The pensions industry should use auto-enrolment as an opportunity to clean up its act and regain the public’s trust, according to pensions minister Steve Webb.
Webb (pictured)said the pensions industry was often regarded as unclear and self-serving, and it should use the reform as a way to alter public perception.
‘I think the industry needs to recognise that time and again it has not been seen to be on the side of consumers, and that’s a terribly difficult reputation to shake off,’ he said.
‘If we have this vast auto-enrolment now and firms are not seen to have put consumers first, the damage it could do could be enormous.
‘It’s a chance to clean up its act basically. This is a chance to make a fresh start with a whole new set of customers.’
Auto-enrolment opt-out rates
Auto-enrolment began in October 2012 for companies with 120,000 or more employees, and small and medium-sized businesses will come under the reforms from the end of 2013 onwards.
The reform has been broadly welcomed: it has certainly been given an easier ride than Webb’s other flagship policy, a flat-rate state pension, but its critics have pointed out it can only be judged a success if it maintains low opt-out rates.
Webb said information from employers so far suggested an opt-out rate of between 10% and 15%, which was within the Department for Work and Pensions (DWP) expectations.
If auto-enrolment engaged consumers in pensions, and led to a more transparent and cheaper pensions market, it would achieve two of Webb’s aims at once.
Naming and shaming
In October 2012, Webb pledged to ‘name and shame’ pension providers who allowed auto-enrolment into ‘lousy, high-charging old schemes’. At the same time he said he would praise providers who enrolled members into low-charging well-run schemes.
Webb was hesitant, for legal reasons, to name ‘bad’ providers, but pulled no punches when it came to explaining the qualities he does not like.
‘[I’d like to] describe the characteristics of bad firms rather than just listing some additional firms and getting sued,’ he said.
‘I remain concerned about legacy pension provision. There are a lot of people out there with workplace pension provision who are on terms you wouldn’t dream of offering to somebody from scratch today.’
‘We really have to wrestle with scheme quality, hidden charges, exit charges, deferred member charges…’
‘Yes, that too.’
Low-cost large-scale schemes
Webb is open in his appreciation of low-cost large-scale pension schemes, and has staunchly defended the most controversial plank of auto-enrolment: the National Employment Savings Trust (Nest).
Providers, unsurprisingly, have greeted the government-backed scheme with a degree of hostility, while Labour, which can claim paternity of Nest, has attacked Webb for making the scheme uncompetitive by failing to lift restrictions banning transfers and limiting contributions.
Despite being damned either way, Webb said Nest was working the way he wanted: it was on target to gain between two and four million members and attracting competition from other providers.
‘We have new entrants, which we wanted, [like] ATP from Denmark, and Legal & General is talking about going much lower down the market than it had previously planned. We wanted Nest to provide good low-cost provision, but we also wanted it to trigger a lot of competition for low-cost pension provision in the market,’ he said.
‘Basic pension provision doesn’t have to be with Nest, [but] at the moment, Nest does seem to be driving the market.’
He said the government was studying responses to its consultation on lifting Nest’s restrictions, but would not be drawn on its direction of travel.
The minister is also looking at consultation responses before making his mind up about consultancy charging.
In November 2012, Webb wrote to the Association of British Insurers (ABI) calling for an urgent review of consultancy charging, saying he had faced calls to introduce an outright ban.
The debate over consultancy charges typically pits the DWP pushing for a ban against the ABI, a supporter of the model, which last week was hit by HM Revenue & Customs’ announcement the practice was not exempt from VAT.
Webb said the argument was more nuanced than this. ‘Some ABI members said they didn’t want consultancy charging at all, others said yes, but in a controlled way, and it needs to be capped,’ he said. ‘But we will respond soon, before the summer.’
Flat-rate state pension
There is less uncertainty around Webb’s other flagship policy, the flat-rate state pension, which will come into force a year earlier than planned, in 2016.
Despite a guaranteed date of delivery, the reform has not proved immune to criticism, most recently from the Work and Pensions Committee, which said the government needed to do more to inform the public about the changes.
Webb agreed with the committee on this point and said he would spend his remaining two and a half years in office trying to ensure the public had a better understanding of the state pension, and better private pension provision.