To be published as HC 768-v

House of COMMONS



Work and Pensions Committee

Governance and Best Practice in Workplace Pension Provision

Wednesday 23 January 2013

Steve Webb MP, John McCallion and Bridget Micklem

Evidence heard in Public Questions 285 - 361



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Oral Evidence

Taken before the Work and Pensions Committee

on Wednesday 23 January 2013

Members present:

Dame Anne Begg (Chair)

Debbie Abrahams

Mr Aidan Burley

Jane Ellison

Graham Evans

Shelia Gilmore

Glenda Jackson

Nigel Mills

Anne Marie Morris


Examination of Witnesses

Witnesses: Steve Webb MP, Minister for Pensions and Officials, John McCallion, Deputy Director, Pensions Protection and Stewardship and Bridget Micklem, Deputy Director, Private Pensions Policy and Analysis, Department for Work and Pensions, gave evidence.

Q285Chair: Can I welcome you in front of us this morning, Ministers, as part of our inquiry into pensions and governance? I wonder if you could begin by introducing yourself and your team for the record.

Steve Webb: Thank you very much, Chair. Good morning to the Committee. On my right, I have Bridget Micklem, who is our Acting Director of Private Pensions, and on my left I have John McCallion, who heads up the pensions protection and stewardship work of the Department.

Q286Chair: You are very welcome this morning. Can I begin with some questions around NEST? Thank you for agreeing to take account of a mini-report that we are going to publish ahead of our full report on this particular issue because, obviously, you are consulting on the issue at the moment. What evidence would convince you to lift the restrictions on NEST-not all the restrictions but the ones that have been most controversial in terms of the limit and transfers in and out?

Steve Webb: We see NEST as a means to an end, not an end in itself. We do not want NEST to have 1 million or 5 million or any particular number of members. What we want is an effectively functioning private pensions market. We think NEST is a crucial part of that. We think there is already plenty of evidence that it is having an effect in terms of driving down charges, improving standards, innovating. We think it is doing an important and good job. The test for us is whether that continues to be the case as the market develops. At the moment our sense is we are in the early days of autoenrolment; it is the huge firms; they can shop around; everyone is dying to get their business; there is plenty of competition. The worry would be that as we move further down the market, we find that providers are less interested because it is less profitable business. We find that people cannot go to NEST or will not go to NEST because of the constraints and employers end up with a very limited choice, if any; they may end up with one provider or possibly even only NEST and NEST is constrained. As a result, the employees are not getting the best value that they could from a competitive outcome. That is the test for us. If we think the NEST constraints are leading to consumers suffering adverse outcomes, then we would want to look at whether we lift, as you say, one or other or more of the constraints.

Q287Chair: But you would need a crystal ball to be able to foretell whether that is actually going to happen. It is very difficult to have evidence today that that is what will happen in the future, but if you do not lift these restrictions today then what you have just foretold could happen in the future. So how do you square that circle?

Steve Webb: Yes, sure. One of the things that is good about autoenrolment is the lead times. The best advice for an employer is: 12 to 18 months out, start preparing for autoenrolment. So, we already are starting to get an early sense of what firms whose staging date is not until 2014 are starting to think about. I have not seen the evidence that NEST will supply to our call for evidence, but I have already heard informally that they will be able to cite firms who would have chosen them or who would have considered them but for the constraints. But we are also, as the market develops, looking at outcomes. So where are employees ending up? Are they ending up in good-value-for-money schemes? They clearly are at the moment. As you say, we cannot wait for it to go wrong because it is too late by then. Part of that is the OFT inquiry, which, since this Committee last took evidence, has been announced. We worked alongside OFT and we welcome that very much. It is a six-month, until August I think, very quick, inquiry, which is perfect as far as we are concerned. We are talking about coming to a conclusion sooner or later. We cannot just sit around waiting for the evidence, but because we can already monitor the market, the OFT will be looking at the market: they will be talking to employers; we are talking to employers all the time. So, we are not waiting until it has all happened and things have gone wrong; we are finding out what is going on in real time.

Q288Chair: From what you said in the initial response to my first question, are you actually frightened for the financial viability of NEST?

Steve Webb: No. Sorry-I did not mean to imply that. It is quite clear to us that there is a whole set of employers whom the market is not going to be interested in and who will go to NEST. There is almost a core of people who will be in NEST and rightly so: the smallest firms. The letter they get from TPR says, "You can choose who you like, but there is this thing called NEST." For many of them who would really rather not be doing this thing at all, they will choose NEST; NEST is right for them; it is good value. So, it is clear to us that NEST will have significant volumes come what may. The challenge for us is whether consumers who could benefit from NEST, as opposed to another provider, might fail to have access to it because the employer does not choose it because of the constraints.

Q289Chair: Just on a matter of fact, would lifting the restrictions take primary legislation or not?

Steve Webb: Obviously, there is a range of different restrictions, as you say. We could amend the transfer restrictions-so the bulk transfer restriction and the annual contribution limit-through secondary legislation through changes to the NEST order.

Q290Chair: So we could do it fairly quickly, if that was required?

Steve Webb: Yes, so quite properly the NEST order changes would be an affirmative reg, which is fine, so we would have proper scrutiny of that. The requirement to prescribe an annual contribution limit is in primary legislation, which is section 70 of the 2008 Act, but it provides for repeal of that requirement simply by affirmative order.

Q291Chair: One of the main excuses, or reasons, given for the restrictions that exist on NEST is because of access to the state aid fund. The European Commission have said that there should be or has agreed that there should be restrictions on NEST, or have they? I suppose that is my real question. So, is the state aid regulation still acting as a barrier to removing those restrictions? It is not as though you are consulting on removing all of the restrictions; I think the public service obligation is still there. Nobody is suggesting that should be lifted. Have you been in contact with the Commission? Do you know that they would be alright with the lifting of these restrictions or are you still awaiting a reply?

Steve Webb: So, on the sequence of events, the key thing, as you say, about the subsidy to NEST, the subsidised loan, is the public service duty. So because they have to take everyone, including lossmaking customers, it is not deemed unfair competition if we help them to get themselves established through the set-up loan on favourable terms. We certainly do not take EU approval of changes for granted; it is certainly not a foregone conclusion. What we think we have to do is make our own mind up based on evidence. People say, "Why haven’t you gone over to the Commission? Why haven’t you tried to do this?" We have to do this based on evidence: our call for evidence, which, as you know, is going to close; and evidence as the market develops, because, as you said, Chair, right at the start of all of this there was not the evidence that constraints were having a damaging effect. But as the market develops, we will gather that evidence. We will, as appropriate, make a case to the Commission. We believe that the Commission are sympathetically disposed to the idea of NEST in the first place; that is why we got the state aid. They are interested in the innovation to make the market function more effectively, but we would have to make a strong case. So, we are gathering evidence now and we think that is the right sequence of events.

Q292Nigel Mills: Steve, are you just a little concerned, although I think removing these restrictions is eminently sensible, that NEST was set up to cover for market failure? So far, the experience with the large employers is that the market did not fail; people entered and people produced new products. Therefore, it seems a little illogical to say, "The market hasn’t failed so far; therefore, we need to change the restrictions we put in place on something that was there to prevent market failure." It just seems slightly counter-intuitive.

Steve Webb: Yes, indeed. If we rushed in on day one and said, "We have changed our minds," we would have no evidence. While NEST was clearly focused on the people who were previously unpensioned-so people who work for smaller firms, lower paid workers-it is also true even in big firms that there have always been a set of workers who were not in the main scheme. For example, one thing that we thought would probably happen a bit more than it has is that people might use NEST for part of their workforce. So they would have a main scheme and then NEST for part of their workforce. Although some firms have done that-BT have done that; the BBC have done that; and others have done that-we have heard examples of firms who have said, "Because of the NEST restrictions, we would have to have two pension schemes. We do not want two pension schemes. We only want to have one, so we ruled out NEST from our considerations." So, I agree with you. For the biggest firms, there is not a huge amount of evidence, although there is a bit; but as soon as we get just that bit further down, we are already coming across firms who have said, "We just do not want to deal with two pension providers, and because we have got some high-earners, we would have to have two schemes. We just do not want to do that." So NEST is not even getting into the option.

Q293Chair: There is a real concern that the staging posts, the dates, for the smaller companies, which are the ones that you are concerned about, are still so far in the future that that evidence will not be complete.

Steve Webb: Funnily enough, I do not think it is the smallest firms. I think the smallest firms will overwhelmingly go for NEST. If you are a big provider, do you really want to go hunting after another 30 contracts, which would be another 30 scheme members who would probably be loss making, potentially? You have to go out and find them, sell to them, all the rest of it. There is an issue about capacity in the market. Once the big providers have signed up the biggest employers, as we go down the market there is a risk of choice diminishing. Funnily enough, I do not think it is right at the end. I think it is in the middle.

Q294Glenda Jackson: Well, essentially, that was my question. From my perspective, the most vital evidence is not going to be available until 2015. I mean, surely the real thrust of what the Government is trying to do is to attract people into pensions who, at the moment, would not touch them with a bargepole. It could well be that the restrictions on NEST make that bargepole even longer, as far as they are concerned. I think when the Committee-regrettably I could not be with them-visited NEST, NEST were very surprised at the small number of clients, a somewhat euphemistic word, who had approached them. Surely, it is that kind of thing that should be central to your evidence-at the moment it is not looking good for the very people that the Government has introduced this scheme for.

Steve Webb: I accept the point that there is a risk: if we wait until we have got a long way down the track, we have got a problem. I would stress the lead time on all of this. So, you have a staging date, but you cannot just decide a week before that, "Oh, we’re going to use soandso. We’ll use them." There is a mass of preparation. Firms get warmup letters: the biggest firms 18 months ahead; certainly most firms 12 months ahead. We are doing something that Government Departments are not always very good at, and I always encourage my colleagues to do this: we are getting out there; we are talking to firms; we are talking to industry; we are finding out what is in the pipeline. Of course, NEST knows what is coming down the track. The other providers know what is coming down the track. We are getting early intelligence. What we cannot do, as Nigel said, is, for example, try to make a case to the Commission saying, "We think there might be a problem but actually nothing has changed since we last made a state aid case." We have to have new evidence to bring to bear, and that is really what we are gathering now. So we are certainly open to lifting the restrictions but it has to be evidence based.

Q295Debbie Abrahams: Can you confirm what legal advice you have taken in terms of the European Commission’s view on lifting the NEST restrictions?

Steve Webb: We have, obviously, looked at the legal position because I know Greg McClymont has raised this issue about whether, now that NEST is up and running, we have a problem, and there are these four tests. Actually, my legal advice is different to Greg’s, and I am grateful to him for engaging on that debate. My legal advice is actually that we would need evidence that we satisfied the four tests and we are gathering that evidence. But even if we had that, we would still have a whole lot of process to go through. We have obviously-it is a very legally complex area-consulted the Department’s lawyers. There is a risk that we get hung up on the EU and state aid; unless we gather the evidence that something is different to the last time and unless we gather evidence that the market is failing in a way that we had not anticipated, we will not be able to change anything. Whoever’s lawyers you talk to, we will not be able to change anything.

Q296Chair: The key restriction is the public service obligation, which nobody else has. We are not talking about lifting that anyway.

Steve Webb: That is right, yes.

Q297Glenda Jackson: This is essentially about the governance of schemes. Are members of contract-based schemes more at risk of poor governance than members of trust-based schemes?

Steve Webb: I would certainly agree that there are issues for members of contract-based schemes that are different from those that need addressing for members of trust-based schemes. But just by way of preface, I would want to avoid the trustgood/contractbad split, because there are huge numbers of trust-based schemes, many of them very small, and the regulator is very concerned about the standard of governance in those. I will absolutely deal with your point about contract but I just wanted to say that we do not think trust is a panacea. The regulator spends a huge amount of his work trying to make sure trustees do a good job, but, for example, there are small pension schemes whose trustees hardly ever even meet.

Chair: We have got questions on scheme size coming next.

Steve Webb: So focusing on contract, one of the things that helps us regulate the contract market is the relatively small number of big providers; it is getting on for a dozen or so. If you look at roughly a dozen big providers, you have got pretty much everybody covered. So, rather than trying to regulate tens of thousands of small DC trust or DB trust schemes, you are trying to regulate a dozen huge, household-name financial firms. The regulation I think is in some ways easier. Clearly, there are strong solvency requirements. The first thing that you want to be sure of is that the money is going to be there when you retire. You want to make sure that it is professionally invested. Many of these are now setting up governance committees and things like that. So, it is not the same as a trust board but a way in which members of the scheme can have more involvement and more say in the way it is run. Overwhelmingly, scheme members are just not interested, frankly. We have to have a scheme of governance that works for people who are just not going to engage. I saw a stat the other day-I think NEST have put out some figures-saying 98% of people are in the default fund or something like that. Overwhelmingly, people are going to end up in default funds. So provided you have got a well-regulated provider, a big household-name provider, with solvency requirements and good regulation of default funds, I think you are going to get most of the way there.

Q298Glenda Jackson: With respect Minister, that is what we thought about banks and look what happened there.

Steve Webb: Yes, well, "properly regulated" I think are the key words.

Q299Glenda Jackson: Yes, but who is going to do the proper regulation?

Steve Webb: You have had both TPR and the FSA give evidence to you.

Q300Glenda Jackson: Yes, but we have also had evidence that this is a kind of division of responsibility that is not going to be to the benefit of pension scheme members. We have heard arguments that say there should be one regulator for the whole of the industry.

Steve Webb: Yes. Let me respond to that and then I will bring Bridget in on this, because, obviously, one of the things that we try to do in terms of co-ordination is that we have what is called a quadripartite group, bringing together the regulators and the two Government Departments involved, and Bridget will say a bit more about the membership. John will-Bridget is desperate to bring him in.

Glenda Jackson: Very well regulated, if I may say so.

Chair: The same problem with the regulator.

Steve Webb: Very good. My two problems with a single regulator are as follows. First of all, at a time of massive turmoil, the last thing we want is another regulatory shake up. People say, "You are changing everything all the time. There are so many moving parts." "Guess what? Let’s change the regulator as well." TPR has a very specific role. It is employerfacing. We have a regulator who is employerfacing; who is trusteefacing; who has got a very focused role. The FSA clearly covers part of the pensions world, but it is financial service regulation, insurance regulation-a whole separate set of issues. We have to make sure they work together. I absolutely accept that. The Thornton Review in 2007 looked at all this, within the last five years, and said, "There wasn’t really evidence of a problem. Clearly, they need to work together." Let me, before I bring John in, just give you one example of where we have done that. We had a pensions issue, where people in workplace pensions were being given cash bungs-I use the phrase advisedly-to give up some of their company pension rights. So, they had pension rights above the statutory minimum, and firms were coming along and saying, "We will give you X thousand pounds if you give up some of your nonstatutory inflation protection." We were very concerned about that. People were clearly being rippedoff, in my view. To fix that, we partly had to use TPR and we partly had to use the FSA; so we had the FSA into the Department, and the FSA subsequently amended the guidelines they put out in a very helpful way, and we have more or less stamped out that abuse through joint working. So, I think it can work and has worked. But let me just invite, if I may, John to say a little bit more about the joint working.

John McCallion: The important thing we think here is for there to be a proper regulatory focus on pensions. The regulator, as you know, is very much focused on that marketplace. The community they deal with is employers, trustees, and helping to ensure that trustees are properly educated and able to do the job. That is quite different from, if you like, the mindset and the role of the FSA in regulating large companies and financial institutions. As the Minister said, the situation is very much as when this was last looked at as part of the Thornton Review; we feel that is still the case. We feel that there is a very important need for the regulators to work closely together and, as the Minister referred to, we have something called the quadripartite, which is where we, policy colleagues at the Treasury, the regulator and the FSA meet quarterly to consider the risks in the system. There is also regular dialogue and meetings between the regulator teams and the FSA teams. Going forward, the intention is that they will actually do joint thematic reviews, as they call them, and it is between a dozen and 20 providers who are expected to be active in the automatic enrolment space, so it is not an unmanageable thing to co-ordinate and pull together.

Chair: As you can imagine, we have got a number of questions on regulation coming up later. So we will stick at the moment really just around the scheme governance.

John McCallion: Okay.

Q301Glenda Jackson: But, with respect, you have not answered the basic question that I asked. Is there a greater risk for contractbased schemes than trustbased schemes in the upcoming change?

John McCallion: The regulator, in the work with the FSA-we, in policy, have been working closely with them-has looked at mapping the protections in its consultation that it has put out around the six principles, the 31 features, and then looked at the regulatory regime of the FSA-the principles for business, treating the customer fairly-and mapped across. In the recent consultation, they have actually published a mapping document to show that we believe, or the regulator’s analysis supports, there are equivalent protections to members of contractbased schemes.

Steve Webb: I am a member of an auto-enrolled contractbased scheme; what risk is it that you are worried about?

Q302Glenda Jackson: I think we are all worried about the risk that it is, in a sense, unchartered territory, and the history of pension provision is not glowing and golden, is it? One of my central worries is, "Do these regulators have teeth or is it simply going to be driven by the bulk of the existing pensions industry, who talk a lot about standards?" Where are the teeth if it goes badly?

Chair: I think we are concerned about the fiduciary duty on contractbased schemes. Where does the consumer stand in all of this? That is a real concern. If you invest in a pension, will you get a reasonable return and your money out at the end? That is not clear at the moment.

Steve Webb: The OFT inquiry will help with that, because how do you in any market ensure that you get a good deal? Well, if a provider is not providing a good deal, there is a chance to shop around and so on. But auto-enrolment is different, because as an individual you are not choosing the pension; the employer is. For example, many employers and schemes have governance committees; it is not the same as a trustee board, but it is a method for members to be involved and have a say. Things like clear communications are vital, so the scheme members know what is going on and they get reporting back in language they can understand. So there is a lot more that can be done in that space.

Q303Glenda Jackson: Yes, but if it does not work, what are the protections for the consumer? If things do go wrong, who actually has the power or the teeth to redress that? Anybody? Nobody? Is it left to the industry?

Steve Webb: We need to be clear about what we mean by "going wrong". Clearly, your money is being invested in a DC world; it can be invested in a way that goes up or down. So, clearly, you cannot guarantee certain returns or anything like that. This is an inherently uncertain process. But what you can do is you can regulate the firms, which is a relatively small number, as we have just heard, to make sure that they are properly run: that they are audited; that there is internal riskmanagement; that there is external audit. So there is a whole series of tiers of regulation, overseen by the FSA, to protect the scheme member.

Q304Glenda Jackson: So you would not come down pro or con on either a contractbased or a trustbased scheme? You cannot see any variations?

Steve Webb: They are different. The issues are different, but ex ante I would not sit down and say, "I’m not putting my money in a contract," or "Oh, it’s in a trust; that’s alright." That would be oversimplifying.

Q305Sheila Gilmore: There has obviously been some debate and discussion about whether in fact it would be beneficial for there to be larger schemes. There seems to be some support for that. Are there regulatory changes that could be brought in that would assist that?

Steve Webb: I am certainly very sympathetic to the argument that there is evidence that scale, other things being equal, is a good thing. In general, you can have access to, for example, better investment advice, administrative economies of scale; you can see why a bigger scheme, other things being equal, might do better. There is evidence of this from Australia, not just better outcomes but lower volatility, less variance of outcomes, which is something that scheme members would want. So, other things being equal, parallel to Glenda’s question earlier on, ex ante I would rather be in a big scheme than a small scheme. That does not mean there are not good, wellrun small schemes. The trend is to larger schemes. The Committee may be interested to know that the regulator published some statistics 20 minutes ago, which are some annual figures on DC scheme size. There has been a longterm trend towards fewer smaller schemes, and the latest figures show a continuation of that trend. So, scheme membership as a whole in DC is about the same as it was but it is just that bit more concentrated in bigger schemes. That is a longterm trend. It is a trend I would welcome. We consulted in our reinvigoration document before Christmas on whether we should be going further on scale; the Australians, I think, have been quite strict. But TPR have done a survey of schemes by size, and clearly the issues about poor governance by trustees are bigger in smaller schemes. As I said earlier, there is evidence that for smaller schemes the trustees hardly ever even meet in some cases. So, scale is not a panacea, but other things being equal it has strong advantages.

Q306Sheila Gilmore: Do you think from a Government point of view that, rather than waiting to see if it just happens anyway, other steps should be taken? If so, who by?

Steve Webb: There may be. I suspect that later in the session we will talk about scheme quality, because we want to be clear that we are autoenrolling people into good schemes; we want to ensure that we are automatically transferring small pots into good schemes, and if we therefore end up defining what good looks like, we would not necessarily say, "Big is good," but we might say a set of things that a good scheme looks like that small schemes would struggle to meet. So it may well be that as we go down that avenue some of the things we do will lead to consolidation. I am just going to ask Bridget to have a word on that.

Bridget Micklem: I think there are a couple of things to note for the Committee. First of all, the Minister has already talked about the problem we always face of the long lead times; you are trying to anticipate and work out how the market is going to develop. So we have got some evidence this morning that possibly the trend is to have fewer smaller schemes. On the other side, you have got evidence that bigger schemes could start to happen naturally in the market. So there has been the arrival of NOW:Pensions and The People’s Pension; they are potentially bigger schemes. In the coming market, with autoenrolment, they could grow. There is that consideration one has to bear in mind. Then there is something that I am sure we will talk about later on as well, in that part of the attraction of pot follows member is that you are going to get consolidation happening that way as well. So there is a Government intervention that may help to get consolidation. So there is quite a fine a balance because there are arguments against having a market totally dominated by a few big providers. We have to weigh that too when we think about scale. We made those kinds of points in the reinvigoration strategy. So there is room for Government intervention but there is also a space for looking at, "Is the market taking us there anyway?"

Q307Glenda Jackson: What is the Government intervention if it is not?

Steve Webb: So, quality is the key. We have to make sure that people are enrolled into schemes of good enough quality. If small schemes cannot meet whatever quality definition or threshold we have, they will not be able to continue. Now, exactly how we deliver that is something that we are consulting on at the moment, but the key is you should not be able to be autoenrolled into a scheme that is not much cop; you should not be able to auto-transfer into a scheme that is not much cop; and once we have defined exactly what that means, it may well be that small schemes say, "We cannot meet those standards," and they combine with others or the scheme members get moved into bigger schemes. Now, the question that Bridget is asking is, "Is a lot of that going to happen anyway?" Obviously we want to concentrate our regulatory time, legislative time and attention on the things that only we can do. If the market is going to do it for us anyway, then we will do other stuff that the market will not do. My sense is the market will get us some of the way there in consolidation but probably not all the way there. So we probably will be setting standards and that probably will lead to further consolidation.

Q308Jane Ellison: Is it your concern that there might actually be some quite good small schemes, and therefore just defining "small is always bad" may unnecessarily alarm people who are in some good, well administered small schemes?

Steve Webb: Yes, the goal for us is quality and not size per se. Size, again, a bit like NEST, is a means to an end. I think it is very unlikely we will say, "You cannot run a pension scheme below a certain amount of assets," or something like that, but we might well say that it has to have these standards of governance or whatever it happens to be. Small schemes on the whole might struggle to deliver that.

Bridget Micklem: Just for clarification, if you are looking at international examples, in Australia, for example, they basically set a framework that said, "The scheme has to consider whether they meet the standards that a bigger scheme could meet," and then you would get a regulatory penalty. There are ways of going around that. Are the scheme members disadvantaged by not having scale? You could see a way to do that, if you look at international examples.

Q309Sheila Gilmore: I was just wondering about the timescale for all of this, because it is all a bit, "Well, yes, we want to look at quality and maybe quality is better than looking at size," but when is this work going to be done?

Steve Webb: Yes, it is a fair point. For me, autoenrolment is a train that has left the station. It has already started. It has started with the big firms, so we cannot just sit around issuing endless consultation documents and chewing our fingernails, as it were. We are moving fast on this stuff.

Q310Sheila Gilmore: But there are a lot of people already in pension schemes without autoenrolment.

Steve Webb: Yes-oh indeed. But of course, if those schemes are then used for autoenrolment in the future, they will have to meet whatever quality standard we set. I entirely agree with you: we have to get on with it. The document we put out before Christmas, as I say, the reinvigoration document, asks a lot of questions about quality, but we will certainly need to move quickly. We anticipate, subject to Parliament’s approval, a Pensions Bill, which will deal with the state pension stuff but also private pension measures, including the potfollowsmember measures, for example. So anything that requires primary legislation we might use that vehicle for. A lot of this stuff does not necessarily require primary legislation, though.

Chair: We will move on to something that has been a thorny issue and attracted quite a lot of comment as we have gone through our inquiry, and that is cost and charges.

Q311Ms Morris: This will be about the cost of the scheme itself. We have got separate sections that look at consultancy charges and a separate section that looks at the whole transparency issue and the number of codes that have been produced. If we just focus then on the costs on these schemes, there has been much concern raised by stakeholders that those who are autoenrolled will find themselves disadvantaged because there are significant costs in a scheme, which they have no say about or real understanding of. You have reserved the power to cap these costs. What are your thoughts at the moment, given the evidence you have gathered, as to whether or not you would use that cap? What are the triggers that will lead you to make the decision-either I do or I do not?

Steve Webb: Yes, sure. The first thing to say is, clearly, the early signs on charges are actually very encouraging, as you would expect. At the top end of the market, there is fierce competition-probably more fierce than expected. Someone used the phrase "buying business" to me; I do not know if that is an accurate one. Firms really want this business. So, the people who are being auto-enrolled early on are getting charges that frankly 10 years ago people would have dreamt of. So, that is good news. That is really good news.

NEST has been a crucial part of that. Because NEST has a charge equivalent of about 0.5%, people know that if they stray much beyond that there is somebody out there ready to take the business. Constraints notwithstanding, that has been an important factor in dragging down charges. One of the questions is, "Why wouldn’t you just cap the charges anyway? Why don’t you just get on with it? Why don’t you just say, ‘You can’t charge more than a certain amount’?" History would lead us to be just a little bit cautious there, because we do have experience recently of charge capping in pensions, which is Stakeholder. At the moment, under the Stakeholder charge cap, if you were autoenrolled in a scheme that could charge up to 1.5% for the first 10 years and then 1%, when someone next door had been enrolled into a master trust at 0.4%, you would be outraged. That was seen, when it was set, as a reasonable sort of charge cap. Part of that shows how quickly things move. As an example, say we said for round numbers’ sake-this is not a prediction-1%; less than 1% is not much, is it? Well, first of all, even small differences make big differences at the end; 0.25% or something is a big difference. The danger is that you say 1% and someone comes along with a 0.99% offer and says, "Steve Webb says this is the gold standard. It is under the limit; it is all fine; you can be confident that the Government says this is okay," and people do not realise that this is right up against the cap and other people are charging half as much. Sorry, go on.

Q312Ms Morris: For me, the challenge is that there will always be a market. So whatever figure is set, whether it is set by the market or set by the Government, players in the market will then clearly use, as they should, the opportunity to fix different rates. But the challenge for me is, are you going to allow the industry to set the ceiling, or is Government going to set the ceiling? I do not think your argument really holds water because what you are describing will happen whether the Government sets the ceiling or the market artificially sets the ceiling, because then people play with it and artificially bring it down to be more competitive. But ultimately the question is, is it the right thing to try to protect the employee, particularly given their state of knowledge, from the market coming in and setting something that is just too high? If the Government, it seems to me, sets a cap, that is not going to stop lower rates being set; but if the Government does not set a cap, then the sky is the limit and you then leave effectively the monopoly of those players in the market to decide the ballpark they are going to play in.

Steve Webb: I guess the analogy, which I hope you will not find flippant, is with baked beans. Why does the Government not set a price cap on a tin of baked beans? We do not need to because there is a vibrant market; people have lots of choice; there can be new entrants and all the rest of it. So the market will deliver value for customers. So, in general Governments do not intervene in price markets where the market is going to deliver competition and good outcomes. The question is: is this that sort of market? Well, obviously, the OFT inquiry will look very specifically at that. My sense is, at the top of the market, it is. We did not need to set a 1% cap because virtually no big firms that have auto-enrolled have been charged anything near that, so it would have been irrelevant. As we go down the market and employers make these choices, the question is whether they are well informed consumers who will shop around or consumers who are going to get pounced on by predatory firms.

As I say, the danger of a charge cap is a false sense of security. If we set it at, say, for round numbers’ sake, 1% and a mediumsized firm has a provider come along, they will just assume that as long as the firm is below the charge cap it must be good value or alright. The very employers we are worried about-who might not shop around, who might not be active consumers and who might not drive a good deal-might actually be falsely comforted because the Government has said that this is good enough value. Actually, 0.99% probably is not. That is the worry: an artificial intervention that distorts the market.

We absolutely have to make sure there is effective competition in the market. If it looks like people are not delivering good value, not only do we have a chargecap power but we have extended it to include deferred members, so you cannot rack charges up on people who have left the firm. We are absolutely prepared to use the cap if we need to, but it would have to be based on evidence that people were signing up for schemes that were not good value-and we have not got that yet.

Q313Ms Morris: That takes us neatly to the deferred issue. There is not just an issue about whether or not you have a cap, but whether or not you should ban the practice currently out there of charging deferred members who are no longer contributing a higher level to manage a scheme. What are your views on that?

Steve Webb: I am not a great fan of active member discounts-or deferred member charges, depending on how you look at it. Part of the beauty of pot follows member is that you have far fewer deferred members. In other words, if you set a reasonably high threshold for the automatic transfer of pots when you leave a firm, far fewer people will be leaving money behind anyway.

I do think that would be a better world, where schemes’ members-apart from the retired ones-are generally active, i.e. engaged, and the employer cares about them, rather than people who worked for the firm 30 years, whom, frankly, the scheme does not care much about and the employers do not care about.

Q314Ms Morris: Would you be willing to ban these additional charges for those individuals? The world may change as you describe, but it may not. Assuming there is still this distinction between deferred noncontributory members and those continuing to contribute, would you be minded to say, "You cannot impose higher charges anymore"?

Steve Webb: If we had a charge cap overall, we would certainly apply it to deferreds so that it was consistent between deferreds and actives. There is an argument that says that a deferred member incurs certain costs. That is sitting on the books; there is no more money coming in, yet you still have to service them. There are costs associated with that. I am not sure it is a very strong argument.

We would not rule out getting rid of them. It is not at the top of our list at the moment, but I would not rule it out.

Q315Graham Evans: Does it not tell you a bit about the industry? On the one hand they can call it active member discounts, so the layperson will think, "It is a discount." Actually, it is the complete opposite of that. It is a measure of the type of people that we are dealing with here. These are laypeople who have to make decisions and there is language like that.

Steve Webb: Indeed. Slightly coming back to Glenda’s point about the less than glorious history of the industry, my sense is that it-this is a cliché-is on a journey. There are a number of areas where the industry has moved in the right direction-sometimes kicking and screaming. Regarding the leadership of the ABI, Otto Thoresen is a breath of fresh air. In some cases, he is dragging the industry to places it would not have gone.

There is, however, an awfully long way to go. Exactly as you say, the history is far from glorious and there is still a long, long way to go.

Q316Graham Evans: This industry will always be where the money is. They can see that autoenrolment is going to be where the money is.

Jane Ellison: Some of our industry witnesses said they would like to see it go. I do not know how representative they were; they said it with differing degrees of enthusiasm. We have certainly had a couple of people-not from the macroindustry but practitioners from companies-who said, in our evidence session, they would like to see them go. Is that evidence, as you see it, of a direction of travel?

Steve Webb: Yes, because plenty of schemes do not do it anyway. It is by no means universal. To be honest, I have an open mind. I do not like any charge that is not transparent and, to be honest, once you have left a scheme your engagement with it is limited. Instinctively, it is not something I feel very comfortable with. We have to get a grip on the overall charging regime, and that is a facet of it.

Q317Nigel Mills: I share your instinctive concern about introducing caps unless we absolutely have to, but do you think there is a role for a more active regulator? They might say, "Actually, you are charging far too much in that regulated scheme; that cannot be in the interests of your scheme members. Should you not be reducing that?" I am not sure the evidence we took from the regulators last week suggested that they were very keen to be that active. Actually, if they had that power in their back pocket, they could go to some schemes and say, "Look, if you do not sort that, you will not be an approved scheme anymore." That would seem to be a halfway house that could make a difference.

Steve Webb: What we are doing in that territory is that I have taken to naming and shaming-or naming and praising. Schemes say, "For autoenrolment, everyone we enrol will be below a certain amount," or, "We have reviewed all of our legacy schemes and got rid of all the exit penalties," or whatever. It makes my officials rather nervous, but I am very happy to name a commercial enterprise and say, "Well done." We have found that doing that has caused a flurry. We then get other firms queuing up to tell us about the innovations they have made and the good things that they have done. I mention them as well.

I am not being flippant when I say that; I discovered that this has some impact. I do not think you can quite have regulators saying to firms who are operating within the law, "That looks a bit high. We are not sure we are going to let you do this." That feels too grey. You are talking about multibillionpound businesses, who need to know where they stand. You cannot have the regulator having a quiet word and saying, "Come on, chaps; do not do that kind of thing." They need to know where they stand, but people like me can say, "These guys are showing you all how to do it; why are you not like them?" That is probably the way we would do it.

Q318Nigel Mills: Surely, there is a flipside to producing standards that say, "Pension schemes have to be able to show that this is in the best interests of their members and they are not disadvantaged compared with members in a larger scheme." You are actually saying, "Your level of charge is so high that your members are being disadvantaged, and therefore something has to change." Presumably having those kinds of standards with no flipside if they are not met is not a very productive exercise.

Steve Webb: No, I absolutely agree there have to be standards. What I am saying is that they have to be consistent, evidence-based, published and applied. Certainly, if we said, "You cannot autoenrol into a scheme below a certain standard and you cannot autotransfer into a scheme below a certain standard," we would have to say what those were and we would have to enforce it. Where people are within the rules but still not very good is the territory that is more difficult. That is where I am trying to drive standards up though exhortation and example.

Q319Debbie Abrahams: Anne Marie made a very strong argument about the downward pressure that a Government cap would put on the range of the charges. I wondered whether you are monitoring what evidence there is around that internationally. Related to that, if I could have a twopronged question here, we know that the average of charges is coming down but there is still quite a range. The TUC provided evidence that less than a 0.5% reduction in cap would mean a 2% increase in the contribution to pots. In this argument it is really important that we look at the outliers as well. Can you tell me about the range? As I say, I want to know about international evidencemonitoring around Government caps and the range of charges that are being applied currently.

Steve Webb: Charges are lower in places where membership is mandatory: Australia, for example, where you have to be in. You do not have all this faffing about with opting in, opting out and all that stuff. You are in. Of course, firms then get scale, and selling becomes easier. As successive Governments, we have taken the view of soft compulsion and have given people the freedom to opt out. That brings cost into the system; it reduces scale. You have to compare like with like, but schemes with mandatory provision are clearly cheaper than ours. Places like the Netherlands, which I visited recently, clearly manage to achieve low cost. Again, this is through pretty much mandatory, approximately 90%, coverage and scale. Collective DC schemes in the Netherlands, for example, have very low costs, but that is partly because they will do an annuity bit as well so that it is all in one huge scheme. It is quite clear that pension scheme charges in the UK are higher than in many other countries, partly because of the way we do it.

I could decide one morning that noone can charge more than 0.6% or something. The danger is this: how do you pick that number? The challenge is how you pick that number. As I say, with Stakeholder it seemed reasonable to say 1.5%. We now think that would be ridiculous. That is the danger if you pick a cap. I think there is a risk of people moving towards this, whereas at the moment relying on the market, people are moving towards NEST and thereabouts. If you suddenly certify that double NEST, for example, is okay, I think that is a very difficult communication. It is precisely the point you make: even fractions of a percent make a big difference.

Q320Debbie Abrahams: I am sure there could be evidence and ways of determining that, but can you tell me a little bit about the range we are experiencing now? You have given the argument that the issue is what the cap level would be. However, yes, we have high charges, internationally, and yes, there is an option that we need to be considering here. What is the range we are experiencing now?

Steve Webb: Let me give you a flavour. If either of my colleagues want to come in with more detail, please do.

The guts of it is that the vast majority of people are paying 1% or less in both trust and contractbased schemes. From memory I think we are talking about 0.75% or so for one and 0.9% for the other. The typical charges that people are actually paying are in the high 70s to 80 basis points; it is that sort of territory. That would be the average. Relatively few schemes are above 100 basis points. But they do go up to 2%, 3% and 4%.

We publish detailed statistics on the range of charges, which I imagine the Committee has access to. If not, we are very happy to provide it. Regarding the figures I mentioned, for trusts 0.71% was the average charge and 0.95% was for contract. That is, however, backwardlooking.

Q321Debbie Abrahams: Thinking back to the earlier questions on the issues around trust and contractbased schemes, that is very interesting-not just in terms of governance but also in terms of charges. I presume you will also be monitoring the pension pots around the performance of the different schemes in relation to that. That is very interesting.

Steve Webb: Sure, but bear in mind vast numbers of people are now coming in at 0.4% or 0.5% in the new autoenrolment schemes, which are not reflected in those figures as well. Those averages are coming down.

Q322Sheila Gilmore: In a lot of financial services generally, a lot of things are sold almost as loss leaders. For example, with ISAs or other forms of saving, you often find the interest rate drops after the first year or so. It looks like a good deal and then suddenly it is not. Do you think there is a risk in terms of charges that these very low charges we appear to be seeing at the moment may be of that nature?

Steve Webb: It is a risk; that is right. The transaction costs of changing your autoenrolment provider are pretty big. For example, a big supermarket I can think of partnered with an insurance company, but branded the scheme with the supermarket name, not the insurance company name. It was the "Xsupermarket scheme". A heck of a lot of joint work went into that: merchandise, which is probably not the right word, branding, literature and all the rest of it. If that provider then drifted their charges up quietly, it would be a big decision for the employer to say, "We could get a better deal."

There would be a lot of frictional cost in changing, so the employer, if they had not done the contract right in the first place-that is the key issue here-would be exposed to that. "If it goes up 0.1% or 0.2%, can we be bothered to change our provider? We are not paying it; the employees are paying it." That is a risk. The key, therefore, is for the employers to make it quite clear what the terms are when they sign up with a provider. A contract allowing the provider to softly waft up their prices when nobody is looking is not a good contract to sign.

Q323Chair: Minister, you said, in a reply to Anne Marie, that providers are buying business by offering low charges. Is there a risk that once they have secured the business and have the volumes, the charges will go up?

Steve Webb: Yes. I would not have very scientific evidence, but it looks to me like they are already offering, as you would expect, less good deals as the market develops. Some of the deals the very biggest employers in the land have are not going to be matched. That is just the market. That is what you would expect.

Chair: It seems a bit unfair on the small ones coming in later.

Steve Webb: When you go to a supermarket, it is unfair that when you buy a packet of 10 you get it for less-that is bulk purchasing for you. As you say, we need to be sure that, when these contracts are signed, employers are aware not just of the rate they are getting on day one-as Shelia says, these special, introductory bargain rates, as it were-but that this is guaranteed for a period or there are provisions for how it can be changed. I agree we have to keep a close eye on that.

Q324Glenda Jackson: This question is on this issue. I am going back to the earlier questions about active member discounts and deferred member charges. This covers the whole range of possible charge changes during the life of a scheme. Which? have calculated that increased charges for deferred members could potentially reduce their pension income by around 25%. Surely, it should be a requirement for all pension providers to link their charges to the eventual pension pot. If we had those figures, it would be much, much easier, would it not, for both employers and employees to know which scheme they wanted to go into?

To go back to the point the Chair made, having won the business, in my view it will be very easy for those charges to increase over time. They may have different names, but they will probably go up.

Steve Webb: This is where the whole transparency issue is crucial. You might want to come onto that a bit later; it is obviously germane at this point. People need to be able to see what is going on in language they can understand. That is both employees, the scheme members, and employers. At the moment, as we were discussing earlier on, the language is often obfuscatory. It is not designed to enable you to see what is going on. I am not sure you could do literally what you suggested. I am not sure that you know, when the charge is levied, what the impact is going to be on the final pension, because that depends on how the investment performs. What you do know is how big it is; that needs to be transparent. That is the key: consumers need to know what is going on. They need to be able to get out if they are not getting good value.

Q325Glenda Jackson: Who is going to provide this transparency? The industry has markedly failed to do it. They have told us that they are changing; if they are, it is very, very slow.

Steve Webb: I agree.

Glenda Jackson: Who is going to be responsible for ensuring that employers and employees have that transparency and know what is going on?

Steve Webb: I entirely agree: the process has been slow. I met ABI only last week to urge them to do what they are doing a lot faster. The dilemma in all our conversation here is that there are probably 73 different bits of this market I could regulate. I could try to control everything. That would be a vast regulatory task. What we have to do is focus Government regulation on the bits where it really makes the biggest difference: where the market is failing the most and where the industry and competition are not generating good outcomes.

If I regulate deferred member discounts, charges or quality, the danger is that we stop the market doing what markets, on the whole, are pretty good at. What we need to do is focus our regulatory effort on the things the market is not going to deliver. Of course, if transparency does not get us there, we may have to say more. We regulate what are called statutory money purchase illustrations. We say what the schemes have to provide to their members. We think they are too complicated. We are working on simplifying that. All of these things are potential problems, but I do not think we can regulate everything that moves. Regulation has its own cost and distortions as well.

Chair: We will be coming on to transparency, but first we are going to do consultancy charges, which is another thing that has exercised the Committee.

Q326Graham Evans: I think you are doing a very good job, and I agree with what you are saying in terms of legislation. It is very difficult to do this. My point, however, is that the customers are the businesses that are going to purchase these from this industry that is so adept at making things complicated. I worked in the manufacturing industry all my life. If you look at manufacturing, it has reinvented itself in this country. It produces high-quality, bestquality, worldbeating quality. It has managed to do it cheaper, faster and more efficiently. Why can this industry not get the best outcomes for the customers, but do it cheaper and faster? The technology is there. I do think there is a lot of smoke and mirrors. It is done deliberately to make it as complicated as possible for the customer and the layperson.

The businesses-the small and mediumsized enterprises-that now have to do this are the key to this. I am not talking about legislation; I am talking about best practice. There are all these questions about whether we should regulate or not. I use the scenario of a small or mediumsized company that has 100 employees. Let us say they are a manufacturer, so they make things. There are 100 employees in this company. There are five on the board of directors. I will tell you something: I bet they have a pension. There are five senior managers; I bet they have a pension. Then you have five of the administrationtype people. There are five middle managers. 20 out of the 100 have probably got some pension provision. Then there is the shop floor. The vast majority of the shop floor will not have pension provision, though one or two may have.

For me, for that type of company the best practice is for the employer to bring in one of these pension companies and have the purchasing director, someone who knows how to buy things, in on it and say, "What have you got here? Let us have you all in. Just show us what product you have for my employees." You say to them, "The company is going to pay for this. The company is going to pay for the consultancy charges." It removes all this ambiguity for the employees. When you look at some of the charges that employees will find, it can be £600 from the first year of their contributions or 15% of their contributions. If it is not that, it could be £60 per annum for 30 years. It is absolutely crazy for an initial consultation. It is an absolute joke. Most people will not actually realise that all the way through their pension contributions they are actually paying for the bloody advisers.

For me, the way to do this is to have a best practice, so you or somebody like you could say, "No, we are not going to legislate, but what we are going to do is say ‘best practice’." The best practice is aimed at the purchasers: the companies and company directors who will do it. You can say to these companies, "Come on, then. Let us see what you have to offer. We are in the business here. We have 80 employees who want a pension." Essentially, it will be 80 times the same product. It would be very simple. What these guys are trying to do is say, "There are 80 people here. We will have a oneonone consultation with 80 employees and I am going to charge those 80 people an individual price. I will sign you up and I will disappear into the night. I will get my commission and I will get my royalty for the next 30 years."

That is what this is about. You are in a very difficult position. I do not think you can legislate. You should not legislate. What we can do, however, is expose this industry. Remove the smoke and mirrors and say to the small and mediumsized enterprises, "You are the buyer. You are the people with the power. Box cleverly: buy it from them but offer to pay the consultancy fee and remove it from shopfloor employees or the small contributors." I am interested in how you have actually got on with your enquiries to ABI about consultancy charges. You asked, in your letter, whether memberborne consultancy charges should be removed. Is there any way you can remove that from the millions of people who are currently on pensions? 13 million people are not in pensions; you could actually help them by doing that and getting employers to bear the advisers’ fees.

Steve Webb: Gosh, there is a lot to respond to there. I would love it if employers behaved in the way that you describe. That would be great. The reality is that the vast majority of employers receive the letter from the regulator saying, "In a year’s time you must do this." They swear. They say, "Health and safety-da, da da. Pensions-da, da, da. It is a burden on business. I want to get on with making widgets,"-or whatever.

The vast bulk of small and medium-sized businesses, on the whole, would really rather not be doing this. If they are interested in pensions, they would probably have a pension scheme. We are making them enrol people who are not in a pension, as you say. I entirely agree. The good employer, who cares about the workforce, will do exactly what you say. He will grill the providers and will also wave the NEST card, which is crucial. They will say to the provider, "There is this firm out there called NEST who has to take me, so I know I have a provider if I want it. Their charge is about 0.5%, so if you are going to charge me more than that, unless you are offering me something that I cannot get from NEST, I am not interested." That would be great.

However, the vast bulk of firms will not do that, unfortunately. From this platform, I can exhort the firms of Britain and say, "Please be good consumers on behalf of your employees." Some will, but most are too busy and are struggling to stay afloat and all the rest of it. We have to make sure that the firms or the employers who do not do that are going to get value for money. That is where NEST is crucial. We want to make sure that firms have access to NEST, of course. The danger, coming back to the constraints, is that if the employer you cited says, "I am interested in the NEST thing, but I only want one pension scheme, not two. I have my 20 senior managers and administrators in this scheme. I am going to put the other 80 in it. I do not want another one." The NEST constraints have stopped them considering NEST, so that would be an example we would have to consider.

In terms of consultancy charges specifically, I am not obviously here to defend the industry at all, but I would say that the charges we are now seeing-partly because of NEST, partly because of autoenrolment, partly because of scale-are vastly better than they have been in the past. Technology has made it possible to do these things cheaper and so on. Charges are coming down; progress is being made. We would like to see it go faster.

Specifically on consultancy charges, some people have said to us, "You have left this a bit late." However, autoenrolment started in October. Most of the big firms that autoenrolled in October had a staging date in October and have delayed for three months to January. It is literally happening now. RDR only went in force in January. Many of the firms did not even know how they were going to react to the new structure for commission and all of that. We are learning right now how the new charges are going to work.

Our view, as you say, is that consultancy charges cannot be justified if they are not to the benefit of the scheme member. That is the test for us. Again, I will ask Bridget to say something in a minute about our conversations with the industry. The ABI are going out, talking to their members and finding out that some of them do not do this at all. Some have these charges. However, some of the charges are legitimate charges for things members benefit from. That could be an annual management charge. Some of them are just commission and so on. What we need to do is find out what these charges are, who is benefiting from them and where they fall in all of this. They will not go away. They are paying for something. That money is going to be recouped, but it needs to be transparent; it needs to be to the benefit of members. Perhaps Bridget could say a bit more about what we have learned so far,

Bridget Micklem: I would first of all like to tell the Committee that we have had a very strong response to the Minister’s request to the ABI. We have now seen over 25 providers and advisers. That process is ongoing. We are also engaging with employer organisations to try to get a coherent view of the industry’s plans for consultancy charging. The issue that is emerging for us is that we need to be able to unpick and understand very clearly what people are putting in the pot they are calling consultancy charges. Actually, there is quite a lot of difference here. Some people are saying, "This is consultancy, this is advice and this is about the financial piece. This is about how you set up your systems to be automatically enrolled"-the onboarding advice.

It is going to be quite an important job to unpick that and distinguish the different things so that we can work out what, if anything, in here is of benefit to members and what is not. That is the point you were making about obfuscation.

Graham Evans: There is complexity inherent in the system.

Bridget Micklem: Yes, exactly. The other thing I would say is that we are very conscious this is an area that needs to be given clarification quickly. We are hoping to go for a decision in spring, around MarchApril time.

Q327Graham Evans: There are chambers of commerce-there is a myriad of good practice. I do believe that most businesspeople and companies are good people and they want to do right by their employees. This is an opportunity for them to do that. You are right: most small, busy companies do not want to be doing it. In health and safety, for example-you mentioned health and safety-best practice, rather than legislation, is actually good enough for some companies. Most companies want to do the right thing based on quality, just in time, lean manufacturing-just good practice for a good company. Those disciplines being brought in to the purchasing of these services could make that difference. Why should anybody be paying for 30 years for advice they had 30 years ago? I find that quite abhorrent.

Bridget Micklem: One of the options we have, of course, is to put out some guidance on this or increase the guidance we already have.

Graham Evans: It must be good guidance.

Bridget Micklem: There is a whole range of things one could do or has done-the unpicking I have talked about.

Q328Chair: Graham used the phrase smoke and mirrors. Do you not have the suspicion that there is a bit of smoke and mirrors? As providers have taken down their charges in terms of the management of the scheme, they have sneaked in through the back door these consultancy charges, which, after all, are the one bit of the jigsaw that is not regulated. They have been putting these in. Some do it and some do not. The ones that Graham quoted are charges that are happening now. They are recouping the money they have lost in terms of the normal charges they have been quoting, and have ended up with exactly the same amount of money, which ends up as part of the company’s profit by the consultancy charges.

Graham Evans: It is like a royalty, is it not? It is a £60 commission every year for 30 years.

Steve Webb: As I say, a lot of these costs do not disappear; they just pop up somewhere else. That comes back to the issue about charge caps. Again, it sounds obvious that you could just cap charges. Then you ask, "What do you count?" As soon as you say, "These are the sets of things that are capped," you suddenly find there is some other thing you have forgotten to cap or that is defined in a different way. It is at one level and then it suddenly goes up. That is part of the challenge.

Q329Chair: You do not have to regulate; you could just ban memberborne consultancy charges. Your letter to the ABI suggested that you might do that. Will you?

Steve Webb: Indeed, we might. It is tempting. You hear something and you think, "That is a scandal; I must ban it." You have to be pretty confident about what it is, what the consequences would be, and whether there are bits of it that are legitimate that should be somewhere else. It is about getting under the skin of the headline, which is our job.

Chair: It is another case of "watch this space".

Steve Webb: As Bridget indicated, it will be a swift timetable.

Bridget Micklem: May I also say that we are working very closely with the FSA on this? If you are worried about smoke and mirrors, having somebody else also testing from their market intelligence and from very deep knowledge of how financial markets work is quite helpful.

Graham Evans: It is another opportunity for trade unions and workers’ representatives. This is a perfect example of how they can act on behalf of their members to get the best possible deal for those 13 million people who do not have a personal pension at the moment.

Q330Mr Burley: The obvious followon question is this: is this lack of transparency in charges that we have been talking about likely to be a barrier to the success of autoenrolment?

Steve Webb: For me, transparency is one of those things that you cannot have enough of, but is not enough on its own. There are different sorts of transparency, clearly. The firm who is choosing which scheme to use for autoenrolment needs to know what it is paying, what its employees are paying and what they are getting for it in language they can understand. At the moment, they do not. Our survey evidence says that the information employers get about charges does not make any sense to them. That needs to be addressed.

The NAPF’s work on transparency and clarity is particularly employerfocussed. The individual scheme member needs to know what they are getting, not least because the individual scheme member, who has more of an interest, might, at some point, say to their employer, "Hang on a minute. Why am I paying all of this money? Why are the charges this? I have heard I can get this." They engage with the employer. That is an important part of the process that we sometimes miss. The employer chooses the scheme, but the individuals, provided they are engaged, will monitor it more closely than the employer will-particularly once the initial choice has been made. They need information that is transparent; that is where the ABI work comes in. All of that, however, is not enough if, for example, the market is not competitive. It is all very well saying that a provider has to be clear, but the employer might only have one person to choose from or, as we were saying earlier, charges might drift up because nobody notices.

Transparency is great, but we need more of it. There are good initiatives going on already, but transparency is not going to be sufficient on its own.

Q331Mr Burley: You mentioned the NAPF. The second question was whether their progress, with their codes and guidance, has gone far enough. Clearly, you do not think it has gone far enough.

Steve Webb: I certainly think both exercises could go further and faster, but I think both organisations have actually found it quite difficult even to get where they are. They both deserve credit for where they have got to, but they have found it quite difficult. There are a lot of vested interests in this industry. Particular ways of presenting the information are more or less favourable to particular groups. If you present the charges in a particular way that focuses on some aspect of the charge, there will be one provider out there who gets all of their money through that bit who says, "No, that will make us look terrible." Actually, getting any agreement has been quite a challenge.

As I say, we are getting there slowly, but it is inherently complicated. If we sat down and tried to say, "This is how it should be done," trying to do it really simply is a real challenge. You have all of the headline costs of running a pension scheme, the administrative costs, the selling costs and all of the transaction costs. I will give an example of how the charge cap could be perverse. You have a charge cap; you get towards the end of the year; included in your charge cap is your transaction costs. As it were, you have nearly spent all of your money for your year up to the charge cap. Right at the end of the year, what you ought to do is change your portfolio. Your investment advice is that you should sell that and buy that. That incurs a transaction cost. That would take you over the cap, so you cannot do it. This is why, if we are too rigid and prescriptive, there is a danger. The first strategy is to have informed consumers and employers, lots of providers, competition driving down prices and so on. All of these other things help, but I do not think they are the central aspect of it.

Q332Mr Burley: You said we are getting there slowly. A lot of the codes and guidance, I understand, do not come into force until 201415. Is that not going to be a bit late to affect people who are autoenrolling now?

Steve Webb: We are urging the ABI to go faster than that. That is what I said to them last week. The NAPF work is on a slightly faster timescale than that, but all of this stuff needs to be better faster.

Q333Jane Ellison: Can I just ask what the ABI have given as a reason as to why they cannot? There is a real concern, particularly around those people who are already going to be in schemes by then, because we know it starts to speed up quite exponentially from here onwards in terms of autoenrolment.

Steve Webb: As I say, I would stress that the people who are being autoenrolled today may not get very transparent charging information, but they are getting remarkably good deals by historical standards. It is not, as it were, really a problem today. Even if the literature is opaque, what is behind it is obviously a pretty good deal, in general. One of the problems for the ABI is the diversity of their membership. Everybody does something in a different way, and trying to get everybody to do something in the same way is the challenge. Do you want to add anything?

Bridget Micklem: From my knowledge of the industry from the Treasury job I did before joining the Department, the problem with insurers is often that they have businesses that have been put together and big legacy systems and interfaces that do not talk to each other.

The argument only goes so far, obviously, but it is worth noting that one of the things that the ABI did tell us in relation to their new code is that setting a target for agreeing a format for disclosure by the summer of this year is an ambitious target. They think there will be competitive pressure in the industry for some of their members to go fast with that disclosure before the others, because they will see it as a selling point: "Hey, I am clean. I am transparent." You have to weigh these things against the diversity of the industry. There is a systems problem; I know that is true.

Q334Graham Evans: I used to sell into the retail industry. It was open book. When you went for the contract, the buyers used to want to see what the costs of the job were. These were big retailers and nationwide campaigns. They would know the cost of raw materials, the cost of the labour and the cost of the machine time. They controlled our profit. If you deal with supermarkets, anybody will tell you that about supermarkets. Is it possible to know the actual costs of a transaction? Regarding "Am I going to buy or sell this?" you mentioned there is a cost to it; is there an industry standard for the cost of that transaction? I agree about capping. That is something that is of concern, but, as I alluded to before, there is complexity. Is there an industry standard? What is the cost of buying and selling a group of shares or whatever? Is there a rough figure that people could get their heads around, so when they look at the costs of the transaction they can say, "Well, this is very expensive for a transaction. Why?"

Steve Webb: If you think about how you buy foreign currency if you are going abroad, some people will say 0%, but you do not get a very good rate. You buy it and sell it at different rates. Others will charge you a commission but will then have a narrow spread between buying and selling. There are different ways in which the same thing is presented. That is for a single, simple purchase. If you imagine that across all assets-domestic, global, equities, bonds and all the rest of it-trying to get that down to one number is like a holy grail. What is your cost? You can see why every firm that does it differently has a different view on how this should be done in a single number. There are accountancy standards, obviously, but there is not a single, unified, agreed way of presenting this information. That is the problem.

Chair: That is the problem.

Q335Ms Morris: Steve, I am going to challenge you on this issue of inherent complexity and what you say about the almost impossibility of simplification. I took one look at that NAPF code and thought, "If you think that is helpful, you have got another thing coming." It seems to me that there are at least two pieces to this. One is even more fundamental than what we have been talking about. What we have been talking about is, at least, clarity. It seems to me that there is a more fundamental point about which pieces actually need to be in there as discrete charges.

While I entirely understand-I have a corporate background-that these markets are complicated, it does seem to me that to say, "It is complex; it cannot be changed; we cannot unpick it; we cannot work out what is going on," is not the right answer. It seems to me that there has to be a push from Government to look at how we can simplify. If we do not simplify, the communication and the comparison are not going to help you. It seems to me that only Government can put that pressure on.

I am sure there will be a huge push back from the industry, because the only way they can simplify these charges so that they are more understandable to the average investor is by the industry being prepared to take some risk. You are absolutely right: there are a huge number of issues here. The only way to simplify is for them to take the risk. We are not going to be looking at risk in this session in a great deal of detail. At the end, we will come to look at the hybrid schemes-whether we are talking about schemes that are, effectively, a risk for the employer and employee and whether or not there is somewhere in the middle. However, throughout this inquiry one of my concerns has been that this is not and should not just be about the risk that is being taken by the employer and the risk that is being taken by the employee. It seems to me that the industry also needs to fess up and take some responsibility for the risk.

Perhaps I can suggest to you-I am afraid it is a bit like your baked bean example-that the Government has said with regard to energy charges, "Look, industry, we know there are complexities in buying and selling energy, but the consumer is losing out. You are offering a variety of charges. The consumer is being locked into contracts, which, simply, are inappropriate. They do not understand them and they are locked in." We are now saying, going forward, "Energy companies, you have got offer the lowest possible deal to consumers." You are saying to an industry that is perhaps more complex than you might think, "Make it simple, boys." Given that we are moving now into a world of autoenrolment, where the vast majority of people are going to be in pensions, we could now say, "Look, boys. You are going to have to make it simple. I appreciate that means that a lot of issues are going to have to be looked at very carefully. I also appreciate you are going to have to take some risk. But in the world we are in now, it is actually the right thing to be doing."

Steve Webb: I might have, "Make it simple, boys," stuck across my door for everyone who comes in to see me. I wonder if we are at risk of overstating the complexity here. If you are autoenrolled into a master trust today, for example, half a percent of the pot will be taken each year in charges. That is the extent of the complexity that you perceive as the consumer. If you were enrolled in NEST, there is a contribution charge, because we have lent it money, and there is an annual charge.

Q336Ms Morris: That is vastly oversimplified. It is about what goes in to make up that charge. People understand 20% or 10%, but they want to know what it is and how it is made up.

Steve Webb: They really do not. If you have been autoenrolled, you want to know you have got good value. When you buy your baked beans, you do not want to know how much of the price is the petrol for the lorry that brought it to the store. You just want to know that it is a good price and how it compares with other prices. Comparability is important, but there is a danger here. As the consumer perceives this thing, there is a headline figure-or perhaps two headline figures. As long as this information is available and broadly comparable, we are most of the way there. I think there is a danger we are overstating it. It is a complex business. What goes on under the bonnet is messy and complicated, but there are people out there providing simple information and simple charges. People know what they mean and they can compare them.

Q337Ms Morris: If that is the case, why are you even bothering considering the different code of practices and the NAPF *V4*[10.47.09]? If you are saying that all people want to know is whether it is 20%, 10%, X pounds or Y pounds, why bother with a code of practice?

Steve Webb: What I am saying is that this is what people who are being autoenrolled now are experiencing. We have to be confident that as the market goes down we do not get these other charges.

Q338Chair: The key in all of this is the hidden charges. We assume there will not be hidden charges in NEST: "That is nice and simple, 0.5%; we will sign up." What happens if there are other things that come in? That is Anne Marie’s point: if there are hidden things

Steve Webb: Yes, sure.

Chair: We do not always know about the hidden ones. We do not always know about the consultancy charges. The consumer does not always know.

Steve Webb: When you buy something, when you sign up for a financial services product or when your employer says, "We will have our pension scheme with firm A," surely, as a minimum, you say, "What is it going to cost me? What are the charges?" I find it hard to believe that, in general, these vast numbers of hidden charges appear out of the woodwork years later. Clearly, they need to do due diligence.

Q339Graham Evans: 20year-olds are signing up to these things. Steve, my granddad used to say, "What I know now and what I knew then." Not everybody in their early days is clued up enough or smart enough to ask those questions. I agree with the point you are making, but you are dealing with lots of young people.

Steve Webb: You are not. No, it is the employer

Graham Evans: It is the employer. Right, okay.

Steve Webb: These are people who, as you say, are in business and have a bit of savvy.

Graham Evans: I understand, yes.

Chair: We are making great progress.

Q340Sheila Gilmore: There are a number of questions arising from what has been said that are important to address. One is that we are not dealing with baked beans. When I go to buy baked beans I have a pretty fair notion of what a baked bean should taste like and I can, indeed, open the tin and eat it. It will have a shelf life, but I am not going to be waiting 40 years to know whether that baked bean is a good baked bean or not. That is a major problem here.

Secondly, even though we are getting a little carried away with the fact that some of these new autoenrolment schemes seem to be quite good-at the moment, at least-there are still a lot of people in existing schemes and a lot of people who will take up supplementary pensions for various reasons. After all, they are not yet autoenrolled or are people who feel they want to save more. This is a much bigger picture than just autoenrolment. Some witnesses have suggested to us that what people should get is something that, in money terms, very simply says, "This is what money was in your pot at the beginning of the year; this is what has been taken out; this is what is left in your pot." There can be signposting to more detailed information if people want to follow that up. This would alert people to the way that this is happening on an annual basis. Is that something we could require, rather than these complicated documents that we have seen?

Steve Webb: Taking your last point first, those are at different points of the process. The codes that we are talking about are particularly focussing, for example, on the sales point. If a firm is choosing which provider to go for, they need to be able to compare costs in a transparent and comparable way. Individuals choosing a pension provider, outside autoenrolment, need to be able to compare costs.

What you are talking about is absolutely right: on an ongoing basis, scheme members need simple information in a transparent way. One of the reasons we want to consolidate-why we do not want to have nine different pensions and nine different pension providers-is we know that if you get nine letters from nine different pension providers you will bin the lot unread. If you get one with a serious amount of money in it you might actually show some interest in it. Firstly, we have to get people to read the blooming things, which they will not if they have too many. Secondly, I entirely agree: we have to make sure it is transparent. There are already regulations about the way this information is presented, but I agree with you. We can always do better. I have seen some of this. Sometimes regulation gets in the way of communication. You have to put 27 caveats in, and because it looks like that nobody even reads the first page. Much more can be done on that.

On baked beans-lest I be quoted as saying, "Steve Webb thinks the market for pensions is like the market for baked beans"-it is the bakedbean test that I apply. That is the test.

On your point about waiting 40 years, I suppose all I would say is that there are no certainties in any of this. We can regulate the best we can. We can make sure that the people looking after the money do their best job. We can make sure the firm puts money in; we put money in; the employee puts money in. However, at the end of it, it is an investment. We are not saying, when we regulate, that this is going to go phenomenally well. However, we have to make sure the process was done as well as it could have been done. You do not have to wait 40 years to find that out; you can be doing that every year through the course.

Finally, on your point about existing schemes, yes, absolutely. The beauty of autoenrolment, in a sense, is that the employer has to make an active decision when their staging day comes about which scheme to enrol people into and they cannot use an existing scheme for their employees if it does not meet the minimum standards. Particularly if we put new quality requirements on, that may well shake up some of the existing scheme members that you are rightly worried about.

Chair: I do not know whether the rest of us have all asked your questions, Aidan, or if you have anything else to ask.

Q341Mr Burley: I think you should have a can of baked beans on your desk as well as the sign on your door saying, "Make it simple, boys." It was just a question about small businesses, because we have talked a lot about how it is the employer that tends to make the decision about which scheme to enrol its employees in on their behalf. That is often easier in a big firm, where you can have people who are dedicated and who have knowledge of that.

My father employed under 10 people; he was not an expert by any stretch, and what pension scheme to enrol his employees in probably was not the priority for his daytoday work. Do you really have confidence that within the context of small businesses, who are focussed on their daytoday activities and are making these big decisions on behalf of their employees, they do have access to all of the information and guidance they need to make decisions in the best financial interests of those employees?

Steve Webb: NEST is critical at this point. The regulator has websites, phone numbers and all of the rest of it, along with places where you can get information like the Pensions Advisory Service-there are a lot of places people can go. However, we recognise that there is the best part of a million small firms in this country, who would really rather not be doing this. NEST will be the right answer for the vast, vast bulk of them. As you know from visits and so on, when NEST was set up, they went out and talked to the sort of people you are talking about. Somebody would say, "I do my books on the kitchen table, of an evening. The phone goes and I am in the middle of something." NEST set up the website so that if the phone goes and you are not active, when you go back into the NEST website you go back in where you came out. It is about silly things like that. This has just the type of people you are talking about in mind.

I always say that with pensions I want a system that works for consumers who do not have a clue and in autoenrolment I want a system that works for employers who do not have a clue. Of course, in an ideal world they would be well informed consumers who shop around, but where firms or individuals are not engaged, we have to make sure the outcomes and still good. That is where NEST is crucial. It is why we flag NEST in the letter we send to employers, to say, "You can go where you like, but there is this thing called NEST." We think the vast majority of small firms will go to NEST and will get a quality service.

Chair: We still have some meaty things to come, but we will move on to communication.

Q342Ms Morris: Who is responsible for communicating to the employees exactly what they are entitled to and what the scheme is about? It could be the employer or the provider. Clearly, then, there is a question of who the Government thinks it should be. However, who is going to make sure it actually happens? Is that a role for Government? Is that a role for the regulator? How do you see that whole communication piece working effectively in the best interests of the employee, the member?

Steve Webb: We see the Government role principally as one of general awarenessraising: for example, our television advert campaigns with "I am in" and Theo and all the rest of it on the telly. We have done tracking work that has raised awareness of automatic enrolment very considerably, both amongst employers and employees, so that when this happens to you in your firm it is not, "Oh, what is this?"; it is, "Oh, it is that thing I saw the advert about." We want that basic awareness. Clearly, firms are choosing the provider. Firms, on the whole, will not have expert knowledge of pensions. Big firms will have HR departments, but many will not.

In general, although the firm chooses it, the contract, assuming it is a contract scheme, is between the individual and the provider. That is the flow of information there. Obviously, if it is a workplace trustbased scheme, that will have been set up by the firm. There will be membernominated trustees on the trust board. It will depend on what sort of scheme it is. On the whole, if an individual has a contract with a provider, clearly that is the flow of communication. If it is trustbased, the trustees have a responsibility to communicate with their members. That is roughly the way we see it working.

Q343Ms Morris: That makes sense. How can we make sure that this actually happens and providers do actually communicate when it is a contractbased scheme? How can we make sure employers do actually communicate the level of detail that is needed to the members, the employees?

Steve Webb: You have a contractual relationship with a customer. For example, autoenrolment only requires a minimum contribution, but, as a provider, you want people to save more. You want them to buy other financial products. We do not have to make Legal & General communicate with the people who have pensions with them, because they are perfectly willing and ready to do that already. I do not think there is a big problem there.

For trust-based schemes, the regulator has trustee toolkits, trustee training and so on to make sure trustees are doing their jobs and doing right by the members. We do not want to put a burden on employers to communicate with their employees about the pension scheme. Some will-and it is great if they do-but because we have so many firms who do not want to be in this role at all, that is not the place to do it. However, the providers will; the trustees will. I am not aware that there is a big problem in this area, but if you come across evidence that there is do bring it to our attention.

Q344Ms Morris: We have had some concerns raised by some employers, who have said they feel in a risky position. They feel that if they give a view, advice or information they are at risk of being seen as financial advisors and, if it all goes pearshaped, at risk of litigation. What has been suggested by some is that there should be this space, as I gather there is in other countries’ legislation, which enables some level of communication and advice from the employer, which is relatively riskfree.

Steve Webb: There is that space. The fears of litigation are greatly overdone. It is a bit like clearing the snow on a path and not doing it because you think someone might slip. The evidence is that you clear the snow and everyone gets on with their life. Likewise, firms have commonsense conversations with their employees about pensions. We all know what a sensible conversation is-giving information and pointing in the direction of websites and all the rest of it-and we know what financial advice is. It looks like a duck and quacks like a duck-that kind of thing.

Firms are clearly not there to say, "I would put your money into Bolivian equities" or something. Of course they are not there to do that, but they can say, "Look, here is some information about the pension scheme. I am putting money in; the Government is putting money in; you are putting money in. It is your decision, but here are some facts about it." I think firms can apply their common sense. The regulator, again, has issued guidance on the website so that employers know where they stand if they are worried. Bridget has a bit more of the details. The worries are greatly overdone, though.

Jane Ellison: Have there been any examples of legal action of that sort?

Steve Webb: I will not say there never have been, but I am not aware of any.

Bridget Micklem: To add to what the Minister has said, there are even letter templates on the regulator’s website that employers can personalise, so that they know they have told their employees everything they are legally required to tell them. There is an extensive toolkit and support for employers to know they have done their legal duty. It is reasonable to make the judgment. The risk of litigation for not doing what you are supposed to do is mitigated very extensively by what support has been provided by the regulator.

Q345Ms Morris: Steve has made it clear that he sees that the employer is primarily responsible when it is pension based and the provider when it is contract based.

Steve Webb: Sorry, the trustees, not the employer.

Ms Morris: We have the situation where there is something the employer can see is going on in terms of what the provider is doing, the information provided, and feels the options being given to the employees are in some way a bit of a hard sell. They can see that, but they can see that Joe Bloggs, who is sweeping the floor, does not see this. They feel they want to be able to give some objective insight. It is not that they want to give financial advice, but they feel there is a ripoff here and, because they feel a duty of care towards their employee, to step in and do something. Yet there is this fear.

I understand you are saying there is clarity when it is trustees and a trust scheme or it is a contract and it is the provider. The employer feels that he has more of a responsibility to his employees, rather than then to say, "Well, never mind." You will probably tell me that for smaller firms it is off the radar, which is probably right, but I think the middle-sized to larger firms do have a sense of responsibility. What can you do to help in those circumstances?

Steve Webb: If you are a firm who has chosen a contractbased provider and you think they are trying to take advantage of your employees, the first thing you do, if you are not satisfied, is change the provider. You have the option.

Q346Chair: How easy is that going to be?

Steve Webb: A lot depends on the basis on which the original contract is signed.

Chair: There might be exit fees and all sorts of things.

Steve Webb: Yes. Again, the employer as consumer has to be a bit savvy here. It is not necessarily a oneoff decision, but it is potentially a decision for a long period of time, and one they ought to do properly. If the person who they are trying to buy from puts provisions in that say, "If you move away from us there will be a fine," you have to ask yourself about that provider. They ought to be willing to change provider, but firms can, at any point, if they want to, pay for an IFA to come into the firm and talk to them. If the firm wants to do that, they can pay for someone who is authorised to give financial advice and get them in. Lots of firms of medium size do that. It is quite a common thing for a firm to do; it is like an employee benefit, essentially.

Q347Ms Morris: Did you consider the legislation in America, I think, where there is this free space, which actually sets out what an employer can do?

Steve Webb: Yes, this is the safe harbour idea. We have looked at that. We felt that there is not a problem. Firms are not being sued all over the place for giving advice; we are really at the other end of scale. Firms could probably more freely have more conversations, which is why we have provided guidance on what they can do. As Bridget says, we do not want firms to keep having to reinvent the wheel. They have to communicate with their employees about autoenrolment, so we provided template letters. We have said, "If you send this letter, you have done your job and given them the information they need."

John McCallion: We do not think that auto-enrolment requires regulated financial advice to be given by an employer. That is the only area safe harbour is, in my understanding, intended to protect people. We would not want employers to drift-and it would not be right to expect them to-into giving regulated financial advice. They should be worried if they are going down that route.

Q348Nigel Mills: We are going back to a discussion we started earlier on about whether having two different regulators for what look to the layman like very similar products is an effective structure. I know in your earlier answers you said you thought it was best to stick as we are rather than try and change, but the National Audit Office was not entirely convinced these two regulators were working desperately well together, when they looked at this. When we heard from them both last week there were some concerns about exactly how much resource the FSA or the FCA were putting towards their share of pension regulation. Do you actually think that the FSA have taken the right approach in this regard?

Steve Webb: I certainly think there is a case for us, as the workplace/pensions people, to have more of a conversation with the FSA than we do. That is probably a fair point. When we have done on the specific issue I mentioned it worked very well. The challenge for the FSA is that, obviously, they are setting up new structures. They have a vast amount of regulation to do in areas where there are probably bigger problems, to be frank, such as the banking system, shall we say?

The bit the FSA does that we are worried about is contractbased workplace provision, where, as we were discussing, we have a relatively limited number of providers. You can see what is going on. They are big firms. There is a lot of audit. There is a lot of internal risk management and so on. It is tiered. It is not just the FSA keeping an eye on these firms; they have all of their own structures as well. We do need to make sure there aren’t either overlaps where there are two regulators trying to do the same thing or gaps where neither of them are. This is what John referred to a moment ago as this mapping exercise. Who regulates what bit of what? We need to work out the standards that the TPR are asking of schemes and make sure that what the FSA are asking of schemes in their bit of the jungle correlates with that. It actually fits relatively well.

I am not complacent about that: joint working needs to be better. We probably need to engage more with the FSA. The danger is of us thinking of the DWP silo and relating to the TPR while the Treasury are thinking in the Treasury silo and relating to the FSA. Of course, we need to be a bit more crosscutting. That is where this quadripartite thing, to use the jargon, of the Treasury, DWP, TPR and FSA meeting on a quarterly basis and looking at issues is a good forum.

Q349Nigel Mills: It is hard enough to get one organisation to be consistent within itself, never mind getting two different ones to be. We will shortly end up with effectively three regulators having a go, because we will have the PRA as well as the FCA and the TPR-if I can get all of the acronyms in the right place. I can see the logic for there to be some kind of macrolevel look at solvency and things in this area, but once we have split up the FSA is there not then an argument for saying, "We can have the PRA doing some of the macro stuff and all the retail and conduct stuff can be in the same place"?

Steve Webb: There could be. One of the worries is that if TPR went into FCA-given their relative sizes, this is what it would be-the organisation that has a focus on employers would be swallowed up. Most of what the FSA does-or the FCA in future-is, as you say, retail. It is consumerfocused, whereas TPR has built up expertise on employers, trustees and workplace provision of that sort. To stick it in a different building you have not achieved anything, but if it comes a single organisation there is a real risk that, just as, as you say, in the FSA work and pensions might be a lower priority than some things, TPR’s work might be a lower priority as well.

It is, however, vitally important. What TPR is doing, as well as autoenrolment, is making sure that multihundredbillionpound pension deficits are filled, which is an incredibly important job. Expertise on employers and workplace pensions is vital for that. I cannot see the gain. I can see plenty of disruption; I can see potential loss of specialist expertise and focus. I would need a lot of convincing, to be honest.

Q350Nigel Mills: I am not sure I was envisaging moving stuff from the TPR into the FSA as being a way of addressing this. Interestingly, of course, for autoenrolment the TPR did get some responsibility, even though most of that ended up being contractbased schemes that are basically the FSA’s job. That seems to be inconsistent with the general regulatory structure. Was there a logic for that at the time?

Steve Webb: I will ask John to chip in in a second, but clearly somebody has to make sure that firms do what they are supposed to do. Firms can do what they are supposed to do either in a trustbased way or in a contractbased way. We clearly could not have two separate regulators checking, "Have you done that or have you done that?" What TPR has is a contract for employer compliance with the autoenrolment duties, in both the contract and the trust spaces. I will just ask John to say a brief word about that crucial role that they have.

John McCallion: This goes back to the point I was making about the nature of relationships that an organisation like the FSA has, its expertise and focus and the regulator’s world of dealing with many tens of thousands of employers. I was not involved at the time with the difficult decision about where the employer compliance regime went, but it has been working well the way it has been set up. That is why we have gone the way we have with automatic enrolment and why the regulator took on those particular responsibilities.

The other point I was going to add was back to your point about the split between the FSA or the FCA and the regulator. Even if you were to move some of the contractbased pensions responsibility, it is all interwoven with the whole wider business of the insurers and the whole personal pensions market. You would just shift the dilemma, really. The only way we can do it is get even better at organisations working well together, because there will always-it seems to us, however you look at it-have to be a boundary, unless you move everything in to the one giant regulator, which carries all sorts of issues.

Q351Chair: Minister, you have already mentioned small pots and said that your preferred approach is pot follows member. You have given us some reasons why. I would say that, from the evidence we have received, you are in the minority.

Steve Webb: Yes we are; we know.

Chair: Why do you think you are right and the evidence we have is wrong?

Steve Webb: I think a minority is sometimes a good place to be, actually.

Chair: That is because you are a liberal.

Steve Webb: Thank you very much for that.

Chair: I will not go there. It was a cheap shot.

Steve Webb: I will not say which side of the House I now sit on. This is the one issue where I most encountered the vested interests of the pensions industry. I am a bit naïve occasionally, but on this occasion I was astonished by the hornets’ nest we managed to stir up, because in my ideal world-and I should stress this is my ideal world-every pot follows every member. This is an absolute bombshell when you say this, because, of course, you have all of these people who have lots of legacy business. They are terrified that all of their profits are about to disappear, because this idiot is going to force people, when they change jobs, to move their pension pots. If you are a new firm coming into the market and getting lots of new pots, you think it is great; however, if you are an old firm, not doing a lot of new business but with all of this legacy pension money sitting there, often with relatively high charges, you are terrified that I am going to come and stir up your cosy little world and start moving profitable money out of your business. You have to filter everything you hear on this issue and think, "Why are they saying that? What is their commercial interest?"

That is the first thing.

Q352Chair: I have to say that the TUC have that.

Steve Webb: No, the TUC have a different objection.

Chair: Some of the consumer groups would not agree with you either. It is not just the industry.

Steve Webb: No, parts of the industry objected for that reason. The consumer groups have raised a crucial issue and they are right: you cannot just have pot follows member into any old rubbish. The letter that the TUC and NAPF and Age UK and Which? sent said, "We are worried that you are going to autotransfer somebody’s pot from a ‘good’ scheme to a ‘bad’ scheme and there will be consumer detriment." I said to them, "What are we doing letting people be autoenrolled into ‘bad’ schemes?" The problem is not £2,000 being moved from a good scheme to a bad scheme; it is an entire workforce in the new company in a bad pension scheme. We have to address that. Once we have addressed that, the objections to pot follows member not only disappears but, I think, actually becomes a very strong case.

Q353Chair: Are your hands not tied in the first place because of the restrictions on transferring into NEST?

Steve Webb: We would have to fix that.

Chair: You did not have the choice of having NEST as an aggregator. If you can have NEST as an aggregator, does that change your mind?

Steve Webb: No. We could have done that. Clearly, we cannot transfer money into NEST now, but if our policy had become that NEST is the home of lost pots, we would have had to change the rules to do that. We were going to have to change the rules to do this anyway, so we did not rule that out. The issue with having a thirdparty aggregator, a home for lost pots, is that if you set the limit really low for the small pot you still end up with lots of fragmentation. If we say anything under £2,000 is a small pot, NEST or somebody gets all of these piddling little pots and the industry is thrilled because this is all of the dross that they do not want. There are people out there with accumulated dross with a thirdparty provider plus a £3,000 pension here and a £5,000 pension here and a DB pension there. You still have fragmentation. If you have the cap really low you still end up with fragmentation. All you have done is save the industry the hassle of a few small pots.

If you set the threshold high, then the home of lost posts becomes a giant, unbalancing the market, because suddenly most people who leave a firm leave a small pot behind, all these pots get accumulated and you get an imbalance in the market. You either do not get consolidation or you get a giant in the middle of the market.

The beauty of pot follows member is that first of all you get engagement. People miss this point all of the time: you get engagement because you are building up a bigger and bigger pension pot with the provider you are currently with. You do not get your nine letters from nine providers; you get one and it is linked to the firm that you are currently working for. There is evidence that people get interested in pensions, anecdotally, once your pension pot passes your annual salary, say. I do not know if there is any evidence for that, but there is a sense that it then starts to get interesting. That is going to happen much more if you have pot follows member.

How do we make sure, however, that we do not have people autotransferring into poor schemes and losing out, which is what the consumers’ association and others are worried about? First of all, suppose active member discounts and all of that carry on for now; we might get rid of them, but for now they are there. Autotransfers mean you are not exposed to that risk. That is the first gain. The second gain is that you get a bigger, fatter pot. We know that bigger, fatter pots get you better value pensions at the end. The third thing is that you have this money now in your new scheme, but you have an optout. If the scheme you were in before is great and you like it or it is particularly good value, you are free to stay. This is not mandatory; you have an optout. In general, you are building up pots as you go and it becomes normal. You take your pension pot with you; you are building it up; you engage with it. This has huge potential.

In a world of DC, where people are building up these bigger pots, they will be able to get better value annuities. It will just become normal that you have a pension pot and you are aware of how big it is. Shunting pots off over here and having low thresholds and legacy schemes seems a mess to us.

Q354Chair: Of course, if you go to work for an employer who has autoenrolled his workforce into NEST, you are up against a wall.

Steve Webb: We will fix it. We have to fix it.

Q355Chair: That bit you have to fix. When you did your modelling, you did not take account of transfer limits higher than £2,000. That would have got the economies of scale.

Steve Webb: We did. We did four different transfer limits: £2,000, £5,000, £10,000 and £20,000.

Chair: I will take that. We will leave that and go on to our last section, which is defined ambition.

Q356Sheila Gilmore: I suppose I could start by asking whether this is a real idea. Does it have something going for it?

Steve Webb: Yes. If I fell under a bus tomorrow, defined ambition would continue to happen, because it is happening now. If you look at the big firms who run defined benefit pension schemes, many of them are saying, "We are taking all of the risk and the volatility, what can we do to share some of the risk with our employees?" The classic thing for them to do is adjusting the scheme pension age for future accruals because of longevity increases. There is this acronym LEAF for life expectancy adjustment factor, or various other schemes. I think Tesco have done something similar; BAE have done something. Instead of being pure, rocksolid DB, they have said, "We are going to put some of the risk of longevity onto the workforce so future accruals will be at an increasing age because people are living longer." That is risk sharing; it is defined ambition.

Defined ambition is just a label for stuff that is happening. What we are trying to say is that many firms will enrol into pure DC. They will do it; they will do the legal minimum; they will get on with it. Whereas pure, perfect, goldstandard DB may have gone, good employers have not.

Every week, I have major employers coming in to see me to say, "We want to do more than the basic minimum, but we want a regulatory framework that works for us so that if we do some risksharing you do not say, ‘There is a pension promise there.’ I want a PPF levy. I want funding standards. I want survivors’ benefits. I want indexation." In a world of auto-enrolment, where we have abolished contracting out so you have a singletier state pension and anything a firm does is on top of state provision, we should be welcoming firms who want to go beyond the minimum. At the moment, we hammer them with regulation.

Q357Sheila Gilmore: What you first starting talking about was DBlight, i.e. people varying their DB schemes, which has been happening anyway, recently, with the age going up, contributions going up and career averages being introduced. However, unless I have picked this up wrong, what is being talked about here is perhaps something that would have a legislative package of its own because it would appear that some employers are concerned that anything they put in immediately puts them into something else. We only have two definitions, basically; is this a third one? If so, do you think we should legislate for that sort of third variety?

Steve Webb: Yes. I will bring in Bridget, who was one of the key authors of Reinvigorating workplace pensions, which looks at a lot of the options. Many of these things would require legislation. For example, if I want to offer my employees a careeraverage pension, which most employees would think was great, it is illegal for me to do that unless it is inflationlinked. I cannot offer my employees an averagesalary pension unless it has full legal inflation linking. Why? We all think inflation protection is important and valuable, but that should that feature have to be part of the system?

Should we not allow employers to offer a package? Workers might well say, "Actually, I would like to know what my pension is going to be when I retire and I will worry about inflation through other routes. I want the certainty of a salaryrelated pension." If firms will not offer any more indexlinked, salaryrelated pensions, is it not better they offer something than they offer nothing?

The worry I have is that we say, "Here are all these things we say pension schemes should be like." Firms then say, "We cannot afford to do everything, so we do nothing." I am trying to create a space in the middle, which, as you say, will require legislative change. It could be BD light; it could be an element of salary relation, but with less bells and whistles; or it could be DC plus. It is a pot of money that is invested, but maybe there are some guarantees or some elements of certainty: a cash balance being an obvious example. Morrisons have set up a cashbalance scheme, where they say, "When you reach pension age, or leave us, we guarantee a certain sum of money for each year you have worked for us." It is a proportion of the salary that has gone in and so on. What that pension buys depends on annuity rates and all the rest of it. That is a risk on the employee, but the firm are taking the risk while you are working for them.

There are a range of models in the document. Let me just ask Bridget to say a word on this.

Bridget Micklem: All I would add is that what we are doing at the moment in the followup to Reinvigorating workplace pensions, where some models were looked at, is to look at what can be done under the existing framework and what you could do within the existing regulation. The ambition, to coin a phrase, is to have a framework that would span the lot so that you have a whole framework that would cover the options that run from DB and from DC. It does not make sense to have a very bitty piece. Certainly, we are looking at those two things.

Q358Sheila Gilmore: Obviously, some of the things that have been put into DB regulation have been put in for protection. A lot of things, like PPR and the levies and so on, were about experiences that had happened. People who had thought they had a pension promise suddenly found they did not have a pension promise when the firm went bust or whatever happened. In saying there is one framework, are you suggesting we should take anything away from the schemes that are already defined as DB?

Steve Webb: No. I am certainly not suggesting we abolish the PPF. What I am saying is, the second you stray into anything that looks like a pension promise, we come down on you like a ton of bricks. I was listing all of the things you have to do. I suppose what I was saying that limited price indexation, protection against inflation, of course, is a great thing. People live for 20odd years in retirement. Inflation erodes the value of savings. Inflation protection is a good thing. However, if we will not let firms offer pensions that do not have it and they just say, "We will not provide them, then," we have not protected anybody.

I am trying to say that firms who are willing to go beyond the basic minimum could be allowed to have some elements-PPF is a separate issue-of protection or guarantee but not the whole shooting match. That is the space that we are in.

Q359Sheila Gilmore: When do we expect more outcomes on this? Some people have said that employers are just not interested.

Steve Webb: On the contrary, they very often say to me, "Please do not say we have come and seen you," because they are reviewing their own workplace pension provision and, in general, it is not going to get more generous. They tend to be a bit coy about the fact. Household name employers are coming in to the Department every week and talking to me and my colleagues.

As I say, there clearly is a set of employers out there who are going to do DC, minimum contributions or a bit more and that is the end of the story. However, there is a set of employers who see pensions as recruitment and retention. Retirement is the third word I would use. Not many people in the job interview say, "Yes, but what about the pension?" I accept that.

Certainly, though, holding on to more experienced workers can sometimes be about pensions. It is also about managing the retirement of your workforce. If your workers cannot afford to retire, you have a problem. DC workplace pension provision is part of that as well. Not all firms are interested, but there is a set of employers who are. In some cases it is perhaps the more paternalistic employers or the employers of older workers in some cases.

Your 20yearolds are not banging on the door demanding pensions, necessarily, but your 45yearolds may well be. It will be a patchwork. It would be lovely to say, "Here is this nice, neat model and everyone is going to do it." It is not going to be like that; it is going to be diverse.

Q360Debbie Abrahams: At the beginning you mentioned LEAF being used in terms of the development around definedambition schemes. How is healthy-life expectancy being considered within the development of DA schemes? In Graham’s example of his small business with members of the board and so on and shopfloor workers, we know the gap in life expectancy and healthy-life expectancy between board members and people on the shop floor is significant. How is that going to be considered and taken into account in future DA schemes?

Steve Webb: The difference between healthy-life expectancy and life expectancy does not make a difference if you still have to pay somebody a pension. I will come back to your other point. Sadly, if someone is well and active right up to the end or is unfortunately in declining health right up to the end, the bill is the same. The financial implications are the same for any given individual. Clearly, the point you make, however, is that different people in the firm will have different life expectancies, leaving healthy-life expectancy on one side.

Debbie Abrahams: This is replicated across the country; we know this.

Steve Webb: Yes, absolutely. I do not dispute this for a second. Therefore, that is an issue in a world where, for example, inflation protection becomes weaker or something like that. The flipside of that, however, and the good news for DC, is that DC pensions, gender aside, are based on how long you are going to live. Funnily enough, if you buy a DC pension in Glasgow you will get a better pension than in Surrey. Funnily enough, the move to DC, paradoxically, may to some extent-I do not want to overplay this-address the very point that you raise. Pensions that are paid on how likely you are to live will be bigger for people who have more disadvantage.

Debbie Abrahams: Perhaps there needs to be more flexibility.

Q361Chair: If you live in Milngavie in Glasgow and you do not have a long life expectancy it is a place to go.

Steve Webb: It is a place to retire to.

Chair: That has exhausted all of our questions, Minister. Thank you and your team for coming along this morning. It will be very valuable in terms of us writing our report. We hope to publish a minireport around the NEST restrictions in the week of 11 February, but I am sure you of all people will understand if that slips a bit.

Steve Webb: It had better be on time; that is all I can say.

Chair: That is certainly our intention at the moment, but it will obviously take us a bit longer until we finish our final report. We do hope to have that with you fairly rapidly after we agree it. With that, I say thank you for coming along.

Prepared 25th January 2013