Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses(Questions 20-39)



  20. But you have already said that people are actually financially quite ignorant of the different products, so how are they going to get the advice so that they can decide whether they are going to go for a pension or an ISA or a unit trust or life assurance or whatever the product is?
  (Mr Sandler) If the advice is regulated and therefore it comes at a very considerable cost, then it is highly unlikely that they will be able to get much of that advice. That is the current state of affairs. If you look at the cost of distribution of these products, of financial products in general, those costs of distribution have risen by about 10 per cent per annum in real terms over the last 15 years. That means roughly a trebling of costs. It is interesting to pause and say why have the costs of distribution, advice, the advice to which you refer, why have those costs gone up so markedly over the last 15 years? Have the salaries of the advisers gone up by that sort of degree? Have the costs of petrol and all of the other ancillary costs of getting people into a face-to-face situation gone up? The answer is no. What has gone up is the level of regulation which attaches to that process. For very sound reasons; it is governed by the references made earlier to financial scandals. The level of regulation has gone up proportionate to the perceived requirement to protect consumers against the detriment which has arisen in areas such as Equitable. But because those costs of regulation have gone up in the way that they have, it is very difficult to get regulated advice to those consumers. It is not difficult to get unregulated advice to those consumers. If one regulates the product as opposed to the process by which that product is delivered, then the economics can be very substantially transformed.

  21. So do you reckon that the advice which will help someone who knows nothing about the difference between a unit trust or life assurance or what it will give them in the end, that the cost of that advice could still be contained within the one per cent that is allowed in the Stakeholder?
  (Mr Sandler) There is a big debate as to whether one per cent is precisely the right number and that debate is unfolding and we will see ultimately where it gets to. But there is no doubt in my mind that it is firstly necessary to regulate the price of these products, because otherwise consumers would be subject to the potential detriment of excess charging. It is also equally clear to me that unless there was sufficient margin built into these products, no one is going to manufacture them and distribute them. So there clearly has to be some equilibration here where there is sufficient profit in the products, but nonetheless not excess profits such that consumers are likely to be overcharged. Whether that number is one per cent or not, time will tell. But I am quite confident that the economics can be substantially improved through the process of regulating the product as opposed to regulating the advice process. I would say, in addition, that the availability of those products, if they are accompanied by a properly resourced campaign of awareness building, which contains within it the need to save, then I believe we can go a long way towards encouraging consumers into the net. At the moment there is a slightly disembodied campaign "You need to save more" but I cannot actually then deliver the product to you in order to give you a solution to the problem that I am now putting in front of you, I do not think that takes you anywhere. If at the same time as the new suite is introduced alongside it there is a serious concerted campaign to build awareness as to the product attributes and a degree of comfort on behalf of the consumers with what it is that they will be purchasing and, at the same time, an awareness as to the need to save in greater amounts, I believe that substantial progress can be made.

  22. I wonder, Mr Pickering, if you can comment, your own views, on how successful the current Stakeholder Pension has been and how you think Mr Sandler's suite of Stakeholder Products might work?
  (Mr Pickering) I am not intensely critical of the fact that Stakeholders are being bought by some people who are quite well off or even bought by them on behalf of their grandchildren. If Stakeholders were just to have become a poor person's pension vehicle, then we would not have had the consumer protection that one gets from having articulate, well-heeled people subscribing to the products that are in the interests of mass society, rich and poor alike. So I would say on Stakeholders; so far, so good. For the future, however, I would say that there has to be a profit margin in running Stakeholders. There's nothing wrong in making a profit from selling a financial product in the same way that there is nothing wrong in making a profit from selling a car. I think that one of the ways that we square the circle is to use the workplace as a much more effective delivery mechanism than we do at the moment. It is very difficult for employers, because of the Financial Services and Markets Act, to do anything more than designate a Stakeholder. They cannot market that Stakeholder. They cannot sell that Stakeholder to the workforce, either on their own or in concert with a properly qualified financial salesman. We need to change the law in order to give effect to public policy, by allowing employers to put a lot more weight behind the marketing of Stakeholders and to make contributions to those Stakeholders, rather than simply designate.

  23. Should those contributions be made compulsory from employers?
  (Mr Pickering) I believe that there should be greater compulsion within the State sector. I have already mentioned that. I am not yet convinced that we need more compulsion in the private sector. There are too many disincentives at the moment. Let us remove those disincentives, bureaucratic barriers to easy pension accumulation. Let the Government in the Green Paper think about what sort of incentives it may want to offer employers and employees to make pension provision. At this stage, I do not think the case for increased compulsion has been made. Compelling employers alone would simply make another payroll tax and I do not know how high one can push the payroll tax before employing people becomes uneconomic. If one compels employees, do you compel all employees? If you do not compel the poor, when does someone become rich enough to be compelled? If you do not compel the young, when do they become old enough to be compelled? And above all, if one compels people to save into a money purchase pension scheme where £50 paid in becomes £40 overnight because of market movements, and that is on a good day, then that really can be seen as a stealth tax to end all stealth taxes and would bring the pension system into disrepute. I have not yet given up on voluntarism.

  24. What are your views on what Mr Sandler was proposing; his suite of Stakeholder Pension products?
  (Mr Pickering) I agree with Mr Sandler, my words not his. Most people need a salesman. No matter how simple you make these products, they will not sell themselves. Most people need a salesman. Most people do not, however, need a salesman who is an afficionado of inheritance tax planning. At the moment, the financial services infrastructure makes it very difficult to bring a salesman face to face with a consumer with very simple needs, without going through a very costly rigmarole of the sort of tests that one would apply if one was dealing with a more well-heeled person with more complicated needs.

  25. If I can move on to the savings gap that both of you said does exist; is there anything, apart from compulsion, I think there are other questions about compulsion, that the Government can do to bridge that savings gap? It has been suggested in someone's evidence that in fact there is very little that it can do. It can shift the way that people save their money, but it does not actually shift the global way they are going to save. Is there a role for Government in this?
  (Mr Pickering) There is a lot that the Government can do and it can do it at no cost. Savings, whether it is by means of a pension or non-pension savings, is an over-regulated activity. That regulation costs money. That regulation ultimately costs the consumer money. Savings through pensions, through other forms of wealth accumulation should be made much easier, should be easier for employers to play their part than it is at the moment. There are an awful lot of on-costs associated with running a pension scheme. Many of those on-costs are avoidable. Government can make a tremendous contribution by simply withdrawing to the boundary or the touch line and allowing employers and employees to get on with it, allowing market participants and their customers to get on with it. Yes, we do need regulation in a market place where there will always be an asymmetry of information between provider and consumer, but that regulation should be on the boundary. We should not assume that every employer who runs a pension scheme is going to welch on his promise. We must not assume that every commercial provider is going to indulge in mis-selling. And yet much of the regulatory system at the moment makes both of those assumptions. We all pay the price. Those who are paying the biggest price are those who are kept outside our pensions fortress because the entry fees have become too steep.

  26. I wonder, Mr Sandler, if you think that the Government should just concentrate, save for its own, on those who are on low incomes, the groups that are at risk, the ones who cannot work and leave everybody else alone to look after themselves?
  (Mr Sandler) Can I come back to that question? Can I answer your previous question, which is; is there a role for Government in overcoming the savings gap? To which my response is that there are a whole raft of recommendations in here which are directed specifically to that point. Unequivocally my answer is yes, there is a huge amount that the Government can do to assist in overcoming the savings gap, either directly through the Stakeholder suite, which is a specific proposal aimed specifically at that problem. But even if you look at the whole range of other reforms that I have proposed here, including tax simplification, including reform of with profits, including reform of the distribution process aligning the interests of consumers more directly with their advisers, including the improvements in education, they all direct, in one way or another, towards a more effective savings market in which consumers are encouraged to participate and therefore we would be making progress towards overcoming this savings gap. No, I do not think that the impact of Government should be specifically directed solely towards those at the lower end of the socio-economic spectrum. I think there are very specific needs there which have to be addressed in a very specific way, but the savings industry serves the totality of the population. The savings industry has within it areas where improvements can be made and I do not believe that those improvements should be specifically directed at one sub-segment.

Rob Marris

  27. I want to talk about simplification and consumer protection, which we have touched on this morning already because—I appreciate, Mr Sandler, you were not specifically just looking at pensions—there just seemed to be a difference of opinion between the two of you that I would like to tease out or clarify, because in his report, one of Mr Pickering's recommendations is greater reliance on pension professionals exercising and backing their judgment. This morning Mr Pickering said that he thinks that there is over-regulation in the pensions industry. You, yourself, in your report have said that sales regulation has driven significant improvement in the quality of advice and information provided by the retail saving industry and you also said commission driven selling of products remains the norm, recent research by the FSA found statistically significant evidence that advisers recommending one provider's offering over another because it paid a higher commission. I should say that at this point that I, like Mr Dismore, am a victim of Equitable Life, so you are aware of that, though they were not on commission sales as far as I know. Could I start with you, Mr Sandler, on whether you say there is a difference between the way the two of you are approaching the question of regulation?
  (Mr Sandler) I cannot answer the question. I do not think I have a clear enough view of the totality of Mr Pickering's position on regulation. I can talk to mine very happily and that is the statement that you referred to that improvements in the regulatory process have enhanced the quality of consumer protection in this country over the last 10 or 15 years, is absolutely the case. But importantly, it has come at a cost and that cost has been loosely the disenfranchisement of the lower end of the market. So I do not think—

  28. Sorry, is this because of the tripling of costs that you mentioned, the 10 per cent compound over 15 years?
  (Mr Sandler) Yes. That is another expression of it, but yes. So I am not proposing rolling back the frontiers of consumer protection. Absolutely not. What I am saying is that there is an alternative way of delivering consumer protection for a particular part of the market place and that is the proposal that has already been referred to in the evidence thus far.

  29. You also referred earlier this morning to regulating the product rather than the mechanism for distribution.
  (Mr Sandler) Indeed.

  30. To talk briefly about that, if I go and buy a car, the product is regulated in terms of safety and so on for buying a car. The means of distribution is regulated to some extent with consumer protection legislation, safeguards against dodgy dealers, but it is not protected a great deal because it is a fairly transparent product, a car. It seems to me that pensions, the risk of your approach, and I would like your comments on this, is that I end up buying a two seater car and I cannot get my family in the back, but I do not realise that for 30 years.
  (Mr Sandler) It is certainly true that the person who sells you a car, yes he may have certain requirements in law in terms of the way consumer law operates, but he does not have an explicit requirement to deliver something that is suitable to you and you do not have recourse against him if, in fact, the product proves to be unsuitable. Which is the way the sales of financial products currently are regulated in this country. I have no wish to prevent consumers from accessing the full suite of products that exist today through a regulated sales process. I would not wish to interfere with that at all. That is a perfectly satisfactory way of doing things for very many people in this country and it builds a degree of creativity and a degree of innovation into the way the financial industry operates and may it continue. However, the corollary of that is that there is a part of the market which does not get approached by the industry because it is not economic to serve that part of the market. If we do not do anything, then that part of the market remains unserved. So in addition to the present system, which is the regulation of the sales and advice process, my proposal is that there should be the offering, the delivery of a specific suite of very simple, plain vanilla, regulated products which come as close to being universally suitable as one can make them, in the same way that we have today a situation whereby life assurance is not sold on a regulated basis. There is no question of suitability in the sale of life assurance. In pure life assurance, the protection, there is no regulation of that process. There is no regulation of the sale of a bank deposit account. That is regarded as a universally suitable product. So if someone is sold a bank deposit account and it proves to be unsuitable, they have no recourse against the sales agent. What we can do here is create a suite of products which are, in terms of risk and return, one step up from a bank deposit, a low risk diversified product.

  31. You say low risk, but do you think that simplification will lessen consumer protection because that is the concern of some of those who have made written submissions to us?
  (Mr Sandler) I am not talking about simplification here as such. What I am talking about is regulation, regulation of the product. At the moment products are not regulated, except in extremis. There is a body of unit trust regulation.

  32. So you are talking about more regulation?
  (Mr Sandler) I am talking about a different form of regulation. I am talking about replacing sales regulation with product regulation for a particular part of the market.

  33. Would you agree with Mr Pickering's statement or suggestion that there should be greater reliance on pension professionals exercising and backing their judgment, from your experience of the savings industry?
  (Mr Sandler) The statement is disembodied. I would need to see the context to be able to respond—

  34. Perhaps we can switch to Mr Pickering.
  (Mr Pickering) Let me answer the question and then either Mr Sandler can say whether he disagrees with me or you can say whether you think he disagrees with me from what we have both said. Traditionally there have been two routes through which people have accessed pensions; either through the workplace or through the market place. I think that in future increasingly market place products will be delivered through the workplace for the reasons that I gave when answering Anne Begg's question that you get the economies of scale from delivery through the workplace. But if you just look at how both workplace and market place pensions are currently regulated, you will see that hard cases make bad law. So I am arguing for both less regulation and a different sort of regulation. For the workplace the 1995 Pensions Act was a political response to the Maxwell scandal. The Maxwell scandal was dire, in the short term at least, for those directly involved. But in the wake of the Maxwell situation we were subject to a Pensions Act which assumed that every scheme was a likely Maxwell. A very prescriptive approach to running and regulating a pension scheme, to such an extent where many employers are saying; providing a pension is expensive enough in itself, suffering all the compliance bureaucracy is a cost too far, so give the people a pay rise and scrap the pension scheme. It is a law of unintended consequences. The well intentioned Pensions Act created so much red tape that I would suggest that it would make it easier for a new Maxwell rather than more difficult, because he could sneak in behind the red tape and you would not see him coming.

  35. If you could pause there. I understand your argument about the law of unintended consequences. The 1995 Pension Act was designed not only for Maxwell but I think politically in terms of the pensions mis-selling that had gone on, with people switching out to find better vehicles—
  (Mr Pickering) That is the second—

  36. There is a balance there as to whether that restored the confidence in pensions because of the mis-selling and Maxwell and so people took up pensions, the other side of the balance is what you have talked about, the unintended consequences, the employers throwing up their hands and saying "This is all too much". Which do you think was the bigger effect? Do you think there are more employers throwing up their hands and pulling out or more people going back into the pensions market to buy because their confidence was restored by the legislation?
  (Mr Pickering) The evidence suggests that the Pensions Act has contributed to a significant level of dumbing down within the pension system as people indulge in regulatory arbitrage and move away from the more heavily regulated products, ie a defined-benefit employer-sponsored pension scheme, and replace it with a group personal pension plan where there is regulation of a different sort, but it is regulation which does not affect the employer to the same extent. I do want to come back to the market place issue and pick up on your comment of mis-selling because the way in which the market providers of pensions are regulated assumes that every seller is going to indulge in mis-selling. So we have exchanged the risk of mis-selling for the certainty of not selling. I would remind you that although many commercial providers might have abused the personal pension market place, the grand rules for that market place were created by politicians who, back in 1988 when personal pensions were launched, said that before you could take out a personal pension you had to give up membership of your occupational pension scheme. That was absolutely barmy. What we should have said is that if you want a personal pension plan, if you can afford it, then have both. It was because politicians, tax collectors, a combination of the two, said that we are not going to allow people to have both a workplace pension and a market place pension. But society has paid that awful financial cost for mis-selling and indeed society has branded the pensions industry as being the fiefdom of the mis-seller. A lot of that goes back to regulation which prevented sellers from selling personal pensions in addition to, rather than instead of, workplace pensions. Another example of over-regulation producing dramatically unintended consequences.

  37. So you want less regulation and more reliance on the professional selling the products, do you?
  (Mr Pickering) When I refer to professionals in my report, I refer to professionals in the round, not just sales people who should be more professional in the way they do their work, but also the actuaries and people who advise on the running of pension schemes. At the moment, because of the Pensions Act, we have a check list approach to running a pension scheme, to advising on a pension scheme. We are driving out professional ingenuity and replacing it by a tick box mentality. I do not mind tick box mentality, so long as the last box says "now engage brain". At the moment far too many professionals are being prevented from exercising their judgment because of the check list approach and pensions is not immune from that malaise.


  38. Would your position be characterised as saying that in your new Pensions Act, Schedule 1 of your Bill would repeal the 1995 Act?
  (Mr Pickering) Yes, I would like to repeal all existing pensions legislation for which the DWP is responsible and to pilot a new kind of Pensions Act, a Pensions Act which places the emphasis on what the Government wants to achieve through legislating, not to then flesh that out with page after page of prescriptive detail of how that achievement should be brought about. There may be some scope for prescription. Perhaps when one is dealing with priorities on scheme wind up, public policy may say that we want to impose a pecking order here. We are not blindly advocating a Pensions Act which is solely based on principle, but one which is mainly based on principle. Not only that, that any subsequent attempts to legislate for private pensions must be measured against the four key principles that we mention in the report; that it is proportionate, pointed and fits in with existing legislation.

  Rob Marris

  39. Just on that point that the Chairman was talking about, do you think it is the case, Mr Pickering, that if we replaced, for the sake of argument, 500 pages of regulation with a short new Pensions Act and 50 pages of regulation and a couple of codes of conduct, that that would increase or lessen consumer confidence? Or would it be that consumers would not even know, so it would not lessen the confidence?
  (Mr Pickering) I think, without sounding pejorative, that most consumers do not know that there is a 500 page Pensions Act. What consumers do know is that many of their employers are finding the going tough for running a pension scheme. Many commercial providers who used to knock on the front door to sell pensions are no longer doing so. If we can have a slimmed down Act of Parliament, not only will we provide focussed risk based regulation, but we will take an awful lot of cost out of the system so that a greater proportion of every pound spent on pensions is actually spent on pensions and not on red tape.

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