5 Pension reforms
65. We published a report on governance and best
practice in workplace pensions in April 2013.
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.
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.
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 chargescharges
imposed by pension consultants for providing advice to employers,
which are then deducted from scheme members' pension potsshould
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.
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
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?
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.
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.
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".
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.
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
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".
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
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".
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.
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
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.
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.
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
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
Oral evidence taken on 23 October 2013, HC 728 Back
Governance report, para 70 Back
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
Oral evidence taken on 23 October 2013, HC 728, Q26 Back
Oral evidence taken on 23 October 2013, HC 728, Qs 42-44 Back
HC Deb, 23 January 2014, col 14WS Back
HC Deb, 24 February 2014, cols 11-12WS Back
Governance report, paras 76-77 Back
The Guardian, 6 January 2014, "Proposal to allow switching of annuities angers British pensions industry" Back
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:
DWP, Reinvigorating workplace pensions, November 2012,
Cm 8478, Executive Summary para 12 and Chapter 3 Back
Governance report, Chapter 8 Back
Oral evidence taken on 23 October 2013, HC 728, Q72 Back
DWP, Reshaping workplace pensions for future generations, November
2013, Cm 8710 Back