The Minister of State, Department for Work and Pensions (Chris Grayling)
I congratulate my hon. Friend the Member for Warrington South (David Mowat) on securing this important debate. He made some thoughtful comments about an issue that affects a large number of not only his constituents, but those of all hon. Members. He has raised issues that are central in tackling the challenges of increasing longevity and an ageing society, and are crucial to the success of our strategy to increase pensions savings. He has raised many issues and we have taken careful note of what he has said tonight. I will try to address as many of them as I can in the time available to me, but we will also be very open to an ongoing dialogue with him about his concerns.
My hon. Friend rightly says that automatic enrolment in workplace pensions begins this year, and it represents a once-in-a-generation opportunity to transform our savings culture. Millions of new savers will enter the pensions market, and that market will have to evolve to accommodate them with a new generation of pensions products that will come into being. There are already signs that competition in the industry is strong, is driving higher standards and, importantly, is keeping downward pressure on charges. That is welcome but, as he rightly says, it is essential that the Government ensure that all schemes, particularly those that target unengaged and financially unsophisticated savers, are fit for purpose. As he rightly set out, that is especially important when it comes to charges, costs and annuities.
On the costs and charges, individuals who perceive their charges to be excessively high or unfair will be less inclined to save. For those who do save, as my hon. Friend has highlighted, even relatively small differences in charge levels can have a dramatic effect on retirement income. So excessive charges cannot be allowed to become an obstacle to achieving the levels of pension saving that individuals, and we collectively as a nation, need in order to ensure security and dignity in retirement for future generations of pensioners. We as a nation invest about £33 billion a year in the pensions industry, but we really do need individuals to be putting aside money for their retirement as well.
We should acknowledge the positive impact of NEST. Evidence presented last month to the Select Committee on Work and Pensions recognised that NEST is helping to lead best practice in promoting high standards of governance, responsible investment and effective communications. My hon. Friend is right to say that low charges are important. They matter most for the many people newly enrolled into pension savings. Encouragingly, departmental research suggests that charges for default funds are already unlikely to be excessive, with the average annual management charge in default funds between 0.4% and 0.6%. That is a really important element in what is happening, but he is right to express concern about charging and its impact.
The truth is that pensions charges have been decreasing for several years. The introduction of stakeholder pensions, with their 1% charge cap, continued a trend away from the high initial costs of personal pensions in the 1980s and 1990s. Today, a 1% charge is perceived as more of a maximum than a benchmark for basic schemes, and the pensions market is responding rapidly to the challenges of automatic enrolment and the presence of NEST. New schemes, such as NOW: Pensions, with its £18 administration charge and 0.3% annual management charge, and B&CE’s proposed scheme with a basic 0.5% AMC, show that automatic enrolment and NEST are helping to continue downward pressure on charges and maintaining price competition.
We understand that automatic enrolment means that many more individuals who are not engaged with saving or who might be daunted by pensions information will be enrolled, so we need to ensure that providers are properly disciplined by the market and consumers can hold them to account.
The Pensions Act 2011 extended the Government’s powers to set a cap on pensions charges and there are certainly arguments to say that charge capping is the right approach, but it is easier said than done. Should we decide to introduce a cap, we must identify an appropriate level and consider different charging structures in a way that compares them and ensures that there is no room for non-compliance. Those are all issues of some complexity; it is not a straightforward exercise in which we simply say that there will be a one-size-fits-all cap. I can assure hon. Members, however, that the Government will not hesitate to deploy a charge cap if it proves necessary to ensure that individuals’ pensions saving are not at risk from excessive charging.
To help build public confidence in saving, we must also help people to understand how much they are paying for their pensions, by which I mean both the employer who is choosing a workplace scheme for his or her employees and the scheme members themselves. There is still a long way to go in opening up real transparency about how much a member pays and for what and about how their pension is managed. Transparency, as my hon. Friend rightly says, is of fundamental importance.
My hon. Friend raises the question of whether the contribution and transfer restrictions put in place to focus NEST on its target market should remain. That question is being looked into by the Select Committee’s current inquiry. There are arguments both ways, but I assure my hon. Friend that the Government will be considering the Select Committee’s evidence and recommendations very carefully when it reports next month.
In the time I have left, I shall touch on the question of annuities because, as my hon. Friend rightly says, they are at the heart of the debate about how we will make good provision through private schemes. For the majority of people, annuitisation is still the most effective way to provide an income in retirement, but as he points out annuity rates have been falling for several reasons. Increased longevity and people spending longer in retirement are significant issues, and there are wider policy areas, such as the state pension age and extending working lives, that mean that we cannot simply see annuitisation in isolation.
I want to focus on two critical points that my hon. Friend has raised: the importance of consumers understanding their options and their shopping around to compare offers when they come to make decisions about annuitisation. On those two points, he has the full support of both the Financial Secretary to the Treasury and the Minister of State, Department for Work and Pensions, the hon. Member for Thornbury and Yate (Steve Webb), who is the Minister responsible for pensions.
That is why the DWP and the Treasury have been working with consumer groups, industry representatives and other Government bodies to bolster the current right to the open market option by developing a default option. The intention is to ensure that consumers are not pushed through the transition from saver to annuitant in such a way that they end up with unsuitable products and to make certain that the consumer does not simply sign an application form without fully exploring their options.
The Association of British Insurers has recently consulted on a new draft code of conduct that sets out new requirements on all its members. As we announced in September, we believe the code is an important step in changing the dynamics in the annuitisation process. The draft proposals are a condition of ABI membership and state that consumers must be directed to the open market option and that packs issued by providers must not include an application form. They also propose a clear three-step customer journey to help consumers with the decision-making process and is a key step in addressing the asymmetry of information. My hon. Friend the Financial Secretary will make an announcement on the work of the open market option review group in the near future, so I hope that my hon. Friend the Member for Warrington South will understand it if I do not go into more detail at this time and that he will be present in the Chamber for that statement when it comes.
These initiatives represent a wholesale improvement across the pensions landscape, but that landscape is ever fluid; we need to make sure that we take advantage of the potential opportunities presented by auto-enrolment. We should therefore consider the role Government can play in determining scale, and ask ourselves whether the high fragmentation of the UK pensions market offers good value, or whether a smaller number of larger schemes could offer lower charges and better governance, to the advantage of members.
My hon. Friend has made a series of points that I regard as a valuable contribution to the debate. We shall read his remarks carefully and think about the implications of his suggestions. I feel confident that the impact of NEST, the downward trend of charge levels across the market and the steps we and the industry are taking to increase transparency all serve to advance member engagement and improve the annuitisation process. They all point to a world where consumers can feel more informed and more secure about how much they are paying and what they receive in return.
I assure all hon. Members who have contributed to the debate that the Government will be watching closely as the pensions landscape, under automatic enrolment, continues to evolve.
Question put and agreed to.