Examination of Witnesses (Questions 64-79)
MR DICK
SAUNDERS, MR
STEPHEN HADDRILL
AND MS
CHRISTINE FARNISH
25 APRIL 2006
Q64 Chairman: Welcome, and thank you
for coming. Can I start with you, Stephen, since you have been
quoted. The insurance industry successfully lobbied for and achieved
an increase in the price cap for stakeholder pensions to 1.5%.
Your proposal for a partnership pension is planned to operate
at an Annual Management Charge of 0.6% to 0.75%. What are the
main elements of cost that have been taken out of that system?
Mr Haddrill: The main elements
of cost that we have taken out is the commission charge. I think
the previous debate has shown that people are thinking that what
we want to do for the future is what we do now and have done in
the past, and that clearly will not work at the kind of charges,
whether they are aspirational or not, that Lord Turner has set
out. We think that the Turner model completely changes the landscape
and it has to change the landscape for how we sell into the market
as much as how our other savings are gathered forward. The main
reduction in cost is the reduction in commission and the reduction
in marketing expenditure.
Q65 Chairman: The point was made
about Standard Life and Trevor Matthews saying it is a basic flawed
business model. Are there others in the ABI that share that view?
Mr Haddrill: We cannot apply the
current business model to the NPSS—I think that is absolutely
right—and deliver the kinds of charges that Lord Turner
is saying, and so, from that point of view, yes, we would say
that the current model will not apply in that kind of market.
Q66 Chairman: Can I ask the other
two: what is good about your model and why should the Government
choose you?
Ms Farnish: If I may, I would
like to remind the Committee of the context of this debate. For
the last half century, 95% of people saving for a pension in this
country have saved through defined benefit, employer-sponsored
pension schemes where the only decision really they have had to
make is whether or not to join the scheme. The money has been
automatically taken out of the payroll and their money has been
invested; they have not had to worry about that. What they get
when they retire has been underwritten by their employer. By and
large, that system has worked very well but we all know it is
dying around our ears and it is not going to be there for the
future for people coming up to retirement for much longer. I think
we are at a pivotal point in this country in moving from what
has been largely a defined benefit world, where individual consumers
have not had to shoulder much of the risk in a system themselves
as individuals, to one of defined contributions, where an awful
lot of that pension system risk is on the shoulders of individuals.
It is absolutely right that Lord Turner has got us all debating
this crucial issue about how we design our future pension system.
The old world of DB pension schemes sponsored by employers is
not going to persist, but are we really going to move into a full-blown
world where consumers are completely on their own in terms of
the investment choices they make and the investment risks they
carry? I rather hope not. That is why we have come up with a model
which we think does protect the consumer interest, makes sure
consumers will get a fair deal, not just in the short term but
also in the longer term because we have some plurality in terms
of financial institutions, all of which are working in the consumer
interest, and a limited number who would be regulated in such
a way that none of them would deliver a bad deal, and who would
make sure that consumers got a reasonable return at a manageable
level of risk through pooled investment funds.
Q67 Chairman: Dick Saunders, does
that not make you a bit nervous that Mick McAteer has endorsed
your proposal?
Mr Saunders: I feel a bit like
a "Call my Bluff" panellist at the moment and whether
I come up with "bluff" or "truth", I will
ask Mick to call it! We support the centralised model proposed
by Turner, broadly speaking because we think that will best deliver
the objectives of the scheme. We think it will be the most simple
and straightforward for both employers and employees to deal with
because it gives them that single point of contact. From the point
of view of employees, what we know from experience of defined
contribution schemes and international experience is what employees
want is a really good default option. By setting up independent
governance by experts, independently accountable to Parliament,
charged effectively with acting as the investors' champion facing
the financial markets, we think this model best delivers that.
It also gives you the most effective competition. We have seen
in the institutional market how competition drives down fund management
costs. We have seen in the retail fund management market how competition
can drive down administration costs through outsourcing. So we
think it will be highly cost-effective. Finally, broadly speaking,
the infrastructure to carry this out is already in existence in
the market today and can be, as was discussed in the earlier session,
put out to tender.
Q68 Mr Todd: Can you explain the
distinctions in the administrative models that you are proposing,
without perhaps the characterisation that has been thrown around
in some of the debate on this? I am not quite clear exactly where
the various portions of administrative task are allocated in this.
Mr Saunders: Within the NPSS you
would basically have a single, centralised body, which is commissioning
the various administrative functions. You might well want to unbundle;
you might have a different provider, for example, for the call
centre from that which does your account admin. Within the centralised
model there are—
Q69 Mr Todd: Is there any particular
reason why that centralised administrative structure should be
run by the Government?
Mr Saunders: Absolutely not, no.
There are people out there who do this for a living now. There
are at least half a dozen providers in the fund management market
already. I think it is helpful to think about the NPSS as consisting
of three different elements. There is the investment management
element—the actual management of the assets—which
is very straightforward. We know what that costs; we know how
that can be done; we know that is easily scalable. There is the
admin element, which is running each individual account. That
again I think is a relatively low risk part of this because of
the number of providers that are already out there in the market.
The difficulty, and it is a difficulty that arises for all three
models, is around collection. There you do need to develop a new
function which does not exist today. That is the function of compliance
and verification. Mick touched on this in the earlier session.
You will need to create some machinery to ensure that employers
are complying with their legal obligations to make contributions
and to verify that the right contribution is being paid in respect
of individuals, and then those will need to be reconciled to make
sure that they are ending up in the right accounts. That is a
problem for all the schemes.
Q70 Mr Todd: That task must have
some relationship to Government because it is bound by law.
Mr Saunders: In many ways, if
we lived in an ideal world, which we do not, you would give that
collection function to PAYE and National Insurance. You would
simply piggy-back on National Insurance. The great beauty of doing
that, if you can, is that National Insurance/PAYE already has
the relationship with small businesses that we would be targeting
here. They already collect taxes. If you could use that same mechanism
to collect these contributions, you have the least burden for
small businesses. The trouble is, as I understand it and I am
not an expert on this, the current administrative systems surrounding
PAYE as they are today would have difficulty in taking on that
task over and above all the other things they are asked to do.
However, there is an issue about whether actually the present
systems of PAYE are sustainable long-term.
Ms Farnish: Might I add that we
already have very effective systems of policing employer contributions
into pension schemes, DC schemes and DB schemes. Those are policed
by the Pensions Regulator. I see no reason why you could not extend
that system, maybe with a check by her Majesty's Customs and Revenue,
to make sure annually that payments are made.
Q71 Mr Todd: Certainly those who
are investing in ISAs, for example, have to go through a verification
process which does not involve it going through the Government,
as far as I understand it.
Mr Haddrill: Can I run through
this? I think Dick Saunders is absolutely right. There are three
stages, in a way. The first stage is that the employer has to
work out how much to pay into the account of the individual. We
felt that that is very much like what an employer does on payroll
today, so why not use the BACS payroll system, if you like, to
move the money from the employer to the administrator effectively?
So a variant of the BACS, using the BACS but developing it, would
become the collection house. We do not feel that you need what
we think could be rather bureaucratic or an additional agency
to do that. There is also, as Dick Saunders was saying, a need
to verify that the amounts are right, and so on. There is a cost
in verification. The decision really is where does that cost lie
and who does it. It could lie largely with the employer, supervised
in some way perhaps by HMRC, or it could lie with the BACS, which
could take on an additional role, and that is what we have proposeda
sort of BACS+ with verification being done for training the BACS
and the employeror it could lie with the administrator. The key
think is that it is a cost and wherever you put it, that charge
will have to be picked up.
Q72 Mr Todd: You have criticised
the proposal (you may not have done so personally but the ABI
has) for setting up a quango of some sort. I am not clear where
this quango is of which you are complaining.
Mr Haddrill: The quango is just
the collection house, but we first thought that what Lord Turner
was proposing was that both collection and administration would
fall under the same system. I think maybe that was proposed initially
but the debate has moved on from there since then. Certainly I
think we are all agreed, on this table anyway, that the administration
bit should be done by the private sector because that is where
the systems are. We are saying more than that can be done by the
private sector, that the collection bit can be done, too.
Q73 Mr Todd: So the boundaries of
this administrative argument have shifted somewhat and we are
now talking about really quite a narrow area of where the state
may be involved and may not directly be involved either. There
must be some relationship to the state in terms of ability to
verify payments and make sure that they are complying with the
law, but other than that?
Mr Haddrill: I think it is fair
to say that if the Turner model is that wide, then we are arguing
about this bit in the middle. There is a huge amount of agreement
about NPSS and I do not think we should lose sight of that fact
as we debate it.
Ms Farnish: One of the differences
between us, I think, is who purchases the administrative services
from the wholesale market. Most pension administration services
are outsourced at present, whether they are occupational schemes
or personal pensions. In both the IMA's model, Turner's model
and the NAPF's model, there is an independent body purchasing
services on behalf of the consumer. With Turner there is one;
with the NAPF there are around 10, to give some diversity and
innovation in the market. I do not think that is true of the other
model that has come out of the insurance industry.
Mr Haddrill: What we are proposing
is that people are licensed to be providers of the collection
and administration process and that we need a regulator to do
that. That person would also regulate other issues, such as the
level of marketing and so on. We recognise that there needs to
be some governance, that there needs to be some accountability,
but that accountability can be delivered by licensing people to
come into the system.
Q74 Mr Todd: To perform a variety
of administrative tasks?
Mr Haddrill: To perform the collection
of the money and the administration and to demonstrate that they
are sound entities.
Mr Saunders: One key distinction
in this that I think needs to be teased out is whether you have
single or multiple providers. Once you are in a world of multiple
providers, you have a problem when people change job. Does the
individual carry the provider with him to his/her new job, in
which case the employer quite rapidly finds himself in a situation
of having to deal with a number of different providers? Or, when
the individual changes jobs, does he move to the scheme of the
new employer, in which case he might then find himself in the
position of having a number of different accounts representing
different periods of employment with different employers? That
is a complication of any system which has multiple providers in
it. If you want to do away with that and get universal portability
into this, then the way to do that is by having a single interface
for both employers and employees.
Q75 Mr Todd: I entirely understand
that point but I think that is really a challenge to the ABI to
explain, other than defending your members' interests, which I
can understand is your job, what possible advantage there could
be in having a multiplicity of providers offering a variety of
clear back-office functions.
Mr Haddrill: I will come back
to that in a second. If you go back 50 years—
Q76 Mr Todd: We have not got time
to go through 50 years.
Mr Haddrill: I am not going through
history. I am just going to make the point that 50 years ago many
employers tried to persuade all their employees to sign up with
a particular bank. That just is not the way of the world today.
I think we have moved on from that point of view. We feel that
there is a risk associated with having one agency. That agency
may fail. A multiplicity of agencies reduces the risk. We feel
that the way in which these systems operate—
Q77 Mr Todd: That is dealt with,
if I can interrupt, to some extent with the NAPF model, is it
not, which has a diversity, but a rather limited one, to preserve
risk control and some competitive edge in back-office functions.
Is that right?
Mr Haddrill: I am not sure there
is much difference between us in terms of the number of players
we expect coming into the market between the NAPF and the ABI.
Q78 Mr Todd: I assume the other reason
is that you think that your members have something to offer the
world in their back-office function problem. I must admit that
as a consumer I have not spotted that myself.
Mr Haddrill: They have built the
systems. They are operating them now. They have the capacity to
provide those into the market. They are taking in, either in new
money or recycled money, about £150 million a day. Although
a lot of people have a bad impression of the industry, I accept
that entirely, it does operate, and they are paying out £250
million a day.
Q79 Mr Todd: There is, surely, a
viable model which says that competition where it exists—there
is a debate about the scale of this within back-office function
and you may be limited there—lies in the products themselves,
the components of the investments that will make up the pension.
I think there is some debate about the range of competition.
Mr Haddrill: The cost of doing
the management function has come down from about 2.5% to about
1% over the last 10 to 15 years. So competition I think does drive
costs down. I am sure that if we have one provider, we would not
see that.
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