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Workplace Advice

Thereís plenty to worry about in pensions again at the moment.In the last few days the Secretary of State for Work and Pensions and the brand new Pensions Minister have both said in public that we will be seeing the proposed White Paper on pensions by the end of May!So in two weeks time weíll know just what it is the Government has got in mind for us as far as further pension reform is concerned and, in particular, whether they intend to go ahead with the Pensions Commissionís suggestion that we should have a National Pensions Savings Scheme (aka the NPSS).

Thereís no point in my going over the NPSS proposals again, Iím sure you know that I consider the implementation of any such a scheme as highly dangerous if far-reaching reform of the state pension and benefit systems are not implemented first.And letís be frank, that looks to be completely against the run of play doesnít it?Iíve written plenty of BeeLines already this year about the dangers of the NPSS being dropped in place in the middle of the highly complex mix of entitlements and benefits that are currently on offer to pensioners on a means-tested basis and Iím sure you can find those quite easily if you want to re-read them.

But what I think about all this is neither here nor there really.Whatís important is what the Financial Services Authority thinks about it, because in the real world we will have to know just what it is we can and canít do or assume if weíre involved in the tricky business of giving advice on pensions to people in the workplace.The good news on that front is that the FSA gave evidence to the Treasury Select Committee a few days ago and the uncorrected evidence has just been published on the UK Parliament website.Iíve cut and pasted that uncorrected evidence into this BeeLine because I think its contents will be of enormous interest to those of you who are working in the business of providing advice on pensions.

Because the transcript I have appended here is uncorrected I have to point out that neither the witnesses nor Members have had the opportunity to correct the record and it should be read with that in mind.

Nevertheless I am sure you will find the record of the proceedings to be highly interesting as thorny questions relating to suitability; FSA regulation; consumer protection; state pension reform; RU64; Ďadvice-freeí distribution; means-testing; and the like are covered in great detail.The FSA evidence session is long, but I make no apologies for including it here in its entirety; I think itís important that everyone practising the art of advising on pensions in the workplace is aware of all the twists and turns of this important public debate as it unfoldsÖ

Steve Bee

10 May 2006

UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1074-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TREASURY COMMITTEE

THE DESIGN OF A NATIONAL PENSION SAVINGS SCHEME

AND THE ROLE OF FINANCIAL SERVICES REGULATION

Wednesday 3 May 2006

MR CLIVE BRIAULT and MR DAN WATERS

Evidence heard in Public Questions 113 - 184

USE OF THE TRANSCRIPT

1.

This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.

3.

Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.

4.

Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.

Oral Evidence

Taken before the Treasury Committee

on Wednesday 3 May 2006

Members present

Mr John McFall, in the Chair

Mr Colin Breed

Jim Cousins

Mr Michael Fallon

Mr David Gauke

Kerry McCarthy

Mr Brooks Newmark

John Thurso

Mr Mark Todd

Peter Viggers

________________

Memorandum submitted by the Financial Services Authority

Examination of Witnesses

Witnesses: Mr Clive Briault, Managing Director, Retail Markets, and Mr Dan Waters, Director, Retail Policy, Financial Services Authority, gave evidence.

Q113 Chairman: Good morning and welcome to this evidence session on the National Pension Savings Scheme. Could you identify yourself and your colleague please?

Mr Briault: Yes, good morning. My name is Clive Briault and I am the Managing Director, Retail Markets, at the Financial Services Authority and my colleague is Dan Waters who is Director of Retail Policy also at the Financial Services Authority.

Q114 Chairman: You are both welcome. I presume it is the FSA's objective to ensure that the level of regulation is kept to a minimum. Given that situation, what in the White Paper would give you comfort from a regulatory viewpoint?

Mr Briault: Our objective is to ensure that regulation is proportionate rather than necessarily always kept to a minimum, kept to a minimum to achieve the purpose for which it is required. I think, against that background, what we would focus on when we see the White Paper is to think about regulation under a number of headings. The first would be what is required in terms of the information to be given to employees regarding the scheme in terms of the choices they face. One choice, as recommended by Lord Turner, for example, would be under auto-enrolment, that people would have a choice as to whether they opt out of the scheme or not and, depending on the design of the scheme, there may be further choices to consumers, for example, in terms of the particular fund in which they choose for their pension to be invested, and that is a choice which they may or may not have. They may have to choose there, for example, whether to go into a default fund or to choose a different fund, they may or may not have a choice across a wide range of funds, and that is yet to be determined, but certainly information to employees would be the first aspect that we would look at. The second aspect likely to fall more in the area of a pensions regulator, and perhaps we could come back to the differences between a pensions regulator and the FSA in a moment if we need to, is clearly that there will need to be here a minimum level of regulation to ensure that employers do indeed contribute the funds into the scheme on behalf of the individual, so essentially making sure that all of those administrative arrangements, payments into the scheme and indeed payments out of the scheme are properly made with proper records kept and annual statements or whatever sent to consumers of the pension. The third main area would be in terms of whoever runs the fund or funds in which people invest, that they are managed properly in terms of minimum standards of corporate governance, proper management, proper systems and controls in those funds and indeed a minimum level of capital. Therefore, if, for example, it is run by an investment fund, a managed fund of the sort that we currently regulate, we have a requirement there that those funds are required to hold 13 weeks of annual expenditure, so a quarter of the annual expenditure as a minimum capital requirement, and also a requirement, which is also important, that they separate out the client money in the fund. The final aspect which we would need to look at, and I think this is the bit which really depends most on the particular design of the scheme which is chosen, would be a package of issues around whether or not we would need to introduce any regulation of advice. As we point out in the memorandum which we sent to the Committee, we think that the relevant factors there to take account of would be the contributions made by employers and possibly by the taxpayer to supplement the contributions made by individual employees, whether or not there is means-testing of the state pension and whether or not consumers are faced with a wide variety of choices.

Q115 Chairman: We will come on to that later on in the questions.

Mr Briault: I think all of those are important in determining what would be a proportionate approach to regulation around whether or not we would need to regulate advice, and I think what is absolutely crucial there is that one can imagine some schemes which were designed where, frankly, there would be no need for advice regulation, and other types of scheme with other features where you would need to introduce some form of proportionate regulation of advice, but, as I say, that would depend crucially on the design of the scheme.

Q116 Chairman: If the schemes require conduct of business regulation by the FSA, do you think then, in those circumstances, that the Government would have failed its own test regarding affordability and simplicity?

Mr Briault: Clearly there is a trade-off between the two. I think, as I say, if the scheme is as simple as possible, then it is likely that there is no need for regulation of advice and in particular if, in addition to that, the impact of employer contributions, possibly also taxpayer contributions and, on the other hand, reform of means-tested pensions may mean that the scheme is pretty much of near-universal suitability, therefore, there is no need for advice, so I think it does depend crucially on whether there is a need for advice as part of the scheme and, if there is, then it is a question of how best that is regulated.

Q117 Chairman: On the sales and conduct of business regulation, do you think the model proposed by the ABI with a number of competing providers would be possible without a regulated sales process?

Mr Briault: I think there may well then need to be some conduct of business regulation because, if you are giving consumers, which is a possible interpretation of the ABI model, a choice that they need to make among a range of product providers, then questions do arise about the regulation, at the very least, of the information made available to consumers ----

Q118 Chairman: So the answer is no?

Mr Briault: ---- from which to make that. Well, the answer is yes, that would require some degree of conduct of business regulation. Again it would depend on the precise design..

Q119 Chairman: But I asked if it was possible without regulation.

Mr Briault: Sorry, not possible, no.

Q120 Chairman: Ned Cazalet, when he appeared here last week, described the current sales approach for life insurance personal pensions as "fundamentally flawed". Indeed Trevor Matthews of Standard Life is on record as saying that the business model is flawed and outdated. Do you think that these flaws, including the reliance on commission, are eliminated under the ABI scheme?

Mr Briault: Some of them could be eliminated, yes. Again it does depend on the precise design, but because, in the ABI scheme, the choice for consumers could be made directly by consumers based on product information about the various funds, then you may be able to do that without advice intermediaries. I think where you get into greater problems of the type to which they refer ----

Q121 Chairman: Yes, but do you think it is possible, as the ABI claimed here last week, that the commission incentives are all removed in the scheme they are proposing?

Mr Briault: Well, they are removed as long as consumers do not feel the need to take advice from independent financial advisers in order to make the choices which they are required to make under that scheme. They do not have to, they are not obliged to, but, if they decided to because ----

Q122 Chairman: So, if people are given choices to make, but there is no advice, can you imagine the pickle people would get into there, but then, if there is choice, is there not advice for that?

Mr Briault: Well, I think it depends if people want to take advice, and I do not think the ABI scheme is insisting that people do take advice. I think their vision is that the employer does most of the choosing on behalf of the employees and, therefore, the employees do not need to take advice because that is all done for them by the employer, in which case the consumer may be faced with a very limited choice. I think it does depend crucially on whether it is the consumer taking a choice amongst a multiplicity of funds or not ----

Q123 Chairman: But that has to be fleshed out ----

Mr Briault: Yes, that is a detail which is very important.

Q124 Chairman: But that is a preliminary statement and it has got to be fleshed out.

Mr Briault: It has, yes.

Q125 Chairman: The NAPF proposal would offer employers a choice of super-trust, as we know.

Mr Briault: Yes.

Q126 Chairman: Do you think a model of this sort has any implications for FSA regulation?

Mr Briault: I think we would see the NAPF model as falling more within the occupational pensions model which would then fall primarily to be regulated by the pensions regulator.

Q127 Chairman: Back to the point we were making before, you are saying if employers make the choice, so are employers in any sense then consumers requiring protection from unduly complex product features, particularly given that many employers using the scheme would be small businesses?

Mr Briault: We would not see employers as being in the same position as individual retail consumers, no. Clearly, however, you would expect employers to be provided with information about the different funds available across which they need to make the choice as to which fund or funds to make available to their employees, but we would not see that as something which we would regulate, no.

Q128 Chairman: But are they not in a sense, consumers then if they are faced with choices?

Mr Briault: Well, if the consumers are faced with choices ----

Q129 Chairman: No, the small businesses would be. You can imagine small businesses coming to us and saying, "Wait a minute, we don't have time to look at stuff. We are out here to make a living, so what do we do?"

Mr Briault: I think all we would say there is that it is for those small businesses and, yes, they would have to make a choice, if they were required to do so under the scheme, if they were presented with five or six different funds and told, "You need to choose one of those funds".

Q130 Chairman: Therefore, they could require protection from unduly complex product features?

Mr Briault: I think what they would require is a sufficiently simple explanation of the competing funds so that they could exercise a sensible choice. I absolutely accept your point, that there will be some businesses who are better prepared, better able to make those choices than others.

Q131 Chairman: But it could become a matter of concern for the FSA standing on the sidelines, looking at this, saying, "Look, this system is getting nowhere. We are getting more confused and some small employers need some protection". You could envisage yourself asking that question one day?

Mr Briault: I could do, yes, and at the moment it is true to say that small employers already may face that choice in terms of deciding what sort of pensions to offer to their employers.

Q132 Mr Gauke: Could I return to one of the factors you mentioned in determining the level of regulation that would be necessary here, which is the one of means-testing. Is it your view that, if the NPSS is going to be offered without regulated advice, it is necessary for the level of means-testing to be reduced, that that has to be government policy in order to achieve that?

Mr Briault: Well, we are saying that we would regard that as an important element. I do not think one should over-exaggerate the impact. I think it is probably true to say that, even with a degree of means-testing, for the vast majority of employees it would still make sense to save through something akin to the national pension scheme, as envisaged, but clearly the greater the impact of means-testing, the greater the possibility that saving in that way would not be suitable for that individual because they may find at the end of it that they are not well off because they have lost the means-tested element because they have saved through the pension scheme, so the greater the potential impact of that, the more concerned we would be about whether or not saving in that way was likely to be suitable for all individuals. That would then require, if the means-tested was significant and important, some way of trying to alert those particular employees to the possibility that it may not be in their best interests to save in that way and, if that is the case, one would then have to consider how that information can be sensibly and effectively provided to them so that they can exercise sensible choices.

Q133 Mr Gauke: Would you say that it would be essential, or maybe that is too strong a word, or at least helpful to you for the Government to determine its policy with regard to pensions and means-testing before you determine the regulatory regime which will apply to the NPSS?

Mr Briault: It would certainly be helpful for the reasons I have set out, yes.

Q134 Mr Gauke: Would you go further and say it was essential or merely helpful? How important is this in helping you determine what you need to do because it is clearly a factor?

Mr Briault: It is important, but it is quite difficult to judge when looking at the scheme alongside all of the various possible reforms to the state pension scheme which have been suggested both by Lord Turner and other commentators. One can see ways in which the state scheme could evolve in a way which would limit the impact of means-testing and, therefore, limit the extent to which we, as regulators, were concerned about the possibility that people might be entering into things which were not suitable for them and other ways in which it could go which would make it much more suitable. I should also say that part of that balance is the extent of any employer and taxpayer contribution to the scheme because again the larger that contribution over and above the employee's own contribution, the less significant the means-testing element becomes.

Q135 Mr Gauke: Just turning to the levels of regulation that would apply here, if, in your view, it was not necessary to have, if you like, regulated advice in respect of this, how would you go about dealing with the suitability issue? What would be the requirements you would be looking for and what sort of suitability information would need to be provided?

Mr Briault: I think the main requirement then would be information provided to employees preferably through the employer because that would reach them directly so that employees had set out very clearly for them the sorts of considerations they might want to take into account in deciding, first of all, whether to opt out of the scheme because there may be some people, for example, who are heavily indebted and who may be better off using the contributions to repay debt rather than contributing to a scheme, or there may be an element of the means-testing point which would need to be explained to them and also, if consumers, and that is an 'if', were faced with choices about which fund to invest in, they would also need the information to help them make that choice. That could be pretty minimalist in the sense that it might be no more than a very clearly written information leaflet which made clear to consumers what factors they need to take into account when making those choices. That would not be a regulated advice regime, but that would essentially be a consumer information regime.

Q136 Mr Gauke: Just coming back to the second factor which you mentioned, which is the employer's contribution which you repeated again there, under the stakeholder plan non-earners can pay up to £3,600 per annum, although clearly there is not an employer's contribution there. Do you think similar arrangements should apply to the NPSS because you will not have an employer's contribution and, therefore, is there a need for regulated advice in those circumstances?

Mr Briault: I am not quite sure which aspects you mean.

Q137 Mr Gauke: Well, if there is, for argument's sake, an NPSS option for non-earners, clearly there is not going to be an employer's contribution in those circumstances, so, given that, do you think regulated advice would be necessary in those circumstances?

Mr Briault: Clearly it becomes more difficult in those circumstances because being able to rest on the assumption that it is likely to be suitable to the employee is clearly a weaker case in a world in which the employer is not making a contribution, and that may be one of the factors behind the take-up of stakeholder pensions. The take-up of stakeholder pensions tends to be much stronger in cases where the employer not only offers a stakeholder scheme, but also makes a contribution on top of it.

Q138 Kerry McCarthy: If we can return to the question of consumer choice, do you think a significant proportion of consumers have got the financial awareness to make choice a desirable aspect of any NPS Scheme?

Mr Briault: I think most consumers would find it extremely difficult to make many of the choices offered to them under the more complex variants of the scheme, and that is why we think that that complexity and element of greater choice could also have the effect of leading us more into something akin to some form of regulated advice. Our own recent baseline survey on financial capability, for example, showed that, I think, 81% of consumers felt that they did not have adequate pension provision currently through whatever they are members of in terms of both public and private pension schemes, but, of that 81%, only 37% contributed in addition to what was currently available to them, so I think, even where people have recognised the need to increase their pension provision, many have failed to do so which suggests that there is some difficulty in people spotting what is available to them and what is best for them.

Q139 Kerry McCarthy: You have a statutory objective to promote understanding of the financial system.

Mr Briault: Yes.

Q140 Kerry McCarthy: Do you think that the NPSS would place an increasing burden on you in terms of that objective? Obviously it depends which model is adopted, but are there concerns?

Mr Briault: As I say, I think one aspect which it would certainly require us to increase our attention on is providing the sort of information and materials to help consumers make whatever choices they might need to make and, as I say, the most basic one is whether to opt out of auto-enrolment. I also, indeed, very much hope that the introduction of some form of national pension scheme would indeed increase interest in, and awareness of, financial services in the workplace. One of our major priorities under the Financial Capability Strategy is to do far more in the workplace by way of getting information to employees, running seminars about money advice in the workplace, so actually we think that a combination of the introduction of this and the increased emphasis on financial capability may actually generate quite a lot of interest which would help us get broader consumer awareness and consumer understanding messages across in the workforce.

Q141 Kerry McCarthy: Do you actually think that choice might be a desirable aspect to having a scheme then on the basis that it would encourage people to take more of an interest in their financial affairs?

Mr Briault: Not so much for choice, no. I think they will be encouraged to take a greater interest merely through the introduction of the scheme because they will read a lot about it in the press, they will hear a lot about it in the workforce, they will speak to their colleagues about it and I think it will engender a lot of interest which is a good thing because really that is a starting point to get people engaged. I think in terms of choice, there is just a very, very difficult trade-off. As I say, it would be nice to think that people were sufficiently aware, sufficiently well informed to exercise sensible choices of this type. In practice, of course making provision for pensions is a very difficult thing for most consumers, we know that, and, therefore, the trade-off, I think, is between choice and complexity, on the one hand, which will bring with it all sorts of questions about what the most suitable thing is for people to do, what advice they need to help them make that choice, how that advice is then regulated, and, on the other hand, I think coming back to a much earlier question, whether you can design a much simpler scheme with far fewer choices which enables the delivery of widespread personal pension provision at a much lower cost.

Q142 Kerry McCarthy: Do you support the concept of a default fund within the NPSS?

Mr Briault: Yes, I think a default fund is probably a very necessary part of it, some form of default fund, because I think there will be a large number of people who do not necessarily think very hard about whether they should be a member of a scheme or not and may not think very hard about which fund they should go into, so I think having a reasonably straightforward default fund is a very important aspect of it because experience in other countries, and a likely result here, suggests that the majority of employees actually will end up in the default fund.

Q143 Kerry McCarthy: Based on your research, what proportion do you think are likely to end up using the default fund?

Mr Briault: Well, I think that depends again on what choices are offered, what is available in addition to the default fund. We have not done any research which tells us the answer to that because it is a hypothetical question, but, as I say, I would expect more than half, and possibly a much higher percentage, to end up in the default fund.

Q144 Kerry McCarthy: I think we were quoted figures of maybe 90% by the industry, that they expected about 90% for that. Does that surprise you?

Mr Briault: That would not surprise me, no. I think the simpler the scheme and the less choice available, then the more likely it is that people will simply end up in the default fund.

Q145 Kerry McCarthy: If there was an ethical investment option as part of the scheme, would that create any additional regulatory demands?

Mr Briault: No, I think it would still require that fund to be properly explained to the employees who had the choice of going into that fund. There are already ethically based unit trusts in existence. The important thing, I think, as with all funds, is that the key characteristics of the fund and the sorts of things in which the fund invests and how it does it are properly explained to potential investors.

Q146 Mr Newmark: We have heard that really most investors are not particularly sophisticated, that they are not particularly good necessarily at making choices and that perhaps only 20% of people actually get some form of independent advice in deciding what products to actually invest in, and 50% are completely ignorant of particular product features or the cost of actually investing in a particular asset or fund. Turning to actively managed funds as opposed to passively managed funds, it seems that obviously the fee structures are higher there, but, I am curious, are there any regulatory implications with regard to consumers being provided with more actively managed funds within the NPSS?

Mr Briault: I think again not in addition to those which I have already covered. The important thing, if people are being offered such funds, is that they understand the basis on which those funds operate and indeed the charges. The interesting question, I think, that raises is whether or not you can have a range of funds within the NPSS with considerably higher charging structures than, for example, the default fund, but again I think that is a very important design aspect.

Q147 Mr Newmark: But, if there are charges with respect to actively managed funds, there are cost implications to that. Is there an assumption behind that or is there any evidence to this effect, that actively managed funds actually make better returns for those investors which outweigh the costs of having more actively managed funds?

Mr Briault: Well, the research which we have undertaken shows that there is no evidence that, on average and over time, actively managed funds out-perform tracker funds, taking account of the differential in charges across the two.

Q148 Mr Newmark: So it is sort of a wheeze for active fund managers really to make more money and actually those whose funds are being managed really do not get a better bang for their buck, so to speak?

Mr Briault: Well, on average, if you are fortunate enough to choose the fund that happens to perform extremely well over a time period, and some of these funds do perform extremely well for quite extended time periods, then you are better off, or you may have a particular preference that you want to invest in particular things which do require more active management.

Q149 Mr Newmark: Is it really an element of luck? Is it really random in some sophisticated consumers, which we understand most people are, that it is really stick the pin in the donkey and hope you get the tail and make some money?

Mr Briault: Well, the conclusion of our research, which we have publicised quite widely, is that we do not believe that past performance is an accurate guide to future performance.

Q150 Mr Newmark: That is said about every fund though. I am just trying to understand, is there an advantage to going into actively managed funds and do those people whose funds are being managed benefit from more actively managed funds or is it just a means for active fund managers to make more money because the average consumer is not benefiting from that?

Mr Briault: Well, when you say "make more money", of course there is also a cost to the firm of actively managing the fund and it is a question of how those costs are then reflected in the charging structure. In competitive markets, you would not expect the firm necessarily to make a lot more money ----

Q151 Mr Newmark: No, I understand that, but is there any evidence that actively managed funds are performing better than tracker funds?

Mr Briault: No.

Q152 Mr Newmark: You are saying no?

Mr Briault: Yes, absolutely.

Q153 Mr Newmark: So the only people benefiting from this are the fund managers?

Mr Briault: Well, depending on the charging structure related to the costs of running the actively managed fund, yes.

Q154 Mr Newmark: Well, if they are making 25 base points versus ten, the answer is yes.

Mr Briault: But there is also a cost to managing the fund, so the economics is not simply the difference in the charges because it is costing more money to make ----

Mr Newmark: But the fund managers are not running charities. It is about making a margin. Anyway, that is enough, thank you.

Q155 Mr Todd: To what extent has the FSA looked at the administrative infrastructure supporting the existing pension providers and whether that is sufficient to provide a sensible basis for administering the NPSS?

Mr Briault: If I interpret your question correctly, we have not asked that question as to whether any existing fund takes on the magnitude of running the entire scheme.

Q156 Mr Todd: I am not suggesting that. I am suggesting that perhaps you have examined the capability of pension providers at large to offer administrative services which would be appropriate as the basis for the NPSS.

Mr Briault: Certainly.

Q157 Mr Todd: Do you think they are good enough at doing their existing jobs to offer a substantial indication of success in the future because of course that is what they are saying? They are saying, "You can build from what we have".

Mr Briault: I think in terms of running funds which both have large numbers of members and, therefore, meeting what I was talking about in terms of the administrative requirements of collecting the money, putting it in the right accounts, making the right payments at the right time, certainly yes. In terms of managing very, very large funds, again yes. There are some very, very large funds managed out there which certainly would be proportionate.

Q158 Mr Todd: There are two measures which you might have looked at, but I do not know whether you have. One is the cost ratios of the administration that they are offering and the second is any qualitative indicators as to whether they are actually doing it satisfactorily in the view of pension members.

Mr Briault: Well, cost ratios, no, we have not studied that in any detail at all. In terms of the qualitative, yes, in the sense that, if you are running a fund and if you are running a fund which is supporting a pension fund by investing the assets of that fund, then clearly that is a regulated activity and we do keep an eye on whether or not people run that effectively in the sense of whether they are keeping good track of monies and whether those monies are invested in what they say they are going to be invested in, so yes, confident in terms of the qualitative aspects. The administrative aspects ----

Q159 Mr Todd: You are aware that the debate is between a group of providers who are saying, "We've got a lot of skills to offer and we should be the building blocks of any new scheme", and others who say, "To be honest, they are not terribly good at what they do. We would do better to start from scratch". My line of questioning is to try and force you into taking some sort of view between those two or merely making appropriate comments.

Mr Briault: The view I would take is to ask whether they are capable of running it and the answer is yes. There is a separate question, I think, about whether it would be run more cheaply or not through different types of scheme and that is something we have not studied.

Q160 Mr Todd: Do you think that there is the basis of a competitive marketplace should one go down the route of producing one administrative infrastructure to support the NPSS? Do you think there is a competitive marketplace there to offer the administrative services required for that?

Mr Briault: Yes, I think there is because I think that relates back to the previous question which is that the capability of running this either in terms of a single company running all the scheme or a number of companies running the scheme in part by doing it through multiple funds, I think the capability is certainly there for that and, therefore, the prospect of doing that on a competitive basis must be a possibility. How you would do that again comes back to what the Government decides to do and various suggestions have been made. Either you say, "We'll run it" and charge whatever charge you wish to charge or run it and there is a cap or whatever.

Q161 Mr Todd: One would hope that the Government will act on sensible, professional advice in this area and what they might be looking for are some thoughts from yourselves on what your knowledge is of the existing provider base and the potential for people to fill the gap that will be emerging.

Mr Briault: Yes.

Q162 Mr Todd: But you are not in the shape to offer that advice at the moment, by the sound of things?

Mr Briault: I think the advice we would offer is that, from our regulatory perspective, we think that existing funds would be capable of running funds under this scheme, yes. There is a separate question about the charging structure which we do not have expertise in.

Q163 Mr Todd: The advice on transferring money out of the NPSS, people who have joined and then decide to leave, do you think that there should be clear advice on how that advice should be administered because clearly people will be approached with suggestions that that should happen?

Mr Briault: Again I would hope, and again it depends on the scheme design, that it should be possible to provide people with sufficiently clear information about what factors they should take into account to help them make their own choices and decisions on that. I would, frankly, not expect to see a world in which large numbers of employees were actively transferring in and out of a national pension scheme on a regular basis. For some people, it may make sense just as it may make sense for some people not to opt in in the first place.

Q164 Mr Todd: You will be aware that there will be people seeking to persuade individuals that it is a good idea to do that?

Mr Briault: Yes, there may well be, but I think the information to individuals ----

Q165 Mr Todd: And it will be your task to regulate those persuaders?

Mr Briault: Yes, we certainly would regulate them and we would regulate whether or not that advice was suitable if they were actively promoting those possibilities. As I say, it may be for a small number of people that it would make sense to move in and out of the scheme at various points in their working life, but I think that the fundamental design, as proposed by Lord Turner, is of a scheme where, if people opt into it, broadly speaking, the large majority of people who are auto-enrolled remain in it. This comes back, I think, to the point about being in a scheme where there is a substantial employer contribution, possibly also a taxpayer contribution that is likely to provide a better level of benefits than anything which we are likely to get elsewhere other than moving to an employer who runs their own occupational pension scheme which provides even better benefits than the national pension scheme, and there are some of those around already and some people are fortunate enough to be members of those.

Q166 Mr Todd: You certainly look old enough to remember the mis-selling periods when apparently extremely good-value pension schemes lost a large number of members when people with silver tongues and large numbers of noughts on the ends of figures were able to persuade people to leave them.

Mr Briault: Yes.

Q167 Mr Todd: I am merely suggesting that the intrinsic merits and common sense of the scheme may not be sufficient defence against those sorts of approaches.

Mr Briault: Well, indeed not. There is always the possibility of mis-selling of that type. We are, as you say, acutely aware of that possibility and not least because of previous episodes of that sort, so we would be keeping a very close eye on that and, if we saw, and I hope we would be quicker off the mark, large-scale shifts out of the national pension scheme into other schemes, we would want to reassure ourselves very quickly that that was being done on the basis that it was suitable for those employees.

Q168 Mr Todd: In the early stages of such a scheme, there will be people who will accumulate really rather small sums of money in the NPSS as it starts and then they move towards retirement. Have you thought of how to deal with people who have relatively trivial sums and the desire many of them will have which will be just to withdraw it and spend it, how best to deal with advice to them?

Mr Briault: I think again it would be a question of information available to them again preferably in the workplace so that it was made clear to them what the opportunity cost to them was of withdrawing the money from the scheme, if that is a possibility under the scheme, and spending it now rather than waiting until they retire. I think that is just something which needs to be made clearly available to them in the form of an annual statement or whatever and information about that.

Q169 Mr Todd: We probably need a rule there which says, "If you have more than X amount, then you can't withdraw it. If there is less than a certain amount, yes, you can", because, to be honest, the administrative cost of maintaining such a small amount is not worth it.

Mr Briault: Well, that would be a detail to be determined under the scheme.

Q170 Chairman: Back to a previous question, if you were a consultant to the ABI, what advice would you give them to ensure that safeguards were put in place to remove the need for FSA regulation of the sales process under the model for the NPSS?

Mr Briault: I think the most important aspect of that would be to limit the number of choices which individual employees need to make. I think the important aspect of the scheme there was that, if you envisaged a scheme with a number of funds competing for a business or a number of funds where there is almost a random default option if somebody does not exercise a clear choice, then I think, as I think the ABI scheme proposes, that choice should fall primarily to the employer rather than the employee, so what the employee sees is effectively a single fund or at least a single default fund offered to them as part of a scheme offered by that particular employer, and that pushes the choice to the level of the employer rather than the employee.

Q171 Chairman: So the FSA would be happy if that choice was pushed to the employer and you would keep right out of it?

Mr Briault: Well, in a world in which what the employee then faced was a single fund offered to them by the employer together with employer contributions, et cetera, as standard across the scheme, then, if it was limited to that, we would not see the need for advice and regulation for employees around that.

Q172 Chairman: That is a hugely radical departure from the present situation, is it not?

Mr Briault: Well, it is a radical departure from the way in which private pension provision is currently provided. It is not a particularly radical departure from the way in which employers currently offer occupational pensions to their employees.

Q173 Chairman: Could you see the industry adapting to that quite readily?

Mr Briault: I think the industry would then need either to decide or to respond to some mechanism for what the choice of funds would be and it may be as part of the scheme that the scheme would limit the sorts of funds which could be part of that and the industry would then have to respond to that.

Q174 Chairman: In last week's evidence we have Ned Cazalet arguing that it was deluding to believe that the NPSS could be delivered at a profit. In fact he ran a few models and, if you looked at the evidence session, you would have seen that. He attached particular importance to what he saw as the Pension Commission's optimistic view of likely levels of persistency. It has been suggested that the Commission's costings for the NPSS are based on an optimistic view of a likely rate of 2.5% per annum for long-term discontinuance in the NPSS. Could you give us your comments and also on Ned Cazalet's comments on that point regarding the FSA and on whether you have done any work which would shed light on the likely levels of persistency?

Mr Briault: I might ask Dan to comment in a bit more detail on persistency, but persistency is something that we do look at quite closely at the moment because it is an interesting statistic in the context of suitability of advice. I think we would expect persistency to be much stronger under a national pension scheme for the reasons that I outlined earlier, which was that you would expect those people who are auto-enrolled to choose a fund and then quite likely remain with that fund for a substantial period. Because they have chosen that fund within a particular scheme offered in effect by their employer as part of their employee benefits package, I think they would be less subject to selling or advice from others which might lead them to think, "Hang on, am I in the best thing? Shouldn't I switch to something else?", but, Dan, I do not know if you want to comment on persistency more generally.

Q175 Chairman: The point about persistency is that your own figures have shown that the non-persistency of pension plans has continued to increase in recent years, so factors account for this higher non-persistency and which of those factors would be eliminated under the NPSS?

Mr Waters: Chairman, the data is difficult to interpret because the market has changed and indeed, if you look at a world in which there are more flexible pensions available and savers can move between products without exit charges or indeed without penalties, you might have a very different view about what persistency means in a world like that and I think we are in a sort of transition period, if you like, which means that the data is a bit ambiguous. I think, for the reason that Clive articulates, we would expect that the attractions of remaining in a scheme founded upon a contribution from employers would be much stronger than under many existing personal pension arrangements and indeed under many existing employer-sponsored schemes.

Q176 Chairman: Back to the point made earlier, what is the reason for the non-persistency of the pension plans over the past few years?

Mr Waters: I think it is probably variable. There will be some situations in which consumers have not correctly understood their own ability to maintain a pension arrangement over a period of time. We go back to the work that we have done in our baseline survey which shows that consumers are not very good at making choices and they are not very good at planning ahead, so some of that is bound to be a reflection of that. Some of it is also likely to be people who in fact have selected a pension and can move freely to something else that they think is better without a penalty, so you can have both of those factors, I think, playing into that data.

Q177 Chairman: On charge caps, last week's evidence from both Ned Cazalet and the IMA suggested that the costs for the NPSS were likely to start at nearer 0.6% rather than 0.3%. Does the FSA have any views on whether the management costs of an NPSS should be subject to a charge cap?

Mr Briault: No, we do not have a view as to, first of all, whether it should be subject to a charge cap or, secondly, as I said earlier, any particular expertise as to precisely what it would cost to provide under different schemes.

Q178 Chairman: If there were to be a charge cap, then do you think it should be set and monitored by the FSA or another body?

Mr Briault: Not the FSA. As I say, we are not a price regulator and we do not claim particular expertise in the detail of cost and charging structures within individual firms.

Q179 Chairman: On market impact then, could you briefly update us on where you stand in your deliberations on the future of RU64?

Mr Briault: Well, RU64 was a rule introduced by the PIA back in 1999 as a temporary measure, but was then carried across into our Conduct of Business Source book when that was made in December 2001, I believe. We consulted last summer on whether RU64 should be removed and we consulted on the basis that we are proposing that it should be removed. We received, as I think you are aware because it has been discussed in previous sessions of this Committee, very divergent views in response to that which we are still considering. We intend to take a proposal to our Board next month for them to take the final decision on that.

Q180 Chairman: At this stage could you rule out any equivalent of RU64 in relation to the NPSS?

Mr Briault: I think not a direct equivalent of RU64 in terms of writing a detailed rule. I think what we would expect, and would keep an eye on, is firms advising on pension arrangements to take account of the likely impact obviously once the details are more clearly known of a national pension scheme and when it was being introduced, so, if people were entering into a private pension scheme, we would expect advisers to take into account what the national pension scheme might offer to them beginning in, I think the current proposal is, 2010, but whenever it is, and also to think about, rather as Dan was saying in the context of persistency, the flexibility open to an individual to transfer across to the national pension scheme if that was a sensible option for them at that point. We would expect that to be an aspect of an adviser's consideration of the suitability of entering into a personal pension scheme.

Q181 Chairman: It has been suggested to us that the establishment of the NPSS might encourage the move away from high quality occupational pension schemes. Do you have any concerns in that area?

Mr Briault: It is not really, again, a particular expertise of ours. We would have thought that the reason why employers might offer, as they currently do, occupational schemes which are even better than those proposed under the NPSS is in order to attract particularly a high quality workforce and provide them with benefits so that people find it attractive to both join and then remain at that company. That is what happens at the moment. In effect employers compete around the amount and quality of their pension schemes. If that is an important competitive factor in the labour market then I think it would be rational to expect employers to continue to compete in that way and the main impact would therefore be on those employers who currently do not offer anything like as good a pension scheme as the NPSS is currently proposing to provide.

Q182 Jim Cousins: You have said, both in your written evidence to the committee and in the discussion we have just now had, that, provided a government set out to considerably reduce the element of means testing in the state scheme, advice would not be necessary in participation in this scheme. In the last two or three days there have been suggestions, admittedly then subsequently denied, that the state pension scheme might be different for people below the age of 75 than for people above the age of 75. Would that be a major complication in the issue of advice giving?

Mr Briault: If I may just come back to you on the first half of your question, we are not saying that the necessity for advice or not depends only on means testing. We said that that was one of the factors to consider along with employer contribution and the range of choices offered to individuals, but it is certainly an important factor in that, yes. I am less sure about the impact of the age 75 cut-off or not, which I think in the latest proposals is the point at which a state pension might become earnings related. That seems to me to be a different proposition from questions about means testing. I think one could take account of the adequacy or otherwise of what was going to be provided for through a combination of state and personal pension by looking at the combination of the NPSS, whatever that might provide, and a state pension scheme which was not earnings linked up to the age of 75 but then earnings linked after that, and there would not then be a trade-off between the two in the way in which there could be under means testing.

Q183 Chairman: Can I put a last point to you? What would keep you out of the NPSS as a regulator?

Mr Briault: Keep it simple, and then the particular elements of employer and possibly taxpayer contribution plus whatever happens on means testing, so all of those things, depending on which way they go, would push us further and further out of the picture.

Q184 Chairman: I do not know if I fully understand but thanks very much.

Mr Briault: As I say, I do not think it is a binary choice, to be either in the picture or out of the picture. There are some elements which we would continue to regulate, for example, some of the regulation of fund managers we would continue to do as a basic backdrop, not particularly dependent on the NPSS, but in terms of a key question about regulated advice it still depends on the precise design of the system.

Chairman: I think we will go by the "keep it simple" slogan. Thank you very much for your time.

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