House of Commons Hansard Debates for 30 Mar 1994

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record keeping does not of itself necessarily denote that there has been mis-selling for which people would need to be compensated. The report also says that in other cases, although the record keeping was all right, there was some suspicion that the advice that was given was not entirely impartial and not as good as it should have been. In other cases, there was a combination of that suspicion and inadequate record keeping. Those were the worst cases. If one takes the total of good selling, before guidance, coupled with mere inadequate record keeping, 61 per cent. of all the pensions sold were dealt with satisfactorily.

Mr. Austin Mitchell : The hon. Gentleman is trying to put a wholly unjustified gloss on that report. The report said :

"Of 735 client files revealed, only 9 per cent. of the files showed evidence of substantial compliance with the main conduct of business rules."

Mr. Butterfill : To assist the hon. Gentleman, I am stating that those who have some expertise in the matter--the Association of Consulting Actuaries is independent and expert, as I hope the hon. Gentleman concedes- -have analysed that raw statistic to show what that failure to comply comprises. In many cases, it is simply a failure to fill in a form or keep an adequate record on a file ; it is not evidence of mis-selling. I urge the hon. Gentleman to study the reports again in detail and to study the parliamentary brief prepared for Members of Parliament by the Association of Consulting Actuaries. The brief goes into far more detail and he will find it informative and instructive. One of the dangers in the debate is that people speak from too little knowledge of the reality of the position. It would be helpful if some hon. Members were better informed. On the basis that I have just described, 61 per cent. of pensions were adequately sold, but in some cases poor records were kept. In only 7 per cent. of cases in which the records were all right was the advice suspect. I do not defend the figures. They are appalling, but they are not the 90 per cent. failure to comply that some people have suggested. All that I am saying is that there is a danger that we over-egg this particular pudding and frighten a large number people, who may have received perfectly satisfactory service from the industry, into believing that all of them, or almost all of them, have been sold an inappropriate product.

Mr. Dewar : The last thing that I would want to do is scaremonger. The pie chart that records sales after the regulators issued guidance, shows that 47 per cent. were both unsatisfactory and suspect and 11 per cent. were suspect. Even if we take that improved performance, 58 per cent. of the total of sales were either unsatisfactory and suspect, or suspect. That is a very unsatisfactory situation. It does not justify scaremongering, but it certainly justifies a great deal more concern than the Secretary of State showed this afternoon.

Mr. Butterfill : With great respect to the hon. Gentleman, I think that he is misreading the pie chart. If he looks at it, he will find that after regulation 20 per cent. of sales were passed. The 47 per cent. which he said were unsatisfactory were so because of inadequate record keeping.

Mr. Dewar : And they were suspect.

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Mr. Butterfill : No. Only 22 per cent. were unsatisfactory and suspect. It is the darker grey on the pie chart. I agree that the chart is not terribly clear. If the hon. Gentleman looks at the satisfactory sales and those in which there was merely inadequate record keeping, he will see that, following guidance, the number of non-mis-sold or non-suspected mis- sold products rises to 67 per cent.

Mr. Heald : Does my hon. Friend agree that at this stage there is simply no evidence on whether clients have been financially disadvantaged, so one cannot draw conclusions as to what the losses are ?

Mr. Butterfill : That is right. Perhaps we should pass from here to a different aspect of the matter. I merely sought to make the point in response to the hon. Member for Garscadden that the scale of the problem was nothing like as big as some commentators on the subject have led us believe. It would be dangerous for us to leave the House having given people the impression that almost everyone who was sold a personal pension had been necessarily disadvantaged. The reverse is the case. It is estimated by the Association of British Insurers that probably only about 10 per cent. of all of them will require some form of compensation and that probably only 3 per cent. will require substantial compensation. That is still a significant and disturbing statistic, but it is nothing like so bad as may have been suggested.

Ms Abbott : I am reluctant to interrupt the hon. Gentleman's flow, but I am bound to do so because he is referring to an analysis of the KPMG report. I have a copy of the report. The hon. Gentleman has referred throughout to failures in record keeping. The report says, for example, that in 85 per cent. of cases there was no evidence of appraisal of pension alternatives. In 76 per cent. of cases, there was no evidence that the salesman had found out whether the client wanted to retire early. To talk about record keeping in a bland way suggests that the failures were merely technical minutiae. We are talking about the absence of elementary information used to decide whether the recommendation was in the person's best interests. The hon. Gentleman should read the report ; it might help him.

Mr. Butterfill : The hon. Lady will be pleased to know that I have read the report. She is misinterpreting what it says. When the report says that there was no evidence of those questions being asked, it means that on inspection of the file it was found that no record had been kept that those questions were asked. It does not mean that the questions were not asked ; it merely means that the salesmen concerned were sloppy in their approach and did not write the information down. It does not imply that the questions were not asked ; nor that the comparisons were not made.

As I have been trying to explain to the hon. Lady, it is a purely clerical analysis and where further analysis of those problems has been done it has found that the problem is nothing like as serious as the raw statistics suggest. I should like to make some progress now as many hon. Members wish to speak in the debate.

It is significant that the figures show that the regulator that comes out best is the Financial Intermediaries, Managers and Brokers Regulatory Organisation rather than the Life Assurance and Unit Trust Regulatory Organisation. That supports my suggestion that those

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people who sought independent advice did rather better than those who bought directly from the insurance companies.

The other concern I have about the KPMG report is that the Securities and Investments Board told us that it undertook the investigation because it looked at the records of the companies that it regulates through the Securities and Investments Board regulatory organisation--predominantly banks and building societies--found that there were serious problems and therefore instructed KPMG to look at everyone else.

However, the SIB did not give us the benefit of an analysis by KPMG of the firms that the SIB was regulating. It would be very interesting to have a comparison, because we may find that the situation in those companies that the SIB was regulating directly was even worse than that in the companies being regulated by the self-regulatory organisations. That has caused considerable suspicion in the industry as a whole.

What went wrong ? I believe that the SIB totally failed to regulate the retail sector properly and I think that it goes back to the beginning of the process. Those of us who were present for the Committee stage of the Financial Services Act envisaged that the retail sector would be regulated properly. I was appalled when the SIB permitted the establishment of two regulators--FIMBRA and LAUTRO, one to regulate the independent sector and the other to regulate those products that were sold directly or through tied agents. It always seemed to me that that would be a recipe for disaster, but powerful influences within the industry were pushing the SIB in that direction. That factor, coupled with the regulatory arbitrage which the SIB has permitted by allowing certain people to be regulated by the SIB itself, has caused much of the current problem. There has not been consistency of regulation. From the beginning, the SIB should have insisted on a single retail regulator. There are those who ask, "Did the SIB have the power to do that ?" I believe that it would have had the power if it had insisted on it ab initio. If it now needs further powers, I hope that my hon. Friend the Economic Secretary--my views on this subject are very well known to him--will take the necessary steps to give the SIB the power to direct people to that self-regulatory body by whom they must be regulated. We should also get rid of the four different regulators--there will, I hope, shortly be only two, but that is still too many. I wish the Personal Investment Authority well, despite my reservations about it.

I believe that the SIB brief to KPMG was inadequate, for reasons that I have outlined already ; I think that it should have looked at its own regulation as well. Its response was, frankly, a little hysterical and it has raised unjustified fears among the population. That has had an unfortunate side effect : because of the scare created, many independent financial advisers cannot get the professional indemnity cover that they need in order to trade. I think that the insurance industry as a whole must come forward with cover for IFAs as an industry initiative ; otherwise, the IFA sector will disappear altogether. It is high time that the industry accepted overall responsibility for regulation. I have long taken the view that the insurance industry should be responsible for regulating itself properly and that it should not indulge in the factional in-fighting in which it has engaged in the past. When that

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happens, we will see a satisfactory resolution of the problems. If that means statutory intervention by this or any future Government, I will be the first to support it.

How can we remedy the problems of mis-selling ? I believe that there are adequate remedies and I pay tribute to the industry in that it is now taking the steps necessary to solve the problems. People can be reinstated to their former occupational schemes where those schemes are willing to take them back. Of course, not all schemes are willing to do that, as the National Association of Pension Funds has pointed out. Some schemes told people that they should not leave and warned them that if they did the schemes would not have them back. It will be very difficult for those schemes to say, "All right, we accept that you did not take our advice, but we will have you back after all."

However, some schemes will take people back and people will have to return with a sum of money sufficient to compensate them for what they have lost, which must be paid by the company that sold them an inappropriate product. That much seems clear. Alternatively, people who wish to return to a scheme could enter a new scheme set up by their original company. If people cannot return to a scheme, additional payments will have to be made into their personal schemes so that they are in no worse a position than they would have been otherwise.

There is an urgent need to look at the whole structure of the industry. I agree with many of the things suggested by Professor Goode. It is essential that we establish an independent pensions regulatory body, and I hope that my hon. Friend will bring forward legislation to achieve that at the earliest opportunity.

However, I am disappointed by some parts of Professor Goode's report. For example, I am very disappointed that it does not recommend the training of trustees, as many pension funds face the problem of inadequately trained trustees. There should be provision for training and, in the future, all pension trustees must be required to go through a process of not just vetting, which is obviously necessary, but training in the duties that they are required to perform.

I think that we should immediately end regulatory arbitrage. We should have a statutory PIA if necessary. The industry must take responsibility for all its products, however they are sold. There should be much stricter controls on tying-in. I believe that there is still a serious danger in that sector. People are at their most vulnerable when they go to financial institutions to borrow money--usually in connection with house purchase, but also for other purposes. At that time, the financial institutions may say, "It is a condition of your loan that you have some insurance cover or a pension product that will pay out at the end of the day." There is huge implied pressure on the borrower to buy a product through the provider of the money. The potential for abuse in that area is enormous. Hon. Members will recall the concerns that I expressed on this subject in earlier debates. I honestly believe that it may be necessary to consider making that form of covert tying-in an offence under the regulatory code as it develops.

However, I do not think that we should throw out the baby with the bath water so far as occupational schemes are concerned. There have been many comments to the effect that occupational schemes should preserve their money for

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the benefit of beneficiaries and when there is a surplus in a scheme the company concerned should not be able to take a contributions holiday. I understand what motivates people to say that, but I believe that it is a dangerous concept.

In a personal scheme, the risk on inflation and investment return is taken by the pension holder. In an occupational scheme, the risk on both of those factors is taken by the company. If the company is required to make up any deficiency, it ought to be permitted--if the markets go well--to have a rest from making contributions at times when there is a surplus. If we do not permit companies to do that, I believe that most companies will abandon occupational pension schemes altogether and offer only money purchase schemes. That would be to the detriment of the entire industry and the general public. In summary, although the Opposition have done us a favour by giving us the opportunity to have the debate, they cannot take the high ground because they have consistently frustrated and opposed measures to increase personal pension provisions.

The hon. Member for Oldham, West (Mr. Meacher), in a press release in June 1990, threatened to turn private pension provision on its head. We cannot therefore take any comfort in what the Opposition might have done had they been in power and we can congratulate the Government on having encouraged ever-greater provision--80 per cent. of people now can rely on more than their state pension. In the United Kingdom, the total amount invested in private pension provision is more than that in the rest of the European Community put together. The Government have much to congratulate themselves on, but there is still more work to be done in the regulation of the industry.

7.10 pm

Mr. Austin Mitchell (Great Grimsby) : It is somewhat surprising to hear the hon. Member for Bournemouth, West (Mr. Butterfill) attacking the Opposition for their reservations about personal pension schemes when the personal pension system and the Government's fanatical enthusiasm for it have caused the major problem that we are debating.

The problem is a major scandal and the Opposition were right to offer notes of reservation and to tell the Government, "Hang on, think about it. This could be dangerous." They warned that the benefits would be less than those from the state earnings-related pension scheme, occupational pension schemes or other methods of provision. We were right to make those warning noises and surely cannot be criticised for them.

The hon. Member for Bournemouth, West should have criticised the Government, because they perpetrated the problem, in collusion with the industry, which was greedy for commissions--commissions which were never effectively regulated and disclosed. The hon. Gentleman served on the Standing Committee that considered the Financial Services Bill in 1986, as did my hon. Friend the Member for Workington (Mr. Campbell-Savours). We heard frequent assurances that the new system would be regulated and publicised and that it would be clear to the consumer whom he was paying for what. It never turned out that way and it is only now, all those years after passing that legislation, that we are getting decisions on commissions.

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The system has never been properly regulated. The industry was greedy for commissions and was in collusion with a Government who were fanatical about privatisation. People were pushed out of a good scheme into something substantially inferior. That is the scandal and that is what we are talking about. Massive advertising campaigns by the industry conned those people into contracting out. Through massive Government advertising, people were told to grab the money that they were giving. The Government spent £1.2 million on advertisements to encourage people to get out of the state scheme, in collusion with the industry, which would benefit from the incoming commissions.

We have heard many quibbles from Conservative Members--especially from the Minister--about the number of people involved. Let us stick with the Coopers and Lybrand estimate of 2.4 million, which is equivalent to 40 per cent. of the people who opted out. That percentage--the chief victims-- includes all those on low earnings of under £10,000 a year. The contributions that they can pay on such earnings make their scheme too inadequate to out-perform SERPS. In addition, they are paying a substantial commission to belong to the inadequate scheme. Those are the people who have been robbed--the less well off and the very people whom we should have been doing most to protect ; but they have suffered most from that scam.

I am aware that other reports put the figure at 3.2 million, which is equivalent to 60 per cent. of those who opted out and in Yorkshire and Humberside it is higher still, at 66 per cent., or a total of 315,000 people, most of whom are on low pay and have suffered because of the scam.

The Minister said that we should not count people who had lost their jobs since they took out their personal pension. Of course we should. The burden of commission, most of which was front-loaded, falls on them especially heavily because the contributions that they made while in work are mainly drained away by it. They must be counted among the people who have suffered and they are included in the 3.2 million figure.

The heavy burden of charges and commission are the real problem. It is estimated that they amount to about one quarter of total contributions during a lifetime. The scheme must be not merely brilliant but supercalifragilistic if it is to increase performance to the extent necessary to cover the huge drain imposed by commissions.

The industry is so greedy for commissions, but they make private pensions cover so inadequate. That is why the Coopers and Lybrand report states that contracting out is of "significant benefit" only to highly paid people in their 20s and 30s, who are prepared to take an investment risk. Those are the only people who should have been encouraged to contract out. The regulators should have compelled the campaign to concentrate on them and the Government should have concentrated their efforts on that group, although they are often sophisticated enough to know what they are doing. The campaign should not have concentrated on the mass of low-paid people who were taken out of the state scheme.

Let us estimate the enormous cost of the scandal--about £11.5 billion to bribe people to opt out, including an allowance for the savings to the SERPS scheme. The Government spent £11.5 billion to encourage people to opt out of SERPS. There was also a cost to policy holders--principally the commissions, charges and mis-selling that

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took place--amounting to £3.5 billion, as well as the cost of compensation for the people who suffered because of opting out. The last figure depends on how adequate compensation is and I have seen no proposals that satisfy me that people will receive adequate and reasonable compensation for the loss that they suffered. I saw one estimate of £1 billion, which has been put aside by pension companies to cover the liabilities that they will incur because of the scam. Let us be conservative in our estimates and say that it is not £1 billion but £2 billion. If we add all those costs together, they make a total of £18 billion to make the pensions of a significant section of our population worse. That is a tragedy and it is doubled by the fact that the Government were a conspirator, in collusion with the industry to achieve that end.

The tragedy is compounded by the fact that, to crown the labours of the toiling hosts of Crossmans, Castles and all those who tried to develop an adequate pension system for this country--those efforts were mainly made by the Labour party and Labour Ministers, who, through great difficulties, attempted to develop comprehensive and effective pensions coverage--it was time to give the country a proper, effective and fully comprehensive scheme. Instead, the Government opted for the gimmick of privatising and opting out, in collusion with the industry, and thus wasted all that time and money and conned a significant proportion of our people.

The Government have failed in their task of developing a proper scheme and providing effective pensions for the great mass of our people. They have coupled that failure with breaking the tie between earnings and pensions that a Labour Government introduced in the 1970s and sustained throughout their period in power. The basic state pension is, therefore, much meaner than it should be.

We assume that society will be richer in 30 or 40 years' time--not much richer if this Government stay in power, given their present economic performance and such a fragile and feeble economic recovery--but most people will have pensions that are much worse than the average earnings of people around them. In other words, the standard of living of the elderly will not keep pace with that of society. Most people will be affected by that.

In addition, 9 million people will fall down the holes between the various schemes. That is the estimate in the Institute for Public Policy Research document--an excellent document, which I recommend to all hon. Members--by Bryn Davies, who is the director actuary of Union Pension Services, and an acknowledged expert in the field. He says that three groups cannot now look forward to a reasonable level of income in retirement.

First, there are those people who do not belong to an occupational pension scheme for sufficiently long periods in their working lives and who, for one reason or another, have not taken out personal pensions. Secondly, there are those people who belong to an occupational scheme but change their job so often that the rights that they accrue are much lower than those that would be built up by a long-serving member of the scheme. Thirdly, there are those people who have taken out a personal pension, but cannot afford to pay the level of contributions needed to provide worthwhile benefits. Those are the major sections.

Therefore, 9 million working people need to make additional provision for their retirement, but cannot do so in any of the existing forms of provision. Those existing

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forms offer no practical way for those 9 million people to make provision for their pensions. Therefore, they will be in difficulties when they retire.

The fact that the Government, who should have been developing proposals to cover those people and sustain them in old age, have wasted their time pursuing that frivolous gimmick, which has been so damaging to less well- off people especially, is a sign of how irresponsible the Government have been about pensions. They are happy to provide for the better off ; they are happy that people on substantial earnings can provide for themselves, but they are not prepared to do anything to safeguard the standards of those people who fall between the different schemes and cannot now be covered by any of them.

The tragedy that we are debating is yet another indication that self- regulation has failed, and it has failed especially in that sector. The state, which should have been keeping a close eye on and protecting the interests of pensioners, colluded with the industry to push them out of a good scheme into a less adequate scheme, to damage their pension entitlement.

It is a regulatory failure because the Financial Intermediaries, Managers and Brokers Regulatory Orgnisation is criticised harshly by, for instance, the Consumers Association. The hon. Member for Bournemouth, West did not want to quote the Consumers Association, but it is pretty damning in its criticisms of FIMBRA, which has acted much more as a self-protection society than as a guarantor or defender of the wider public interest, and especially the interests of those people who were conned.

The Life Assurance and Unit Trust Regulatory Organisation has been, as the Consumers Association said, fairly supine in the matter. The Securities and Investments Board has done better, but the Consumers Association makes a number of important points, which I should mention. Even though the SIB has done better than the regulators beneath it, it has made no provision for addressing what went wrong, and no provision for calling to account those who are responsible.

Mr. Butterfill : I am interested to know how the hon. Gentleman can tell us that the SIB has done better because, as far as I am aware, as I said earlier, the SIB did not authorise KPMG to examine its own internally regulated companies. Indeed, there are many grounds to suppose that the companies that were regulated by the Securities and Investments Board have performed worse than most of the others in the market.

Mr. Mitchell : The steering group that the SIB has set up to run the review is dealing solely with the compensation arrangements--I am quoting the Consumers Association's criticism of the SIB and its view that although the two subordinate regulatory bodies have been supine, passive and inadequate, the SIB has done only slightly better. One of the reasons that the Consumers Association gives for that is not the reason that the hon. Gentleman gave, but the fact that the SIB is not calling any of those responsible to account.

As the hon. Member for Bournemouth, West said, the big institutions involved must have known what was going on. They do not simply sit in some Olympian cloud, while the harried sales force is off conning people throughout the

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country. They either instruct the sales force or they note what is going on. The fact that those people have not been--and will not be, apparently--called to account is one of the most monstrous things about the business. Those are huge, powerful institutions, in which the public need to have confidence, yet they have allowed--perhaps encouraged--sales people to go on a rampage round the country, conning 2.4 million people.

The Consumers Association adds that consumer representatives have been excluded from the steering group and the advisory committee, and it adds that the very regulators who failed to protect the consumers in the first place, and to prevent the breaches of good selling practice and best advice, are now themselves investigating the potential misconduct that has resulted.

There has been a serious regulatory failure. The Government connived in it for ideological reasons when they should have been protecting the public, but in that situation the regulators should have stood firm and controlled the situation. They did not ; they failed. It is another nail in the coffin of self-regulation. I believe that self-regulation cannot work. I have done so for some time--since we went in for the self-regulatory frenzy of the 1980s, which started with the Lloyd's Act 1982. Self-regulation has obviously been a conspicuous success in Lloyd's. That frenzy continued through the Financial Services Act 1986, which was opposed by the Opposition, who demanded an independent statutory regulator. It continued in banking and the building societies. It continued in the Companies Act 1989, when we set up effective self-regulation for the accountancy profession with the recognised supervisory bodies. A fetish has been made of self-regulation, which the Government seem determined to extend to the whole country. I do not know whether they want a self-regulating country, but they certainly want a self-regulating financial sector.

Self-regulation has not worked ; it has failed and it is time to dismantle it. Self-regulation cannot work. The mafia cannot regulate the mafia. It is impossible. It is a structure which is over-elaborate, which is overlapping, which is confusing, and which, in the case of the Personal Investment Authority, is stumbling before it even starts, as the Government attempt to fill that gap. The authority cannot work because it has no firm base and no clear powers. Only an effective statutory base, setting out its responsibilities, and an independent role can make it work. The Government tried to over-compensate by over-elaborate rules, as they did in the Berrill regime in the SIB. Then they went into reverse and tried to simplify it all again, throwing everything into confusion, but the PIA is bound, of its nature, because it is inadequately based and its role is unclear, to be complex. One cannot effectively, through those puny regulatory bodies, regulate the huge big business interests that are involved in that and other areas. The big insurance companies, for instance, have not been regulated. Even now, they are not being called to account. In the case of the big six accountancy houses, the puny structure of professional self-regulation in accountancy and audit is supposed to call to account five or six multinationals, whose fees run into about £3 billion a year, when they permeate the institutions of accountancy and dominate all the committees of accountancy, running the regulatory structure in their interests. It simply cannot be done. We should not continue with self-regulation. It has failed and must be brought to an end.

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My hon. Friend the Member for Edinburgh, Central (Mr. Darling), whose efforts in this sphere I much admire, is moving gradually towards supporting a structure of independent regulation. I welcome that process. It is a big advance because Labour Members did not advocate--not, at any rate, during the 1992 election--a structure of independent regulation after the vice-chancellor of the university of Waikato was transferred from his job involving responsibility for trade and industry. However, we are advocating it now, which is right.

We have moved towards the idea of a statutory independent regulator--a new Securities and Investments Board. I welcome that, but it does not go far enough. The structure that I should like to see put in place would be based on the exchange commission in the United States. We should set up an independent, super-regulator with powers to call people to account, to investigate, to prosecute, to fine, to disqualify--all the necessary controls. To support that organisation, a series of commissions should be set up, all of which should be independent, should include representatives of the public interest and should cover the various sectors involved.

Those sectors include banking, where we want an independent regulator and accountancy. We should have a securities and investments commission rather than the puny private company that we now have. We should have a company sector responsible for corporate governance. The structures should come underneath an independent securities and investments commission. That would give us effective, powerful independent regulation. We need that independence and the openness of an open sunshine policy because the City's reputation suffers without it, and a lot depends on that reputation. The type of scandals that been have allowed to go on and have not been stopped by self-regulation have tarnished that reputation. The financial sector's reputation suffers from the sort of scandals to which we have referred. The inadequacy of accountancy and audit becomes exposed and causes growing public concern unless there is effective independent regulation of accountancy and audit. The reputations of the financial services, the City and the financial sector on which the economy lopsidedly depends are at stake. They will not be saved unless we have an effective guarantee of the public interest in an independent regulator.

7.32 pm

Mr. David Willetts (Havant) : The Labour party's attitude to personal pensions lies behind this debate. That attitude is, at best, one of unease and, at worst, one of total hostility. That hostility is shown in the motion because it does not only criticise the poor advice given to people considering what to do with their pensions--a problem which every Conservative Member recognises--but it describes personal pensions as offering

"no real prospect of security".

That shows that the motion goes far beyond a discussion of procedures into the substance of personal pension provision. I want to make clear the risks and benefits of personal pensions. Many people refer to the obvious risk in personal pensions : the performance of the capital asset that someone has acquired depends on the performances of the stock market and the gilts market. With such pensions, one takes a risk that depends on the future performance of the capital markets. No one can know what will happen to the stock

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market in the next 20 years. That is one of the problems with the speculative stories about how much personal pensions are worth. Equally, there are gambles involved in a traditional occupational pension--a gamble on the person's career, on whether he will stay with one employer for 30 years or move around, on whether he will have a period of unemployment, and on whether he will be on peak earnings at the end of his career. When one changes from an occupational pension to a personal pension, one shifts from a pension that inevitably has an element of risk, because one does not know what one's future career will be, to a pension that has an element of risk because one does not know what will happen to the value of one's savings in the capital markets. Neither pension can guarantee total security and many people would rather take a gamble on the future performance of capital markets than on the future shape of their careers, because many more people now move around more in their jobs. That is why we can expect personal pensions to expand as the labour market changes. It is the Labour party's inability yet again to understand the big economic changes and big changes in the labour market which is the source of its continuing hostility to personal pensions.

We should recognise that there are two distinct problems : the problem confronting people who have opted out of SERPS into personal pensions ; and that confronting people who have transferred from occupational pension schemes and have gone into personal pensions. I shall consider each problem in turn.

I am sorry that the hon. Member for Glasgow, Garscadden (Mr. Dewar) is not in his place. I find the Labour party's sudden concern about the pension entitlements of people who have left SERPS rather bizarre given what it has been saying over the past two years. Many of us in the Chamber will recall previous speeches by Labour Front-Bench spokesmen in which they denounced the incentives given to people leaving SERPS. We were told that those incentives were too generous, and in particular that the total value of the Exchequer's liabilities that were being saved as a result of people leaving SERPS was much smaller than the total value of the rebates being given to people who left SERPS. If that argument is correct--and we heard it persistently from the Labour Front-Bench team--it cannot also be the case that those people who have left SERPS to take out personal pensions are as severely disadvantaged as many members of the Labour party now claim. The figures do not add up.

Mr. Flynn : Does the hon. Gentleman agree that part of the mythology of the Conservative party involves its justification for reducing the value of SERPS--the demographic time bomb involving the number of elderly people ? Does he agree with the statement "we are not facing a crisis caused by the increasing number of elderly people"

at the end of a chapter in a book written by someone called David Willetts ?

Mr. Willetts : I am grateful to the hon. Gentleman for that plug for my pamphlet. I do not believe in a demographic time bomb. There are good arguments for leaving SERPS and encouraging personal pensions that do not depend on the demographic time bomb arguments. I believe in people registering claims on future resources for their retirement through private contracts and private

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savings. That is the Conservative approach to pension provision and that is the argument for personal pensions and against SERPS. The figures that the Labour party has bandied around about the expensive rebates for people leaving SERPS are not consistent with the argument that we have heard today about the supposed problems of people who have left SERPS to take out personal pensions. It is widely accepted that the financial benefits of leaving SERPS are particularly strong for younger people. We all acknowledge--it is a something that the Government are reviewing as they move towards age-related rebates--that younger people are most likely to benefit from leaving SERPS and taking out a personal pension. The figures prepared by bodies such as the Institute of Fiscal Studies and the Carnegie inquiry into the Third Age clearly show that the typical person leaving SERPS is someone at the beginning of his working career. A research paper for the Carnegie inquiry states that the take-up rate for personal pensions among men aged 22 to 26 who have left SERPS

"approaches 50 per cent. whilst for those aged 47-51 it is little over 10 per cent... high take-up rates among younger workers are not surprising if individuals engage in a rational economic calculus of future returns from various types of pension schemes."

By and large, those leaving SERPS have been younger workers who have probably taken a rational economic decision.

It has made sense for younger workers to leave SERPS and more than half of them have done so in order to take out personal pensions. They have many decades ahead of them during which their personal pensions can accumulate in the saving schemes that they have taken out, whereas under SERPS they had only 20 best years during which to accumulate an entitlement.

My final point about SERPS is that the Labour party's feeling for it is rather odd given that SERPS is essentially a negative means test. It is not a system that gives most to those with least ; it is earnings related and gives most to people who earn most. One of the problems with SERPS is that people with low and intermittent earnings do not accumulate much of an entitlement. Admittedly, such people will accumulate modest entitlements to personal pensions, but they are not well served by SERPS either. Personal pension provision simply reflects the bias within SERPS--both are clearly earnings related.

Another problem that has caused much concern is people who had occupational pension entitlements. That is a much smaller group than the many millions who opted out of SERPS to take out a personal pension, and people's worries about it are much better founded. It seems odd for anyone whose employer was contributing to his or her pension scheme to opt instead for a personal pension with no employer's contribution. Many personal pension providers now accept that personal pensions taken out in those circumstances are unlikely to be as favourable as remaining with an occupational pension. Another category is people who have already left an occupational pension scheme, perhaps because they are no longer in employment, or have changed employment. What were those early leavers to do with the lump sum remaining in their original occupational pension scheme ? Those people are subject to scrutiny in the notorious

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KPMG document circulated by the SIB, entitled "The KPMG Study on Pension Transfers". Some of the Labour party's interpretations of the document are simply not consistent with a clear and close reading of the text. As my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) pointed out, the study is essentially concerned with evidence on whether clerical procedures have been followed. Although there may be a problem, we cannot be sure of its size simply on the basis of that study. It is concerned with evidence about record keeping, but that is not the same as saying that there is evidence that bad decisions were taken.

Opposition Members have no evidence that I am wearing shoes, but that does not mean that they have evidence that I am not wearing shoes. If, after much careful scrutiny, an extremely pedantic accountant comes up with a report saying that they have no evidence that I am wearing shoes, it would be no basis for their announcing that the Conservative Benches are full of people who, sadly, do not possess footwear. That is one of the ambiguities that Opposition Members have been shamelessly exploiting in the past few hours. We must also recognise the crucial point made at the beginning of the report :

"There is no automatic connection between a client's file not evidencing compliance and the client suffering financial disadvantage. But non compliance will, in some circumstances, result in financial disadvantage."

Of course it will in some circumstances. The crucial question is how many people are in those circumstances. This much-touted report simply fails to deal with that.

May I consider some of the policy issues that arise from this debate ? A parallel can be drawn between the story of personal pensions and the story of personal share ownership. One of the Government's successes in personal share ownership was spreading it widely. The focus was then on ensuring that share ownership was also deeper, which was the origin of marvellous initiatives such as personal equity plans.

The same story applies to personal pensions. The initial success was spreading personal pensions much more widely. The objective must now be to make people's personal pensions deeper--worth more. That means that, alongside taking the rebates that were available from the national insurance fund, we must also ensure that many more people contribute from their own savings and that employers contribute. Instead of always looking at the bad news, we should welcome the fact that a third of people with personal pensions already contribute directly from their own savings. I hope that a consequence of this debate and the debates that have gone on for the past few months is that, in future, more people will recognise that if they want a substantial pension when they retire, they must be prepared to save up for it now.

I also hope that employers will contribute to personal pensions. Looking ahead, there seems to be a sensible compromise between a pure, stand-alone personal pension and traditional occupational pensions which do not take account of changes in the labour market. That sensible compromise is a group personal pension in which an employer identifies a personal pension provider and contributes a top-up for those who take out a personal pension with that provider. Such schemes have lower administrative costs than when individuals take out their own free-standing personal pensions. At the same time,

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they have the crucial advantage of personal pensions, in that every individual accumulates his or her carefully defined pot of money. The Department of Social Security's research reveals clear evidence that many employers have been worried about advising on pension matters and encouraging group personal pensions because they were afraid of breaching the terms of the Financial Services Act 1986. Many of the Opposition's criticisms of that Act are misconceived. The problem is not simply that some financial advisers have not followed its terms, but that it created a monopoly by saying that only certain categories of people could give financial advice, excluding others who may in the past have been happy to do so. Employers felt that, unless they were prepared to go through the cumbersome procedure of registering under the Financial Services Act, they could tell their employees nothing about pension provision.

The speech by my right hon. Friend the Secretary of State at the beginning of this debate made it clear that employers can give advice to their employees. If employers feel able to give that advice, and if they work with their employees in developing group personal pension schemes, personal pensions will not just be widely taken up in future, but will also deepen. Thus we shall fulfil the Conservative vision of people accumulating their own pot of savings, through their efforts and assisted by their employers, to ensure that they have a high standard of living in their retirement.

7.49 pm

Mr. Mike O'Brien (Warwickshire, North) : The financial services industry is a large industry. It employs about 2.5 million people and is a crucial part of our economy ; some 18 per cent. of our GDP may well be linked to the financial services industry. Most of those who work in it are decent, honest and truthful in their personal lives. That has to be said at the start of a speech which will contain a number of criticisms.

There are problems in that industry that require regulation. Although we must be careful that over-regulation does not damage competitiveness or risk-taking, we have to ensure that there is sufficient regulation to protect the consumer. We are debating whether self-regulation is really adequate.

The Treasury Select Committee, of which I am a member, is currently examining that issue. Clearly, it does not seem to have been adequate until now, because we have had a series of scandals and we have had to reorganise the SROs, FIMBRA and LAUTRO. From July, some areas under their control will be passed to the Personal Investment Authority. The PIA will also have a greater independent element. I was struck by the comments of a number of those who gave evidence to the Select Committee, who saw self-regulation as an important concept whereby the industry would begin to run itself. They were quite critical of the position we are approaching, in which the PIA has a large independent element. That means that we are moving away from self-regulation towards more independent regulation. Some parts of the industry take the view that if we are to move away in that sense from self- regulation, we might as well have single-tier statutory regulation. The right hon. Member for Berwick-upon-Tweed (Mr. Beith) said that the move to statutory regulation from self-regulation may not

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be such a big step in practice, because the elements of each system may contain parts of both. Indeed, a statutory system may well have practitioners closely involved in the way in which it is run. The man from the Pru, Mr. Mike Newmarch, when he gave evidence to the Select Committee, took the view that we should have a single-tier statutory system which would be a much more accountable and effective form of regulation. Indeed, the Pru announced today that it would prefer to be directly regulated by the SIB. That is all part of the industry's ability to shop around for the regulation that it wants. In a sense, I disagree with that element of the current SRO system, but the Pru is trying to make the point that a single tier of statutory regulation through the SIB or a similar organisation might be the best route.

There is a strong case for change and for a move towards a system of regulation that can inspire greater public confidence. The key issue is confidence. The current scandals will become more serious. The home loans scandal and the pension transfer scandal will find their way on to the front pages and undermine public confidence in that important part of our economy. It is not necessary just for the consumer and for the industry ; it is necessary for our economy and our country to have confidence in the financial services industry. That confidence does not exist at the moment.

The Countrywide Independent Advisers told the Select Committee that the public feels little better provided for than it did before the Financial Services Act and, as we have already heard, the Consumers Association regards the present regulatory system as unacceptable and not providing a basis for any confidence.

The pension scandal should not be underestimated. It threatens not just to expose incompetence and bad advice from some salesmen ; it will also further undermine the whole financial services industry. When the SIB says that 500,000 workers might need to be compensated, when there is talk of £2 million to £3 million--and when the Association of British Insurers is suggesting that it could be £300 million--in compensation, there is a significant crisis of confidence in the financial services industry. That crisis must be addressed by the Government.

If that amount of compensation or anything like it has to be paid, someone will be paying for it. The people who will be paying for it are those who pay premiums into the various parts of the financial services industry. It will hit the consumer. That is the nature of the problem.

There is more than the problem of individual salesmen being incompetent or dishonest. Some of the media have suggested that that is the central issue, but there is also institutionalised incompetence and dishonesty within some companies that have had respectable reputations to date. As we are now beginning to understand, they have institutionalised both incompetence and dishonesty within their procedures by employing barely trained salesmen for short periods on commission only.

The Norwich Union has now suspended its work force, having admitted the inadequacy of its training after the SIB drew attention to the problem. We should not be to quick to criticise the Norwich, because it took action. If we are too critical and if there is too much publicity, other companies may well be deterred from taking that necessary action.

Evidence to the Treasury Select Committee--I have not had the opportunity independently to evaluate it, so I am just reporting it--was that companies such as Abbey Life

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