Examination of Witnesses(Questions 20-39)
MR ALAN
PICKERING AND
MR RON
SANDLER
6 NOVEMBER 2002
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.
Chairman
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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