My Lords, in opening for the Government on this, I welcome the comments of the noble Lord, Lord Bradley, regarding jargon. We certainly agree on that and I suspect that we will agree on much more as we proceed through the Bill. I, too, will try to avoid jargon and too many acronyms, which seem also to be a feature of the pensions landscape.
We fully appreciate the intention behind the amendment and agree that consumers must be given the necessary information and support on their retirement choices in this new flexible landscape, which I think we all welcome. As the Financial Conduct Authority’s Thematic Review of Annuities and recent published findings from its market study concluded, competition in the annuity market is not working effectively—as the noble Lord, Lord Bradley, said. That means that many consumers are not getting the most out of their hard-earned savings.
To be clear, annuities can be good value where the individual member selects a product that meets his or her needs. That is why the Government are legislating in the Bill to deliver a service providing the public with guidance. That will ensure that individuals can access
the support that they need to understand and navigate their retirement choices—for example, to help them decide whether an annuity product is the right choice for them at all. Where they decide to purchase an annuity, they must be encouraged and supported to shop around for the best deal. Those are key objectives for the guidance and the Financial Conduct Authority’s rules will underpin it. I will come back to those issues shortly.
Turning to the specifics of the noble Lord’s amendment, I am not convinced that imposing additional costs on either some schemes or members is the best way to facilitate the increase in shopping around. The amendment would effectively require all schemes that offer an annuity to provide or source an independent annuity broker run by independent trustees and overseen by the Pensions Regulator. What is less clear from the amendment is who is to meet the extra costs of this provision. Although some 52% of schemes already offer an annuity broker service, requiring all schemes that provide annuities to their own members to offer or source such a service must come at an extra cost. These additional costs must either be met by all the members of the scheme, whether or not they use the service, or by those members who do so, on some kind of fee or commission basis. If it is the former, then clearly scheme costs increase for all members even if they were going to go and purchase their annuity or other product elsewhere. If it is the latter, then the effect would be to increase the costs of selecting annuities from certain schemes, making them less attractive, or requiring members to pay fees for a decision that they may have made in any event.
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The changes proposed by the noble Lord could restrict members’ choice because members would not be able to secure a pension income from the scheme unless a recommendation from an independent annuity broker had been secured. It might also have the perverse effect of meaning that the pension saver did not look at their own annuity provider because they feared the additional cost and went elsewhere, deterred from going for what might have been their best option. This would create a real risk—and I agree with the noble Baroness, Lady Drake, that risk is inherent in this and we must do what we can to ensure that the risks are minimised—that members would stop considering internal annuity products, even though this might be the best choice for them. It would particularly impact those whose scheme or provider offers them a guaranteed internal annuity rate. This can often be a higher rate than available on the open market, yet individuals would be deterred from considering it by the extra costs of using the brokerage service.
There is also the question of the proposed role of the Pensions Regulator. The Pensions Regulator primarily oversees occupational pension schemes. Many of the annuities offered and bought by members using their defined contribution savings are provided by contract-based pension schemes. These contract-based schemes are then regulated by the Financial Conduct Authority, which also oversees the wider financial services industry, including annuity brokerage. It is therefore not clear how the requirement for the Pensions Regulator to set
standards for best practice for annuity brokerage can ensure independence of all annuity brokerage firms offering this service, when they are all regulated by the Financial Conduct Authority.
Although we do not believe that imposing this brokerage requirement on all schemes is the correct approach, there is clearly a need for consumers to receive support in making retirement choices—I absolutely agree on that. This is why the Government and the Financial Conduct Authority are requiring pension providers to signpost customers approaching retirement to the guidance service and encouraging them to use that service, which, of course, is at no cost to the consumer. The guidance service will help consumers to understand their retirement choices, including the different kinds of annuity product available—for example, single or joint life or enhanced annuities for those with health problems. It will also provide consumers with information on how to proceed to the next step if they wish to purchase a product, for example by signposting them to the Money Advice Service’s impartial annuities comparison table.
The Financial Conduct Authority’s policy statement of 27 November 2014 reaffirmed the expectation set out in its own rules that firms encourage consumers to shop around on the open market whether or not they have sought guidance and that they should receive sufficient information, including a key features document, about the consequences of their choices before signing up to a purchase or variation of an existing contract. It also makes clear that it is possible for the provider to draw that to a customer’s attention, where the provider feels that the customer’s action is potentially inconsistent with their circumstances. Importantly, providers will be able to do this without overstepping the boundary into regulated advice.
The Government are also working with industry, in particular through working groups convened by the Association of British Insurers and the National Association of Pension Funds, to ensure that material communicated to customers is genuinely effective in encouraging them to engage with their retirement choices. This includes ensuring providers supply information to customers about their pension pots in a simple and accessible format so that they can compare their provider’s offerings with that of market rivals. The Financial Conduct Authority has also made a series of recommendations including that providers should make clear to customers how their annuity quote compares to other providers in the market.
The Financial Conduct Authority is currently considering how best to build on its market study as part of wider operational objectives of promoting competition and protecting the interests of the consumer. The Government look forward to seeing how this work will progress. We believe that this approach, which will allow individuals to make choices supported by an independent guidance service with access to the right information, is the right way forward. On that basis, I urge the noble Lord to withdraw his amendment.