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7.46 p.m.

Lord Desai: My Lords, we are grateful to my noble friend Lord Haskel for bringing this matter before us. It is of some interest that this particular problem of pensions has been discussed again and again lately, more by this side of the House; indeed it is we who initiated the discussion. We discussed the matter last June when my noble friend Lord Jay, who unfortunately is not in his place, initiated a debate.

The reason is that it is quite clear that in occupational schemes and in personal pensions there has been something akin to a disaster over the past few years. That disaster was not only foreseen; it is a manufactured disaster. When we look at the history of how the transfer to personal pensions was encouraged, indeed debated, we see that in a sense not enough care was taken to make sure that what people were being sold was properly vetted and tested.

The enthusiasm for the transfer to personal pensions was such that one almost suspects—one cannot quite allege it —that misinformation was generated: a price distortion. In a free market if you had price distortion and signal distortion wrong decisions would be made. I do not say this lightly. The noble Lord, Lord Jenkin, made a remark about individuals taking responsibility. The nice thing about this episode is that the individuals who were responsible for the disaster have not taken responsibility. Mr. Norman Fowler, who was Secretary of State at the time, would seem to be very proud of what he did. In his memoirs, Ministers Decide, he says:

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The estimate of how many people got it wrong is, I agree, perhaps not as high as 83 per cent. That was a false figure. Perhaps it is only as many as 500,000 people.

The noble Lord spoke about selling a car. The context is quite different. The person who sells a car does not have to know whether the buyer has the income to pay for it. But it is irresponsible to sell an unsafe car. That is the problem. The fault does not lie with the purchaser but with the seller.

The noble Lord, Lord Lawson, who at the time was the Chancellor of the Exchequer, wrote in his memoirs:

    "First, the tax reliefs enjoyed by occupational pension funds were extended to personal pensions whose promotion had been one of the main purposes of the Fowler reforms. They were taken up on a positively embarrassing scale, partly because Norman had persuaded me to provide, at least on a temporary basis, excessively favourable National Insurance contribution rates for those who contracted out of the State Earnings Related Pension Scheme in order to invest in a personal pension scheme".

he Chancellor of the Exchequer was embarrassed by the concession he had made. Obviously, he made the concession because a propaganda campaign had been mounted, which was close on misinformation, generating anxiety about SERPS.

Noble Lords have spoken about mobility and how, in our great and changing age, many people want to change jobs. While it is true that occupational pension schemes discouraged mobility, SERPS did not do so. If people had been concerned only with mobility, they could have stayed in SERPS.

Let me quote what my noble friend Lord Jay said during the debate on 15th June this year. He offered a quotation from Michael Prowse, one of our better economics correspondents, who wrote in the Financial Times:

    "The original SERPS had all the virtues of a good pension scheme. It offered exceptionally low administrative costs, job mobility and maximum security in old age. Nothing in the private sector can match this combination of virtues". —(Official Report, 15/6/94; col. 1750).

hat was said in the Financial Times, not in Tribune—and not by me, either.

Let us be clear that SERPS was a good scheme. First, the Government started to undermine the benefits under SERPS; and then they spread the rumour that, because the dependency ratio would change, SERPS would become too expensive. A moment's thought would show that how a society pays for its pensions is a kind of macro-economic point. Those who are in work pay for those who are retired, whether it is a funded or an unfunded scheme. If those who are in work refuse to pay for those in retirement, there will be only inflation and a strain on resources. Basically, in such a transfer between generations—this is a sound economic theory; I know what I am talking about—there needs to be a scheme which comprises low administrative cost, low risk to the taker and good information and is one from which society as a whole can benefit.

I respect the free market. Some of my best friends are free marketeers. However, in the free market lodge, there is a strange contrast between the UK and the USA. In the USA there is a free market but they have zealous regulators. They do not just believe in laissez-faire; they

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believe in competition. They believe in the free market, an open society and transparent information. They believe in thorough regulation. In the UK, especially over the past 10 years, in enthusiasm for the free market we have let these schemes go on and, four or five years later, various people have paid the cost of unregulated free enterprise. In a sense much of the privatisation and deregulation has been an outdoor relief scheme for the City, which has made a lot of money out of it. There was a market failure and no proper regulation. No one was in place to regulate the kind of schemes that insurance companies were selling. It was not even asked whether they had properly trained staff. Staff training for financial operations is only now beginning to occupy the minds of people in the City. There was self-regulation and of course it failed.

Only after some 500,000 people have lost something on their personal pension—that is 10 per cent., which is a high risk factor—and only after occupational schemes have failed do we have a stream of reports: the Goode Report; the Government's response to the Goode Report, in two volumes; and another little response to the Goode Report. There will also be legislation. Why could it not have been seen beforehand that a disaster would be bound to happen if such a huge reform were mounted and it was not checked out whether the seller had the capacity, authority and information to be a good seller—especially if the attractiveness of one asset as against another was being distorted, basically bribing people to buy that asset.

The Government want to have free markets and believe that deregulation means no regulation. Deregulation makes a move from what is perhaps an over-interventionist scheme to one where a proper choice can be made with full information about the costs and benefits of the choice being made. What happened in the case of personal pensions? The SIB said—again, it is not lightly said because the SIB tries to be extremely polite about these matters—

    "The City is satisfied from all the information it has that some of the business was done in a materially non-compliant way and some of the investors concerned will be found to have suffered loss as a result of unsuitable advice".

How lovely! Only this afternoon there was a Statement read in this House from the Secretary of State for Social Security. He was pursuing people who were scrounging and defrauding the social services. They were probably defrauding the social services of £10 or £20 each, which is not very much. The suffering of the 500,000 people in those personal pension schemes far exceeds the amount of money which at the next Tory conference the Secretary of State for Social Security will boast about having saved. Nothing has been done to punish the people responsible. No Minister has apologised in public, either in this House or the other place. It is assumed to be due to market failure and the fact that this sort of thing happens. People have to be responsible for what they undertake, and the buyer should beware. But what about the seller? Why does only the buyer have to beware? Why is something not done about the seller? Why are not proper regulations laid down?

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It is very easy to say that it was done "in a materially non-compliant way". More simply, people were lied to. That is what it was. It was mis-selling. I am sorry to say that there has been very little done about mis-selling.

If we are to have a free market, we should adopt the American standard. We have to be aware that free markets fail. The answer often is not intervention but regulation —intelligent regulation. Let us have that. It was a mistake to undermine SERPS. Having lost the one good pension scheme that we had, we have undertaken more expensive ones. I believe that we shall have to spend a lot of time getting back a properly supervised and properly regulated pension scheme in which people will have confidence. To restore confidence in the pensions industry will take a very long time. It will be very costly.

8 p.m.

Lord Meston: My Lords, the first part of the Motion for debate this evening calls attention to the consequences for those who transferred from occupational and other pension schemes. The problem concerns not just those who transferred out of existing schemes—those are people who can be identified —but also those who opted not to join established occupational schemes, who are less easily identified. They will have to be identified as the mess created during the 1980s is cleared up in the course of the 1990s.

It is now clear that the consequences have indeed been serious for a large number of people; just how serious and how many people were affected we shall probably never know precisely. I suggest that there is a heavy onus on the pension companies to try to find out as quickly as possible. It is a truism that existing pension entitlements which were transferred by people in their thousands were hard earned. That looks to the past. For the future, the preservation of the values of accrued pension rights during the 1990s and beyond becomes an all the more important part of everyday life as people live longer and no real job security can be assured.

The activities of those who misadvised and misled people into entering unsuitable pension arrangements with hidden costs have created a large additional measure of anxiety and uncertainty in the lives of those who relied on such people and on their representations. They paid a high price for flexibility and choice, and other slogans which lay behind the move to opt out of schemes to which people already belonged.

The exposure of this disaster—I fear that is not an overstatement of what happened—led to a large amount of finger-pointing and buck-passing. The pension companies and their commission-driven agents must obviously take the main blame and bear the main cost, presumably at the expense of their shareholders and other policyholders. I welcome the remarks of the noble Lord, Lord Jenkin of Roding, in his description of the improvements in the culture of the present pension market. I hope he is right and I hope that the enlightened self-interest of the pension companies will ensure that there is no repetition of this sort of mishap in the future. I cannot help fearing that he may be over optimistic.

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The DSS can be blamed for advertising to encourage people to opt out of occupational schemes in favour of private plans. As the noble Lord, Lord Jenkin, observed, the trustees of existing occupational schemes can be blamed for not advising caution. Employers can perhaps also be blamed for not advising caution in a situation in which they stood to save the cost of their contributions to the existing schemes if employees could be encouraged to go elsewhere. Certainly the SIB can be blamed—as it has been—for not acting faster, thus delaying both relief for investors and increasing the final bill for the pension companies.

As matters stand it seems that people also lay blame on administrators of occupational pension schemes—including the Treasury in respect of public-sector schemes—for putting too high a price on allowing reinstatement into their schemes. Finally, as we heard from the noble Earl, Lord Clanwilliam, among others, individuals themselves may be blamed, particularly if they have to fight for the compensation to which they feel entitled, for allowing themselves to be misled. There is an unattractive prospect of pension companies and their agents and independent advisers arguing that they in fact offered no advice, or no advice which could have been expected to be relied upon by the individuals whose business they were seeking.

The second part of the Motion for debate requires attention to remedies and future protection. It seems that there must be two priorities. The first is to ensure that the victims are identified and are then compensated fully and quickly. Like any other victim of somebody else's culpable acts or omissions, those individuals should be restored to the position in which they would have been had they remained where they were. I entirely accept that that exercise may not be easy and that there may be difficulties of computation and projection. But the Government owe a responsibility to provide publicity corresponding to the publicity which enticed people out of existing schemes in the first place. They have a responsibility also to exert pressure in the appropriate quarters so that victims do not have to cross a legal minefield full of arguments which anyone can see could be levelled about disclaimers, limitation periods and the like. It should not be too much to hope or to expect that pension companies, anxious as they properly are to restore confidence, will accept liability and that in the great majority of cases the only discussion will be about quantum and the method of compensation.

It is also to be hoped that in more difficult cases, where those being offered a compensatory sum can justify the need to have a second opinion on the amount being offered or the method of compensation, the pension companies will, where appropriate, pay for independent actuarial advice. I am afraid that that regrettably raises the problem behind the old saying that if you put a question to two actuaries, you are likely to obtain three different answers.

The second priority is to ensure that, so far as possible, this does not happen again. The pension companies will surely be looking at their commission structures; that means not only at the way in which commission forms the major part of the agent's

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remuneration, but also at the way in which commission is higher for some types of product than for others. For example, as I understand, it a lower commission is typically payable for a single premium plan than for an annual premium plan. Obviously that can affect the advice that is given to the individual consumer. In that respect the proposed introduction of a declaration to the consumer of the commission payable to the intermediary or agent is long overdue and we all look forward to the improvements that that will undoubtedly bring about.

I suggest that the Government must take a hard look at the regulatory and statutory framework. I am sure there can be no doubt in anybody's mind that the Financial Services Act would not have left Parliament as it did had the mess now revealed been properly foreseen at the time. The Companies Act 1989 made some changes; but they do not go far enough and there remains a great deal of red tape behind a bewildering array of acronyms.

This is not the time and place to analyse the weaknesses of the present structure with the delegation by the SIB to various SROs. The clear lesson is that the structure involving the SIB providing guidance—and little more than guidance—to SROs, albeit a reduced number of SROs, has not proved adequate. What is now needed is one overall regulator concentrating expertise in a single body and possessing true independence from the financial services industry and from the Treasury; a body willing to defend the consumer and willing to take on the government of the day. If that is not possible in the short term, at the very least the SIB should now be accountable to Parliament and not merely obliged to report as at present. I suggest that the lesson to be learnt is that, unless there are fundamental changes, regrettably something like the disaster described by the noble Lord, Lord Haskel, will happen again.

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