Examination of Witnesses (Questions 120-139)
MR CLIVE
BRIAULT AND
MR DAN
WATERS
3 MAY 2006
Q120 Chairman: Ned Cazalet, when
he appeared here last week, described the current sales approach
for life insurance personal pensions as "fundamentally flawed".
Indeed Trevor Matthews of Standard Life is on record as saying
that the business model is flawed and outdated. Do you think that
these flaws, including the reliance on commission, are eliminated
under the ABI scheme?
Mr Briault: Some of them could
be eliminated, yes. Again it does depend on the precise design,
but because, in the ABI scheme, the choice for consumers could
be made directly by consumers based on product information about
the various funds, then you may be able to do that without advice
intermediaries. I think where you get into greater problems of
the type to which they refer—
Q121 Chairman: Yes, but do you think
it is possible, as the ABI claimed here last week, that the commission
incentives are all removed in the scheme they are proposing?
Mr Briault: Well, they are removed
as long as consumers do not feel the need to take advice from
independent financial advisers in order to make the choices which
they are required to make under that scheme. They do not have
to, they are not obliged to, but, if they decided to because—
Q122 Chairman: So, if people are
given choices to make, but there is no advice, can you imagine
the pickle people would get into there, but then, if there is
choice, is there not advice for that?
Mr Briault: Well, I think it depends
if people want to take advice, and I do not think the ABI scheme
is insisting that people do take advice. I think their vision
is that the employer does most of the choosing on behalf of the
employees and, therefore, the employees do not need to take advice
because that is all done for them by the employer, in which case
the consumer may be faced with a very limited choice. I think
it does depend crucially on whether it is the consumer taking
a choice amongst a multiplicity of funds or not—
Q123 Chairman: But that has to be
fleshed out—
Mr Briault: Yes, that is a detail
which is very important.
Q124 Chairman: But that is a preliminary
statement and it has got to be fleshed out.
Mr Briault: It has, yes.
Q125 Chairman: The NAPF proposal
would offer employers a choice of super-trust, as we know.
Mr Briault: Yes.
Q126 Chairman: Do you think a model
of this sort has any implications for FSA regulation?
Mr Briault: I think we would see
the NAPF model as falling more within the occupational pensions
model which would then fall primarily to be regulated by the pensions
regulator.
Q127 Chairman: Back to the point
we were making before, you are saying if employers make the choice,
so are employers in any sense then consumers requiring protection
from unduly complex product features, particularly given that
many employers using the scheme would be small businesses?
Mr Briault: We would not see employers
as being in the same position as individual retail consumers,
no. Clearly, however, you would expect employers to be provided
with information about the different funds available across which
they need to make the choice as to which fund or funds to make
available to their employees, but we would not see that as something
which we would regulate, no.
Q128 Chairman: But are they not in
a sense, consumers then if they are faced with choices?
Mr Briault: Well, if the consumers
are faced with choices—
Q129 Chairman: No, the small businesses
would be. You can imagine small businesses coming to us and saying,
"Wait a minute, we don't have time to look at that stuff.
We are out here to make a living, so what do we do?"
Mr Briault: I think all we would
say there is that it is for those small businesses and, yes, they
would have to make a choice, if they were required to do so under
the scheme, if they were presented with five or six different
funds and told, "You need to choose one of those funds".
Q130 Chairman: Therefore, they could
require protection from unduly complex product features?
Mr Briault: I think what they
would require is a sufficiently simple explanation of the competing
funds so that they could exercise a sensible choice. I absolutely
accept your point, that there will be some businesses who are
better prepared, better able to make those choices than others.
Q131 Chairman: But it could become
a matter of concern for the FSA standing on the sidelines, looking
at this, saying, "Look, this system is getting nowhere. We
are getting more confused and some small employers need some protection".
You could envisage yourself asking that question one day?
Mr Briault: I could do, yes, and
at the moment it is true to say that small employers already may
face that choice in terms of deciding what sort of pensions to
offer to their employees.
Q132 Mr Gauke: Could I return to
one of the factors you mentioned in determining the level of regulation
that would be necessary here, which is the one of means-testing.
Is it your view that, if the NPSS is going to be offered without
regulated advice, it is necessary for the level of means-testing
to be reduced, that that has to be government policy in order
to achieve that?
Mr Briault: Well, we are saying
that we would regard that as an important element. I do not think
one should over-exaggerate the impact. I think it is probably
true to say that, even with a degree of means-testing, for the
vast majority of employees it would still make sense to save through
something akin to the national pension scheme, as envisaged, but
clearly the greater the impact of means-testing, the greater the
possibility that saving in that way would not be suitable for
that individual because they may find at the end of it that they
are not well off because they have lost the means-tested element
because they have saved through the pension scheme, so the greater
the potential impact of that, the more concerned we would be about
whether or not saving in that way was likely to be suitable for
all individuals. That would then require, if the means-testing
was significant and important, some way of trying to alert those
particular employees to the possibility that it may not be in
their best interests to save in that way and, if that is the case,
one would then have to consider how that information can be sensibly
and effectively provided to them so that they can exercise sensible
choices.
Q133 Mr Gauke: Would you say that
it would be essential, or maybe that is too strong a word, or
at least helpful to you for the Government to determine its policy
with regard to pensions and means-testing before you determine
the regulatory regime which will apply to the NPSS?
Mr Briault: It would certainly
be helpful for the reasons I have set out, yes.
Q134 Mr Gauke: Would you go further
and say it was essential or merely helpful? How important is this
in helping you determine what you need to do because it is clearly
a factor?
Mr Briault: It is important, but
it is quite difficult to judge when looking at the scheme alongside
all of the various possible reforms to the state pension scheme
which have been suggested both by Lord Turner and other commentators.
One can see ways in which the state scheme could evolve in a way
which would limit the impact of means-testing and, therefore,
limit the extent to which we, as regulators, were concerned about
the possibility that people might be entering into things which
were not suitable for them and other ways in which it could go
which would make us more concerned. I should also say that part
of that balance is the extent of any employer and taxpayer contribution
to the scheme because again the larger that contribution over
and above the employee's own contribution, the less significant
the means-testing element becomes.
Q135 Mr Gauke: Just turning to the
levels of regulation that would apply here, if, in your view,
it was not necessary to have, if you like, regulated advice in
respect of this, how would you go about dealing with the suitability
issue? What would be the requirements you would be looking for
and what sort of suitability information would need to be provided?
Mr Briault: I think the main requirement
then would be information provided to employees preferably through
the employer because that would reach them directly so that employees
had set out very clearly for them the sorts of considerations
they might want to take into account in deciding, first of all,
whether to opt out of the scheme because there may be some people,
for example, who are heavily indebted and who may be better off
using the contributions to repay debt rather than contributing
to a scheme, or there may be an element of the means-testing point
which would need to be explained to them and also, if consumers,
and that is an `if', were faced with choices about which fund
to invest in, they would also need the information to help them
make that choice. That could be pretty minimalist in the sense
that it might be no more than a very clearly written information
leaflet which made clear to consumers what factors they need to
take into account when making those choices. That would not be
a regulated advice regime, but that would essentially be a consumer
information regime.
Q136 Mr Gauke: Just coming back to
the second factor which you mentioned, which is the employer's
contribution which you repeated again there, under the stakeholder
plan non-earners can pay up to £3,600 per annum, although
clearly there is not an employer's contribution there. Do you
think similar arrangements should apply to the NPSS because you
will not have an employer's contribution and, therefore, is there
a need for regulated advice in those circumstances?
Mr Briault: I am not quite sure
which aspects you mean.
Q137 Mr Gauke: Well, if there is,
for argument's sake, an NPSS option for non-earners, clearly there
is not going to be an employer's contribution in those circumstances,
so, given that, do you think regulated advice would be necessary
in those circumstances?
Mr Briault: Clearly it becomes
more difficult in those circumstances because being able to rest
on the assumption that it is likely to be suitable to the employee
is clearly a weaker case in a world in which the employer is not
making a contribution, and that may be one of the factors behind
the take-up of stakeholder pensions. The take-up of stakeholder
pensions tends to be much stronger in cases where the employer
not only offers a stakeholder scheme, but also makes a contribution
on top of it.
Q138 Kerry McCarthy: If we can return
to the question of consumer choice, do you think a significant
proportion of consumers have got the financial awareness to make
choice a desirable aspect of any NPS Scheme?
Mr Briault: I think most consumers
would find it extremely difficult to make many of the choices
offered to them under the more complex variants of the scheme,
and that is why we think that that complexity and element of greater
choice could also have the effect of leading us more into something
akin to some form of regulated advice. Our own recent baseline
survey on financial capability, for example, showed that, I think,
81% of consumers do not think a state pension will provide them
with the standard of living they hope for in retirement. But,
of that 81%, 37% have not made any additional pension provision,
so I think, even where people have recognised the need to increase
their pension provision, many have failed to do so which suggests
that there is some difficulty in people spotting what is available
to them and what is best for them.
Q139 Kerry McCarthy: You have a statutory
objective to promote understanding of the financial system.
Mr Briault: Yes.
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