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Session 1999-2000
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Delegated Legislation Committee Debates

Stakeholder Pension Schemes Regulations 2000

Eighth Standing Committee on Delegated Legislation

Thursday 13 July 2000

[Mr. Barry Jones in the Chair]

Stakeholder Pension Schemes Regulations 2000

9.55 am

Mrs. Jacqui Lait (Beckenham): I beg to move,

    That the Committee has considered the Stakeholder Pension Schemes Regulations 2000 (S. 1. 2000, No. 1403).

I welcome you, Mr. Jones, to the Chair for this brief, final debate on stakeholder regulations before they come into effect.

Mr. Desmond Swayne (New Forest, West): Hallelujah!

Mrs. Lait: As you may have heard from a Committee member, Mr. Jones, some of us have spent many years considering stakeholder regulations. Hon. Members may be relieved that they will no longer be involved in the legislative process. You may feel that you have drawn the short straw in having to chair today's Committee.

We have prayed against all the regulations, because questions still need to be asked about stakeholder pensions. I hope that I do not stray out of order; it may seem that I am drifting away from the regulations, but all the issues are interrelated. The announcements by the Treasury, for instance, are directly relevant to the administration of, and the regulatory regime for, stakeholder pensions.

The Government proposed stakeholder pensions along with the state second pension as their big idea for pensions. However, that big idea has had such an impact that, according to Mintel, 58 per cent. of the population have never heard of stakeholder pensions. If they are to be a success in the target market, one hopes that that figure will have decreased substantially by next April, when they are introduced.

We have been dealing with another problem for a long time: the interrelationship between the stakeholder pension, the state second pension—particularly when it goes flat rate—and the minimum income guarantee will put many people off purchasing this new product. It has taken two or three years of legislative time to produce a new product for the pensions market.

The Opposition have no argument with a low-cost, private sector, fully funded pension. The question is whether it will deliver what the Government want. As I said, we have some difficulties. This Government are grappling, as the previous one did, with the structural problem of the interrelationship between the Treasury and the Department of Social Security regarding the regulation of pensions.

The latest announcement by the Treasury, which has an impact on stakeholder regulations, is about the individual pension account. It has become stakeholder-friendly. I assume that the account was announced deliberately to tie in with the end of debates in this Committee and on the Child Support, Pensions and Social Security Bill. That, too, has an impact on stakeholder pensions. It seems that yet another product is being offered in the range of pension provision.

Mr. Swayne: My hon. Friend draws attention to the range of products available and mentions the individual pension account. Members of the public will face difficulty in understanding the range of products available under the regulations. That will lead to a crucial need for advice. Am I right in my estimate that advice will be lacking under the regulations? People are somewhat disinclined to pay for professional advice which, traditionally, has come from the industry and been funded by commission. On account of cost restrictions the regulations will militate against payment of commission to fund advice.

Mrs. Lait: My hon. Friend is right. Perhaps he will forgive me if I do not respond immediately but deal with that a little later as I wish to be brief so that others may contribute to the debate.

On the point about complexity, anyone who knows the slightest thing about pensions, including ourselves as we consider our own pension provision, will know that in the target market people are seriously put off by the complexity of pension provision. While I congratulate the Treasury and the Government on simplifying some of the tax rules governing stakeholder pensions, effectively not one new product but two—the Individual Pensions Account and the stakeholder pension—have been brought into an already complex market, and although the way in which they were devised may of itself be simple, their addition to such a market has heightened its complex nature.

The other aspect that inevitably will have an impact on stakeholder pensions is the Government's decision—welcome though it is—on concurrency. We have always argued for total concurrency. The Government have argued that that would be a tax break for the rich. It is interesting that the concurrency level has been set at £30,000 a year. People could just about be paying tax at 40 per cent. if they earn that sum. If the Government genuinely no longer believe that the stakeholder pension is a tax break for the rich, this sits uneasily with the definition of a moderate earner being someone who earns £10,000 a year. By my calculation, someone earning £10,000 a year is earning only £50 a week above the national minimum wage. I doubt whether people on £10,000 a year regard themselves as moderate earners, but people earning up to £30,000—and they are the bulk of the population—will welcome concurrency.

A question, albeit technical, arises over what happens when someone drifts above or below the £30,000 limit. A person could be put in the position of having a stakeholder pension illegally if, for instance, he earns £28,000 but receives a bonus that takes him over £30,000—for example, a salesman relying on fluctuating earnings around £30,000. Someone at that end of the market might question whether a stakeholder pension is worth while and wonder how to get advice that would enable them to become a legal stakeholder within the 1 per cent. cap.

I shall not spend too long on the broad issues, but before I go on to welcome in detail some of the changes in the draft regulations, I must say that the Government have to think through a bit more fully the potential impact of FRED20, a new accounting standard that will crystallise on the balance sheet a company's liability towards its occupational pensioners. That has a bearing on stakeholder pensions. It appears that this will accelerate the decline of defined benefit pension schemes, something that probably all of us would regret. Unless that is changed, its technical impact is likely to make finance directors look carefully at the occupational benefit scheme that they offer.

Another read through shows, as my hon. Friend the M for New Forest, West (Mr. Swayne) said, that there is also an impact on the cost of advice. If occupational pension schemes are to be closed, people may wish to transfer it to a stakeholder pension. The Financial Services Authority is not keen on transfers, which are difficult to keep within the 1 per cent. cap. The cost to an independent financial adviser of giving someone advice on such matters is between £500 and £1,000.

That brings me neatly to other problems connected with the cost of advice. I congratulate the Government on introducing the 1 per cent. cap, as it has encouraged the industry to consider developing services, such as e-mail, call centres, the fax system and post offices—if the new post office bank gets off the ground—all of which have the potential to offer simple, easy advice for people who have simple, easy problems. However, people are different and so are their pension requirements. If they do not fit into that simple advice system, it will be difficult to contain the cost of advice within 1 per cent.

Mr. Swayne: It is not so much that people are different, but that a person's pension requirements will change over time. It would be relatively simple if, throughout their lives, people fitted into the three income bands outlined in the Green Paper, but they will not. For example, a young graduate's expectations may rise throughout his life. There is a huge potential for mis-selling inappropriate products to people early in their working lives.

Mrs. Lait: My hon. Friend puts his finger on a problem that I was trying to simplify. He is absolutely right to say that people have different requirements throughout their lives. We could spend time examining whether ISAs are better than stakeholder pensions, but that would be ruled out of order.

The 1 per cent. cap simplifies the cost of advice offered by the pensions industry, which is welcome. Hon. Members may be a sophisticated audience, but many people in the target market for pensions tend not to be active buyers of pensions or savings instruments, although the Government's definition of that market is unclear. An educational role is needed, but that is expensive. It cannot easily be accommodated within the 1 per cent. cap, even if the details are sorted out on a computer, with people filling in the boxes to work out whether a stakeholder pension would be appropriate.

Many people buy ISAs and sales are better made face to face when people's questions can be answered as they arise, rather than in the structured pattern imposed by a computer or a call centre.

Mr. Steve Webb (Northavon): I do not wish to pre-empt the h Lady's remarks, but I want to be sure that I follow her reasoning. I agree with her that advice is needed, that face-to-face advice is a good thing and that it will have to be fitted in to the 1 per cent. cap. Does she, therefore, conclude that the 1 per cent. cap is too low?

Mrs. Lait: The hon. Gentleman is encouraging me to abbreviate my comments. He leads me to ask whether the 1 per cent. cap imposes an inflexibility which will have a deleterious effect on the potential target market. Good advice is needed, but it costs money. One of my anxieties is the difficult position of the Financial Services Authority, which has been invited to produce decision trees to help advisers keep within the 1 per cent. cap in deciding whether people should have a stakeholder pension. The FSA's late May production on decision trees leads me to suspect that someone in the FSA trained in the Foreign Office because the document has been written—

 
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Prepared 13 July 2000