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Column 965I see no advantage in having an SRO. I have every sympathy with people who say that there has to be a substantial public interest representation on the board. I also understand the interests of those who say that what is happening is no longer self- regulation. In any event, it is quite clear that there is little point in having the SIB if it has endlessly to negotiate and compromise with an SRO beneath it before it can make any progress. Whatever happens to the PIA, direct regulation is inevitable.
The Secretary of State was probably not in the House--I was in the House only by chance--on 12 January when the Economic Secretary was speaking. I heard a remarkable series of exchanges about Lloyd's. I shall not go into that. The people who spoke made it clear that they had had bruising personal experience and in that sense they were parti pris. The hon. Member for Reading, East (Sir G. Vaughan), a senior ex-Minister in a Conservative Government said :
"It is totally unreasonable to expect the self-interested to be self- regulating."--[ Official Report , 12 January 1994 ; Vol. 235, c. 288.]
That in some ways encapsulates the difficulty and is a view with which I have a good deal of sympathy.
Pensions are of course enormously important. It is a cliche to say that they are arguably the most important purchase an individual makes in his or her life. Even a modest money purchase policy will build up a fund of £100,000 or more in its lifetime, but there is no area where ignorance is a greater enemy and in which it is more common.
People can contract back into SERPS if they know about DSS form APP2, if they are aware of the arguments and the reasons and if they know about the actuarial projections, but few in fact do. Many people--certainly it was true of me and arguably it is still--are not aware of the complexities, at least in full. They tend to buy a pig in a poke. They need protection and they have not had it. I do not object to the state promoting investment and saving for retirement ; in fact, I welcome it. I recognise that, in 1992- 93, tax relief on employees' contributions was worth £2.3 billion, and that tax relief on employers' contributions was worth £2.7 billion. The concession that makes investment income in a pension fund tax free cost £5.7 billion. That amounts to about £10 billion altogether--a lot of money, given in a very important cause.
We must do more than that, however. We must offer the right framework and guidance, and try to avoid a repetition of the deplorable confusion that was predicted and has come to pass. We also have a duty to try to ensure that proper compensation is offered to those who have suffered.
The Minister is bound to have read an article by Norma Cohen that appeared in the Financial Times on Monday 28 February. I read it with interest, because it gave an account of a gathering that I remember very well--at Chevening in, I think, July 1992.
Mr. Dewar : Indeed I was not : that is why I am so curious about what happened. I do not even know who was present, but many civil servants and Ministers were. Oddly enough, I was told that Dr. Madsen Pirie of the Adam Smith Institute was present ; I wonder whether he has had some say in the approach to these matters.
Column 966I say that because I must warn against over- enthusiastic blanket endorsement of every action taken by the private sector in regard to pensions. Let me draw the Minister's attention to a "radical agenda", edited by Dr. Pirie, which was published last year. According to that agenda,
"For fully funded private schemes much higher figures would be achieved"
in return per annum, that is.
"Indeed, calculations show that if contributors paid half as much into a private scheme as they pay to the state plan, they could be ten times better off in retirement as a result."
I suppose that the phrase "could be" is quite important, but if that is an example of the kind of advice that the Minister has been listening to, I am not surprised that we have got ourselves into considerable difficulties.
We are told by the FT that
"On the opening day of a strategy session called by Mr. Peter Lilley, the social security secretary"
whom I see sitting before me
"a group of ministers and civil servants was alerted to the potential cost of persuading people to opt out of occupational and state pension schemes into personal pension plans.
The warning came from Mr. David Clark, then deputy secretary for pensions, in a paper to the assembled group . . . A minister recalled : The paper said that, in some sense, personal pensions have been a tremendous success'"
that is fair enough
" but there are a few time bombs ticking away there.' The time bombs had been set ticking just eight years earlier when, as a former official put it, the government became mesmerised' by the allure of personal pensions".
If such a time bomb was indeed identified at that Chevening meeting, it is interesting to contemplate what Ministers have been doing to defuse it and to help those who have already been damaged. The metaphor has problems, because presumably the time bomb has not gone off--or perhaps it has, with a series of explosions : there have certainly been casualties.
There is a clear duty to guide and protect, and the Government are culpable because they have failed to discharge that duty of care. The House--and, more important, the country--will want to know what they intend to do about it.
welcomes the extension of individual choice of pension provision brought about by the Government's pension reforms, which has resulted in substantial increases in funded pension provision through both occupational and appropriate private pension schemes ; welcomes the Government's steps to ensure the effective regulation of occupational pensions and to ensure that individuals have adequate information to make informed choices about provision for their retirement ; and welcomes the measures being taken by the Securities and Investments Board, with Government support, significantly to improve investor protection.'.
I welcome the opportunity to debate this important issue. The Government's objectives are clear : to ensure a wide range of choice for people to provide pensions for their retirement, to develop a secure framework within which informed choices can be fairly made, and to encourage the growth of fully funded private pension provision on top of the basic state pension. Unfortunately--although the hon. Member for Glasgow, Garscadden (Mr. Dewar) made some valid points, with which I shall deal--the Opposition's motives are equally clear. The Opposition do not like private pensions ; they would prefer people to remain in or return to the state
Column 967system. They latch on to legitimate concerns about mis-selling, solely to frighten people back into the state earnings- related pension scheme. Today's debate is simply an exercise in scaremongering : the hon. Member for Garscadden did not mention any of the steps being taken by the SIB to reassure people that they will suffer no loss as a result of joining a private scheme. Hon. Members will be able to check that in Hansard .
By contrast, precisely because we favour private pensions, we are genuinely determined to tackle past problems of mis-selling and to prevent them from recurring. I shall explain shortly what is being done ; first, however, let me remind the House of the position before the 1988 reforms. Then, many people had good reason to be unhappy about the choices--if any--that were available to them. Private pensions often just did not meet people's needs ; pension rules reflected an outdated assumption that people stayed with one employer throughout their working lives, and anyone who changed jobs was particularly vulnerable.
Even if an employee moved after as long as four years in an occupational scheme, all his employer was required to do was return his contributions to him. The employer was not required to provide him with a pension when he retired. If the employee left behind his rights to a pension, he would be given a frozen handshake : the value of any pension rights that he had built up could be set in ice, to be melted away by inflation so that precious little was left by the time he retired. An employee who changed jobs did not have the option of taking the value of his pension with him.
We ended that unfairness, introducing three new rights for people who changed jobs. We gave people the right to a deferred pension after just two years in a job ; we gave those who changed jobs the right to have the pension that they left behind protected against inflation ; and we gave people the right to take the value of their accrued pension rights with them when they moved jobs. In 1988, we also gave people a wider range of choice in regard to pension arrangements, so that they could choose what best suited their needs.
Mr. John Greenway : Before my right hon. Friend ends his catalogue of the considerable improvements in pension legislation that the Government have made, may I ask him a question ? Does he agree that far too many elderly widows have no income other than what the state provides, because the occupational pension died with their husbands ?
Following those changes in 1988, individuals can now join an occupational pension scheme if their employer runs one. They can invest in a personal pension-- [Interruption.]
Mr. Lilley : Such people can invest in a personal pension, or they can choose to stay in SERPS. We gave people the right to top up their pensions, either by contributing extra to their employer's scheme or by making free-standing additional voluntary contributions. We also made new choices available to employers : we introduced new arrangements to allow them to set up contracted-out money purchase schemes, and we made it possible for them to contribute to their employees' personal pensions.
There should be no doubt about the overall success of our reforms. When personal pensions were introduced, critics predicted that they would grow at the expense of occupational pension provision ; the opposite has happened. There are now more occupational schemes, including 16,000 new employers' contracted-out money purchase schemes ; they cover just as many people as before the introduction of personal pensions. Now, the 5 million holders of personal pensions are additional to the ll million members of occupational pension schemes.
More people are committing more of their own money to boost their retirement income. When we launched our reforms in 1988, individuals and their employers contributed just £260 million to personal pensions ; last year, the annual amount invested had grown nearly tenfold, to £2.5 billion. Members of occupational schemes have also been saving more for retirement. The growth in investment in top-up pensions--free- standing additional voluntary contributions--has been dramatic.
In 1988, individuals committed just £20 million to free-standing AVCs. The amount invested last year had grown over twentyfold, to £420 million.
Mr. Paul Flynn (Newport, West) : Is not the Secretary of State being too modest in his claim about the reason why most people have moved to alternative schemes ? It is due almost entirely to the fact that the Government have undermined all faith in the basic state pension by cutting it almost every year that they have been in office.
Mr. Lilley : That is nonsense. If the hon. Gentleman is contradicting the point made by his hon. Friend the Member for Glasgow, Garscadden (Mr. Dewar) that people should have been opting out because it is to their advantage to do so, he should discuss that with Opposition Front-Bench Members.
The figures that I have just given reveal that there has been a massive increase in provision for pensions. Employees and employers invested £30 billion in pensions in 1992. Nothing could demonstrate more clearly the success of our reforms in building a solid foundation of funded pension provision for the future.
In the United Kingdom, we now have a healthy and diverse mix of pension provision--state and non-state, occupational and personal, salary-related and money purchase. Nearly 11 million people now belong to occupational pension schemes. Five million have personal pensions--10 times as many as originally forecast--and over half of them are under 30.
We want to make it attractive to people of all ages to make private provision, and to encourage even more people to do so. Private provision is good for the individual and for the economy. When the state finances pensions, nothing is saved or set aside for the future. This year's contributions are used to pay this year's pensions. It is pay-as-you-go. By contrast, in private schemes this year's
Column 969contribution is saved and invested. It goes into British industry to build up the assets that will pay for the pensions in 10, 20 or 30 years' time, when people retire.
Very few of our European partners have developed funded private pensions on anything like the scale that we have. As a result, Britain is far better placed than most of our partners to face the growth in the number of retired people in the next century without imposing a huge tax burden on the economy.
Over £500,000 million is invested in pension and life insurance schemes in the United Kingdom at present. That is more than in the rest of the European Community, in similar funded schemes, put together.
Mr. David Shaw : In relation to the £500,000 million invested in life insurance and pension schemes, is not my right hon. Friend concerned, like me, that some £80 million of that went missing and was under the management of a man who was promoted recently to the Opposition Front Bench for his connections in taking £80 million away from the Maxwell pensioners ?
European countries that have less-developed private funded pension schemes are now seeking to emulate our success. They are only now beginning to address the problems that we began to address a decade or more ago. In France, the state pay-as-you-go scheme is in massive deficit. Last month, the French Government published plans for funded private pension schemes not unlike those in Britain. The previous Italian Government introduced measures to reduce the burden on their state scheme, and established tax incentives for private pension funds.
Mr. Campbell-Savours : On a point of order, Mr. Deputy Speaker. I am sorry to intervene, but can it be placed on record that the statement made by the hon. Member for Dover (Mr. Shaw) is factually incorrect ?
Mr. Lilley : I will not get involved in that little dispute. In Spain, debate is under way about the problems of pay-as-you-go schemes and the need to expand private pension provision. Across Europe, other Governments are following the lead that we have set. There are of course concerns, and four have arisen about private pensions. First, there is the security of pension fund assets. The Maxwell affair raised serious questions about the security and regulation of occupational pension schemes. That is why I established the pension law review committee under Professor Goode. The report has been widely welcomed, and I have been consulting since then with a view to legislation which will reassure people that they can have the fullest possible confidence in the security of their pensions in the future.
Column 970privacy of this exchange between the hon. Gentleman and myself--I hope that it will be overheard by the Lord President--that I hope that it will go ahead next year.
The second area of concern is the mis-selling of personal pensions to people wrongly advised to leave their occupational pension scheme. The Securities and Investments Board has established that the standard of compliance with record-keeping requirements and so on has been poor. That is deplorable, but not, in itself, evidence that clients were wrongly advised, or that they suffered financial disadvantage.
The Securities and Investments Board is now carrying out a major exercise to establish the extent of the mis-selling. Clearly, any past mis-selling must be put right. Anyone whose future pension arrangements have been jeopardised must have a remedy. My right hon. and learned Friend the Chancellor has made that clear. The chairman of the Securities and Investments Board gave a public commitment in December when he said :
"I am confident that the great majority of firms in this business will co- operate and ensure that none of their customers will suffer as a result of bad advice. In any case the regulators will use their powers, as necessary, to ensure appropriate remedies."
Mr. Lilley : As my hon. Friend will know, we have taken steps. We set up the Maxwell pensions unit. I hope--and I believe that the trustees now foresee--that there will be sufficient recovery of assets to restore the pension rights of those who had them put at risk as a result of the Maxwell scandal.
Mr. Campbell-Savours : The right hon. Gentleman has just quoted a statement from Mr. Large. If he looks at the proceedings on the Financial Services Bill, Standing Committee E, November 1986, he will find almost exactly those words used by the Minister responsible for putting through that legislation. If we had an assurance then from the man who is now the Secretary of State, why should we any more believe today a statement by the chairman of the SIB ?
Mr. Lilley : That could not have been the case, because, at the time to which the hon. Gentleman is referring, the situation did not exist. If he had listened carefully, he would have heard that Mr. Large was referring to mis-selling that has occurred. He said : "the regulators will use their powers, as necessary, to ensure appropriate remedies."
Existing personal pension investors need not be alarmed ; nor should they be panicked into any precipitate action by scaremongering from Opposition Members.
The regulatory bodies have already acted to prevent and deter future mis- selling. Yesterday, we heard that the Norwich Union suspended its sales force because its staff training scheme did not meet new standards. That followed a monitoring visit by the authorities. An unauthorised financial adviser was recently gaoled by the High Court for flouting an SIB ban.
Column 971Regulators have shown themselves ready to impose substantial fines--over £700,000 in one case--where companies have broken the rules. The SIB's regulatory steering group published last week its first report and recommendations on future preventive measures to ensure high marketing standards. I am glad that the hon. Member for Garscadden welcomed that. Once the board has completed its investigations, there will be a full report.
At the end of the day, no one is better placed or has greater interest in monitoring the progress of pension arrangements than the individual to whom they belong. That is why the Government are committed to giving individuals proper access to information to help them choose the right pension and monitor its performance. We have taken action in a number of ways.
Following directions from my right hon. and learned Friend the Chancellor, the Securities and Investments Board recently published proposals to give greater transparency to charges and commissions. The proposals will begin to take effect from July this year. In future, anyone selling personal pensions must reveal to potential investors how much he stands to gain in commissions by making a sale. Illustrations of personal pension benefits must reflect the actual charges levied by a provider, so that investors can compare the cost of different products.
Mr. Flynn : On 15 March 1990, I complained during Prime Minister's Question Time about what I described as the wicked mis-selling of personal pensions. Many other hon. Members had complained before and have done so since. The Prime Minister rejected the charge at that time. Why on earth have the Government and the regulatory bodies not taken action until now ?
As I said, we believe that the effective disclosure of charges and commissions is the best way to protect consumers from overpriced products and the dangers of biased advice in future. The Securities and Investments Board's proposals are a solid step towards improving the marketing of personal pensions and helping investors to make well-informed decisions.
My Department has also taken action to help potential investors to make informed choices about personal pensions. Last June, we published a new guide for people who are thinking about buying a personal pension. The guide advises people to consider all their pension options, including any employer's scheme that might be available, before making a decision.
If an individual decides that a personal pension is his best choice, the guide advises him to shop around before choosing a particular scheme. A month-long national press campaign to advertise the guide has just finished. Guides are available from citizens advice bureaux, and we have set up a special telephone line for individuals to order their copy directly. So far, more than 250,000 copies have been distributed.
We have also published a guide for people who have recently taken out a personal pension plan to help them get the best out of their scheme, and we shall shortly issue a guide to personal pensions for self-employed people.
I can also announce that we shall shortly be issuing guidance for employers who want to give advice to their employees about pensions. The Financial Services Act
Column 9721986 requires that anyone carrying on the business of giving financial advice should be authorised. Apparently, some employers mistakenly believe that the Act therefore constrains them from advising their employees on pensions. For most employers, that will not be the case as long as they adhere to simple rules.
Employers can give all the help and advice they want about their own scheme without breaching Financial Service Act rules. They can also advise employees on personal pensions in general as long as they steer clear of the merits of any particular pension scheme. Our guidance will help employers who want to help their employees make informed decisions about their pension.
Mr. Willetts : Will my right hon. Friend accept that his remarks are very significant, because many employers believe that the Financial Services Act inhibits them from giving such advice ? His statement will encourage them to give the advice that many have wished but have been afraid to give.
Mr. Lilley : I am grateful to my hon. Friend. The leaflet, which is crisp, punchy and comprehensible, will shortly be available. People will realise that they are able to give advice which they thought--mistakenly-- they were not able to give.
The third concern is that people may have opted out of the state earnings- related pension scheme into a personal pension when it was not in their interest to do so. SIB's investigations so far have concentrated on the sale of personal pensions to those transferring out of occupational schemes. The chairman of the SIB has said that he has no evidence so far of systematic non-compliance with selling practice rules in cases of movement from SERPS to appropriate personal pensions, but the SIB will be examining the matter, and my officials are already discussing with SIB officials how to handle this phase of the work.
When the SIB has completed its investigations, we shall know whether any poor advice has been given to those contracting out of SERPS, whether any investors have been disadvantaged, and the extent or scale of any problems.
Mr. Austin Mitchell (Great Grimsby) rose
If the SIB discovers that investors have suffered disadvantage through being given bad advice, the SIB will expect effective remedy to be provided by the companies responsible.
Mr. Austin Mitchell : Why does the Secretary of State omit from his list of things that are wrong the major problem, which is that a huge number of people cannot look forward to a reasonable income in retirement ? A report entitled "Better Pensions for All", written by Bryn Davies--an acknowledged expert--and published by the Institute for Public Policy Research, estimates that 9 million working people who need to make additional provision for their retirement cannot look to existing forms of provision for a practical way of doing so. A huge number of people will not benefit at all.
Mr. Lilley : That is rich, coming from a member of a party that has been critical of all our measures to extend the availability of pensions. In 1979, only 43 per cent. of retired people had an occupational pension. The figure is
Column 973now more than 60 per cent, and for newly retiring people it is nearly 70 per cent. The figure will be higher still when joined by the figures for those with personal pensions.
Mr. Dewar : I think that it was the Under-Secretary of State for Social Security, the hon. Member for Richmond, Yorks (Mr. Hague) who suggested in a parliamentary answer that 60 per cent. of people who had contracted out into an APP were not paying an additional contribution, which is a matter of concern. Because of the charges and costs, will those people have any significant pension at the end of the day ? Has the Minister any comment to make ?
Mr. Lilley : Obviously, I want more people to make ever better provision, appropriate to their resources. I am glad that significant numbers of people go beyond the minimum, which is more or less the equivalent of what they would receive under the state scheme. They will have better provision by opting out and topping up. One company--Prudential --recently revealed that 70 per cent. of its investors with personal pensions are paying more than the minimum, which is equivalent to SERPS and financed by the rebate. We hope that others will increase their percentage, too.
Much of the discussion has been due to misunderstanding of published figures and of remarks by Coopers and Lybrand Deloitte. Following recent articles, Coopers has issued a press release which aims to
"set out the background to the reports which have appeared in the press in recent days which have misrepresented our views . . . there must be a real danger that unnecessary distress could be caused to those people affected".
I agree. Much of the coverage reveals a misunderstanding of what the figures show.
It is important to remember that the figures refer to a single year. They therefore represent only a snapshot at a point in time of the profile of personal pension holders in that year ; but it is the earnings over a lifetime that determine an individual's pension. Some commentators have also focused on the number of investors shown in the table as having zero earnings in the particular year, and suggested that those personal pensions must therefore have been mis-sold. That is not necessarily so.
Mr. Flynn rose