is what he calls a "laterlife guarantee". When you get your DC pot-you get to 65; you set aside some money; you pay an insurance premium-that delivers you a pension from age 80 onwards. From 80 onwards, you are sorted. You have a guaranteed income from 80 onwards. Now whatever you have left is a finite set of money. You can probably work out how to spend that over a given number of years, 15 years or whatever, because you can budget for that; you can divide whatever you have by 15. You can work out whether you want to take more this year or next year. It is the uncertainty about life expectancy that usually confuses people. They always get it wrong. They underestimate their life expectancy by five years, on average. They think they are going to live five years less than most statistics will show they will, and they find that uncertainty very difficult to deal with.

Andrew Vaughan: A variation on that, Kevin, would be to say that with your annuity pot at retirement you buy a fixedterm annuity. You have a facility to defer your state pension to 75 or a date in the future, and you then try to manage your income accordingly, so you have a fixed term. You can retire at 65; you annuitise for 10 years, in the knowledge that you will have a higher state pension at 75. You cannot do that under the current tax rules.

Kevin Wesbroom: It is the same thing. It is to try to get certainty in the process, rather than take out life expectancy. That is something, by the way, where the Government could help. The Government could issue government bonds linked to life expectancy. We were the first country to issue government bonds linked to inflation. There is nothing to stop us from trying to go down the route of issuing Government bonds linked to life expectancy. That would be the catalyst for the insurance market and other providers to be able to sell some more innovative products in that area.

Will Aitken: What we are hearing here, though, is that there are some solutions to this issue, but they do introduce additional complexity, which introduces a greater need for advice, which introduces costs, which need to be borne by somebody. We need to bear in mind that this is an area where defaulting and inertia is not going to solve the problem, because people’s needs, how long they are going to live, their marital status and their state of health all vary widely. Defaulting them into some sort of an option is not going to be an optimal solution.

Q222 Sheila Gilmore: I just have a quick observation. Sometimes organisations, and this is true of a lot of public organisations as well, use regulatory complexity or the language of it as a reason for producing letters that are unintelligible, because there is a great fear of translating it into simpler language and then perhaps getting it wrong. While I can understand that, and I was thinking of repairs notices that my council sends out, which are gobbledegook, they will say they follow the words of the statute, which I am sure they do, but that does not make them intelligible to people. There are real disadvantages to that, because people’s behaviour is, if they do not understand what they been told, not to do whatever it is that you want them to do. It is just a thought that sometimes we are not prepared to interpret statute and maybe again Government could help. On the question of regulation, are there aspects of the regulatory system as we have it at the moment that might hinder DC schemes from providing good outcomes?

Jim Doran: In a word, no. There are many challenges, indeed obstacles, to good member outcomes in DC schemes from, on occasion, employer inertia and member inertia. I am not sure I can actually say it is the regulatory framework that prevents members from achieving good outcomes in DC pension schemes. I know the pensions industry frequently blasts government for there being too much regulation. I had an interesting experience, if we have time for anecdotes in this session, where I was at a round-table discussion with a number of representatives from firms of advisers, a couple of months ago. They were all saying there was too much regulation. When we were mischievously asked a question by the chair, "Name the one regulation that you would remove from the statute books," everyone froze and no one could actually answer.

Q223 Chair: I think that is what the Government’s Red Tape Challenge is discovering as well.

Andrew Vaughan: The only observation I would make is that having two different regimes, in itself, introduces complexity and lack of clarity in some situations. Having a trustbased and a contractbased regime, which operate under different rules and principles, in itself-

Q224 Sheila Gilmore: Just to cut into that, because obviously we are running short of time, but is there a case for having a single regulator?

Andrew Vaughan: I think there is.

Jim Doran: I think so, too. We spoke earlier about the distinction between trustbased and contractbased. Again, sorry to appear to labour the lack of governance in contractbased schemes, but they are viewed by a number of employers as a light touch from a governance point of view. A number of employers that sponsor trustbased schemes migrate to contractbased schemes, sometimes because they want to give employees more choice, but often because they want to have an arrangement that does not require too much by way of governance. I think that is unhelpful.

Kevin Wesbroom: Yes to a single regulator, and I would vote for TPR, because they seem to have been quite open with their approach, engaging with the industry, taking on board thinking, having secondees and being fairly proportionate, rather than overly prescriptive.

Q225 Chair: I was just wondering then if the lack of regulation is a problem in DC schemes. Should there be more?

Jim Doran: Kevin hit the nail on the head. The Regulator has been very effective in, again, upping the governance game of trustee boards and governing boards. Maybe more guidance and more best practice, rather than more compulsion.

Andrew Vaughan: You could argue for a more principlesbased set of regulations, so a series of principles, and then asking fiduciaries to certify periodically that they are complying with those principles, so actually shifting the emphasis away or actually to loop back to the Regulator or somebody else, TPR. You could have the principles, "We want you to, every three years, come back and say that you are complying with those principles." That is not an unreasonable framework to put in place.

Q226 Nigel Mills: Risksharing is a topic we touched on with the previous witnesses. Do you actually think that is something that employers will be interested in?

Kevin Wesbroom: Yes, but only if it is DC. Can I just explain the diagram I sent you?10

Chair: Yes. I was going to ask you about that. We are not used to visual aids.

Kevin Wesbroom: It is a very simple question. You have got a person going to join a DC scheme. They are going to be in it for 25 years and they are going to pay 10% . They ask a perfectly reasonable question: "What should I expect by way of a pension?" I guarantee you would not get the same answer from the four of us here. That chart shows not what they might expect, but what they would have got in practice, depending on when they had retired, when those 25 years ended and what they had invested in. The answer is, "You will get somewhere between 6% and 60% of your final pay". "Say that again: 6% to 60%. What are you on about?"

That huge variability is where I see one of the big weaknesses of current DC schemes, and why it is worth trying to push some of these Defined Ambition ideas. If you can narrow that down, if you could get that to, say, 20% to 25% of salary, not guaranteed, because we will not get employers backing the guarantees again-DB is dead for that purpose-we will not get employers going that far, but if they can give an intention to try to target something like that to get a much narrower range, then the individual knows he has a state pension; he has 25% here. Is that enough to live on? Yes, "okay", or not, "I have to do something about it." It is really narrowing down the range of options there.

Andrew Vaughan: Can I cut in, Kevin? To answer the question, Kevin said no; I think the answer is yes. We have got two diametrically opposed views. I have a slight interest in that I have been chairing the industry working group that has been helping DWP come up with ideas around Defined Ambition, so the inside track, as it were. One of the issues is you need to segment the UK into different-sized employers, different types of employers and different industries. There are still some industries out there that are manufacturing and need a pension plan that gives them some degree of certainty over the outcome, so for people retiring from that business, they can actually encourage them to retire at the end of their career, bearing in mind that when the default retirement age changes you cannot actually remove people anymore. You need to have a sensible vehicle there to do it, and some form of risksharing arrangement would make sense.

From my conversations with big employers, there are still some big employers around who will do something that is not pure DC. There are still some mediumsized employers around. At the other end of the scale, Steve Webb is very keen on pursuing some form of guarantee, value for money type arrangement in DC. Again, there are potentially some options there that are covered in the Reinvigorating Workplace Pensions paper, which are definitely worth pursuing, all of which are targeted on improving the amount of money that ultimately goes into pension savings.

Will Aitken: It is important, without wanting to extend this any further, to understand that risksharing options exist already. While they are used, they are not used extensively. If we get more options-and it would be absolutely fantastic if we had more options that employers could select from-we need to be realistic about how much they are going to be used, and we need to bear in mind that, over the next few years, millions of people are going to be enrolled into pension schemes and the vast majority of those people will be enrolled into Defined Contribution. We need to focus our energy on making Defined Contribution better, I fear.

Kevin Wesbroom: I would be asking for regulation to support the type of scheme that we identified, because they are slightly different between the very stark extremes we have got at the moment, and they do need some element of protection for employers that set them up, that they are not subsequently changed with the benefit of hindsight, 20 years down the lane, to something they were not anticipating. I would be looking for some support there for a type of legislation that gives an employer a sensible incentive to set one of these things up, otherwise they will just default to "I’ll give them DC, plain vanilla DC, and let them get on with it," and I don’t think that actually helps members to get the best outcomes.

Jim Doran: Kevin said no and Andrew said yes, so I feel obliged to say maybe. The thing to appreciate is that a number of employers, which have migrated to DC from DB, have done so because they were utterly traumatised by the experience of DB, and indeed are still paying more into their closed DB scheme than they are into their open DC scheme. I am not sure many employers in that category will want to embark on a new series of guarantees, a new generation of guarantees to offer their members. I think the paper was very helpful, because it showed that risksharing comes in many different colours. There are lots of good ideas in there.

One in particular for improving DC might be the idea of an unallocated fund within DC schemes, whereby the employer and perhaps other trustees, as a discretionary activity, if they have unallocated assets when members retire in circumstances of hardship or in circumstances where outcomes have not been achieved, can dip into that discretionary fund and top up members’ benefits. There is no guarantee involved; there is no employer underwriting per se involved, but there is still a facility there to try to improve things for members.

Q227 Nigel Mills: You are drifting a little towards some kind of Collective Defined Contribution (CDC) scheme or something there. Is that a direction that you think would be helpful?

Kevin Wesbroom: That is certainly the basis of our submission. I do think that has a number of advantages, one of which is an obvious one, in some senses. It does not require the individual to get involved in investment decisions. It puts the onus on a bunch of trustees or other people to take decisions, and they are complicated decisions. Which of those charts would you have chosen 20 years ago, 30 years ago or 40 years ago? This is complicated stuff. It is not sensible to ask individuals to learn the details behind all this. A collective approach that takes that away and puts it to a bunch of fiduciaries feels good.

The other thing about the collective DC approach is you stop people ending up having to buy an annuity. You can avoid forcing people, in effect, to buy an annuity, and that is the one area of the market that is really lacking in innovation: some alternatives to buying an annuity. Why would anybody buy an annuity today? You only get one chance to do it. You are buying it when interest rates are the lowest they have ever been in history. You will never get a chance to go back in a couple of years’ time and say, "Actually, I would rather do something else," whereas if you have a collective scheme, it can take a longerterm view and try to smooth out, if one dares to use that word, some of the ups and downs of these things and take a longerterm perspective. That could give better outcomes for members.

Will Aitken: The minute you stop buying annuities, you would need to understand what the risks are. In a CDC scheme, there is a possibility that you are going to need to go back to pensioners and say, "We are cutting your pensions because you have not bought annuities." If we reframe annuities as insurance against living too long, perhaps people would look differently at them. Either you have pensioners whose pensions you need to cut and/or you need a steady supply of younger people coming through the scheme, so risks can be transferred from the older people to the younger people.

Those risks are not theoretical. We have seen in the last five or six years that there have been instances where markets have crashed. If we are going to maintain the values for older members, we have to transfer that to younger members. Over those last five years, have those crashes recovered? No. Is a recovery on the horizon? Not necessarily. This idea of risk transference between generations is not a theoretical risk; it is a very real risk. How you bring young people into a scheme like this, how you market the scheme to young people and their employers, needs to be thought through very carefully.

Kevin Wesbroom: Interestingly, that is one of the good things about the Dutch system. Everybody says, "Oh, Holland is terrible; they are having to cut pensions." I say, "Yes, bring it on," because if you do not, you are just defrauding the younger generation. You are just ripping off the youngsters again to keep benefits up for the current generation. That is a classic example. That little chart shows it has never got worse than it is today. If you do not cut pensions in this sort of collective system today, when are you ever going to be doing it?

Will Aitken: It is very difficult to cut pensions for pensioners. As we know from experience, if you do that they will start parading naked in front of party conferences. The people who are retired have a much stronger vested interest than people who are 25.

Kevin Wesbroom: The collective schemes have got a much bigger opportunity before they get to the ultimate weapon of cutting pensions. They have got variable indexation. I was struck by a comment Sheila Gilmore made that people were not told in the 1970s that they might not get their benefits. Indirectly, they were, because they did not get inflationproofing then. In the mid1970s, schemes just cut inflation-proofing, and we had real inflation then, do not forget, 20% per annum, none of this Mickey Mouse stuff. You had proper inflation, but people were not getting their increases because the schemes could not afford it. They caught up when things went very well subsequently, so schemes did a bit of smoothing. Nobody cut their pensions, but they did not get fair value perhaps.

Q228 Chair: Are the existing DB schemes not seeing that generational transfer anyway, because new entrants have got quite different projected outcomes from the pensioners who claim it?

Will Aitken: I am oversimplifying here but, in a Collective DC arrangement-and no doubt Kevin will correct me if I am wrong-you are kind of robbing Peter to pay Paul. If the money is not there to pay Paul when he retires, you take some money from Peter. Within the DB and DC patchwork that we have, you are not actually physically taking money from DC members. The contribution rate might be lower than it might be otherwise, but at least you know what the contribution rate is. In collective DC, you are transferring money from one place to another, hoping that returns will come back and make up this gap in funding.

Chair: I think we have exhausted our questions. Was there anything that you came along burning to say today that we should know or recommend from us, as a Committee looking at this, that you have not managed to say? No. Thank you very much for what has been quite a lively session and thanks for the chart. I think that will be very useful and, indeed, all of your contributions will be very useful when we come to write our report.


[1] Small and Medium-sized enterprises

[2] Advisory, Conciliation and Arbitration Service

[3] Individual Savings Accounts

[3]

[4] National Association of Pension Funds

[5] Financial Services Authority

[6] Group Personal Pensions members

[7] Association of British Insurers

[8] Finance Director

[9] Investment Management Association

[10]

Prepared 4th February 2013