Examination of Witnesses (Questions 40
to 59)
MR MICK
MCATEER
AND MR
NED CAZALET
25 APRIL 2006
Q40 Peter Viggers: In your paper
you move broadly to the conclusion that the NPSS-style pension
scheme is by far the best solution to the pensions challenge the
UK faces and then, Mr Cazalet, you are much more critical. Have
you separately addressed the issues of compulsion in saving and
also the effect of means testing?
Mr McAteer: Each of the models
that are being proposed at the moment all face challenges when
it comes to means testing. The position we have taken on means
testing is that, whatever happens, more clarity will be needed
between existing state benefits and private sector savings. I
do not think any of the models are immune from the means testing
question, but none of the models offer any advantage or disadvantage
when it comes to the relationship with state benefits. Whenever
we say we think the NPSS or the IMA model is the best one, what
we mean is for people who do not have access to decent employers'
pension provision. This is a crucial point. This is for people
who do not already have access to good employer schemes. We certainly
would not want to imply that it is better than the existing employer
pension provision.
Q41 Peter Viggers: And compulsion?
Mr McAteer: We actually went further
than Lord Turner. We have always supported full-scale compulsion
along the Australian model actually. We recognise that the proposals
in the Pension Commission report were, I suppose, an acceptable
compromise to get it off the ground. We actually advocated full-scale
compulsion.
Q42 Ms Keeble: I wanted to ask some
questions about regulation and particularly the purpose of the
FSA. What role do you see for the FSA in regulating a National
Pension Savings Scheme?
Mr McAteer: In relation to the
scheme itself, I would imagine that this would sit naturally better
with the Pensions Regulator role than the FSA itself. Again, it
depends on which particularly model is chosen for delivering the
NPSS. If the Government went for the ABI model, I think that would
have to be FSA as the lead regulator. If it went for the NAPF
model, I would imagine that would be closer to the Pensions Regulator,
and similarly if it went for an IMA style model, I would think
the governance and the legal relationships would be overseen by
the Pensions Regulator. Like most UK regulations, it is quite
complex. Ultimately, whichever model is adopted, the investment
professionals will still be regulated by the FSA anyway because
they will be authorised investment professionals and it is the
FSA which has the responsibility for actually regulating those
people as individuals.
Q43 Ms Keeble: Would you like to
run through some of the main safeguards that you would want to
see put in place, either if we go through the Turner model or
some of the key safeguards you would want to see if one of the
other models were adopted?
Mr McAteer: Again, the process
of this is a hugely important aspect when contrasting the different
proposals. We looked at the legal ownership issues; we looked
at the regulation; we looked at the governance, all of the three
models. Again, starting at the farthest end of the spectrum, we
thought the ABI proposals represented just too much risk for ordinary
consumers because, from what I understand, and maybe they have
changed their position on this, certainly at the last big open
meeting that the DWP held—
Q44 Ms Keeble: Can I just say that
I do not want so much about the risks but what regulatory and
safeguards should be put in place?
Mr McAteer: Whatever regulation
is needed should be designed to address these risks, which is
why I am explaining where we see the main risks lying. From my
understanding, the ABI model expected the sales process would
be unregulated in their proposals. Therefore I think that is an
appalling vista: to allow an army of insurance company sales people
to run around the workplace selling their own version of partnership
pensions is completely unacceptable. You would clearly need a
regulated advice process or a regulated sales process. You would
need regulated advice as well because, as I said earlier, you
have such a huge number of options under the ABI proposals. You
would then need financial advice to help people make the right
choices. In turn, that would further add to costs and further
complexity and so on. The other issue is that what we quite like
abut the NPSS model/IMA model and the NAPF model is that the governance
of those schemes I think is much more preferable than the ABI's
model because you have people with a legal duty to look after
the interests of the scheme members. I am afraid that is just
not there in insurance company products where, under insurance
company law, the legal ownership of the assets belongs to the
insurance company. Because of the listings regime, the shareholders
of those companies have a specific legal duty to their shareholders.
They do not have duty to consumers. Again, in terms of legal protection
and governance, we think the NPSS or the NAPF model is preferable.
Q45 Ms Keeble: Can I come back again
because the regulatory aspect is incredibly important for consumer
confidence and therefore the public's willingness to actually
put money into pension schemes. That is why it is so important.
It seems that one of the problems is that the regulations, particularly
for the consumers' role, are at the front end of buying and advice
and so on, whereas the fallout if things go wrong is a long way
down the line when people do not have many options. Often it is
not dealt with by the regulator. It is, it seems, both for the
private pension and the occupational pensions, to have been dealt
with by the Ombudsman. They are the people who have actually highlighted
the issue and put pressure on for things to be resolved. Is there
any way that you can see, even with the NPSS model, that there
can be some real improvement in regulation, and not just through
advice, which is actually very difficult to regulate for, that
there can be a real improvement in regulation such that people
will feel confidentI know it is incredibly hard to structure thisbut
where there would be some come back, other than people, once they
are retired and have run into difficulties, going to the Ombudsman
and then trying to feed changes in that way?
Mr McAteer: I think you are absolutely
right that the regulation and the legal structure is fundamental
to consumer confidence. We know how little consumers trust the
financial service industry and unless the regulation is robust
enough to maintain consumer confidence, then we are just not going
to have sustainability.
Q46 Ms Keeble: But that is going
to apply even it is perceived to be a government issue?
Mr McAteer: What I found interesting
was that our research was tested on three different models in
terms of consumer trust. We found that the Government was trusted
twice as much as the insurance industry to run pensions. All this
talk about straw men and nobody trusts the Government and so on,
I think is a bit of plague in both your houses at the moment,
to be honest. The idea may be that the Government is trusted least;
the insurance industry is trusted even less than the Government.
The model that was trusted most by far was the NPSS/IMA model.
Independent people, with a legal duty to look after your interests
and so on, with the limited range of choices, I might add, were
also very attractive as well. Consumers do not want all this additional
choice but the one thing they do fear is handing over yet more
of their life savings to the same people who mis-sold them endowment
policies, mis-sold them personal pensions and so on. Unless we
actually do built a new type of pension system, then we are not
going to maintain or restore confidence, and therefore sustainability
in the wider pension system.
Q47 Ms Keeble: There is just a small
question on the issue of consumer choice. There are very strong
views amongst the public about ethical investments now. Would
you see that as being something that, if we have an NPSS mode,
should be taken into account?
Mr McAteer: I do not think it
would be right to offer any ethical option as one of the core
funds, but I would certainly see room for offering some sort ethical
choice on top of the core fund. I do not think it would fit as
one of the core four or five funds that would make up the basis
of the NPSS. It is a bit like the same choice that we face as
pension fund trustees. We do not think it is right to impose ethical
choices on the rest of the scheme members.
Q48 Mr Gauke: Can I ask about the
relationship suitability and means-tested benefits? I do that
in the context of the FSA announcement that seems to say that
if you want to be in a position to avoid the need for regulation
and advice, the product needs to be nearly universally suitable.
If it is going to be universally suitable, you need reform of
the means-tested state pensions. Do you agree or disagree with
that analysis?
Mr McAteer: I certainly agree
that this could be difficult for any of the models to work unless
there is greater clarity between state benefits and private savings.
We are not in the business of actually saying what level should
means-tested benefits be or what the basic state pension should
be. That really is a social policy matter and we cannot really
comment on that. There is no question that greater clarity would
help consumers make long-term choices more effectively.
Mr Cazalet: I cannot see how you
could possibly operate this model, any new model, if you have
means testing. There will be a substantial number of people who
simply should not do this and for you to work out whether you
are one of those people is fantastically complex. I was at Downing
Street two years ago when John Hills of the Pension Commission
stood up, with all his clever `professorology', and explained
in using any 14 or 15 slides how to make a decision whether you
should be in the scheme or not. People simply are not going to
do that. I cannot see how you can combine the two things. The
one other thing which people do not mention is that people talk
about saving, but for those families that are couples with children,
25% of them in the UK have no savings whatsoever, and the next
25% all have savings of no more than £1500. There is a question
that if you have no savings whatsoever, should the first savings
that you make be a pension scheme that locks it up for ever? If
you look at the socio-economics and demographics, increasingly
you have an indebted society and increasingly you have younger
people that have debt because of university. They find it difficult
to get on the housing market and so forth. If you think they can
combine that with either hard compulsionsaying you are all in,
you are all locked inor this trawler where you are dragged in
unless you wriggle your way out, I can see that has the potential
for being very messy. Going back to the original point about persistency,
if people do sign up and find that their means are so limited
or find that actually this probably is not the best thing, you
should not expect persistency to be dramatically better than it
is now. In fact there are a lot of indicators that say that it
could well make some part of your customer base on this type of
scheme a lot worse than it is. That goes back to the viability.
Yes, if you want compulsion—and I am not arguing for compulsion,
it is a political point—then you can run this sort of scheme
and lock everybody in. You need to get rid of means testing, and
you make it very clear for people to make that decision or you
make it very straightforward to stand up as a politician to say,
"This is what we are imposing upon you. This is why it is
good for you". There is too much grey area around means testing
for my liking on this. I cannot really see how you can possibly
trawl everybody in and say, "Regardless of whether this is
a disbenefit to you because of the impact on—
Mr McAteer: This is where the
employers' matched contribution is so important for people.
Mr Cazalet: That is the other
leg the FSA identified.
Mr McAteer: Some people have been
arguing for employers not to be auto-enrolled into this system
and not have to matched contributions, but I think that clearly
would change the economics for people on lower to average incomes.
Q49 Mr Gauke: When you talked about
clarity with regard to means testing, do you mean by that clarity
as to exactly where means testing is going to apply or are you
saying that actually the problem is how many people get means-tested
benefits and it needs to be fewer people?
Mr McAteer: I think where it actually
applies it is important that consumers are able to understand
fairly clearly when it makes sense to save. It is as simple as
that. We would not recommend a particular limit or a particular
level. That really is a social policy decision. Means testing
was brought in for a very different reason.
Q50 Mr Gauke: Under the stakeholder
plans, non-earners can pay up to £3,600 per year into a stakeholder
plan. Should similar arrangements apply with the NPSS? That comes
back to your point, Mick, about the employer contribution? How
would that work, if it did, in particular with regard to suitability
and advice? How would that all work together?
Mr McAteer: I think the beauty
of the NPSS type structure is that because you have a single account,
what we call the personal or retirement account, that means that
if the Government so wished and the Government was worried about
people on the lowest incomes, then they could contribute on their
behalf or else other people could contribute on behalf of their
dependants and spouses and so on. The idea of having that single
account is very attractive in terms of administrative efficiency
and in terms of keeping costs down. This idea of persistency is
incredibly important again but do not forget that if you have
a single account, then at least the money is there. It is not
actually being switched from pillar to post with different insurance
companies, insurance company A to insurance company B, with all
the attendant costs. It still stays there in your account and
it is still run by the National Pension Saving Scheme. That structure
makes it much easier for people, disadvantaged consumers, to be
supported to some alternative to means testing.
Q51 Kerry McCarthy: On Stakeholder
pensions, and we have touched on it in a number of instances already,
what would you summarise as the key lessons to be learnt?
Mr McAteer: A lot of people have
said that Stakeholder has been a disaster. I think actually Stakeholder
has succeeded on two of its three main objectives. I remember
very well the original concept of Stakeholder. I remember very
well why it was introduced in the first place and it had three
clear objectives: one, to try to bring some kind of competition
into the life insurance sector; two, it was meant to try to banish
the chronic mis-selling within the pensions industry; three, it
was meant to make pensions affordable so that people on lower
incomes could save for the future. On the first two counts, it
I has been a fantastic success. It brought competition into the
sector for the first time, and it made mis-selling nearly impossible
under a properly regulated sales process. I am afraid it did not
achieve the third objective; it did not extend the saving habit,
not because the price cap was too low or anything like that but
because people could not afford to save. They had lost trust in
the industry. Fundamentally, the economics of the retail model
of the insurance industry meant that it could never sell to the
Government's target market anyway. I think the main lesson for
the Government is that if it gives in to the ABI now, then we
will just see a repeat of Stakeholder pensions within the National
Pension Savings Scheme. I think that is a huge political risk
for the Government. What I fully expect is that the ABI will come
forward with some very eye-catching charging level for the National
Pension Savings Scheme. They will try to claim that they can run
it on 0.6% or 0.8% or whatever, and they will say that is a significant
advance. Believe me, once they get their foot in the door, then
in five years' time you will see all of the charges just creeping
up again and always creeping up. By that time, it will be too
late for the Government to stop what it is doing, dismantle what
it is doing, and start again. I am afraid if they do allow this
ABI this open market model to get its foot in the door, it will
create a real hostage to fortune. That is the biggest lesson from
Stakeholders pensions. Giving in to the producer interests at
this stage is really going to create a hostage to fortune.
Mr Cazalet: When Stakeholder came
in, we wondered what on earth life assurance companies were doing
planning to run this. We said, "This will not make you any
money; if you do it, we will go and hit you round the head".
Three years down the track, having said, "We are going to
make money on it", they said, "We cannot make money
on it. Please put the charges up". So I guess that gives
you some insight into some of the thinking that goes on, I am
afraid, with some of our clients in the insurance sector. The
challenges of trying to sell anything via a distributed network
from those sorts of charges are almost insurmountable, particularly
in the mass market. I think the key economic thing is that, in
the change in the landscape in the last 10 to 15 years, we are
in a low inflation environment. That will mean over a period of
time that the sort of returns you will get on core asset classes,
equities and bonds, are going to be double digit numbers. Before
Stakeholder came in, it was typical for charges or the impact
of charges on a pension plan to be the equivalent of reducing
the rate of return to the saver by 3% or maybe 4% per annum. That
clearly had to change. In that sense, the Stakeholder concept
was a very good idea actually in the sense of saying, "It
clearly cannot be beneficial to consumers to have a substantial
part, if not the greater part, of their likely return gouged out
in terms of costs". So, low inflation, this environment we
are in, itself demands, leaving aside all the other political
and social objectives, that we have a structure that leaves some
benefit on the table, otherwise all this running around trying
to create schemes if the charges are high—and we are now
in a situation of 1% or 1.5%—actually takes out a big chunk
of what you might expect from any managed fund. So there is this
sort of balance. If you are going to build something, is it genuinely
beneficial to the consumers or should they simply stick their
money in the building society and have a pension wrapper round
there, because you could do that if you wanted to. I guess that
we needed, and we do need, to keep a clear eye on what this is
all about: it is trying to provide a benefit to the consumer and
not simply keep the lights on for the benefit of some sort of
prehistoric industry. It is a huge challenge. Given that the industry
clearly did not understand how to add up when many players said
they could do this at 1% and what you needed was scale, which
was ridiculous, we said, "Look, you are saying that actually
you cannot really make any money this but if you would write lots
of it, then you will make money". How did that work and why
was it that three years down the track a lot of people threw their
hands up and said, "Of course we cannot make any money"?
Three years at university with an actuarial degree and seven years
of exams and you cannot work that out! These guys have a form
for really not getting the numbers right. What we find fascinating,
without necessarily mentioning names, but the Chairman mentioned
Standard Life which have been very public in saying that this
model does not work, is that we can think of three, four, five
or six other substantial names that say the model is not going
work and "We simply cannot do it and therefore we are not
going to pretend". You have this great split going on at
the moment with what Mick may refer to as the ABI, but I cannot
imagine the ABI really represents all of these people, saying,
"Frankly, this is not what we should be doing. This does
not make money for us. We cannot add benefit to the consumer".
You have a whole bunch of other guys that are saying, "We
must keep the show on the road". Having those two polarised
views is quite fascinating to watch because they cannot both be
right. I think you will find that out and how long it is going
to take for people just to drift away from this, but that does
leave the question about who serves the consumer. It is all very
well to say the insurance companies cannot cope but they have
spent £30 billion in the last four years. In fact in the
last four years they have spent about £17 billion on trying
to write pensions business alone and that does not seem to stack
up. With all that money being spent year after year after year,
how can you deliver consumer benefit? I think we are in a real
change in our sector. You are seeing that with just things like
what is listed on the London Stock Exchange. You have companies
like Resolution Life. What are they? They are sort of the Wombles.
They have picked up the scraps and they put them into a big basket.
The model is changing and people are starting, as you have heard
from Standard and others, to re-think and to ask, "Does this
actually make sense?" We are a long way from everybody holding
their hands up and saying, "Yes, this does not work".
For as long as you have people pretending they can do it, they
clutter the airways with their thinking.
Q52 Kerry McCarthy: The price cap
is up for review in 2008. Do you think it should be reviewed by
an independent regulator or should the Treasury legislate on this
decision?
Mr McAteer: It is a difficult
question. It all comes back to Ned's point here, does it not,
because if you calculate the price cap and you start off by saying
that most of the industry needs to make a profit, then you will
end up with a higher price cap. As Ned said, they are just not
efficient enough to deliver pensions at a level that makes sense
for consumers. Whoever does it will come to the same conclusion
if you start from that premise. The fact is a price cap is more
than enough for them to make money at the higher end of the market,
which is where they are going to sell to anyway. The only reason
they want a price cap to go up is so that they can extract more
revenue from people on medium to higher incomes. They are not
interested and have never been interested in the lower to average
income earners.
Q53 Jim Cousins: Mr McAteer, I just
want to check that I understood something properly that you said
earlier on. Did I get it right when you said that under your scheme
you would not allow transfers out of NPSS?
Mr McAteer: No. I would imagine
complete flexibility. I think it would have to be flexible.
Q54 Jim Cousins: So there would have
to be transfers in and transfers out?
Mr McAteer: Yes. The point I was
making about transfers in was that I think, in terms of valuing
the amount of money being transferred from, say, a defined benefits
scheme, the NPSS would have no business having a say on that.
That would be a matter for the scheme trustees and the regulator
and the individual scheme member. I think the NPSS would have
to be set up to be flexible enough to allow transfers out and
transfers in.
Q55 Jim Cousins: I am grateful to
you for that. The other point is this. Coming back to what you
called a social policy point, if NPSS was launched in a context
in which the basic rate of state pension was at level X, and at
a later date a future government decided that the basic rate for
state pension would be at level X minus 25%, how would your scheme
cope with that?
Mr McAteer: I would imagine you
would have to raise the contribution rate to offset the difference.
Those kinds of changes to state benefits and so on affect each
of those models in the same way because these are essentially
second tier private savings models to build on the provision from
the state. If the state provision is altered in any way, then
clearly that has a knock-on effect on the second tier private
savings. Are you asking how to make up the gap?
Q56 Jim Cousins: I am just asking
how your scheme would work.
Mr McAteer: In any of the schemes,
I presume people would have to save more. If the level of state
pension was decreased, then you would have to save more to make
up that joint level of income.
Q57 Jim Cousins: Your view presumably
would be that the NPSS in any form could only be introduced if
Turner's recommendations about the basic state pension were put
into effect?
Mr McAteer: I am saying that there
would need to be greater clarity about the interaction between
state benefits and—
Q58 Jim Cousins: I am sorry, Mr McAteer,
you have consistently dodged this point in your replies.
Mr McAteer: Yes, because we are
a consumer organisation, we are not—
Q59 Jim Cousins: You are advocating
something, and I think the context of what you are advocating
has to be made clear. Does your scheme depend on the Turner proposals
for the basic rate of state pension being implemented or would
you or could you consider a situation in which NPSS was put into
effect but the Turner changes in the basic rate of state pension
were not implemented?
Mr McAteer: Yes, I could.
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