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I assure the noble Lord, however, that, as the former Deputy Leader of the other place made clear in her meeting with him, any changes to the selection process and, if it is felt appropriate, the removal of the Pensions Act exemption could be achieved without the need for primary legislation, which is one of the points on which the noble Lord pressed me particularly.
The noble Lord also asked whether electoral college arrangements would be possible. I understand that that would be a possible option and we are continuing dialogue to get started on subject and other options. I hope that I can indicate to the noble Lord a degree of process, although the key point is that dialogue should continue. Certainly, my honourable friend in the other place is keen for that to happen. Any changes that might need to flow from that dialogue do not need primary legislation and do not need to be dealt with in this Bill. I hope that that will satisfy the noble Lord that there is some movement on this although I suspect that it is not as robust and fast as he would like.
Lord Fowler: My Lords, the Minister can say that again. He said “not as robust and fast”, but this is snail-like progress. It certainly does not in any way fulfil the implied promise in the comments of Ministers up until now. I noticed the careful phrases that the Minister used when he talked about the appointment process, and the careful way that he managed to steer away from the concept of elections. If you are in any other pension scheme the power to elect trustees is a matter of right. That comes with the rations and rightly so.
My noble friend Lord Crickhowell made an important point: if things go wrong the fact that there are elected trustees, who are to some extent accountable either to contributing members or pensioners, helps the matter
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It seems absurd that Parliament, the home of democracy, does not allow this kind of step forward. The Minister’s reply bordered on reactionary in the sense that he offered nothing. Perhaps I overstated that and that he is offering talks. Very well; my colleagues and I will seek to have talks on this issue. However, at the next stage of the Bill this is something that can be brought back. Although we do not require legislation to change the pension scheme, the Bill does not exclude legislation to change that scheme. It is with the background that talks might be entered into that I will pursue this matter with the Minister and the Deputy Leader of the House of Commons. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Oakeshott of Seagrove Bay moved Amendment No. 76:
76: Before Clause 123, insert the following new Clause—
A provider of a pension scheme must not sell an annuity unless the purchaser has signed a form of consent, to be prescribed and kept under review by the Financial Services Authority, so as to ensure that the purchaser is fully aware of the options available to provide best value annuities in relation to matters including, but not limited to—
(a) ill health,
(b) employment,
(c) smoking,
(d) place of residence,
(e) inflation protection, and
(f) any dependents’ benefits after the purchaser’s death.”
The noble Lord said:My Lords, this is a straightforward amendment designed to make it crystal clear to both buyers and sellers of annuities that the full range of options must be available, including enhanced annuities. I am old enough to remember that they were called impaired annuities when they first came in, but that was before the insurance company marketing departments got to work and decided to put a rather more favourable spin on them.
There is an important fundamental point here. Initially, this started when companies offered better rates to smokers or people with diabetes or cancer, but many people are now able to benefit from the fact that there is an enormous discrepancy in life expectancy, even within cities. For example, in Glasgow compared with Bearsden, which is literally five miles away, there is a difference in life expectancy of more than 10 years. The same is true in Sheffield, as my right honourable friend Nick Clegg has pointed out. The real scandal is that, because people are not properly advised by their insurance companies of their options when they come to buy an annuity, only a quarter of those who would be eligible for these best-value insurance annuity products
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The insurance industry has been making some changes. The Association of British Insurers, partly under pressure from some effective journalism and obviously from speeches in this House and another place, has moved to some extent. But I do not believe that it has moved enough. I have had useful meetings with Legal & General, the leading provider of annuities and the biggest annuity supplier in the field, which would be happy to see more specific requirements for these options to be made available to people. I have not discussed the exact wording of my amendment with Legal & General, but it would prefer to go further than the rather general guidance coming from the Association of British Insurers.
In drafting this amendment, I have tried to place the responsibility on the Financial Services Authority, not necessarily to draft the form, but to approve a standard form that all insurance companies must show people buying an annuity, and people have to sign to say that they have read it. If not, people will not have the proper confidence that they have been given those options. We have to face the fact that a commercial issue is involved. By doing this, insurance companies may lose business by having to say, “You could do better elsewhere than the rates we are offering you”. There is a hard commercial issue here, but given the fact that the insurance companies are sophisticated and that consumers are not, a serious issue of consumer protection is involved. We believe that this is the right way to ensure that this rip-off—and I say that advisedly—does not continue. I beg to move.
Lord Skelmersdale: My Lords, I for one find this a curious amendment, as the noble Lord, Lord Oakeshott, knows because we discussed it last week or possibly the week before. It is clearly well intentioned, because it is certainly in pensioners’ best interests to get value for money when annuitising their pension pots. However, the 400,000 that he just mentioned presumably includes those people whose pension schemes pay out in the form of an annuity immediately after they retire. That is the whole predication of a particular pension scheme. Any generic advice that they received would of course encourage shopping around, not least because a quick reference to “annuities” on Google will tell you that competition is alive and well in the annuities market. However, it is not always the consumer who has to do the shopping around. It might well be the pension scheme that they signed up to while they were in employment.
6.30 pm
Going back to competition, when I looked last week, I found that a man of 65 with a 65 year-old wife and a pension pot of £100,000 could receive a joint-life
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One must ask whether having signed this form is likely to affect a person’s attitude to life. For example, it is unlikely that someone aged 65 with a £100,000 pension pot will take up smoking to get the extra £1,300 a year that is available. What about the ex-smoker? Would he go back to smoking? He might well. Much more likely would be a person moving his residence to a less healthy part of the country; the noble Lord, Lord Oakeshott, mentioned Glasgow and Bearsden, just next door to each other. That is a possibility. However, is moving from leafy Surrey up to Glasgow really likely?
Of course, I accept that there is a postcode lottery in annuity rates, as exists in many other walks of life. However, is it right that such a thing is rammed down people’s throats? The same applies in the other direction. Inflation protection and dependence benefits go to reduce an annuity, although they may well be sensible for some people and not for others. Then, of course, there is the confusion aspect that the noble Lord, Lord Oakeshott, is so keen on. Just knowing their effects, the pensioner may well have to weigh up the relationship between several of the specified items in the six paragraphs, which are the minimum a pensioner must sign to having been informed about at the point at which he takes his annuity. How does someone in ill health or a smoker—which are likely to be plus factors—balance these with a possible decision as to whether he also wants inflation proofing and/or dependence benefits? Even worse, if such a list changes the annuity rates across the board, as it well might, who is the gainer? I doubt that it will be the pensioner, especially one who delays taking his annuity until the last possible moment.
Lastly, is the Financial Services Authority the right organisation to maintain and update the noble Lord’s form of consent? I would not have thought that it was the FSA’s job. I am not even sure that it should come within the Pensions Regulator’s remit, but perhaps the Minister has some ideas on this.
Baroness Hollis of Heigham: My Lords, I have a lot of sympathy with the objectives of the amendment. In a sense, it is almost a subset of the need to get generic financial information. We are talking about ensuring that people use their money in the best possible way when purchasing an annuity, so that they are aware of all the factors that affect it. I could add that gender might be included, but I know that the noble Lord and I do not see eye to eye on this issue.
I have two questions; whether my noble friend or the noble Lord, Lord Oakeshott, can best answer them I do not know. First, I am not comfortable with
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I do not go along with the noble Lord, Lord Skelmersdale, about people trying to create or avoid moral hazard by shifting addresses and things. That is not likely to happen. However, I am not sure that it is the Government’s job at this stage to lay the duty on the FSA, and for the FSA to, in turn, lay the duty on pension or annuity providers.
This issue should be explored with the FSA, if it is not already doing so. It is a perfectly sound idea. However, from my feeling of where the Bill is going on this, I do not think that it is the right medium for a clause of this sort. In so far as we can encourage the FSA to take this issue forward as part of the post-Thoresen debate, I welcome that very much.
Baroness O'Neill of Bengarve: My Lords, the amendment has a serious consumer-protection objective, but I doubt whether it can achieve it. Consent forms in most areas of life, particularly complex forms, simply do not ensure that purchasers are fully aware of the matters to which they are appending their signature. A supply-side solution is more likely to be effective. A consent form is an ornament too far.
Lord McKenzie of Luton: My Lords, I thank the noble Lord for moving the amendment; it gives us a chance to discuss an important issue. The Government fully support the objective underlying the amendment. People choosing an annuity should have the best possible understanding of the options available to them, and of the potential impact that their choices can have on their own retirement income and that of their dependants.
However, the Government also believe that it is vital to avoid imposing unnecessary, and potentially costly, legislative burdens on pension savers and annuity companies. The most effective way of ensuring that people make an informed annuity choice is to give them the best possible information at retirement, rather than legislating to make them sign additional forms. I agree with the noble Baroness, Lady O’Neill. If you get people to sign forms and tick a box, there is a great risk that they will take their eye off the ball of what they should really be doing: ensuring that people have information.
We are actively working to ensure that people have good information about their annuity choices. Legislation and FSA rules require providers to disclose relevant information about annuities to members and for members to sign the contractual documentation to take an annuity. In addition, FSA rules more generally require firms to treat their customers fairly and to disclose relevant information. These rules ensure that a baseline level of information is available in all cases.
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However, we recognise that more can be done. Improving information was a key recommendation of the Government’s review of the open market option published with the Pre-Budget Report in 2007. Following one of the recommendations of the review, the Pensions Advisory Service has launched an online annuity choice tool to help people understand the complex issues involved. Initial feedback from those who have used the tool has been very positive. The Government support, and are taking, this type of action to help people make the right annuity choice. Therefore, while I support the spirit of the noble Lord’s amendment, it seems unnecessary. There is also the issue of compliance. A process would need to be determined for when an individual did not receive a form, or did not want to sign it, and all that that entails.
In conclusion, the Government agree that it is vital that people should make an informed choice about their annuity, but we do not agree that legislating to add more forms and administration to the process of choosing is the right way to achieve this. Following the noble Lord’s discussion with Legal & General, I should be happy to engage with him and Legal & General to elicit any views that it may have, even if it is not particularly wedded to this approach. We have a shared objective, but I am not convinced that this prescription is the right way to go.
Lord Oakeshott of Seagrove Bay: My Lords, this has been a useful and thoughtful debate. However, I was rather confused by the contribution of the noble Lord, Lord Skelmersdale, which seemed in essence to boil down to saying that people do not need advice at all. The measure does not suggest that people do anything different or that insurance companies offer different options. It is not a question of moving or not moving. I do not think that insurance companies would be fooled by people moving at the age of 65 or stopping smoking. We are not talking about that but about how we ensure that vulnerable people get the right advice. Not for the first time today, I think that the noble Lord, Lord Skelmersdale, and I are not communicating properly, which may be my fault as much as anyone else’s.
The contributions of the noble Baronesses, Lady Hollis and Lady O’Neill, were very helpful. I agree with the noble Baroness, Lady O’Neill, that a supply-side solution is much the best. I am not in favour of any more legislation or prescription than one has to have. Part of this process, and of trying to get publicity for the points we are making, is to put pressure on the industry to get its own house in order, and to encourage the FSA to focus a little more directly on these issues. I take the Minister’s point that the measure is probably a little too prescriptive. However, in some ways this is reminiscent of the debate we had on generic advice. I am delighted that some people are using an online tool, and that the feedback is positive. However, the problem arises with the people who are not using the online tool and who do things automatically. We are not getting through to those people. That is why I am trying to highlight this problem. There is a sloping playing field, particularly as regards some of the smaller insurance companies, which may be less scrupulous or less well informed about annuity options. There is a
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Amendment, by leave, withdrawn.
Lord Oakeshott of Seagrove Bay moved Amendment No. 77:
77: Before Clause 123, insert the following new Clause—
“Amendment of rules to take pension annuities by the age of 75
(1) Any statutory provision or rule of law requiring a pension to be taken in the form of an annuity by the age of 75 is amended so that the age limit is 85.
(2) The Secretary of State must review the age limit no less frequently than every five years and report on the average life expectancy.”
The noble Lord said: My Lords, this is the second bite of the cherry as we debated this matter earlier today. Therefore, I do not propose to cover all the same ground again. As I said, many of the arguments supporting this amendment and Amendment No. 77A, in the name of the noble Lord, Lord Fowler, are about tactics on the best way of relaxing the rules applying to the purchase of annuities, which I think most noble Lords regard as onerous. However, the important thing is to get a worthwhile increase in the age of compulsory annuitisation. If the noble Lord, Lord Fowler, decides to press his amendment on the 80 age limit, I shall be happy to go along with that. It is right to have a compulsory limit for annuitisation, but it was fixed at 75 a generation ago in the mid-1970s. Since that time life expectancy has risen by slightly more than eight years. Therefore, even if one accepts that it was right to fix it at that age at that time, it should be raised to at least 80, if not to 85. My amendment seeks to raise the relevant age and proposes that it should be reviewed every five years so that we do not have to wait another 30 years before it changes.
Given the substantial falls in the market in recent months—the noble Lord, Lord McKenzie, said that not everyone’s pension fund is fully invested in equities, but corporate bonds, in which many are also invested, have also taken a tumble—it is highly unlikely that those losses will be regained for several years to come. As regards giving practical help to people in this situation, a minimum of a five-year, or preferably a 10-year, increase in the annuity age would enable advisers to offer proper planning and would provide a reasonable period for the long-term market to reassert itself. In this country equities have always produced good returns over long periods, but losses cannot be recouped in a short time.
I accept the basic present structure—I think we all agree that the Government are not likely to give way on that—but consider that, given the present crisis, we should move to an age limit which allows for a reasonable period during which pension funds can be rebuilt.
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6.45 pm
Lord Fowler: My Lords, my Amendment No. 77A is grouped with Amendment No. 77. I shall not add much to what I have said. I have already made two speeches on annuities this afternoon, and I think that by now everyone has a clear idea of where I stand on them. I want the total abolition of compulsory annuities. Indeed, the Minister’s suggestion that alternatively secured pensions are the way forward has rather torpedoed his own case in that respect. However, we shall have to see about that.
In wanting compulsory annuities to be abolished, I differ from the Liberal Democrats, who do not want them to be abolished, but want the age limit to be extended. There is no question that there is a financial crisis and there is no point in repeating the detail of it. However, given that crisis, I seek a compromise and the provision of help to people reaching 75. However, the compromise has been rejected and the help is not forthcoming. The noble Lord, Lord Oakeshott, said that one of his objections to my proposal for suspending the annuity rule was that his proposal for an 85 age limit was the only answer. We shall see what the Government say. Frankly, I doubt very much that they will give ground. I do not know whether anyone on the Liberal Democrat Benches thinks that the Government will announce a sudden conversion to the 85 age limit for annuities. If anyone thinks that, they are living in a fool’s paradise. The Liberal Democrats voted solidly against my proposal and consequently we missed an opportunity to change the situation for the better, and the losers—
Lord Oakeshott of Seagrove Bay: My Lords, if the noble Lord will allow me, what is his basis for saying that he thinks the Government would not possibly accept an increase in the age limit but that they would accept a temporary amendment? Why would they accept one and not the other?
Lord Fowler: My Lords, I am not saying that. The Government will not accept either. I hate to teach the noble Lord his business, but the point is that we could have defeated the Government this afternoon, but we cannot defeat them now. I guarantee to the noble Lord that we will not defeat them now, because of the time and because of all the points that anyone with any sense knows about this House. If the noble Lord thinks that we are going to defeat them now, he is living in a fool’s paradise. We should not have arguments about such basic politics.
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