The noble Lord, Lord Lawson, has put an immensely important issue on the table. I would encourage the Government to widen their focus even beyond pensions, because it is important not only in the pensions arena but for the other ways that people save, for instance with ISAs. When people save in ISAs, they are looking at an overt, explicit asset management charge, but sitting behind that is a set of other hidden costs. This is an issue where more information will help. It will not transform the situation—we are deluding ourselves if we believe that lots of individual savers are themselves, individually, going to pay attention to this—but as the noble Lord, Lord Lawson, has said, the press, including the specialist press, will pay attention to it and a wider debate about just how large these charges are is very important. It would, for instance, be very interesting to start seeing how much higher these hidden costs are for actively managed funds versus index-linked funds, because that is a piece of information that people ought to bear in mind when they make those decisions between different classes of assets.
I urge the Government, as they go forward with this idea, to look at whether that disclosure should in future apply not just to pensions but to a wider class of investments—to cast it, as the noble Lord, Lord Lawson, said, as widely as possible so that we capture all costs—and to see this as a start point of an extremely important debate in which we get a better handle on the total costs that are being imposed by the asset management and investment fund management industries.
I do not think that transparency is an alternative to a charge cap, which is why I have also put my name to Amendment 29, but it is a very valuable additional tool.
Baroness Drake: I do not intend to make my contribution because I do not think there is anything I can add to what the noble Lord, Lord Turner, has said. However, as I have never been a Minister I am not familiar with the dark art of crafting ministerial syntax, so perhaps I could take this opportunity to ask the Minister a question before he responds.
I have before me the Written Ministerial Statement, which says:
“Last year, we consulted on whether to cap charges in the default funds of schemes used for automatic enrolment, and the
Government remains committed to seeing this policy through during the life of this Parliament”.—[
Official Report
, Commons, 24/2/14; col. 11WS.]
My simple question is: does the phrase,
“seeing this policy through during the life of this Parliament”,
mean that the Government will introduce a charge cap before the election in 2015? A simple yes or no answer would be helpful.
Viscount Eccles: My Lords, I had not really intended to intervene. I have not played any part in this Bill since Second Reading, but I just want to draw attention to the fact that there is a difference, in my opinion, between price control and transparency.
I am 100% in favour of transparency. Perhaps I should declare that I have a very complicated pension situation. I have been in defined benefit schemes and money purchase schemes and I have a SIPP. I have also been the trustee of probably half a dozen pension schemes. I have done transfers of people under TUPE in the Local Government Pension Scheme. So I have had a lot of reasons to worry about the amount of somebody’s pension fund that is absorbed by costs. I am totally on board with complete transparency on that issue.
However, that is a different matter from price control. The problems in this market, which I fully agree has very considerable aspects of dysfunctionality, are created, in part at least, by the incredibly complicated structure of pensions that we have created, in both the public and private sectors, over many years. It is a very complicated subject and of course there are people who take advantage of that complexity, I completely agree. There are also people who are so frightened by the complexity that they do not know when they are getting value for money and when they are not.
That is my point: there is a great difference between a market which by its transparency enables people to see whether or not they are getting value for money and a market in which there is price control. Picking a figure for the price control would be a very foolish thing for any Government to do.
6.15 pm
Lord Freud: My Lords, this is a very substantial area and we are making very substantial moves. We are looking for transparency on all charges. We are looking to ensure that that is published. We are looking to make announcements on our capping plans soon. I enjoyed more than anything else the noble Lord, Lord Turner, teetering on the edge of giving investment advice, although I suspect he is privileged to do so here.
I will quickly recap some of the language in our Amendment 26A. It says “some or all” rather than “all” for drafting reasons. We need to set out, as far as we can, in regulations what costs should be included but our intention is to include all transaction costs, which incorporates not just the transaction costs that my noble friend Lord Lawson made the point about but all costs, because we have permissive powers in the Pension Schemes Act 1993 to get all costs, not just transaction costs.
As I said, before Third Reading we will look at whether to include the defined benefit schemes and we will come back to that.
Lord Browne of Ladyton: I am very grateful to the Minister for giving way. On this very point about the transparency of transaction costs, my understanding of the Government’s amendment is that they have given themselves the power to exempt from transparency where there are existing FCA rules in relation to transparency. The existing FCA rules on transparency exempt transaction costs, so how will the transaction costs in such cases be dealt with?
Lord Freud: I am putting it on the record that we will aim to capture all costs, including all transaction costs. As noble Lords know only too well, when you look into this legislation there are bits and pieces scattered all over the place, but I can summarise it in that very simple sentence. It is very similar to the point about proposed new subsection (6): it is just a drafting requirement that we do not overlay things and that we have a clear line. It is not to do with the EU.
I am sorry that the noble Lord, Lord Browne, was concerned about my overconcentration on my noble friend Lord Lawson. I did not mean to do any airbrushing but I did mean to concentrate on the fact that I believe that my noble friend Lord Lawson’s amendments in Grand Committee and at this stage have been especially helpful in pushing this whole debate forward.
Turning to Amendment 29 in the name of the noble Lord, Lord Browne, I would actually be very disappointed in the noble Lord if he was to decide to test the opinion of the House. I have been absolutely clear about the timing of government action. I do not understand why he would want to start stipulating in primary legislation the timing of when regulations would be brought, given the language that I am using to talk about what we are doing.
Even though I may not satisfy the noble Baroness, Lady Drake, with the clarity of my expression, I will go through what we are doing. Consultations have sought views on policy implementation. Employers made clear that they wanted sufficient notice of any new scheme requirements. The Minister remains strongly minded to cap charges and, as former Ministers know and can tell the noble Baroness, Lady Drake, significant policy decisions must go through due process, but the Government response is coming soon.
I hope that I have made it utterly, utterly clear what will happen. That is the reason that I do not want the noble Lord, Lord Browne, to test the opinion of the House, because that seems purely political, given what I have just said, and that is not in the spirit—
Baroness Hollis of Heigham: I thank to the Minister for giving way. Do the words of the Pensions Minister in the other place, “strongly minded”, have the full, unambiguous support of HMRC?
Lord Freud: Yes. I do not want to go into the Lobby on this. I do not think we should; that is not the way that we have conducted the Bill, which we have done by information, support and debating the issues. We should not reduce ourselves to having a debate when we are saying exactly the same thing across the House. That is my request of the noble Lord.
26A: After Clause 43, insert the following new Clause—
“Disclosure of information about transaction costs to members etc
In section 113 of the Pension Schemes Act 1993 (disclosure of information about schemes to members etc), after subsection (4) insert—
“(5) The Secretary of State must make regulations under this section requiring information about some or all of the transaction costs of work-based money purchase schemes to be given to some or all of the persons mentioned in subsection (2).
(6) But subsection (5) does not apply in relation to a scheme of a particular description if—
(a) as a result of another enactment, requirements are imposed relating to the disclosure of information about transaction costs of schemes of that description, and
(b) in the opinion of the Secretary of State, those requirements provide an adequate alternative to what is required by subsection (5).
“work-based money purchase scheme” means a money purchase scheme that is—
(a) an occupational pension scheme,
(b) a personal pension scheme where direct payment arrangements (within the meaning of section 111A) exist in respect of one or more members of the scheme who are workers, or
(c) a personal pension scheme which is or has been registered under section 2 of the Welfare Reform and Pensions Act 1999 (stakeholder pension schemes);
(a) who is a worker for the purposes of Part 1 of the Pensions Act 2008, or
(b) to whom a provision of Part 1 of that Act applies as if the person were a worker because of a provision of Chapter 8 of that Part;
but for the purposes of paragraph (b), ignore section 92 of that Act.””
Amendment 26B (to Amendment 26A) not moved.
Amendments 27 and 28 not moved.
Schedule 18: Work-based schemes: power to restrict charges or impose requirements
29: Schedule 18, page 103, line 40, at end insert—
“(1A) The Secretary of State must lay before Parliament regulations to restrict such charges as soon as reasonably practicable and no later than 30th April 2015.”
Lord Browne of Ladyton: I beg to move, and I wish to test the opinion of the House.
6.22 pm
Contents 165; Not-Contents 225.
CONTENTS
Adams of Craigielea, B.
Adonis, L.
Alton of Liverpool, L.
Anderson of Swansea, L.
Armstrong of Hill Top, B.
Armstrong of Ilminster, L.
Bach, L.
Bakewell, B.
Bassam of Brighton, L. [Teller]
Beecham, L.
Berkeley, L.
Bew, L.
Billingham, B.
Blackstone, B.
Borrie, L.
Bragg, L.
Brooke of Alverthorpe, L.
Brookman, L.
Brown of Eaton-under-Heywood, L.
Browne of Belmont, L.
Browne of Ladyton, L.
Campbell-Savours, L.
Carter of Coles, L.
Clancarty, E.
Clark of Windermere, L.
Clinton-Davis, L.
Collins of Highbury, L.
Corston, B.
Coussins, B.
Cox, B.
Craigavon, V.
Crawley, B.
Cunningham of Felling, L.
Davies of Coity, L.
Davies of Oldham, L.
Dean of Thornton-le-Fylde, B.
Donaghy, B.
Donoughue, L.
Drake, B.
Dubs, L.
Elder, L.
Elystan-Morgan, L.
Evans of Temple Guiting, L.
Falkland, V.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Finlay of Llandaff, B.
Foster of Bishop Auckland, L.
Foulkes of Cumnock, L.
Gale, B.
Gibson of Market Rasen, B.
Gordon of Strathblane, L.
Grantchester, L.
Greenway, L.
Grenfell, L.
Griffiths of Burry Port, L.
Hanworth, V.
Harris of Haringey, L.
Harrison, L.
Hart of Chilton, L.
Hayter of Kentish Town, B.
Healy of Primrose Hill, B.
Henig, B.
Hilton of Eggardon, B.
Hollick, L.
Hollis of Heigham, B.
Howarth of Newport, L.
Howe of Idlicote, B.
Howie of Troon, L.
Hoyle, L.
Hughes of Stretford, B.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Jones, L.
Jones of Moulsecoomb, B.
Jones of Whitchurch, B.
Judd, L.
Kennedy of Cradley, B.
Kennedy of Southwark, L.
Kestenbaum, L.
Kilclooney, L.
King of Bow, B.
Kirkhill, L.
Knight of Weymouth, L.
Lane-Fox of Soho, B.
Lea of Crondall, L.
Levy, L.
Liddle, L.
Lipsey, L.
Lister of Burtersett, B.
Low of Dalston, L.
McAvoy, L.
McDonagh, B.
Macdonald of Tradeston, L.
McFall of Alcluith, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
McKenzie of Luton, L.
Mandelson, L.
Mar, C.
Martin of Springburn, L.
Maxton, L.
Monks, L.
Moonie, L.
Morgan of Drefelin, B.
Morgan of Ely, B.
Morgan of Huyton, B.
Morrow, L.
Noon, L.
Nye, B.
O'Neill of Clackmannan, L.
Pannick, L.
Parekh, L.
Patel of Bradford, L.
Pendry, L.
Pitkeathley, B.
Plant of Highfield, L.
Ponsonby of Shulbrede, L.
Prosser, B.
Quin, B.
Radice, L.
Ramsay of Cartvale, B.
Rea, L.
Reid of Cardowan, L.
Rendell of Babergh, B.
Richard, L.
Rooker, L.
Rosser, L.
Rowlands, L.
Royall of Blaisdon, B.
Sandwich, E.
Scotland of Asthal, B.
Sherlock, B.
Simon, V.
Smith of Basildon, B.
Smith of Finsbury, L.
Snape, L.
Soley, L.
Stevenson of Balmacara, L.
Stoddart of Swindon, L.
Stone of Blackheath, L.
Symons of Vernham Dean, B.
Taylor of Blackburn, L.
Taylor of Bolton, B.
Temple-Morris, L.
Thornton, B.
Tomlinson, L.
Touhig, L.
Triesman, L.
Tunnicliffe, L. [Teller]
Turnberg, L.
Turner of Camden, B.
Turner of Ecchinswell, L.
Uddin, B.
Wall of New Barnet, B.
Watson of Invergowrie, L.
West of Spithead, L.
Wheeler, B.
Whitaker, B.
Whitty, L.
Wilkins, B.
Williams of Baglan, L.
Williams of Elvel, L.
Wills, L.
Young of Norwood Green, L.
NOT CONTENTS
Aberdare, L.
Ahmad of Wimbledon, L.
Alderdice, L.
Anelay of St Johns, B. [Teller]
Ashdown of Norton-sub-Hamdon, L.
Astor of Hever, L.
Attlee, E.
Baker of Dorking, L.
Bakewell of Hardington Mandeville, B.
Bates, L.
Berridge, B.
Best, L.
Bilimoria, L.
Black of Brentwood, L.
Blencathra, L.
Bonham-Carter of Yarnbury, B.
Borwick, L.
Bourne of Aberystwyth, L.
Bowness, L.
Brabazon of Tara, L.
Brinton, B.
Brooke of Sutton Mandeville, L.
Brougham and Vaux, L.
Browning, B.
Burnett, L.
Caithness, E.
Cameron of Dillington, L.
Carrington of Fulham, L.
Cathcart, E.
Chalker of Wallasey, B.
Chidgey, L.
Clement-Jones, L.
Colwyn, L.
Cope of Berkeley, L.
Cormack, L.
Courtown, E.
Crathorne, L.
Cumberlege, B.
De Mauley, L.
Deighton, L.
Dixon-Smith, L.
Dobbs, L.
Dykes, L.
Eaton, B.
Eccles, V.
Elton, L.
Empey, L.
Erroll, E.
Falkner of Margravine, B.
Faulks, L.
Fellowes, L.
Fellowes of West Stafford, L.
Fink, L.
Finkelstein, L.
Flight, L.
Forsyth of Drumlean, L.
Fowler, L.
Framlingham, L.
Freud, L.
Garden of Frognal, B.
Gardiner of Kimble, L.
Gardner of Parkes, B.
Garel-Jones, L.
Geddes, L.
German, L.
Gold, L.
Goodlad, L.
Goschen, V.
Grade of Yarmouth, L.
Greaves, L.
Green of Hurstpierpoint, L.
Grender, B.
Griffiths of Fforestfach, L.
Hamilton of Epsom, L.
Hamwee, B.
Hanham, B.
Harris of Peckham, L.
Henley, L.
Heyhoe Flint, B.
Higgins, L.
Hill of Oareford, L.
Hodgson of Abinger, B.
Hodgson of Astley Abbotts, L.
Holmes of Richmond, L.
Home, E.
Hooper, B.
Hope of Craighead, L.
Horam, L.
Howarth of Breckland, B.
Howe, E.
Howe of Aberavon, L.
Howell of Guildford, L.
Humphreys, B.
Hunt of Wirral, L.
Hussain, L.
Hussein-Ece, B.
Hylton, L.
Inglewood, L.
James of Blackheath, L.
Jenkin of Kennington, B.
Jenkin of Roding, L.
Jolly, B.
Jones of Cheltenham, L.
Jopling, L.
Kakkar, L.
King of Bridgwater, L.
Kirkham, L.
Kirkwood of Kirkhope, L.
Knight of Collingtree, B.
Kramer, B.
Laming, L.
Lang of Monkton, L.
Lawson of Blaby, L.
Leigh of Hurley, L.
Lexden, L.
Lingfield, L.
Linklater of Butterstone, B.
Livingston of Parkhead, L.
Loomba, L.
Lothian, M.
Lucas, L.
Luke, L.
Lyell, L.
Lytton, E.
McColl of Dulwich, L.
MacGregor of Pulham Market, L.
McNally, L.
Maddock, B.
Magan of Castletown, L.
Mancroft, L.
Manzoor, B.
Marland, L.
Marlesford, L.
Masham of Ilton, B.
Mawson, L.
Meacher, B.
Miller of Chilthorne Domer, B.
Montrose, D.
Moore of Lower Marsh, L.
Morris of Bolton, B.
Moynihan, L.
Naseby, L.
Nash, L.
Neville-Jones, B.
Neville-Rolfe, B.
Newby, L. [Teller]
Newlove, B.
Nicholson of Winterbourne, B.
Noakes, B.
Northover, B.
Norton of Louth, L.
O'Cathain, B.
Oppenheim-Barnes, B.
Paddick, L.
Palmer, L.
Palumbo of Southwark, L.
Parminter, B.
Patten, L.
Pearson of Rannoch, L.
Perry of Southwark, B.
Phillips of Sudbury, L.
Plumb, L.
Popat, L.
Purvis of Tweed, L.
Randerson, B.
Rawlings, B.
Rennard, L.
Ridley, V.
Roberts of Llandudno, L.
Rodgers of Quarry Bank, L.
Roper, L.
Rowe-Beddoe, L.
Ryder of Wensum, L.
Sassoon, L.
Scott of Needham Market, B.
Seccombe, B.
Selkirk of Douglas, L.
Selsdon, L.
Shackleton of Belgravia, B.
Sharp of Guildford, B.
Sharples, B.
Shephard of Northwold, B.
Sherbourne of Didsbury, L.
Shipley, L.
Shrewsbury, E.
Shutt of Greetland, L.
Skelmersdale, L.
Smith of Clifton, L.
Spicer, L.
Stedman-Scott, B.
Steel of Aikwood, L.
Stephen, L.
Sterling of Plaistow, L.
Stewartby, L.
Stoneham of Droxford, L.
Storey, L.
Stowell of Beeston, B.
Strathclyde, L.
Suttie, B.
Taverne, L.
Taylor of Goss Moor, L.
Taylor of Holbeach, L.
Thomas of Gresford, L.
Thomas of Swynnerton, L.
Thomas of Winchester, B.
Tope, L.
Trefgarne, L.
Trimble, L.
True, L.
Tugendhat, L.
Tyler, L.
Tyler of Enfield, B.
Verma, B.
Wakeham, L.
Wallace of Saltaire, L.
Wallace of Tankerness, L.
Walmsley, B.
Walpole, L.
Warsi, B.
Wei, L.
Whitby, L.
Wilcox, B.
Williams of Trafford, B.
Wrigglesworth, L.
Younger of Leckie, V.
6.35 pm
31A: After Clause 47, insert the following new Clause—
(1) Any qualifying money purchase scheme must direct its savers to an independent annuity brokerage service or offer such a brokerage service itself.
(2) Pension schemes shall ensure that any brokerage service selected or provided meets best practice in terms of providing its members with—
(a) an assisted path through the annuity process;
(b) ensuring access to most annuity providers;
(c) minimising costs; and
(d) ensuring that information and support is available on alternative at-retirement products.
(3) The standards meeting best practice on decumulation shall be defined by the Pensions Regulator after public consultation.
(4) The standards set out in subsection (3) shall be reviewed every three years and, if required, updated.”
Lord Browne of Ladyton: My Lords, Amendment 31A, which stands in my name and in the name of my noble friend Lady Sherlock, proposes the addition of a simple clause to the Bill. The clause would require the provision of an independent annuity brokerage service or the offer of such a service to all members pending retirement. The clause goes on in later provisions to set out how best practice should be defined and maintained in the brokerage service offered to the retiring member or to which he or she is directed. It calls for an independent brokerage service to assist people to annuitise at the point of retirement. This is hardly a radical proposal. It fits the description of best practice and is what many employers with DC pension schemes already offer.
The ABI code of practice says that providers should tell people decumulating that they can shop around and transfer the funds to another provider and advise them to seek advice before so doing. However, that is not enough. As Dan Hyde wrote in an article in the Telegraph in December:
“The process starts with a ‘wake-up’ pack sent to savers months before their named retirement age, in which pages of often unintelligible information, packaged in unhelpful ways, baffle even the well-informed”.
Of course, people can purchase their own independent financial advice but the majority do not retain or use independent financial advisers or accountants. A one-off appointment would be expensive—equivalent to a week’s take-home pay for workers on average wage—even if they knew where to go.
Undoubtedly, employers’ firms can negotiate a better rate but the scandal of annuities is well known and widespread. In one sense, how often do we need to be told? Only last week, in yet another report, the Financial Conduct Authority confirmed again that the annuities market is not working and that it is disorderly. The number of adjectives that can now be found to describe financial services markets is interesting. The Financial Conduct Authority has ordered a further review but we need immediate action. Each week, more than 1,000 people are buying annuities and those transactions are irreversible. Once bought, you cannot change your mind and getting the right one can be the equivalent of an extra £1,500 in savings. With respect to the FCA, it
hardly needs another competition market study to find out why consumers do not shop around. The problem is that the pension companies which sell them are simply not doing enough to explain to people that they can shop around.
When this amendment was debated in Grand Committee the Minister used the same diversionary tactic as Steve Webb, the Pensions Minister, did in the Commons and as the Minister who responded to the Westminster Hall debate on annuities did too. Depressingly, I fear that the Minister can be expected to repeat that argument today. It is all very well to suggest that those reaching retirement age can do many other things—other than plan for an annuity—but it is insufficient, in the face of the continued mass selling of inappropriate annuities, to say to people that they have many different opportunities and need lots of different advice beyond annuities. The fact is that the variety in the annuities offered and the deals available is considerable. Those people—1,000 of them each week—need independent support and advice right now.
The need for independent advice at this point may be obvious but the reasons for it are worth repeating. First, on the complexity of choosing the right annuity option, annuities are a complex product and decumulation is a complex process. Comparison between the providers is difficult. Before we debated this in Committee, I saw a quote for an annuity pot of only £30,000. In one short e-mail the following terms were contained: single life, level escalation, anticipated bonus rates and required smooth return rates—every single one of which was without an explanation. It offered four choices to a “conventional lifetime quotation” annuity described as income-choice annuity or with-profit annuity, and out of nine total options the rates varied between £700 and £1,400, with most around the £1,200 mark. It is no wonder, with such complexity, that no one should exercise a choice without advice; and so it is no wonder that over 50% of people just go with their existing provider.
The first comparator website has been launched. This is a step in the right direction. However, the independent pensions consultant, Ros Altmann, who gave evidence to the Commons committee, did not think that it was simple. She said that it was disappointing and not easy to use. Annuities are complex products with multi-options and perhaps there never can be a simple comparison site.
At this point I intend to repeat questions that I posed to the Minister in Grand Committee. They demand answers from the Government, to explain their resistance to this amendment, and they were not answered when we were in Committee.
First, does the Minister accept that annuities are complex and that people need independent advice? Does he accept that purchasing that advice is beyond the grasp of most people, particularly those with no knowledge of investments? If he does so accept, how does he suggest that those who need this advice now can be guaranteed to get it?
Secondly, the variety in the kinds of annuities offered and the deals that people can get is bewildering. The NAPF and others have said that annuitising with the pension scheme provider pays on average 20% less than shopping around. In effect, inertia, or being overwhelmed
by the complexity of making a choice, is exploited by pension providers. Insurers are making excessive profits from purchasers failing to shop around. On “Newsnight”, Ros Altmann said that if you had an annuity with the worst performers you would have to live until you were 100 to get back just what you had paid in.
Inertia, as I say, is a powerful force that results in excess profits for insurers. They penalise you, not reward you, for loyalty. Estimates suggest that £1 billion of retirement income is being lost to savers every year just by the force of inertia. The report of the FCA Consumer Panel—the FSCP—was published in December and made many points. I have drawn on these points before in debating this issue and I do so again because they are so powerful.
First, the tactics used by insurance companies and brokers were “tantamount to burglary” of old-age pensioners. The report said that it is nearly impossible for pensioners to know whether they are getting a good deal. Pensioners are hit by excessive profits and exploitative pricing. Insurance companies are making 20 times more profits on annuities than any other financial product. As for poor returns, on a pot of £100,000 Clerical Medical offers £4,664 per annum while Reliance Mutual offers £6,111. Over their expected lifetime people would be just over £36,000 worse off if they made the wrong choice.
As for opaque charges, brokers are incentivised to sell particular products; in some cases they make 6%, or £12,000, on a pot of £200,000. There are sharp practices with brokers shopping around, resulting in a referral fee from each. Many also have exploitative pricing; that is, they have sold a product for a fit person when they are not fit, or an adviser neglects to tell people of other products such as income drawdown because the profit margins are slimmer. Companies can make £35,000 profit over 25 years on a pot of £100,000. I have to say that that was the finding of the report, although the figure was denied by the ABI. The ABI has not, however, said what profit is made.
As your Lordships will be aware, the Pensions Minister, Steve Webb, commissioned a review of annuities from the FCA which reported last week. To no one’s surprise, the FCA concluded that the annuities market was not working. It was “disorderly”, according to the FCA’s chief executive, and the watchdog’s report suggested that four out of five consumers could get a higher income by just shopping around. To many people’s frustration and disappointment, after this extensive review the FCA said that it would launch a further review, a competition market study, to find out what we all already know. Consumers will now have to wait many more months for this second-stage investigation before regulatory action of some description can be started. In the face of 1,000 people a week still making this irreversible decision, that is not good enough.
People who have gone without, who have diligently saved throughout their working lives, are being systematically “burgled”, to use the FSCP’s word, by a profit-hungry industry and its associated sales force. Annuities are building up to be the next scandal and mis-selling crisis. The sector will not sort itself out. We need to strengthen the buyer side, and Parliament needs to take action on behalf of savers. If we do not sort out annuities we will undermine auto-enrolment.
This proposed new clause, if accepted, will provide people with guaranteed access—or at least the offer of it—to an independent annuity brokerage service at the point of decision. It will strengthen the buyer side. Annuities are one area of pension policy where the buyer deals directly with the provider and makes choices. With independent support these choices will be better informed choices. Access to an independent service will protect savers from making poor choices that could reduce their income by up to 20%. This small step may help divert us away from the next financial mis-selling scandal—or at least protect Parliament from the criticism that it failed to act when presented with the evidence of the need to do so.
I think that the information I have laid before your Lordships makes the case for the need to provide an independent annuity brokerage service, or at least the offer of such a service, to pension scheme members who are approaching retirement to help the member make wise choices. There are already 400,000 people annuitising each year, and this number will escalate from 2020 onwards when the impact of auto-enrolment starts to kick in. I again urge the Minister to accept the need for it now and in the future. I beg to move.
Lord Freud: My Lords, this amendment is identical to the one that we debated in Committee. I will confirm the government position for the record, as well as respond to the new points made.
The Financial Conduct Authority has confirmed the Government’s concerns that the way the annuity market operates may be disadvantaging consumers. This may be—in the language of the noble Lord, Lord Browne of Ladyton—“tantamount to burglary”, and it clearly continues to be of great concern to the Government. We recognise that it is critical that individuals make the right decision about their retirement income, because some of these decisions are ultimately irreversible. However, the solution offered by this amendment is not the answer to a problem which I acknowledge.
What are the Government doing? First, we are supporting the consumer to make a decision that is right for them. We are leading on and supporting a wide range of initiatives aimed at driving up standards among providers, providing guidance to trustees and educating members. The ABI code of practice is designed to tackle the worst of the inertia selling practices—for example, removing the application form from the pack. It talks about the three decisions that the consumer needs to make: whether they should retire now; what type of income is appropriate—it may be annuities, but it may not be—and telling the consumer how to get a better deal on the open market.
Secondly, the new Pensions Regulator guidance sets out expectations for what trustees should provide for their members. Thirdly, the Money Advice Service is developing its services for people approaching retirement age. Fourthly, the National Association of Pension Funds has published a guide to trustees and employees about the benefits to scheme members of support at retirement and the range of options available to them on the open market.
Those are just some examples of the initiatives that have recently been delivered under this Government. In addition, the noble Lord mentioned the Financial
Conduct Authority’s thematic review of annuities and the fact that it has launched a market study on the annuity market. He did not seem to welcome that wholeheartedly but we are very pleased that the FCA has decided to take this step; it is this Government’s changes to the FCA’s objectives that have enabled it do so. HMT and the DWP are currently reviewing the broad range of available research and statistics on at-retirement options, but with emerging findings from the FCA we will have the evidence to inform any further action required.
On the issue of independent advice, individuals already have access to free and independent information and guidance via the Money Advice Service and the Pensions Advisory Service. I need to pay tribute to the noble Baroness, Lady Hollis, who is a board member of the latter organisation.
I come to the core of why this amendment is not the right response. Indeed, it is rather funny that the noble Lord was quoting examples of sharp practice, with brokers shopping around and not informing their clients of the income drawdown. This is the point about, “While there is a problem, this is not the solution”. Making annuity brokers the first port of call for all would simply create a captive market for one part of the industry without effectively adding to consumer protections. Annuity brokers, unless they are also FCA-regulated advisers, are not required to ensure that the product is suitable for the consumer. I must be absolutely clear on this point: this measure would not provide the member with regulated advice. The Financial Services Consumer Panel recently published a report identifying a number of risks for the consumer in going down the non-advised route.
This measure would therefore push people down a brokerage route and could lead to the next mis-selling crisis, not help to avoid it, as the noble Lord suggested. The amendment as it stands would mean that people would be been pushed into receiving non-regulated advice and might end up locked into unsuitable products without recourse to the protections that regulated advice affords. Furthermore, the measure focuses almost exclusively on annuities; it makes reference to information on alternative at-retirement products, but it has to be recognised that annuity brokers are not necessarily impartial—they make their money if a member buys an annuity. Indeed, that is a point that the noble Lord made in his own speech.
This Government’s position is that it is essential for people to understand all their options, not just annuities, and to work with relevant bodies to ensure that appropriate help is available. Clearly, our work is not complete. However, we do not believe that this amendment, pushing people down a single product path, is the right solution. We are committed to ensuring that consumers have the information that they need to make good choices and that the annuities market works effectively for consumers. It is ongoing work but we will continue to challenge the industry if there is no significant improvement. The Financial Conduct Authority’s review findings will be vital in that assessment.
While I welcome the debate, which is clearly an important one, this amendment would not deliver what the Opposition actually want. It risks making things worse for the consumer. It would legislate to make
annuities the foremost option for deriving a retirement income when this may actually not be the right route for many, especially those with small pots. It would put the responsibility for providing information to members solely in the hands of annuity brokers, leaving many without the protections afforded by regulated advice. As I said, if that is not a potential mis-selling scandal, I would like to know what is.
I would like the noble Lord not to test the opinion of the House on this because he should not, and he does not actually want to push it.
Lord Browne of Ladyton: My Lords, I am grateful to the Minister. He failed when he played that card last time; he should have learnt.
The use of the word “burglary”, which is not one that comes easily to a Scottish lawyer because we in Scotland have no such concept, is not mine but is from the FSCP’s report. The report which looked into this described such behaviour as tantamount to burglary. I deploy the word because it is evocative but also because it describes quite well what is going on.
I am grateful to the Minister for setting out the Government’s ambition in this regard, which is far-reaching, complicated and, I understand, ambitious, but the scandal continues. While we discuss the complexity of all this and indeed add further complexities to it, 1,000 people a week, most probably through inertia, are buying annuities, many of which are tantamount to burglary of their savings. We are suggesting with this amendment that we must do what we can to try to stem that process, while all the other complex things that need to be done—I accept the detail and the challenge of that—can be done. The scale of the scandal demands a deep and wide perspective of responses; I accept that. However, there is something we can do about this. Given that these people are going down this path without independent advice, the purpose of the amendment is to get them access to that information and that service so that they can make choices.
I now come, in just a few sentences, to the core issue that the Minister used as his principal push-back against this amendment. I suspect that he did not read all of the amendment carefully enough. Had he got as far as proposed new subsection (3), he would have seen that all this advice has to be best practice, defined by the Pensions Regulator after public consultation—a form of regulation—and that that process has to be subject to a continuing review. It was intended, in the flexible sort of way in which I have got used to this Government working, to provide a process of engagement, discussion and consultation that allowed best practice to develop in this area and to improve the performance of those people who provide independent annuity brokerage services. This is a model that I have learnt, in my time in your Lordships’ House, from the conduct of the coalition Government. I commend it to the Minister, I commend it to the House and I wish to test the House’s support for it.
6.58 pm
Contents 131; Not-Contents 197.
CONTENTS
Adams of Craigielea, B.
Adonis, L.
Alli, L.
Anderson of Swansea, L.
Armstrong of Hill Top, B.
Bach, L.
Bakewell, B.
Bassam of Brighton, L. [Teller]
Beecham, L.
Berkeley, L.
Borrie, L.
Bragg, L.
Brooke of Alverthorpe, L.
Brookman, L.
Browne of Belmont, L.
Browne of Ladyton, L.
Campbell-Savours, L.
Carter of Coles, L.
Clancarty, E.
Clark of Windermere, L.
Clinton-Davis, L.
Collins of Highbury, L.
Corston, B.
Coussins, B.
Craigavon, V.
Crawley, B.
Davies of Coity, L.
Davies of Oldham, L.
Donaghy, B.
Donoughue, L.
Drake, B.
Dubs, L.
Elder, L.
Elystan-Morgan, L.
Evans of Temple Guiting, L.
Farrington of Ribbleton, B.
Faulkner of Worcester, L.
Finlay of Llandaff, B.
Foulkes of Cumnock, L.
Gale, B.
Gordon of Strathblane, L.
Grantchester, L.
Grenfell, L.
Hanworth, V.
Harris of Haringey, L.
Harrison, L.
Hart of Chilton, L.
Hattersley, L.
Hayter of Kentish Town, B.
Healy of Primrose Hill, B.
Henig, B.
Hollick, L.
Hollis of Heigham, B.
Howarth of Newport, L.
Howe of Idlicote, B.
Howells of St Davids, B.
Hughes of Woodside, L.
Hunt of Kings Heath, L.
Jones, L.
Jones of Whitchurch, B.
Judd, L.
Kennedy of Cradley, B.
Kennedy of Southwark, L.
Kestenbaum, L.
Kilclooney, L.
King of Bow, B.
Kirkhill, L.
Knight of Weymouth, L.
Layard, L.
Lea of Crondall, L.
Liddle, L.
Lipsey, L.
Lister of Burtersett, B.
McAvoy, L.
McDonagh, B.
McFall of Alcluith, L.
McIntosh of Hudnall, B.
MacKenzie of Culkein, L.
McKenzie of Luton, L.
Mar, C.
Martin of Springburn, L.
Maxton, L.
Monks, L.
Moonie, L.
Morgan of Drefelin, B.
Morris of Yardley, B.
Morrow, L.
Noon, L.
Nye, B.
O'Neill of Clackmannan, L.
Patel of Bradford, L.
Pendry, L.
Pitkeathley, B.
Ponsonby of Shulbrede, L.
Prosser, B.
Quin, B.
Radice, L.
Ramsay of Cartvale, B.
Rendell of Babergh, B.
Richard, L.
Rooker, L.
Rosser, L.
Rowlands, L.
Royall of Blaisdon, B.
Sherlock, B.
Simon, V.
Smith of Basildon, B.
Smith of Finsbury, L.
Snape, L.
Soley, L.
Stevenson of Balmacara, L.
Stoddart of Swindon, L.
Stone of Blackheath, L.
Symons of Vernham Dean, B.
Taylor of Bolton, B.
Temple-Morris, L.
Thornton, B.
Touhig, L.
Tunnicliffe, L. [Teller]
Turner of Camden, B.
Uddin, B.
Wall of New Barnet, B.
Watson of Invergowrie, L.
West of Spithead, L.
Wheeler, B.
Whitaker, B.
Wilkins, B.
Williams of Baglan, L.
Wills, L.
Wood of Anfield, L.
Young of Norwood Green, L.
NOT CONTENTS
Aberdare, L.
Ahmad of Wimbledon, L.
Alderdice, L.
Anelay of St Johns, B. [Teller]
Ashdown of Norton-sub-Hamdon, L.
Astor of Hever, L.
Attlee, E.
Baker of Dorking, L.
Bakewell of Hardington Mandeville, B.
Balfe, L.
Bates, L.
Berridge, B.
Bew, L.
Bilimoria, L.
Black of Brentwood, L.
Blencathra, L.
Borwick, L.
Bourne of Aberystwyth, L.
Bowness, L.
Brabazon of Tara, L.
Brinton, B.
Brooke of Sutton Mandeville, L.
Brougham and Vaux, L.
Browning, B.
Caithness, E.
Cameron of Dillington, L.
Carrington of Fulham, L.
Cathcart, E.
Chalker of Wallasey, B.
Clement-Jones, L.
Colwyn, L.
Cope of Berkeley, L.
Cotter, L.
Courtown, E.
De Mauley, L.
Deighton, L.
Dixon-Smith, L.
Dobbs, L.
Dykes, L.
Eaton, B.
Elton, L.
Empey, L.
Falkner of Margravine, B.
Faulks, L.
Fellowes of West Stafford, L.
Fink, L.
Finkelstein, L.
Flight, L.
Forsyth of Drumlean, L.
Framlingham, L.
Freeman, L.
Freud, L.
Garden of Frognal, B.
Gardiner of Kimble, L.
Gardner of Parkes, B.
Garel-Jones, L.
Geddes, L.
German, L.
Gold, L.
Goodlad, L.
Goschen, V.
Grade of Yarmouth, L.
Greaves, L.
Green of Hurstpierpoint, L.
Greenway, L.
Grender, B.
Griffiths of Fforestfach, L.
Hamilton of Epsom, L.
Hamwee, B.
Hanham, B.
Harris of Peckham, L.
Henley, L.
Heyhoe Flint, B.
Higgins, L.
Hill of Oareford, L.
Hodgson of Abinger, B.
Hodgson of Astley Abbotts, L.
Holmes of Richmond, L.
Home, E.
Hooper, B.
Horam, L.
Howarth of Breckland, B.
Howe, E.
Howell of Guildford, L.
Humphreys, B.
Hussain, L.
Hussein-Ece, B.
Inglewood, L.
James of Blackheath, L.
Jenkin of Kennington, B.
Jenkin of Roding, L.
Jolly, B.
Jones of Cheltenham, L.
Jopling, L.
King of Bridgwater, L.
Kirkham, L.
Kirkwood of Kirkhope, L.
Kramer, B.
Lane-Fox of Soho, B.
Lang of Monkton, L.
Lawson of Blaby, L.
Lexden, L.
Lingfield, L.
Linklater of Butterstone, B.
Livingston of Parkhead, L.
Loomba, L.
Lucas, L.
Luke, L.
Lyell, L.
Lytton, E.
McColl of Dulwich, L.
MacGregor of Pulham Market, L.
Maddock, B.
Magan of Castletown, L.
Mancroft, L.
Manzoor, B.
Marks of Henley-on-Thames, L.
Marland, L.
Marlesford, L.
Masham of Ilton, B.
Mawson, L.
Meacher, B.
Montrose, D.
Moore of Lower Marsh, L.
Morris of Bolton, B.
Nash, L.
Neville-Jones, B.
Neville-Rolfe, B.
Newby, L. [Teller]
Newlove, B.
Noakes, B.
Northover, B.
Norton of Louth, L.
Oakeshott of Seagrove Bay, L.
O'Cathain, B.
Oppenheim-Barnes, B.
Paddick, L.
Palmer, L.
Parminter, B.
Patten, L.
Perry of Southwark, B.
Phillips of Sudbury, L.
Plumb, L.
Popat, L.
Randerson, B.
Rennard, L.
Ridley, V.
Roberts of Llandudno, L.
Roper, L.
Rowe-Beddoe, L.
Ryder of Wensum, L.
Sassoon, L.
Scott of Needham Market, B.
Seccombe, B.
Selsdon, L.
Shackleton of Belgravia, B.
Sheikh, L.
Shephard of Northwold, B.
Sherbourne of Didsbury, L.
Shipley, L.
Shrewsbury, E.
Shutt of Greetland, L.
Skelmersdale, L.
Smith of Clifton, L.
Spicer, L.
Stedman-Scott, B.
Steel of Aikwood, L.
Stephen, L.
Sterling of Plaistow, L.
Stewartby, L.
Stoneham of Droxford, L.
Storey, L.
Stowell of Beeston, B.
Suttie, B.
Taylor of Goss Moor, L.
Taylor of Holbeach, L.
Thomas of Gresford, L.
Thomas of Swynnerton, L.
Thomas of Winchester, B.
Tope, L.
Trees, L.
Trimble, L.
True, L.
Tyler of Enfield, B.
Verma, B.
Wakeham, L.
Wallace of Saltaire, L.
Wallace of Tankerness, L.
Walmsley, B.
Walpole, L.
Warsi, B.
Wei, L.
Whitby, L.
Wilcox, B.
Williams of Trafford, B.
Wrigglesworth, L.
Younger of Leckie, V.
7.10 pm
The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab): My Lords, I need to announce a correction to the voting figures on the first Division this evening, which was on Amendment 23. The correct figures were Contents 210; Not Contents 251.
Schedule 20: Pension Protection Fund: increased compensation cap for long service
32: Schedule 20, page 108, line 37, at end insert—
“( ) A person credited with a length of notional pensionable service because of pension credit rights is to be treated for the purposes of this paragraph as having pensionable service of that length (in addition to any pensionable service that the person is treated as having under sub-paragraph (8)).”
Lord Freud: My Lords, in moving government Amendment 32 I will speak also to government Amendments 33 to 41.
As noble Lords will be aware, we are proposing to change the compensation cap in the Pension Protection Fund to recognise long service in a scheme. The standard cap shall be increased by 3% for each year of pensionable service over 20 years. Schedule 20 contains most of the provisions needed to implement the long-service cap. However, some technical amendments are needed to reflect particular situations and I shall address them in groups.
Amendments 32 to 34 deal with the identification of pensionable service for certain individuals—obviously an important issue, given that the long-service cap kicks in once a person has 21 years of service. For example, a person who has been a member of a scheme for 10 years has that amount of pensionable service. However, they might also have transferred into that scheme a pension built up in a previous employment. Where the PPF has deemed service, say 15 years, in respect of this transfer, these amendments will permit the two periods to be added together so that the individual will be treated as if they had 25 years’ service in total.
Amendments 37 and 38 deal with a scheme in the process of assessment when the legislation commences, where the scheme applies for the decision not to transfer the scheme to the PPF to be reconsidered. While the
application is being considered, the current cap will apply for the purposes of assessing the scheme’s protected liabilities.
Amendments 35, 36, 39 and 40 are needed to clarify the scope of the legislation dealing with those who are in receipt of compensation when the long-service cap becomes law, for people sharing compensation and with benefits entitlements arising at different times. Amendment 41 is a minor correction needed to the current legislation.
In Grand Committee, the Government tabled a new clause, now Clause 50, dealing with the compensation cap. As my noble friend Lord Bates explained at the time, the clause was needed to ensure that the legislation reflects the policy and current practice when applying the compensation cap separately to compensation based on benefits deriving from different sources which are payable on the same day—for example, where an individual has entitlement to a pension but also a pension credit deriving from a divorce settlement. Clause 50 has a retrospective effect so as to cover payments already made. However, it applies only to cases where the two benefits were payable on the same date.
Amendment 41 is needed to provide retrospective cover in cases where compensation derived from different sources is payable on different dates. It modifies the relevant provision of the Pensions Act 2004 to allow us to bring forward regulations that have a retrospective effect, so that such payments already made in accordance with the accepted policy and practice are covered.
Getting the long-service cap into legislation has been a long process, requiring amendments at various stages of the Bill, and I thank noble Lords for their patience. I beg to move.
Lord Browne of Ladyton: My Lords, on behalf of these Benches, I welcome these amendments. In doing so, I take the opportunity to ask for an assurance that entitlement to a pension credit secured by a spouse as part of a divorce settlement will not be weakened by any of these amendments. If the Minister is unable to respond immediately to that, I will be content for him to write in due course.
Lord Freud: My Lords, that position is not affected by these amendments.
33: Schedule 20, page 109, line 6, at end insert—
“(9A) Where a person becomes entitled to relevant compensation in respect of benefits under two or more connected occupational pension schemes at the same time, this paragraph applies in relation to the relevant compensation in respect of each benefit as if—
(a) a reference to the length of the person’s pensionable service were a reference to the total length of the person’s pensionable service under all of the schemes (ignoring any period of overlap), and
(b) sub-paragraphs (8) and (9) apply for the purposes of working out the length of the person’s pensionable service in respect of each scheme as if a reference to the admissible rules were to the admissible rules of that scheme.”
34: Schedule 20, page 109, line 6, at end insert—
“(9B) When applying this paragraph in relation to relevant compensation in respect of a benefit, ignore any pensionable service that relates to a benefit that is not from the same source.
(9C) For the purposes of sub-paragraph (9B)—
(a) benefits attributable to a person’s pensionable service under a scheme are from the same source as benefits attributable to the person’s pensionable service under that or a connected occupational pension scheme,
(b) benefits under a scheme which are attributable to a pension credit from a transferor are from the same source as benefits under that or a connected occupational pension scheme which are attributable to a pension credit from the same transferor, and
(c) benefits are not otherwise from the same source.”
35: Schedule 20, page 109, line 13, at end insert—
“( ) In paragraph 24(2), at the end insert “of the periodic compensation at that time”.”
36: Schedule 20, page 109, line 16, at end insert—
“In paragraph 18(2) of Schedule 5 to the Pensions Act 2008, for “the compensation cap” to the end substitute “a modified version of the compensation cap in paragraph 26A of Schedule 7 to the Pensions Act 2004”.”
37: Schedule 20, page 111, line 37, leave out “sections 127(2)(a) and 128(2)(a) of the Pensions Act 2004” and insert “the following”
38: Schedule 20, page 111, line 40, leave out “that Act.” and insert “the Pensions Act 2004—
(a) any provision in which the definition of “protected liabilities” in section 131 of that Act applies, and
(b) any provision in which the definition of “protected benefits quotation” in section 151(8) of that Act applies.”
39: Schedule 20, page 113, line 3, at end insert—
(1) In relation to a case involving multiple benefits, transitional provision made by order under section 55(8) may, in particular—
(a) disapply or modify any provision of this Schedule;
(b) make provision similar to any provision of this Schedule.
(2) For these purposes, “a case involving multiple benefits” means a case mentioned in paragraph 26(9) of Schedule 7 to the Pensions Act 2004.”
40: Schedule 20, page 113, line 3, at end insert—
(1) Transitional provision made by order under section 55(8) may, in particular, make provision in relation to compensation payable under Chapter 1 of Part 3 of the Pensions Act 2008 (compensation sharing on divorce etc) that is similar to any provision of Part 3 of this Schedule.
(2) Regulations under paragraph 18 of Schedule 5 to the Pensions Act 2008 which restrict an amount payable to a person in any period by reference to a modified version of the compensation cap in paragraph 26A of Schedule 7 to the Pensions Act 2004 (inserted by Part 1 of this Schedule) may also make provision similar to any provision of Part 3 of this Schedule.”
Clause 50: Pension Protection Fund: compensation cap to apply separately to certain benefits
41: Clause 50, page 27, line 16, at end insert—
“(8) Regulations under paragraph 26(9) of Schedule 7 to the Pensions Act 2004 (modifications for cases where compensation becomes payable on different occasions) made in consequence of this section may be made with retrospective effect.”
7.15 pm
41A: After Clause 51, insert the following new Clause—
Within one year from the date of enactment, the Secretary of State shall, following the completion of a public consultation, lay before both Houses of Parliament a report assessing the impact of the provisions contained within this Bill on the following—
(a) current and future recipients of the state pension;
(b) members of private pension schemes;
(c) women born between 6 April 1951 and 5 April 1953;
(d) the level of knowledge among young people of state pension entitlement and private pension provision; and
(e) such other matters that the Secretary of State for Work and Pensions and the House of Commons Work and Pensions Committee deem relevant.”
Baroness Sherlock: My Lords, Amendment 41A in my name and that of my noble friend Lord Browne calls for the Secretary of State to review and report to Parliament on the impact of the Bill on specific groups. I recognise that the department undertakes research, but this amendment picks up on something slightly different: the impact on specific groups about which concern has been expressed during the passage of the Bill through Parliament, or where provision is in effect a work in progress.
This is a major Bill that will have a significant impact on the majority of our citizens—indeed, on pretty much all of those who have yet to reach state pension age. If the Bill proves to be even half as good as the 1948 Act, it may be in place for a long time. The amendment calls for reviews of provisions made in the Bill to check that we have got it right and to enable us to make any necessary adjustments for those who are unfairly disadvantaged, or where provisions seem not to be working as we might have hoped.
Paragraph (a) of the proposed new clause calls for a review of existing and future beneficiaries of the state pension scheme. When there are winners and losers we should review that to make sure that we have got the balance right. We should also include within the review an assessment of whether transitional arrangements are adequate and working.
Paragraph (b) relates to the operation of private pension schemes. Given the debates this evening, I hardly need detain the House further by sharing our views on whether the private pensions system is working well; I think that we all know that there are challenges. Some of the changes that are needed, such as to the annuity market, may well need primary legislation, but many will not. The review will take the opportunity to look at whether the various changes, legislative or not, which the Government have made and promised, are working effectively.
Paragraph (c) relates to the concerns expressed by many women born between 6 April 1951 and April 1953. I am sure that all noble Lords have had many communications from women in that category who are affected. In Grand Committee, the Minister was pressed by various noble Lords, including my noble friend Lady Hollis and the noble Lord, Lord Paddick,
to be clear as to whether or not this cohort of women would be better or worse off under the new system. The assumption of the Government is that they will be better off, but I never got a satisfactory response to the question I posed in Committee as to why the Government think that women born between 1951 and 1953 are better off under existing arrangements, and yet also claim that women will mostly be better off under the new pension arrangements. I still do not quite understand how both can be right. The amendment asks the Government to report to Parliament on the actual impact of these provisions, rather than simply relying on analysis of what the impact is likely to be.
Paragraph (d) focuses on the need for a review of the knowledge of young people of the system. Young people currently face a challenging work environment with high youth unemployment, the potential for high debts if they go to university and astonishingly high rents. We may safely conclude that, for most of them, concern about living in poverty in their dotage is not chief among their concerns, so a call to start contributing to an auto-enrolled pension may not ring loud. Yet that is of course the very best time to address those concerns.
Better financial education is needed, coupled with information about the importance of providing in future for their retirement. We owe it to young people to encourage them to consider making pension provision as soon as they are able to do so. This amendment seeks to keep track of the Government’s strategy to ensure that our young people are armed with a greater understanding of the need to proactively engage with pension decisions.
This is a far-reaching Bill and we should therefore make sure that we have got it right. Paragraph (e) of the proposed new clause recognises that the Select Committee, and indeed the Government, may identify other matters that should be reviewed and reported to Parliament.
The principle underpinning the Bill is that people should have a state pension that is simple to understand and that they should take responsibility for saving for their old age through work-based pensions. We also need to have it acknowledged today that the state owes a duty of care to the large numbers coming under auto-enrolment. In light of the broad consensus that industry must improve its standards and reduce its charges, its progress towards that should be monitored by Parliament. The amendment sets out a method of parliamentary scrutiny to ensure that we have got it right and that the Pensions Bill will last us, as the Minister aspires, for decades to come. As there will be an election before enactment—and, of course, a change of Government, one hopes—the amendment is prudent. I recommend it to the House. I beg to move.
Lord Freud: My Lords, I do not think that anyone in the House can be under any misapprehension but that the Government value extremely highly the role of evidence, analysis, consultation and evaluation in policy-making. Our approach to designing this once-in-a-generation package of pension reforms has been heavily informed by a robust and wide-ranging evidence base. However, looking at the text of the amendment
and its timing, I must make clear that the provisions on the new state pension, and many of the other provisions in the Bill, will simply not have been commenced by spring next year—the time used in this amendment. Therefore, all that would come out of such an amendment would be a rehash of the information that has already been provided to Parliament: there would be nothing to add. We have no particular objection to this amendment in terms of sentiment, but its timing is just not appropriate.
I will not spend a lot of time going through all the issues, which we have gone through in huge detail over the past weeks and months. However, I will touch on how we will monitor the impacts in the future and what the plans are. It is clearly imperative, as the noble Baroness said, that a set of reforms of this nature is accompanied by a strategic approach to monitoring at sensible intervals. I am not saying anything that noble Lords will disagree with when I state that pensions is a very long-term policy area, and that the impact of many measures will not be felt fully for decades.
As a society we are asking people to do more to think ahead and plan for their retirement. As a Government it is our duty to do the same in looking at the retirement outcomes of the population as a whole. Our retirement outcomes framework, published in September 2013, provides an overview of projected future retirement incomes, looking at the impacts of government pension reforms as a whole and across state and private systems.
Baroness Hollis of Heigham: Perhaps the noble Lord could write to me if he does not have the answer at his fingertips. I respect his concern for evidence and policy base, but, as he will know, that depends on longitudinal statistics and their consistency. There has been quite a lot of dispute about threats to discontinue some of the longitudinal statistics which show households below average income, recipients of benefits, what is happening with pension credit, and so on. My noble friend Lady Lister, who is not here at the moment, has been concerned about that. Can the noble Lord write to us and tell us what series of statistics will be kept from the implementation of this Act, so that we can track, for example, the groups that my noble friend has mentioned—the 1951 to 1953 group—and what is happening to people who will lose their derived rights as married women, widows, divorcees and so on? What assurances can he give us about how we can be sure that we are in a position, if we need to be, to adjust policy because we have the information to hand?
Lord Freud: That is clearly a relevant and central set of issues, and it is quite technical. As the noble Baroness invited me to write, I will make sure that we produce a comprehensive look at exactly what these series are and what they will contain. I will be happy to arrange that.
Baroness Hollis of Heigham: Also, what if any future surveys does the Minister expect the Government now to engage in as a result of this Act coming into force?
Lord Freud: I am happy to make sure that we itemise those in a way that will help noble Lords keep an eye on what they need to monitor as we go along.
We will update the modelling as evidence becomes available on the impact on work and saving of automatic enrolment, the single-tier state pension, and state pension age changes. As noble Lords will know, the department conducts a six-monthly tracking study of attitudes and behaviours in relation to pensions, later life and automatic enrolment. A similar exercise will start after Royal Assent, to monitor awareness and understanding of the reforms.
We are committed to the principle of post-legislative scrutiny, but such scrutiny must have scope to provide insights beyond the impact assessment and consultation practices to which we are already committed. I know that the noble Baroness accepts the point on timing, but the timing of this amendment would not add materially to the powers of the Work and Pensions Select Committee. Indeed, there is an awkwardness about the timing, because it straddles the next election. However, we look forward to continuing to develop pensions strategy with that committee’s input.
I know that the noble Lord does not appreciate my asking for the other side to withdraw this amendment and not press it to a vote, but that is the position I am in. Maybe there is more warmth to my request than there has been this evening.
Baroness Sherlock: My Lords, that would not be hard. I thank the Minister for that response, and I thank my noble friend Lady Hollis for pressing him for more detail on how this will be monitored in future.
I am very grateful to the Minister for setting out the Government’s commitment to post-legislative scrutiny and for setting out his commitment to making sure that the impacts of the Bill are analysed carefully, and with the use of evidence. I will press him to do two things. The first is to give particular attention to the two groups mentioned by my noble friend Lady Hollis. The women born from 1951 to 1953 feel very strongly that they have missed out on something important with this. If the Government turn out to be right, and they are better off under the current system, it is important not just that the Government find that out but that they share that knowledge as widely as possible. If that is the case, those women will be reassured—and, if not, they have a right to know anyway. Can the Minister also look at the position of those who would have been affected by, for example, the removal of derived rights, and whether the transitional protections are working well for them?
Secondly, as well as all the work that has been done to an appropriate timescale, will the Minister give some thought to how that might best be shared with the House? The proceedings have been very good as the Bill has moved through Parliament. A lot of issues have been raised—in this House in particular—and a lot of expertise has been brought to bear on this, and we have all learnt a lot from the process. Having done that, rather than have the results of it disappear into the department, marvellous as it is, it would be helpful if they could come back out so that we can all learn from that, both for the Bill and for future legislation. However, I will take his assent to those marvellous suggestions as read, and on the basis of that—and because he asked so nicely—I beg leave to withdraw this amendment.
Clause 53: Regulations and orders
Amendments 42 and 43 not moved.
Care: Financial Services Industry
Question for Short Debate
7.28 pm
To ask Her Majesty’s Government what plans they have for the role of the financial services industry in funding care provision in the light of the Dilnot commission reforms.
Lord Lipsey (Lab): My Lords, I declare my interests as unremunerated president of the Society of Later Life Advisers and a member of the advisory committee of the Equity Release Council.
The request for a debate on this was sparked by the publication on 21 January, jointly by the Department of Health and the Association of British Insurers, of a document called Social Care Funding: Statement of Intent. To be more accurate, it was sparked by the reporting of that document the next day in the Financial Times, which said that the statement meant that,
“government hopes of early products covering the cost of long-term care for the elderly”,
had been dashed. That was based on one conclusion of the report: it was unlikely that prefunded products to pay for long-term care would emerge, at least in the immediate future—that is, products that people had paid for during their working life. I am myself a journalist, but I am afraid that that really was news only to the FT. There have been no such products for a very long time, and they are even less likely in the light of the Dilnot cap on care costs. The fundamental reasons are very simple: they are supply and demand. From the point of view of companies providing them, they are very difficult policies to produce, because they require you to assess many years in advance how long people will live for, how long they will claim off the policies for and how much the cost will be. That is on top of all the usual problems of moral hazard with any insurance product. To put it technically, they are virtually impossible to price.
Even if those products were on offer, who on earth will buy them? We know that people during their working lives do not much care to think about their last years of life. We know that roughly only one in three people goes into residential care and is therefore most likely to benefit from prefunded products, and we know from talking to independent financial advisers that if you try to raise this sort of product with people during their working lives, they are not interested. They are interested in their pensions, yes, but not in care products. So they have never been a possibility and nothing in the Government’s plans has ever assumed that they were a possibility or were going to happen. If I were an insurance salesman, which thank God I am not, I reckon that I would have a better chance at selling heating to the denizens of hell than I would of selling these products on earth, if they existed. They are unsuitable and unsaleable—what is to like?
The FT missed the real story in the account, which is that there are two classes of product that are saleable and suitable and would supplement the recommendations of Dilnot as interpreted by the Government. One is point-of-use products whereby, if I go into a home tomorrow, I can insure myself so that my care costs are covered, however long I live. The second product is the enhanced annuity—that is, I start off with one pension and then, as I develop greater care needs, that pension is enhanced. I want to say a word or two on each of those products, which are essential in complementing the Dilnot proposals.
Point-of-use policies already exist. It is a small and specialised market, with about 7,000 policies extant and about 1,000 sold a year with three firms providing them. However, very few elderly people know of their existence. That is a point that I shall return to later—not, I think, greatly to the Minister’s surprise. They have a very important part to play in the Dilnot settlement. Dilnot caps costs at £72,000, or at least that is the story. But in reality, for many of the better-off people who go into a residential home it does not cap costs at £72,000 at all. They have to pay £12,000 in living costs on top of the £72,000 but, more importantly, that is £72,000 at the rate that a local authority will pay for a home. To cite the example of someone whom I know and love, who is in a home in Oxford that costs roughly £1,000 a week, she is marvellously cared for but the local authority will not fund £500 so there will not be £500 to count towards the cap. If she wants to protect herself so that she can stay in that home for the rest of her life, as she would like, one way in which she can ensure that is by buying one of the private policies. But Ministers have spoken rather with forked tongues about this. I do not mean the Minister here in particular, but Ministers from the Prime Minister onwards who have tried to obfuscate the fact that the cap covers only the cost of a home at the rate provided by the local authority. Really, the Government have to come clean with the public about what the cap is so that they can protect themselves, and know that they need to protect themselves, if they wish to.
On care annuities, the Government have a bigger role to play. There are a lot of difficult issues here. For example, there could be tax difficulties. If you have an enhanced annuity that raises your income to a level where you are paying higher rate tax, that would be quite a difficulty. Indeed, the tax situation on these annuities is not altogether clear, partly because the Inland Revenue likes to ensure that annuities are taxed. Although they are allowed to rise in line with prices, they are not necessarily allowed to rise in line with needs. The Government have more work to do before those policies can be safely marketed, sold and developed as they should be to help people as their needs grow.
I conclude with two final sine qua nons—I am sorry, that is naughty. I have used two Latin tags in one speech, but your Lordships’ House will forgive me if nowhere else will. Those sine qua nons must be met if the financial services industry is to fulfil its potential as a complement to the post-Dilnot world and not as a substitute for the government cap or assuming that the Government will pay for everything, which is the world that we are, thank God, finally leaving.
My first point concerns regulation. I am afraid that I could speak for a long time on that but, fortunately, this is a time-limited debate. In particular, I am not convinced that the standards required of independent financial advisers operating in this field are sufficiently high. Too many advisers sell too much on the basis of too little knowledge. The standards are simply not high enough. I exempt, as of course I would, SOLLA-qualified advisers, who are very fully trained and equipped—but others are not.
There is also a worry that needs a good deal of thought, and I do not have the solution to this one yet. There is something about in the industry that I would call the fear of FOS—the Financial Ombudsman Service. Many advisers who could play a very useful role for society and themselves by getting into this business are frightened that, although they sell the policies reasonably honestly, they will be found to have mis-sold them by FOS and will be forced to pay huge amounts in compensation. That is something that the Government need to look at, to see if any reassurance can be provided if we are to have the advisers available to provide the advice that people need.
The second sine qua non is the provision of information from the Government about precisely what the scheme does and does not offer as well as what it remains for individuals to provide for themselves. Does that make three Latin tags? On the subject of information, we made very good progress during the passage of the care Bill, and I thank the Minister and his ministerial colleagues for being so open-minded about this. The Government are committed to a national information campaign and to monitoring progress in public understanding, as well as to obliging local authorities to play their part in what we hope will emerge as a holistic system of advice and information. But the devil lies in the detail. I think that it is on balance right that the detail is not in the Bill, but getting the rules absolutely right is essential and giving local authorities the resources that they need to fulfil their advice functions is also essential.
There are also in the advice field complexities entirely of the Government’s own making. It is absolutely crackers to have one date on which the deferred payment scheme is introduced, whereby people do not have to sell their house, and a quite separate date when the Dilnot scheme comes into effect. Can noble Lords imagine how in that intervening year a financial adviser is to explain, let alone provide sound advice, to a client? It is simply impossible. What happens if someone comes to him a few weeks before the new benefit rules come into effect? Does he tell them to take out a deferred payment or not, when that benefits scheme may pay a lot of those costs? This is simply mad. The Minister will be glad to hear that if he agrees to reconsider his policy on this—and I hope that he will discuss it with his colleagues—the Government would actually save a bit of money.
I conclude as I began. The private financial services market has an important role to play as a supplement to Dilnot and providing a holistic system of support, particularly in helping people who have saved hard all their lives to make sure that they protect the assets that they wish to leave to their children. However, although
we have passed the Bill and it is passing through another place, there is still much work for the Government and the industry to do if it is truly to fulfil that potential.
7.39 pm
Baroness Gardner of Parkes (Con): My Lords, I am delighted to join in this discussion, particularly as the noble Lord, Lord Lipsey, has made many important points. I am glad to hear that he is on the Equity Release Council’s advisory board. Equity release is something people know very little about; they are suspicious of it and distrust it because they do not understand it. Equity release schemes will have to prove themselves if they are to satisfy people.
I first debated a cap in connection with care costs years ago and I think that the relevant figure at that time was less than £10,000, which shocked me a bit. Even now it is less than £24,000, so it is appropriate that Dilnot has proposed a much more realistic figure for our times. However, a great difficulty arises as regards financial products and older people. In earlier times, older people could get a bridging loan from their bank. Now it does not matter what your assets are, the banks will give nothing at all if you are over 75, and some banks will not give anything to people over 70. They do not want to know you if you are in that age group. They will give you a loan if you want to buy something to rent but, if you want to use the money to cover your own future needs, despite the fact that they can easily recoup it from the sale of the property when you die, they do not want to know.
In many parts of the country, particularly London, many elderly people are capital-rich but have only a very small income. If they wish to remain in their own home, they have to find a means to raise money. At the moment, equity release or insurance seem to be the only two available options. Kensington and Chelsea is cited as having more people who have lived in their home for more than 50 years than anywhere else in the UK. When I came to London, I rented a flat near Portobello Road. The porter of the block lived in a small house in Portobello Road. Those houses were selling in the 1950s for £750. As a sitting tenant, the porter was offered his for £450, which, sadly, he could not afford. Today, those same houses are selling for well over £2 million. If a mansion tax is introduced, the residents will be liable for that tax. Tremendous social upheaval would be caused if people who have been in their house for 50 years suddenly have to find ways to release cash in order to stay there. I have asked equity release organisations whether those people could use equity release for that purpose and was told that they could. However, if they do so, there will be less money available to pay for their care. Moreover, the relevant bodies are willing to provide only a certain amount given that risk is the big factor in all financial transactions now. Everyone wants to avoid risk and we want to be sure that the banks are sound. They are risk-averse, so the whole thing is very difficult.
As I say, the public do not know enough about equity release, and regulation is very important. I was interested to hear the comments of the noble Lord, Lord Lipsey, on regulation. There are good regulations in this field—for example, the regulated home reversion plans, sale and rent back plans and home purchase
plans. The ombudsman scheme to which he is referred is, I am pleased to say, free for the complainant, which is important. People are still a bit rattled by what happened at the Co-op, which everyone had thought was so sound. However, the regulator regulates standards of behaviour, not of pricing. We need to be sure that equity release does not end up like the payday loan scheme and rip people off in a big way.
The Financial Services Authority was replaced in April last year by the Financial Conduct Authority and the Prudential Regulation Authority, so a lot of these matters are still regulated, but are the Government satisfied that the systems in place are sufficiently hands-on to cope not only with existing problems but those that might arise when the schemes to which I have referred get going?
I meet people who bought their flats years ago in what were then council blocks—some, indeed, who did so in the days of Mrs Thatcher. Obviously, the value of those flats has increased hugely over that time. However, when the right to buy council flats was introduced, purchasers had the right to sell their flats back to the council if they needed money. The councils were happy to buy those flats as it cost them less to do that than to build new ones. However, no such provision is available now. The flats have all been farmed off to housing associations and housing organisations that operate schemes for the local councils, which has made life much more complicated. I hear of people who are on a pension of £170 a week but are required to pay their share of roof repairs costing £12,000 or £13,000, which is more than their income, so these issues are difficult to assess. It is tremendously difficult for people to assess whether or not they can afford to meet the costs of their care, their daily living costs and the costs of staying in their own home. Furthermore, elderly people in particular know their way round their own property and are safer in their own property than when they move to another one. People do not fall down and break a hip in a place they have lived in for years; that happens in the new place they move to. Therefore, if people do not require full-time residential care, there is great merit in staying in their own home.
I suggest that we need a free, independent advice service. However, that is no good unless skilled staff run it. It is useless if people think that they are getting good advice only to find that the person to whom they are talking knows less about the issue than they do themselves. This issue is a huge project for the future. The Government cannot think that it is resolved, all sorts of problems will come up that we do not even envisage now. The financial services can, and should, do a lot more in this area and should adopt a positive approach. It is a difficult situation as anyone running a financial services organisation is torn between satisfying the Government that they are risk-free and have plenty of spare capital, and satisfying the people who would like to avail themselves of funds from a reliable source, who then find the whole issue is much more complicated than they thought.
I am told that there is far greater confidence in the equity release market at present. Recent figures indicate growth of 12% since last year, with £473 million of housing wealth unlocked in the first six months of last
year. There is currently £251 billion tied up in home equity that could be released under equity release products. That is interesting and the release of that money makes sense, but only if it can be handled in a sound way that protects the consumer and helps people. I think that the Government support the Dilnot report, and I certainly strongly support it. We want to see it come into force and benefit people.
7.47 pm
Baroness Brinton (LD): My Lords, I congratulate the noble Lord, Lord Lipsey, on securing this important debate that joins together progress in health and social care for the elderly and how our financial services can help deliver this from 2016—two years’ time—in the wake of the Dilnot commission reforms.
The rising cost of care, however, has become an increasingly worrying issue. Two years ago, the commission estimated that the cost of the reforms was approximately £1.7 billion. Inevitably with an ageing society and limited resources, the state does not have sufficient funds to meet the increasing demand of social care for the ageing and disabled population. As Bruno Geiringer noted,
“with demand for older people’s social care expenditure currently touching £8 billion and actual spending sitting at around £7.25 billion, the gap between supply and demand is alarming”.
In 2011, the amount spent on care and support was 1.2% of GDP. However, in the same year, the figure was estimated to rise to 1.7% of GDP after the implementation of Dilnot.
As we have heard from other speakers, currently, individuals are meeting costs by drawing down equity from their housing assets, purchasing insurance, or taking from their pension funds. Where they do not have access to these sources, many have to sell their property, while still alive, to fund their nursing care, but, frankly, this is such a hard decision at a very difficult time in people’s lives as they face reducing their independence and losing their home. It is evident that there is, or will be, a market for the financial services to support the older generation. With a cap on the individual’s lifetime contribution, this can be much more clearly defined than under the present system.
The challenge is that the financial services industry must take greater initiative in funding these reforms. Several key financial products, some of which have been mentioned, are possible sources of funding. The disability linked annuity works by reducing the income of an otherwise flat annuity, but then doubles or trebles the income once care is required. In marketing this product, customers need to be aware of the tax treatment of annuities because they are treated as pay as you earn under current pension taxation rules. The second source of funding is products linked to housing assets. Many people fund their social care by utilising a portion of their housing equity to meet costs by either downsizing or taking out loans that are secured on their house, payable on death. The third source is linked to insurance. There is an opportunity for critical illness or life insurance policies to cover care costs. Similarly, top-up insurance can also assist individuals in the amount they spend on general living.
However, no providers currently offer pre-funded insurance, mainly because there is a lack of demand for it. This is why pre-funded insurance products have failed in the past, and consequently are no longer available on the market. However, such products could fit the new profile needed to fund social care in the future. I ask the Minister, if these insurance products are indeed beneficial in covering care costs, how can the Government help the industry stimulate demand for the products? A potential alternative to the previous options is a deferred payment scheme. Under this, people could pay insurance fees after they have died. This works by taking a portion of an individual’s life insurance and applying it towards paying for care fees.
Despite the potential of these products, there are many concerns that have been raised by both the Dilnot commission and the Government. As I have outlined, some products exist but face low take-up due to demand-side barriers, including reputational issues, a lack of public awareness, and the cost and complexity of the products. I am sorry to say that reputational issues have led to a loss of trust by many people in financial services. Research conducted by the Chartered Insurance Institute in late 2010,
“found that one in five respondents will never trust financial services again and 72% of people have not very much trust or no trust at all in financial advisers and life insurance providers”.
The most serious problem is the lack of awareness of social care costs. In several consumer surveys it was noted that most individuals do not know how much they will be paying for care in old age. The Local Government Association says that it found in a survey that,
“63% of individuals wrongly estimated the average cost of a care home as less than £25,000 per year”.
It is imperative, then, that we address issues related to engagement barriers in an effort to encourage people to seek private sector solutions. We must increase marketing for the products and raise awareness on the amount that people are likely to have to pay in future for their social care. This must start early. Worrying about it when you are 55 is, frankly, too late.
The Government have already established an expert working group that will involve the Government, the financial services sector, local authorities and the care sector. It is exploring ways in which individuals can best be directed to truly independent financial advisers, and will build links with pension benefits and other services. However, it is shocking that out of 53,000 self-funders in residential care only 7,000 received financial application advice in 2009. This may be a possible explanation as to why one in four self-funders ran out of money and sought help from the state. Clearly, there is a necessity for the support of financial industry in the form of products and advice. The Department of Health expects the financial services industry to respond by 2016. However, that is only two years away and most financial products take between five and 10 years to design before they come to market, let alone general take-up. I therefore ask the Minister, if this is the case, then where are these financial products and where is the early launch of information and advice to reassure the public on the adequacy of these financial options?
To conclude, there are too many individuals unaware of the social costs related to healthcare and the ability of financial services to help them finance costs. Although there is broad consensus that action needs to be taken, there is also a real fear that the commission’s recommendations could be left to rot because of the lack of products. This issue must be dealt with now because the financial services industry has the potential to minimise the full-scale effect of these costs on the lives of the ageing and disabled population. Equally importantly, it will remove the lottery of how much people have to pay for their social care, which has been a scandal for years.
7.55 pm
Baroness Greengross (CB): My Lords, I add my congratulations to the noble Lord, Lord Lipsey, on securing this debate and pointing out so much that still needs to be done to fulfil the potential of the Dilnot recommendations. While we all regret the fact that it does not seem that long-term care products will be available for some time—perhaps that was predictable and perhaps we all knew that—we have been encouraged by the Government’s decision in its Care Bill largely to accept the Dilnot commission recommendations for a cap to be created for an individual’s lifetime contributions towards their social care costs. That represents an important starting point from which new care funding solutions can begin to emerge.
An important outcome from those reforms for the industry would be the long-term stability and sustainability of the social care funding framework. A stable state framework should give consumers the confidence to invest in solutions to pay for their share of care costs. It will also have a positive impact on providers’ willingness to enter the market. However, much of the detail around the operation of the cap, in particular the modus operandi of the benefit eligibility criteria, as the noble Lord, Lord Lipsey pointed out, will be clear only when the promised guidance finally emerges from the Department of Health. It would be helpful if we had a better idea about the timetable for the appearance of that guidance.
The legislation itself will not deliver a new care funding option unless it first creates the right environment in which new markets for care funding products can develop. Accordingly, I warmly welcome the new statement of intent between the Association of British Insurers and the Government. That is an important step in the process of helping people to plan and prepare for the costs of long-term care. From my perspective, an important element of that statement is the declaration that there will be a joint initiative to raise public awareness of the reforms in advance of 2015. In the absence of such an effective information and education campaign, possibly run in conjunction with a campaign on pensions awareness, low consumer understanding about the realities of care funding—as the noble Baroness, Lady Brinton, pointed out—will continue to reduce the demand for new care funding options, which the financial services industry could potentially develop products to meet.
Currently, for those who can afford them, immediate needs annuities are the only products dedicated to care fees funding. These guarantee an income for life to
fund care costs in return for a one-off premium. In the continued absence of any form of pre-funded long-term care insurance products, it is to be hoped that products such as disability-linked annuities and vehicles that combined care insurance with other protection insurance options—the so-called care conversion and hybrid protection products—will emerge. We should do all we can to encourage such innovations.
Unless local authorities, as part of their mandate to establish a competent local information service, have effective processes in place to refer future consumers—who are already emerging and may require appropriate regulated financial advice—perhaps to members of SOLLA, who are reliable and can give them the correct information, not only will the information programme be wasted but many consumers will not get the outcome their sensible considerations and planning merit. Some reassurance from the Minister on both the information programme and service would be helpful. I hope that he can give that assurance to us.
For people with property assets, one of the routes to funding care fees that emerges may be based on the current equity release products, as we have heard. For example, only yesterday the think tank Demos launched a research report which explored the possibility of helping customers to ring-fence a proportion of their housing equity to help them to meet their long-term care costs in later life. It is also important to remember that, while the proposed extension of local authority deferred payment schemes is positive, these are complex financial arrangements with long-term consequences. In many ways they are very similar to fully FCA-regulated equity release products but without the accompanying consumer protection and redress features.
Therefore, first, an information and advice campaign must be aligned with that on pensions; secondly, the guidelines should be consulted upon, and eligibility criteria and the level of need should be thought about again—it is really important that we build in some protection for people—and, thirdly, eligibility criteria should, I think, be national rather than local so that minimum standards are guaranteed and could be exceeded locally but not lowered.
The older population has within it people of all different shapes and sizes with different aspirations and needs, and a one-size-fits-all solution is inappropriate. I end by echoing the aspirations of the statement of intent, in that all of us must continue to work together to help people to better plan, better prepare and better save for care costs. We must spare no effort in seeking to identify the best care funding solutions for all our different people of all ages and backgrounds.
8.01 pm
Lord Hunt of Kings Heath (Lab): My Lords, I, too, thank my noble friend Lord Lipsey and the other noble Lords who have spoken in this highly informed debate. It takes us back to our debates on the Care Bill, which is still subject to deliberation in the other place.
My noble friend referred to the statement of intent and to the difficulties that the industry has encountered in producing policies, for the reasons that he set out.
We have studied the statement of intent with care. I noted that the introduction refers to the following fact:
“In March 2013 the Department asked the major firms and trade associations in this field to undertake a review of how the market could develop. This reported back in July 2013 and is being published today”.
No one admires more than me the Department of Health but it does seem to have taken rather a long time for this to have been reported. I should have thought that it would have been more helpful to noble Lords if it had been reported when we were considering some aspects of the Care Bill.
The essential point of the review was that,
“there is currently a lack of demand for products and that new products might initially reach only a small market”.
Shock, horror in the Financial Times—but I do not think that my noble friend was surprised. As he said, he does not really hold out much hope that there will be a market in the future in the way that noble Lords have been talking about tonight: first, as he said, because of the difficulty of pricing products due to the uncertainties in the years ahead, and, secondly, because of the reluctance of most of us to buy those products even if the industry were certain of being able to put them on the market. I should be interested to know whether the noble Earl agrees with my noble friend’s analysis or whether he is more optimistic. If he is more optimistic, then why?
However, my noble friend pointed to what he described as two saleable products: first, point of use and, secondly, enhanced annuities. He felt that those were essential to underpin the Dilnot proposals. I do not want to go over old ground but I agree with my noble friend and other noble Lords that the real problem for us is that, while we obviously welcome the foundations laid in the Care Bill, the fact is that it does not really produce what we originally thought it would—a clear cap that people can understand. We have the £72,000 cap but, in reality, we know that it is much higher. There is the £12,000 per annum living cost and there is also the fact that the £72,000 cap is related to what the local authority will pay. We know that private funders pay more than that, and there are many suggestions that private funders are subsidising people funded by the local authority. Whether that will survive the transparency that will come in a few years’ time, I very much doubt. We argued and debated this when we discussed the Care Bill.
I know the nursing home that my noble friend referred to because my mother has instructed me that, if she has to go into a nursing home, that will be the one to which she goes. She sized it up and everyone in Oxford knows that it is a very good nursing home. However, £50,000 a year—£1,000 a week—is much higher than the local authority will be paying for the people for whom it will be responsible. Therefore, in essence, the cap will be much higher than £72,000. I agree with my noble friend that the Government need to come clean on this. We will not get the certainty that is required or achieve the required literacy among ourselves and other people unless it is clear what the likely liability is going to be for many of us and our relatives.
My noble friend raised two further points. The first concerned regulation. He is not convinced that the standards required of independent financial advisers are sufficient. This is worrying. Noble Lords will have received very interesting briefings for this debate from the Equity Release Council and the Just Retirement organisation. The Just Retirement briefing refers to polling that it commissioned, conducted by YouGov. It found that when individuals were asked where they would go for information or advice on how best to pay if they needed to organise professional care, one in five chose their local council, a similar number chose a CAB and almost a fifth said that they would go to the National Health Service—I am not sure whether that is advised, but there we go.
However, interestingly, the poll also revealed that when people were informed that they would face a large care bill before reaching the cap, almost two-thirds recognised the need for professional financial advice. That is encouraging as long as we can be sure that the independent professional advice is of a high order. I share my noble friend’s concerns that this is very variable, and I am not sure that the regulatory context in which those providing the advice operate will deliver the goods.
The second point that my noble friend raised comes back to being clear about what people are liable for. There are continuing concerns about the role of local authorities in this and their capacity to deliver. I am still concerned about their ability to undertake assessments when the new clock starts, and I have not been convinced that local authorities really do have the capacity to do the job effectively. However, that then raises the question of the nature of the very welcome campaign that the Government, as a result of our debates, have agreed to.
A national public awareness campaign is very important, but it has to be done with effectiveness and vigour. I wonder whether the noble Earl will be able to say a little more about how the campaign is going to be organised, what the budget will be, when it will be launched, how long it will run for and what partner organisations his department will work with. I refer him again to a poll by Just Retirement, which found that nearly one-third of those aged 55 and over believe that councils pay most of the cost, with individuals topping up the rest, while 40% believe that individuals pay most, with councils topping up the remainder. Many, many people do not understand the liabilities that they will face. We need to do everything that we can to ensure that people understand and can get proper advice, and we need to ensure that where the insurance market has a role to play, that role will be as effective as possible. This debate, although very short, is very important if we are to go forward with confidence in terms of Dilnot and the many liabilities that people are going to have to face in the future.
8.10 pm
The Parliamentary Under-Secretary of State, Department of Health (Earl Howe) (Con): My Lords, I begin by thanking the noble Lord, Lord Lipsey, for raising this very important issue. I thank equally all speakers for their contributions to the debate. The noble Lord, Lord Lipsey, and I have conversed many times of late
on the Floor of the House about the provisions of the Care Bill, so I am in no doubt that he is very well acquainted—perhaps more than most of your Lordships—with the recommendations of the Dilnot commission on the funding of care and support. However, for the benefit of others who may not have been following as closely, I will take a moment or two to refresh our memories.
The commission found that the current system is simply unsustainable and not fit for purpose. We need to ensure that we have a system that is sustainable and that people do not face catastrophic care costs. This is what the reforms we are introducing will do. The commission defined a new model for funding care and support—a new partnership between the individual and the state. It suggested that where individuals can afford to contribute they should do so but that it was simply not fair to expect people to spend their lifetime savings meeting the cost of their care. To address this current imbalance we are putting in place a cap on care costs, as recommended by the commission, to provide people with an insurance against catastrophic costs and the fear and worry that these can bring. We are also extending the means test and, as a result, we will be giving 35,000 more people means-tested support with their care costs immediately when the system comes in.
These are all ways that the state will be providing additional protection. However, we must remember that what the commission described was a partnership, and there are at least two sides to every partnership. It recommended that where they can afford to do so, individuals should also contribute. It is just as important, perhaps even more so, to make sure that we are providing individuals with the support they need to meet their contribution. We as government are providing flexibility through the introduction of the universal deferred payment scheme and additional support through the new Clause 4 duty on local authorities to provide financial information and advice. I shall say more about that in a moment.
We cannot, however, do this alone. The financial services sector needs to provide some support, too. The noble Lord, Lord Lipsey, recommended Ministers to go away and think about a postponement of the deferred payment scheme. I am sure he would agree with me that the deferred payment agreements perform a very important function and are one of the ways in which people can pay for their care more flexibly. Local authorities, as he is aware, already offer deferred payments. That gives me grounds for believing, and indeed having confidence in believing, that they have the ability to implement the universal scheme in April of next year. Given the fundamental function that these deferred payment agreements will fulfil, I am very hesitant, if not reluctant, to consider delaying the universal scheme. However, I will convey the noble Lord’s views to my honourable friend Norman Lamb.
I should like to address the precise question placed before me by the noble Lord, Lord Lipsey. He asked what plans the Government have for the role of the financial services industry in funding care provision in the light of the Dilnot commission reforms. My straight answer to that question would need to be that we have no direct plans because the industry is independent of
government and, as such, we have no control over what it does. We cannot compel it to play any role, however much we might like to. I cannot say what plans we have, but I can tell the noble Lord about the joint work that we have been doing with the industry, our shared ambitions and our commitment to continue this joint working—a commitment, incidentally, reinforced by the briefing issued by the ABI ahead of this debate.
In March 2013, the Department of Health invited companies from the financial services industry to conduct a review of financial products to fund care—the opportunities that the Care Bill would provide and the barriers that needed to be overcome for it to flourish. The review reports were published on 21 January this year, alongside a joint statement of intent between industry and government, where we both committed to working together on this agenda. The industry-led review told us that the introduction of the Care Bill reforms would largely give us the right conditions for a market of care products to emerge. I do not think we should overlook the importance of that finding. Further, the reports confirmed that industry saw itself as able to play an important role in helping people to plan for their care and support needs—again, a sentiment reinforced by the ABI in its briefing yesterday.
However, that does not mean that our job is done. We need to be realistic about what we might expect, and when. More work needs to be done and there are some barriers to overcome if we are to see this market take off. Again, I have no need to familiarise the noble Lord, Lord Lipsey, with some of those barriers. Indeed, he has spoken of them in the debate. Public awareness of how care is funded is woefully low. We need to build an understanding, a greater awareness of how the system works and the need for people to plan and prepare for future care needs—something that the Government have already committed to do. My noble friend Lady Brinton asked how demand for financial products could be stimulated. We need to make sure that there is good information and advice to support and enable people to make well informed decisions about the types of care they want to receive and how they can pay for it—something that we will ensure happens through the new information and advice duty on local authorities.
To be successful, an awareness campaign needs to be delivered in partnership—national and local government working alongside the wider care sector. We are already working with partners to develop the right approach. I can tell the noble Baroness, Lady Greengross, that we have already embarked on a joint programme with local government to implement the care and support reforms and that awareness raising will be an important part of this. The department will co-ordinate the messages to ensure that a simple, coherent campaign can be delivered nationally and locally. We are engaging with the voluntary sector, care providers and the financial services industry to make sure that we can all play an effective part in communicating these reforms. The noble Baroness, Lady Greengross, emphasised the need for stability in the sector in the way these reforms are implemented. If we combine our efforts and maintain cross-party support for these reforms—which I hope and believe we can—we can ensure that this happens.
We want to see products developed and in that process we need to consider whether this could be aided by regulatory change, which was also mentioned by the noble Lord, Lord Lipsey. The department has already opened up the lines of communication between industry, the Treasury and the Financial Conduct Authority to explore this issue further.
As to being realistic about what we should expect, I want to be clear that I do not expect a big bang moment where financial services companies across the country release hundreds of new products. I want to see a sustainable market develop, with products which are designed to meet the demands of customers. These developments will be incremental and are likely to take some time. That is emphasised in the ABI report, which states that it will take a much longer period of time before younger people are encouraged to purchase care products. It also identifies products that could be adapted and brought to market in the short term. It suggests that the first step, the quick wins, would be to adapt existing products such as pension annuities, health insurance and, as my noble friend Lady Gardner said, equity release, to name but a few. The recent announcements made in January by a number of leading firms confirm that the industry is beginning to develop its offer for the market. That is a positive development.
The noble Baroness, Lady Greengross, and the noble Lord, Lord Hunt, asked about the timetable for the guidance. We will consult on the draft regulations and guidance for the April 2015 reforms in the spring of this year. We intend to consult on the draft regulations and guidance for the April 2016 reforms—that is, the cap on care costs—in the autumn of this year. We have committed to do this to make sure that they get the scrutiny they require and to give local authorities enough lead-in time properly to prepare for implementation.
My noble friend Lady Brinton asked how people could obtain information and advice about the adequacy of the products they were being offered. There is a separation of roles here. It should be the role of government to raise the levels of awareness of how care funding works and encourage people to plan and prepare—I have already talked about that—but it
should not be for government to recommend or give a gold seal to any financial product. Advice is regulated precisely because whether something works or is appropriate is down to individual circumstances. That is why the noble Lord, Lord Lipsey, emphasised the point around the expertise of SOLLA representatives, for example.
The noble Baroness, Lady Greengross, suggested that the eligibility criteria for deferred payments should be national. Eligibility criteria for deferred payments will be in national regulations to ensure that there is protection for those people who face having to sell their homes in their lifetime to pay for care—that is the minimum offer. Local authorities, however, will have discretion to be more generous than the minimum offer, and we will consult on all the draft regulations and guidance that are to come in next year, as I have mentioned, in the spring of this year.
The noble Lord, Lord Hunt, returned us to the issue of the cap on care costs and suggested that, in reality, people would find themselves paying more. I would not seek to argue with the points that he and the noble Lord, Lord Lipsey, made. It is a difficult issue. We want to extend state support for social care to tens of thousands of people who get little or nothing under the current system and the Care Bill establishes a legal framework to enable this. We would like to be able to set a lower cap, which may well be possible in the future, but we also need to live within the broader economic constraints on public spending that we currently face. It is a matter of finding that balance at the current time. We have committed to reviewing this question every five years to ensure that we continue to get that balance right.
I am optimistic that the financial services industry will step up to the plate and play a role in helping people to plan for their care costs. We will encourage it to do so. Our continuing work with the industry is a key pillar in our efforts to support individuals in the new partnership recommended by the Dilnot commission. There is still a long way to travel but the first stirrings of growth are beginning to show.