Monitoring the Performance of the Department for Work and Pensions in 2012-13 - Work and Pensions Committee Contents

5  Pension reforms

65. We published a report on governance and best practice in workplace pensions in April 2013.[76] On 23 October 2013 we held an oral evidence session with the Minister for Pensions, Steve Webb MP, to explore developments since our report was published.[77]

66. As our report explained, to address widespread under-saving for retirement, the Government has introduced automatic enrolment into workplace pensions. Beginning with the largest companies in October 2012, employers will be required to enrol their employees into a workplace pension scheme and to make contributions to that scheme (unless the employee opts out). This requirement is beginning for different employers on different dates, depending on the number of employees, but the process will be completed by 2017 for all existing employers. Auto-enrolment will bring many millions of people into the complex world of pension saving for the first time.

Pension charges

67. The range and scale of pension charges and costs is complex and is often impenetrable for many scheme members. Our view on pension charges was that employees being automatically enrolled into workplace pension schemes, many of them on low incomes, need to be protected from excessive charges because of the potentially serious effects that high charges can have on the returns which individuals receive on their pension investment. Some of our key recommendations sought to address concerns about charges.

68. We previously recommended that member-borne consultancy charges—charges imposed by pension consultants for providing advice to employers, which are then deducted from scheme members' pension pots—should be banned outright. Following our report, the Government announced its intention to ban consultancy charges in automatic enrolment qualifying schemes. This ban came into effect from 14 September 2013. We very much welcome this step.

69. We also highlighted concerns about the lack of transparency in the information provided by pension providers about the total charges and costs that scheme members incur. As well as the adverse impact on scheme members, lack of clarity about charges and costs also makes it difficult for employers to choose a good value scheme in which to auto-enrol their employees. We recommended that the Government review the levels of transparency across the pensions industry early in 2014 and that, if it found that a lack of transparency was preventing employers from making informed choices about different pension schemes, that it impose a charge cap on auto-enrolment qualifying schemes or on the schemes which are not complying with the transparency codes and guidance issued by industry bodies.[78]

70. In response, the Government announced its intention to publish a consultation on the quality of workplace pension schemes which would include a proposal on capping charges in Defined Contribution schemes.[79] The consultation took place during autumn 2013. During our evidence session, the Pensions Minister emphasised that imposing a charge cap "is not a no-brainer" because:

    First of all, how do you define what it is you are capping? The OFT [Office of Fair Trading] said there are 18 different sorts of charges they have identified, so you have to sort out which of those you are counting. You have to have the data. Alright, you set a cap. Where do you set it? Do we know enough about current charges? [...] The third worry they had was levelling up. You set a charge cap. Does that just mean everyone drives up to the cap?[80]

The Minister also explained that "if we had a charge cap, we would have to define charges comprehensively" because "the danger is, if you define it too narrowly, mysteriously all these other charges that you have never heard of suddenly start popping up".

71. He made clear that, although the focus was on auto-enrolment, "any charge cap we introduce will not just apply to schemes that you newly use for auto-enrolment; it will apply to qualifying schemes"—existing workplace schemes into which employers may be seeking to enrol employees as the automatic enrolment responsibilities are extended.[81]

72. In January 2014, the Government announced that, while it "remained strongly minded to cap pensions scheme charges" for auto-enrolment schemes, no cap would be introduced before April 2015 to ensure that employers required to auto-enrol their employees in a workplace pension scheme had at least 12 months' notice of the rules which would apply to them.[82]

73. In February 2014, the Government introduced an amendment to the Pensions Bill 2013 which will place a duty on the Secretary of State "to make regulations requiring greater transparency around the transaction costs incurred by work-based defined contribution schemes".[83]

74. We welcome the Government's decision to bring forward regulations to ensure greater transparency in transaction costs in workplace pension schemes. The range of charges and costs which scheme members incur can make an enormous difference to the size of the individual's pension pot when they reach retirement.

75. There has also been some progress in tackling the wider issue of high pensions charges in the form of the Government's consultation on a possible charge cap. Although we understand the reasons for the Government's announcement that no steps to implement this important change will be taken for at least another year, it is disappointing that there will not be earlier progress. We reiterate our view that, at a time when millions of people are already being automatically enrolled into workplace pension schemes, it is vital that they are protected from excessive charges imposed by some pension companies and that the charges which are levied are transparent and comprehensible.


76. We also commented in our 2013 report on the disadvantageous position facing many scheme members when they come to convert their pension pot into an annuity. We recommended that the Government and regulators took action to ensure that pension schemes made clear to their members that they had the option to buy annuities from providers other than their pension provider; and that full information was given to scheme members on the variations in annuity rates different providers offered, at the time they came to convert their pension funds.[84]

77. The Pensions Minister indicated at the beginning of January that he was considering measures to allow people to switch annuities in a similar way to the ability homebuyers have to change mortgage provider every few years to secure a better deal.[85]

78. The Financial Conduct Authority (FCA) published a Thematic Review of Annuities on 14 February. This found that 60% of scheme members buy an annuity from their existing provider; and that 80% of consumers who do this could get a better deal on the open market. It concluded that there were "significant barriers" to consumers shopping around in this market. The FCA now intends to carry out a competition market study on products for retirement income. It says that "If we find poor sales practices we will ask firms to make changes immediately".[86]

79. The Financial Conduct Authority's intention to carry out a market study of retirement income products, following on from its thematic review of annuities, is welcome. However, the Government and the regulators have had clear evidence for some time that the open market in annuities is not yet working in the best interests of the majority of pension scheme members, many of whom face the risk of substantial financial loss in purchasing an annuity from their pension provider. We recommend that the Government and the FCA take urgent action to make the open market option a realistic one for all those who purchase annuities, not just the minority who are currently able to negotiate it successfully. We reiterate the recommendation from our 2013 report: that, if improvements in the annuity market do not occur soon, the Government might, as a last resort, have to consider taking steps to separate the function of providing pension schemes from that of providing annuities.

Defined Ambition and Collective Defined Contribution schemes

80. Our pensions governance report highlighted that, in the current workplace pensions system, Government, pension providers, employees and employers all share the market and longevity risks involved in pension saving to some extent and to varying degrees, depending on the type of scheme. In Defined Benefit (DB) schemes, employers bear the risk of low investment returns, and of scheme members living for longer than expected. Conversely, in most Defined Contribution (DC) schemes, it is the scheme members who bear the risk of poor investment returns, low annuity rates at the point of retirement and greater than expected longevity, factors which could potentially result in a lower income in retirement.

81. In November 2012 the Government published a strategy paper, Reinvigorating Workplace Pensions. Amongst its proposals were ideas for new ways of risk-sharing in workplace pension schemes under the banner of "Defined Ambition" (DA) pensions. The document explained that: "there may be a number of different types of Defined Ambition schemes. Some may have elements of current DB schemes, but with greater sharing of risk; others may start from a DC standpoint, but with increased certainty for members".[87]

82. We believed that the benefits of offering new forms of risk-sharing arrangements included:

·  helping to rebalance risk between the employee and the employer;

·  potentially providing employers with an attractive alternative to DC schemes; and

·   potentially offering employees better outcomes from, and/or greater certainty about, retirement income.

83. Our report welcomed the Government's intention to develop plans for DA risk-sharing schemes. We recommended that the Government take the necessary steps to remove legislative and regulatory barriers to DA by 2016. Meeting this timescale would help ensure that employers offering DB workplace schemes would have a viable alternative available to DB when contracting-out ends as part of the State Pension reforms in 2016 and avoid the burden of two major upheavals in pension regulation in close succession.[88]

84. In oral evidence in October 2013, the Pensions Minister told us that his aims in taking forward DA were: to provide scheme members with greater certainty about the pension they would receive than traditional DC schemes offer; to look at a regulatory framework that could make it cheaper to offer pension guarantees than was currently the case; and to assess the "Dutch-style" collective DC pension model (CDC), which does not require use of annuities and which offers "risk-pooling" between scheme members.

85. The Minister confirmed that "if we are going to do this, we will have to do it soon, because the end of contracting-out in 2016 means firms are making decisions now" . He indicated that draft legislation might be brought forward early in 2014, followed by a full Bill in the next parliamentary session. [89]

86. In November 2013 the Government launched a consultation on Reshaping workplace pensions for future generations, which included more detailed proposals for introducing DA and CDC pensions and making the necessary accompanying regulatory changes.[90] The consultation closed in December but DWP has not yet published its consultation response or any final proposals. It remains unclear whether the plans for DA will be taken forward in a Bill in the 2014-15 session.

87. The Government launched a consultation on its plans for Defined Ambition workplace pensions in autumn 2013. We expected to be invited to carry out pre-legislative scrutiny on the resulting proposals for broadening the range of pensions available to employers, but these final proposals have not yet been published. We are concerned that the momentum for bringing forward these proposals may have stalled. It is important, as auto-enrolment widens out to the whole of the working population, and with the continuing closure of private sector Defined Benefit schemes, that employers and employees are offered new ways to share risk and to maximise retirement income. There is additional urgency in that the new arrangements ideally need to be in place by the time contracting-out of DB schemes ends in 2016. We look forward to seeing the Government's legislative proposals for these changes very shortly.

76   Work and Pensions Committee, Sixth Report of Session 2012-13, Improving Governance and best practice in workplace pensions, HC 768, April 2013 (hereafter "Governance report") Back

77   Oral evidence taken on 23 October 2013, HC 728 Back

78   Governance report, para 70 Back

79   DWP Press Release, The government is acting to protect consumers by announcing a two-pronged plan to tackle high and inappropriate pension charges, 10 May 2013 Back

80   Oral evidence taken on 23 October 2013, HC 728, Q26 Back

81   Oral evidence taken on 23 October 2013, HC 728, Qs 42-44 Back

82   HC Deb, 23 January 2014, col 14WS Back

83   HC Deb, 24 February 2014, cols 11-12WS  Back

84   Governance report, paras 76-77 Back

85   The Guardian, 6 January 2014, "Proposal to allow switching of annuities angers British pensions industry" Back

86   Financial Conduct Authority, Thematic Review of Annuities, 14 February 2014, Executive Summary. The terms of reference for the Retirement Income Market Study are available on the FCA website:


87   DWP, Reinvigorating workplace pensions, November 2012, Cm 8478, Executive Summary para 12 and Chapter 3 Back

88   Governance report, Chapter 8 Back

89   Oral evidence taken on 23 October 2013, HC 728, Q72 Back

90   DWP, Reshaping workplace pensions for future generations, November 2013, Cm 8710 Back

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Prepared 18 March 2014