My Lords, having listened to the Government’s amendments, I am tempted to say that this one is minor and technical and hope it will slip through on the back of that. However, it is not. On the
first day in Committee, our first amendment on decumulation was an attempt to ensure that the Government did not lose focus on ensuring that all pension savers obtain a good deal when they look to turn their pension pot into a retirement income. In that instance, we wanted to protect savers from being defaulted into an annuity without a recommendation from an independent broker.
This amendment asks the Government not to lose sight of progress that has been made in getting a better deal for pension savers, despite the sweeping changes enabling freedom of flexibility in accessing pensions that will come into force this April. The cap that has been introduced on charges for work-based pension schemes of 0.75% a year has no equivalent in draw-down products, but from April a great many more savers—perhaps an estimated 320,000—will be using these products to get a retirement income. They should be protected from unfair charges. I repeat: they should be protected from unfair charges. It is welcome that NEST, the National Employment Savings Trust, has launched a consultation on draw-down products and how to ensure that middle and low-income earners have suitable and good-value products available to them. As the consultation rightly says:
“The solutions we as an industry develop over the next few years could determine the lives of millions of people in old age. We absolutely cannot afford to fail consumers … Leaving their retirements to chance is not an option”.
We have been clear throughout that welcoming the Budget freedoms is predicated on good solutions being available for savers in those income brackets, which we hope will happen. A good first step would be to remove the possibility of savers being open to what may be termed rip-off charges. This should apply in the decumulation stage as well as the accumulation stage, because a rip-off charge is a rip-off charge, wherever a consumer finds themselves at the end of it.
What is the evidence that this may happen in the decumulation stage for draw-down products? We already know that charges can be varied and opaque. The report from Which?, The Future of Retirement Income, points out:
“Even for a simple fund structure from a low-cost provider, the annual management charge might be 1% plus an administration fee of £250 per annum, which would cover the cost of income payments and income level reviews, for example. A more common total cost is about 2% p.a. which is similar to that for an investment-backed annuity. Worryingly, we came across cases where the charges for a SIPP package and advice were 4%-4.5%”.
Our amendment would give the Secretary of State the power to address this. The report goes on to point out that the costs are not always clear to the consumer:
“There are also hidden costs, including bid-offer spreads, the cost of sub-funds within the main fund, platform charges etc. Where an actively managed fund is selected, there is a risk that high turnover (churning) would add significantly to the total cost due to the transaction costs involved”.
Remember, this is about a product that is likely to become a great deal more widespread from April. The report therefore recommends that the Government should consider the introduction of a charge cap on the DC decumulation market at the same time as this is made a requirement for auto-enrolment DC schemes.
No one can be quite sure how the market will develop after April, but if the Government do not want to put this in place now, accepting our amendment would give them the power to take action to prevent consumer detriment in a new market in an area that has not always served savers as well as it should. This seems to me to be a sensible step that will protect consumers and ensure that they are not subject to rip-off charges. In that spirit, I hope that the Government will accept this amendment.