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Column 943That should be illegal. Financial advisers would strongly oppose that because it would cut out their middle man's cut of the profit, but people should be encouraged to shop around.
There has recently been an improvement in the insurance market, with companies selling directly to the public. One company has provided policies of enormously greater value than the policies that were previously available. It is not possible to do that with pensions ; it is not possible to cut out the intermediary, lose the commission and gain advantages by going directly to the company. It should be done. That is a reform which should be made.
Personal pensions have been a sad business. I cannot over-emphasise the number of tragedies that have resulted or the amount of anxiety that people feel. I doubt whether one person in 1,000 understands precisely the nature of the policy that he or she buys, and I have noticed that that is true among people of great education in the House who, when I discuss the subject with them, immediately bring the subject round to their personal policies.
We tend to trust the person who sells us a pension policy. We do not buy our cars or our houses in that way. In a lifetime, we might buy half a dozen cars and two or three homes, but, before we do so, we want experts to give us advice. We want the surveyors to look round the house. Yet we buy our pensions once only. We make a decision that will determine our income for possibly a quarter of our lives--it might even be longer--and we respect those salespeople as though they were disinterested in themselves and were giving us independent advice. The sad truth is that many of those people do not deserve that trust. Although they wear pinstripe suits, they should be treated with the same suspicion with which we treat double glazing salesmen or timeshare salesmen.
I suggest to the Minister that we need a genuinely independent financial advice agency, from which people could obtain advice for a small fee. I think that when the change takes place in personal pensions--when the Act comes into force--many financial advisers will lose their jobs. Those people could run such an institution. At the moment, however, people are at a loss to know where on earth they can obtain independent financial advice in circumstances in which the person who advises them does not have a vested interest in selling them a policy that offers the greatest commission.
We have gone back to the days when Beveridge said that a national insurance scheme was necessary. He felt that having people knocking on our doors and selling policies and collecting 2s 6d a week from our parents was a grossly inefficient system, in which 50 per cent. of the premium went towards commission and administration charges and was lost. That is why Beveridge wanted a national scheme. We have a national scheme in which only 5 per cent. of the costs go in administration, yet we are bribing people to desert it and go into private schemes, where 50 per cent. of the costs, again, go in commission and administration. It is wildly inefficient system. I look forward to hearing the Minister give a positive answer--I gave him notice of what I intend to raise today--and whether he will approve the idea of setting up an
Column 944independent finance advice agency, which would separate the sales part of the pensions industry from the part that makes the commissions. That, above all, is needed.
The Parliamentary Under-Secretary of State for Social Security (Mr. William Hague) : The hon. Member for Newport, West (Mr. Flynn) has often raised this subject in the House, although he has raised a number of new aspects today. I will certainly seek to respond to the points that he raised. He did, indeed, give me notice about an hour ago of some of the things that he intended to say, just as he notified the Prime Minister of his question yesterday. After having open government, we have the hon. Gentleman practising open opposition. I congratulate him on that innovation.
Before I respond to specific points, I shall say a few words about the general background to the issue. Personal pensions are an important part of the Government's strategy for ensuring a continued improvement in the general level of post-retirement income. The means by which we are pursuing that objective are to widen choice, to encourage more people to plan for their retirement income, and to build a solid base of funded pension provision for the future. Widespread and successful occupational pension provision is vital to those objectives, but so is the availability and success of personal pensions.
Before our reforms of pension law in the 1980s, the state and employers had more say over how individuals could save for their own retirement than did the individuals. Employers could require people to join their scheme as a condition of employment--even against the individual's will. Where no employer's scheme was available, the state obliged people to contribute to SERPS. We changed that in the 1980s. We ended compulsory membership of any particular scheme. We gave people the opportunity to choose a pension for themselves. Now everyone can plan for the pension that best suits their needs, whether it be state or non-state, occupational or personal. By widening choice, our intention, in which we have succeeded, is to encourage more people to save for their retirement. Growth in personal pensions has brought dramatic growth in personal investment--something which the hon. Gentleman did not mention, but which we should remember in a debate of this kind. In 1988, individuals and their employers contributed £260 million to personal pensions. By last year, those contributions had increased nearly 10 times to £2.5 billion. Of the 5 million people who have taken out a personal pension in place of SERPS, more than 40 per cent. are making contributions on top of those received from the Department of Social Security to boost their income in retirement. That is new money being invested to provide extra security in old age--money that could not have been paid into SERPS.
As the hon. Gentleman well knows, SERPS operates on a pay-as-you-go basis. The money paid in today is also paid out today, to current pensioners. Nothing is saved. Nothing is invested. As the number of pensioners increases in the next century, the burden on those making contributions will be heavier. That is why we want to encourage more funded pension provision, where money paid in today is invested for the future. Not only does that
Column 945create a flow of funds for investment in British industry now ; it provides a sustainable means of providing pensions for the future. That is the general background. I will deal now with the allegations of mis-selling of pension transfers and with some of the specific points that the hon. Gentleman raised. Choosing a pension will be one of the most important financial decisions that most people will ever make. And however people choose to save for their retirement, it is essential that their pension rights should be secure. With personal pensions, that means that people must have access to the information that they need to make an informed choice. They must be able to rely on the highest standards of expert advice, and they must be able to have confidence that the regulatory framework will protect their interests against the unscrupulous and the incompetent.
When the Securities and Investments Board recently reported evidence of poor compliance with rules governing the sale of personal pensions to people transferring from employers' schemes, the Government made the position clear. Concerns about compliance must be investigated fully, the extent of any mis-selling must be determined and anyone whose pension rights have been jeopardised must be provided with a remedy. As the hon. Member will know, the Securities and Investments Board is currently conducting a major investigation into pension transfers. The board has already acted to prevent and deter any further mis-selling and new guidance has been published designed to raise the standards of future transfer business. From next month, any financial adviser advocating a transfer from an occupational scheme to a personal pension will have to provide the client with a written statement explaining why the recommendation is suitable. Advisers will have to undertake computerised comparisons of the benefits offered by the occupational and personal schemes, a so-called "transfer value analysis", and supply the results to the customer. Where a client wants to proceed with a transfer against advice, regulators will require evidence that attempts to counsel the customer have been made. From November, if advisers want to undertake transfer business they will have to demonstrate special competence in pensions advice or have their work double checked, and any firm wishing to undertake pension transfer business will be obliged to notify the regulators. Those firms will be subject to special monitoring.
These measures represent a solid step to improve the marketing of personal pensions and to safeguard the interests of the potential investor. In the next few weeks, the Securities and Investments Board will complete its investigations into past mis-selling and we expect a full report. The board will tell personal pension providers and independent intermediaries how they should review pension transfer business and assess compliance with regulators' rules. It will provide guidance on how firms should contact their clients and it will lay down a framework for providing redress to investors who may have been mis-sold a personal pension and suffered disadvantage as a result.
I can therefore repeat the reassurance offered to personal pension investors by my right hon. Friend the Secretary of State a few weeks ago. No investor need be alarmed ; nor should investors take precipitate action. If investors have any questions about their scheme, they should contact their personal pension provider. The hon. Gentleman referred to a particular firm which included disclaimers in its contracts. I cannot comment on
Column 946allegations against a specific firm. All authorised companies are bound by the regulators' rules on selling personal pensions, and any evidence of malpractice should be referred to the relevant regulator. I can tell the hon. Gentleman that the regulators will treat with lively scepticism claims by firms that personal pensions have been sold without advice. They will expect all such claims to be backed by credible evidence that the customer genuinely asked for a transaction to go ahead without taking advice from the firm.
As I have said, the Securities and Investments Board published guidance on future pension transfers in May. That set out new guidelines for firms on "execution only" business as it is called. That is defined as a transaction where the customer simply gives his order and does not rely on the firm to advise him about the merits of the transaction or its suitability for him. The board considers that such transactions are likely to be unusual where there has been personal contact or correspondence between the individual and an intermediary. The guidance advises firms carefully to consider their position before classifying a transaction as execution only, and a customer's signature on a standard form may not be regarded as conclusive evidence of a transaction's execution only status. All firms should bear that in mind.
When the hon. Gentleman asked about annuity rates he raised an important point and drew attention to a difficulty that people experience when turning their personal pension rights into an annuity. Of course annuity rates simply reflect market conditions. Interest rates and inflation have fallen over the period that the hon. Gentleman described, and in that time annuity rates have also fallen. The key to preserving the purchasing power of annuities is the maintenance of tight control of inflation. Between 1990 and 1994, annuity rates fell, on average, by about 25 per cent. Inflation and interest rates fell by more than that, and providers would be entitled to point out that annuity rates in 1990 and surrounding years would have been unusually high--much higher than they might normally have been. The hon. Gentleman has raised an important point and the Government are aware that individuals would like more flexibility over the timing of their annuity purchases. We are committed to developing proposals that will enhance flexibility without jeopardising security in retirement. In developing those proposals, we will bear in mind the important points that the hon. Gentleman made.
I turn briefly to the alleged mis-selling of appropriate personal pensions, which allow people to opt out of SERPS. The Securities and Investments Board's current investigation relates to the sale of personal pensions to people leaving occupational schemes ; it does not address the sale of personal pensions in place of SERPS. The chairman of the SIB has indicated that he has no evidence of systematic non-compliance with selling practice rules in this area, but that the SIB will nevertheless review sales of appropriate personal pensions in due course. In the meantime, we must not exaggerate the possible scale of the problem. The hon. Gentleman referred to a Coopers and Lybrand report, but he is aware that Coopers and Lybrand has asked people not to read too much into its figures and not to exaggerate the scale of the problem. Once again, we shall expect the SIB to investigate the matter thoroughly. Mis-selling which has caused harm to investors must be identified and those responsible for providing bad advice must provide suitable redress.
Column 947The hon. Gentleman asked about information. The Government are committed to giving people access to information about personal pensions. We want consumers to make informed choices. That means not only firm regulation but the new rules, which the Chancellor has directed the SIB to produce, governing the disclosure of charges and commissions are important. These will come into effect next month. In future, illustrations of personal pension benefits must reflect the actual charges levied by a provider
The motion having been made after half-past Two o'clock, and the debate having continued for half an hour, Mr. Deputy Speaker-- adjourned the House without Question put, pursuant to the Standing Order.
Adjourned accordingly at one minute past Three o'clock.
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