Pension Transfer Schemes

HL Deb 30 November 1994 vol 559 cc659-86

7 p.m.

Lord Haskel rose to call attention to the consequences for members of occupational and other pension schemes transferring their pensions to private insurance companies and the need for remedies and satisfactory consumer protection in the future; and to move for Papers.

The noble Lord said: My Lords, on 15th June this year my noble friend Lord Jay and other colleagues drew to your Lordships' attention the problems of a large number of pensioners, present and future, caused by the Government's drive towards personal pensions. Since that debate we have had the Government's proposals to rectify this damage. I should like to examine these proposals and show that unless regulation is much stronger a lot of the damage will not be rectified and further difficulties will arise resulting in yet more calls on the benefits system.

I wish briefly to remind your Lordships how all this came about. In 1986 the Government decided to encourage people to move from state earnings related pensions, known as SERPS, and occupational pension schemes, to personal pension schemes. The reason given was portability of pensions. The real reason was to move pensions from the public sector to the private sector. Some £14 billion was spent on this exercise. Some £4 billion was spent to fund a 2 per cent. bonus to persuade people to opt out of SERPS. Some £10 billion was spent on National Insurance rebates. A further £1.2 million was spent by the Government on a TV and press advertising campaign to persuade people to move into private personal pensions.

Some of your Lordships may remember the frenzied activity that went on at that time; the advertisements shouting that this was the only time the Government would give you money, and urging people to liberate themselves from the public sector. Of course, the voice of reason was drowned out by the hard sell of the pensions industry, ably abetted by the Government. The Consumers' Association, the National Association of Pension Funds, the CBI and even one or two of the large pension companies all warned of the dangers of people ending up with inadequate income by contributing to a personal pension plan rather than by contributing to a defined benefit scheme.

In the early 90s the warnings began to come true and people started to find that their pensions were in fact inadequate. Some made a fuss and because of this the regulators—one wonders what they were doing all this time—started to investigate and unearthed a whole culture where the mis-selling of pensions, deliberate or negligent, had been allowed to flourish. It is estimated that some 5 million private pensions had been sold during that time, and each one would have to be investigated and where there had been mis-selling the customer would have to be compensated.

The Securities and Investment Board, SIB, decided to split up the 5 million customers into priority groups. The first priority group, consisting of 1.7 million people, are those who are approaching retirement. They will have their personal pensions looked at during the next two years. The steps to be followed have been laid down in great detail. First, the pension provider examines each personal pension plan to see if there has been any loss because of the changeover. If there has been a loss, then the pension provider examines the records to see if there has been any mis-selling. The customer is sent a form to complete to help the pension provider with this work. If there has been any mis-selling, the pension provider calculates the compensation based on certain actuarial assumptions and makes an offer to the customer. If the customer is not satisfied, there is an appeals procedure eventually going to the Pensions Ombudsman.

I am sure that by now your Lordships will be wondering how the customer is going to cope, but do not worry, the SIB has produced a 12-page booklet for the consumer with helpful advice, such as that on page 7 which states that if someone receives an offer of redress, he should read it carefully. It further states, you will have to decide whether you agree or disagree with the assumptions", contained in this offer.

But never mind, there is a telephone help line. The Pensions Hotline is an 0171 number, which means that the caller has to pay, and it is open from 9 a.m. to 5 p.m. Monday to Friday only. Noble Lords may like to compare this with the Cones Hotline to complain about roadworks. This is an 0800 number, which means that it is free to the caller, and it is manned 24 hours a day seven days a week. Obviously roadworks are more important than pensions. A friend of mine telephoned the hotline and was advised to contact the regulator. The regulator said that he was not allowed to comment on compensation and advised my friend to go to an independent financial adviser—perhaps the one who got my friend into the mess in the first place! If the consumer wants true, independent advice from a solicitor or accountant, he will have to pay. Perhaps the Minister will tell us if he is satisfied with this consumer protection.

Sorting all this out is a huge task. Let me remind your Lordships that there are 1.7 million priority cases. There are also lots of hazards in the way. There are missing records; firms which have gone out of business or which are deliberately dragging their feet; and potential disputes between the pension providers and their intermediaries. And there is more to come. The first investigation does not cover SERPS. This is to come in 1995. There also seems to be some trouble looming about the mis-selling of endowment policies, mortgages and investment advice. Nobody knows how many cases will merit compensation in the end, but, in anticipation, the Ombudsman is appointing two assistants and increasing the staff. Who will pay? Most firms and independent financial advisers have professional indemnity insurance, but this usually only covers part of the cost. The rest of the money will have to come from the pension providers or from a levy. At the end, this enormous cost will come from our insurance premiums.

So what lessons should we learn from this sorry mess? First and foremost somebody must look after the consumers' interests and see it through. Can this be the regulator? Not as at present organised. The Personal Investment Authority, or PIA, was set up in June by SIB to raise standards and tighten up on regulation. But it is a kind of hybrid institution. On the one hand it is supervised by SIB, which is in turn responsible to the Treasury. But on the other hand the PIA has to bid for members of the pension industry to join it because without their funding the PIA cannot exist. So it is not pure self-regulation, and neither is it independent regulation. The public must have confidence that the regulator is impartial and detached.

This conflict between the demands of the pensions industry and the demands of public interest will be impossible to resolve. I believe that the self-regulation that we had in the 1980s has had its day, and that eventually we must have a system of direct regulation. Meanwhile, I urge the Government to strengthen SIB yet further while an orderly changeover takes place. The regulators will be very unwilling to damage their own paymasters, and so will have every incentive to keep the compensation low.

A second lesson to be learnt from this is how foolish the Government were to rush in and create a false market in personal pension plans. Indeed, because of their advertising and the financial inducements offered, one could fairly say that the original mis-selling was by the Government themselves, but the financial cost of putting this right will eventually fall on all policyholders. Not only were the Government warned of the problems: the data on which they acted were wrong. Their data assumed that all of us would work continuously until aged 60 or 65. This is now manifestly untrue. With the benefit of hindsight we can see that the collective provision of pensions plus the encouragement of personal savings is a far cheaper way than buying annuities out of personal pension plans. Only an independent financial adviser and somebody with a dislike of the public sector, could think otherwise. I hope that the Government have learnt their lesson and, in rectifying the situation, will look at alternatives, such as universal private pension provisions to run alongside the state scheme, or the national pension savings scheme suggested by the Social Justice Commission.

A third lesson to be learnt is that we must keep standards high. During this past year there has been a great deal of euphoria about the joys of deregulation and self-regulation. That has not been shared by pensioners because the private sector is also capable of low standards. It has allowed people to buy private pensions but contribute no more than the contracting out payment. After deduction of commission and charges, virtually no pension is provided. In exactly the same way as some bad employers use the benefits system to supplement low wages, so a low level of pension will have to be supplemented by social security.

It is in the interests of all of us to see that standards are raised, and part of the regulator's duty must be to see that people's pensions are properly funded. Low standards of pension funding now only means a call on the benefits system later.

Looking to the future, I welcome the important step that next year we shall have much more openness about commissions and expenses. That will help the consumer to make more informed decisions. Had that information been available during the 1980s as many of us on these Benches requested, many mis-sold private pensions might well have been avoided.

There are other problems to be dealt with. Both occupational and personal pension schemes have serious drawbacks. The treatment of early leavers in occupational pension schemes and the high administrative costs of personal pension schemes are but two examples. However, the more flexible arrangements regarding the purchase of annuities for those with personal pensions announced yesterday by the Chancellor are a step in the right direction.

The basic state pension does not provide adequate income, and more than 1.5 million pensioners are entitled to income support. One in four do not claim it. The basic state pension is only 15 per cent. of average male earnings. On current calculations, it could be worth just 6 per cent. of average earnings in 40 years' time. That is what makes pensioners the new poor.

I hope that we shall hear from the Minister that the pensions Bill proposed in the gracious Speech will tackle those problems and give your Lordships a further opportunity to debate this important and urgent problem. It is urgent, because, if pensions are not properly funded, a smaller workforce will be paying for a larger retired population. That makes pensions an urgent and major area of welfare reform. If, as a result of this scandal, adequate pension arrangements are made and direct regulation ensures that the quality of advice to consumers is good, then something will have come out of this. I beg to move for Papers.

7.13 p.m.

Lord Jenkin of Roding

My Lords, I have pondered carefully as to whether it would be appropriate for me to take part in the debate. I have to declare an interest immediately. I am chairman of a major mutual insurance company which has sold a large number of pensions. Whether it deserves the obloquies which have been thrown at the industry by the noble Lord remains to be seen. Happily, I believe that the company that I chair has always had extremely high standards.

I have no doubt that we shall discover some cases in which compensation will have to be paid. However, I believe that I shall be able to convince your Lordships that in his speech the noble Lord, Lord Haskel, has fallen into the trap of a great many other commentators who have chosen to jump on the bandwagon of bashing the life insurance industry, of extracting partial information from reports which were leaked before they were completed and of drawing conclusions which will turn out to bear no resemblance to the facts.

Perhaps I may develop my argument and justify my contentions. I agree with the noble Lord in some of what he said. It is very important that, as he put it, we keep standards high. I would have hoped that he would have recognised that standards in the selling of insurance products, including pensions, have increased dramatically in the past five years. I have no hesitation whatever in saying that the system of regulation and monitoring of companies which now exists has played a large part in that. We welcome it. I am not sure that the system is right yet, and if I have time before the clock catches up with me I may be able to offer some possible suggestions.

I also agree with the noble Lord about the disclosure of commission. About four years ago I minuted my chief executive indicating that I thought that the office should be prepared for a system of full commission disclosure. Most of the industry did not accept that and it was resisted. It is now coming, and all the preparations are being made.

Perhaps the most hopeful sign for the future is that the chairman of the SIB, Andrew Large, is firmly of the view that if we have full commission disclosure it may be possible to dispense with much of the enormously bureaucratic and costly regulation which the industry currently undergoes. When he told me that I said "I will believe that when I see it". However, I hope that the noble Lord, Lord Haskel, is right and that that will make a considerable difference.

The last speech that I made as Secretary of State for Social Services, in July 1981, grappled with the problem of the dismal treatment of early leavers from occupational pension schemes. I warned the pensions and life insurance industry then that unless it dealt with that problem the Government would be forced not only to provide a compulsory measure of protection but to introduce personal pensions. Very little was done about the plight of the early leavers—those who changed jobs regularly during their careers. They end up with substantially reduced pensions. Of course, it is in the interests of a pension scheme to make sure that there are as many people as possible with frozen benefits because that means more for everybody else, and bully for the pension fund manager.

The noble Lord, Lord Haskel, described what happened in 1988. That was six years ago and a great deal has changed since then. The Government recognised that one of the ways to protect early leavers was to allow people to buy money purchase personal pensions rather than surrendering the interest in final salary schemes. That change coincided with the implementation of the Financial Services Act.

The changes in the regulation of the pensions market were at that time regarded favourably. As a result of the advertising which the Government undertook, there was considerable interest among the public in the new portable products. All life offices provided those products, and many independent intermediaries and tied sales forces made a particular sales effort.

Because at that stage regulation under the Financial Services Act was still in its infancy, many of those early sales, it is now widely recognised, were made on the basis of inadequate fact finding. Moreover, it should have been clear—and to some it certainly was clear—that it was unlikely to be good advice for an individual to opt out of a good quality occupational pension scheme and simply leave their pension behind. Schemes such as the teachers' scheme and the National Health Service scheme have been instanced.

However, to have transferred into a personal pension scheme may well have been appropriate. After all, in the economic climate of 1988–89 to ask a person whether he or she was likely to stay in the same job for the whole of his or her career was to invite the answer, "Of course not". The economy was in a state of growth and development. People were moving. There was enormous change. Very few people imagined that they would stay in the same job. In those circumstances, to transfer out of an occupational pension scheme and pay the money into a personal pension plan, in some cases with employers continuing to make contributions to that plan, could very well have been very good advice indeed. At the same time, when people saw the appalling results of the Maxwell débâcle, and when it appeared that perhaps the security of occupational pension funds was not so sound as people had thought, it added to the problem.

The noble Lord, Lord Haskel, did not make this point; or if he did so, I hope that he will forgive my having missed it. Where is there mention of responsibility for that situation on those who promoted occupational pension schemes? Of those who said, "I'm leaving; I'm opting out of the scheme," how many were asked, "Wait a minute. Are you really doing the right thing"? Of course they were not, because it suits the actuarial balance of a pension fund to have people opt out. It is a matter to which the Government need to pay attention. As well as being chairman of an insurance company, I am trustee of an occupational pension scheme in another area. I am happy to say that in such circumstances the managers warned people, saying, "You realise what you're leaving behind". We had very few opt-outs from our scheme.

However, the industry remains pretty certain that a relatively small proportion of the people who bought personal pensions were given advice which was flawed, where pensions should not have been sold. As I indicated at the beginning of my remarks, regrettably, owing to a widespread misinterpretation of the original KPMG Peat Marwick report to the SIB, which was the subject of a highly coloured leak before it was ready for publication—the SIB did its best to indicate what the story was—it is widely believed that 90 per cent. of all the people who were sold personal pensions will be entitled to compensation. I suspect that that figure is at the back of the mind of the noble Lord, Lord Haskel: that millions of pensions were sold and that 90 per cent. of the people who bought them will be entitled to compensation.

That belief has been fanned by the press which is ever happy to find a jolly good whip with which to beat one of our institutions. However, one must make some points clearly. First, personal pensions are the right product for many investors. Many, especially the self-employed and those who are changing employment, will continue to find the flexibility of a personal pension the right answer. That is fully acknowledged by the SIB in its report.

Secondly—I shall be interested to hear the remarks of the noble Lord, Lord Peston—all political parties in the UK have long accepted the principle of private pension provision as a means of providing incomes in retirement. The noble Lord, Lord Haskel, referred to the value of the national insurance pension. It is essential that there is a great deal more private provision for pension for old age, and no doubt also for sickness through permanent health insurance and other methods, if we are to float people off dependence on social security. During my noble friend's Statement on social security upratings much was said about dependency. One of the best ways to reduce dependency is for people to make better provision for themselves. I should have thought that that was common ground for us all.

Thirdly, there has been no criticism whatever of personal pensions as a product. What has been criticised is the fact that some people received no advice, or wrong advice, and took out a personal pension when it was the wrong thing to do. Therefore, I ask the same question that the noble Lord, Lord Haskel asked: what needs to be done?

First, regulators and firms must seek to speed up the review of the many thousands of cases which they will have to examine in order to identify those where advice was clearly misconceived. I know what a long, time consuming and expensive business that will be. However, we have no option but to do it. To put the matter into context, in my company —having sold perhaps well over 100,000 pensions, many of them involving transfers or opt-outs—we have probably had fewer than 100 direct complaints. We are not expecting many —certainly very few from those schemes sold by our own sales force. We do not yet know about those sold through intermediaries. I shall come to that in a moment.

Secondly, before any compensation can be paid we must have the promised (it is a lovely phrase) prescriptive guidance from the SIB. It will not be an easy task to assess the compensation for those cases in which a pension was mis-sold. It can be stated in principle that the pensioner should be put into the position in which he would have been if the pension scheme had not been so sold. However, there is such a huge range of cases that it will be a difficult task. The sooner we have that guidance, the better. I understand why the matter is taking a little time; it is complicated.

Thirdly, it must be made clear to the public—it has been made clear by SIB and I have had it confirmed by the Government—that the standards of selling which have to be taken into account in deciding whether or not adequate advice was given are the standards which were in force at the time when the policy was sold. That is in the SIB paper. It is accepted by the Government but it is certainly not yet understood by the public. They are judging what they did five or six years ago by the very much higher standards which are now applied by the industry when selling.

Fourthly, and leading on from that, the authorities must move to lower expectations. People believe that hundreds of thousands of individuals are involved. It is unlikely to turn out to be that number.

Fifthly, we must make it clear that there is no redress for people who simply change their minds. They may have believed that they were going to change their jobs and that their decision was right. But come the recession, they did not change their jobs. Those individuals cannot just change their minds. They must take responsibility for their own decisions. There should be no compensation in the absence of evidence of mis-selling.

I hope that the noble Lord, Lord Haskel, agrees with me on this point. Every effort must be made to restore public confidence in the industry. There has been a significant fall of new premium income; and that must be reversed. We all have to work at the issue. The industry is thoroughly aware of its responsibilities. I beg people to recognise that expectations have been wildly exaggerated and must be reduced.

7.28 p.m.

Baroness Dean of Thornton-le-Fylde

My Lords, I thank my noble friend Lord Haskel for introducing the debate this evening. It is a debate on an issue which affects us all; it is not the prerogative of any party or group of people. Pensions affect the overwhelming majority of people in Britain today. It is therefore regrettable that we are in the present position. In my industrial experience, one of the successes of the past 20 years has been the growth of occupational pension schemes. For the individuals concerned there is the income support that it will give them during retirement and therefore the confidence to look forward to retirement. They do not have to rely on the state and therefore the taxpayer. That built a confidence around pensions schemes. The reference to the strong arm of the insurance companies protecting the individual was believed by the majority of people. That confidence extended itself to occupational pension schemes.

There is no doubt that for some people occupational pension schemes are the answer. It is equally true that, in the world in which we now live, with changing employment patterns and shorter-term employment guarantees, personal pensions are the answer for many people. It is true that, with both of those, we need to restore the confidence which was there but which has been severely eroded because of the experience of the past few years.

The noble Lord, Lord Jenkin, mentioned the Maxwell fiasco, and I was very closely involved with it. Way back in 1986 when we started to have anxieties about the schemes that he took over with IPC and a number of other companies, we were told when we took professional advice that our anxieties were unnecessary. We could get no further with the inquiries we were making and that definitely created a lack of confidence among people. The exposure of the massive fraud and corruption in those schemes undermined the confidence of many people.

The problem is that the majority of occupational pension schemes in Britain today are well run. They have conditions which are within the proposals of the Goode Report. The effect has been not to drive people out of pension schemes but to start them becoming more involved and questioning the schemes more. That, coupled with the divulgence of the information relating to personal pension schemes to which my noble friend refers in the Motion, has created a tremendous lack of confidence. The issue is important not just because of that but, I suggest, because an occupational pension scheme is one which deals with deferred payment for employees. Apart from buying one's home, the individual personal pension scheme is probably the most important investment that any individual ever makes. So it is absolutely crucial that we have not only strong regulations but effective regulations covering the schemes.

I shall not dwell on it this evening but great stress is caused by that lack of confidence and there is a need to get to grips with it and to introduce measures that will not only restore confidence but will also put in place strong support which guarantees that the undertakings that are given are met. That is important. It is too late when the horse has bolted from the stable, it is too late when we talk to people—as I had to—in their early 60s who expect to retire at 65 and are confident that they will get a decent pension but whose pension now has a big question mark over it. That creates a mass fear which may be ill founded, but who can blame people who feel like that?

The subject is also important for another reason. We are all living longer; there are far more of us in retirement in the community. The number is 10 million today; in 40 years' time it will have increased to just over 15 million. In pension accumulation terms, 40 years is not a long time and it is important that we have a savings philosophy within our society by which people either join an occupational scheme or provide for a personal pension scheme.

Those are the reasons why I welcome the debate this evening. The measures which have been introduced, such as the disclosure requirements from next year, have been welcomed across the board, from the responsible life assurance companies right the way through to occupational pension schemes. As long as they are effectively enforced, they are to be welcomed. Increased competition and knowing what one is paying for financial advice are crucially important in rebuilding confidence. Training programmes for sales people who sell personal pension schemes are important, as are standards of conduct within the selling of the schemes which are generally accepted and endorsed across the board.

We shall come back to the issue time and time again—and rightly so. We shall have the opportunity next year to discuss the Goode Report and the measures which it proposes, and it will be interesting to see which measures are taken up. Much of the lack of confidence and the lack of a feeling of security about the benefits which people felt they had within pension schemes will be dispelled, in my view, by effective regulation. It will be helped by not making it an ideological issue but a practical one that protects the personal investment which individuals make in their pension. That will be absolutely crucial.

I close my short presentation by offering my deep and sincere apology to the Minister and my noble friend Lord Haskel, as well as to the House. Unfortunately, I have another commitment which I cannot postpone and I shall not be able to stay to the end of this important debate.

7.35 p.m.

The Earl of Clanwilliam

My Lords, I thank the noble Lord, Lord Haskel, for this welcome opportunity. He mentioned at the end of his remarks that the matter would be dealt with in future legislation. That legislation will be able to cover all the problems that have arisen and solve those which the noble Baroness mentioned of the requirement to make proper provision for the future. That is one of the greatest problems for the pensions industry. Mis-selling is another matter which has been dealt with tonight.

I should also like to take the opportunity to congratulate the Government on the extension of the use of personal pension plans and the money purchase principle of pension provision. They are the right product for many investors, especially for the self-employed—a point which my noble friend Lord Jenkin has already covered—and those who leave occupational pension schemes. Many people are highly mobile and they will need personal pension schemes so that they do not rush from one lost transfer to another.

The success of the pension schemes is reflected in the number of people involved; I believe that a figure of 8 million has been mentioned since they were recommended, of which 5 million have opted out of SERPS. The 5 million did not all opt wrongly. It was quite a small number, about 500,000, who did. Many people opted into highly successful managed unitised pension funds with an excellent performance record and they are quite content with their lot. However, some were badly advised and they are the subject of today's debate. It is an extremely complex subject, in my view, as is the rather arcane system of many occupational pension schemes.

The noble Lord, Lord Haskel, referred to defined benefits, and many occupational pension schemes are money-purchased too. They are important and should be retained at all costs.

Be that as it may, the Government are to be commended not only for setting up the Pension Law Review Committee but also for their measured, responsible and comprehensive response set out in Volume II of the Secretary of State's document.

One concern is the cost of the actuarial assessment. I was listening the other day to some actuaries at a meeting upstairs in your Lordships' House and they mentioned a figure of an initial charge by them of £200 million before they could get anywhere. That figure is daunting. That there has been mis-selling is painfully obvious and the SIB report will be with us for a long time. No doubt it will take up many hours of your Lordships' House in discussion. I suspect that confusion will be worse confounded by the fact that many insurance companies have no records left of some of the subjects which need to be discussed.

One of the extraordinary factors is the motivation of a member of an occupational pension scheme. Two-thirds of his contribution is paid by the employer, but he suddenly decides to take a personal pension plan. Apparently he forgets that he is getting two-thirds of his pension contribution from his employer and he then has to pay the whole amount himself. How many people are there like that? It is claimed that there are many. Who would leave such a plan? It appears that there are people, including nurses, who did this. It is horrifying to think that people can be so irresponsible with their own money.

The SIB has laid down clear rules and the companies will have to act with all speed as soon as the letters that they have sent to their clients asking them to submit a complaint if they have one are returned. It will take a long time before all those letters come in. I am sure that pension companies, such as that mentioned by my noble friend Lord Jenkin of Roding, will perform their task with admirable responsibility. We cannot do much about that. We just have to wait and see what comes out.

It will be disastrous for many of the independent advisers, many of whom stand to be wiped out. They would be a great loss to the industry. There are some rogues and some very good advisers, but it would be extremely unfortunate if they were to be wiped out. Many of them will be unable to make reimbursement as calculated by the actuaries. The question that the noble Lord, Lord Haskel, asked is: who then will pay? I have no answer to that.

Much of the blame will also be levelled at the commission salesmen. Now that there is to be total revealing of all commissions I believe there will be a change in the industry. Because of the considerable up-front charge of a commission-only salesman, it is likely that most salesmen will be put on to a salary. The level of return will still be the same, but it will not be so frightening to the prospective user of a pension plan if he suddenly finds that a large lump of money will go as a prepayment against future premiums to the employee.

As a result of the furore, regulations instituted by Lautro, for instance, require immense detail to be provided and considered by salesmen and by the companies—not necessarily to much avail. The principle of caveat emptor seems to have gone by the board in the welter of regulation. Are estate agents and car salesmen required to ask the client whether he has enough money to buy the car or the house? Is he asked to explain what his income is? No, he is not. But under the new Lautro regulation that is necessary. It seems to me to be quite ridiculous. Certainly, if you are in somebody's private room and you are discussing their personal affairs, you have to discuss the matter in detail. But the six-page documents are only confusing. They are as confusing to the prospective investor as they are to the adviser.

The noble Lord, Lord Jenkin, also mentioned the problem of the occupational pension scheme. The occupational pension scheme trustee should surely have made representations to individuals and should have told them what would be the result of their move out. It seems extraordinary to me that they did not do that. It is also very odd that many of the transfers that were arranged by the actuary were extremely low. The transfers were calculated from a number of notional factors, including the interest rate prevailing at the time of the transfer. That interest rate is quite irrelevant. The only matter that is of interest to the person who will be a pensioner is what the rate will be at the time he retires. So many of the factors that are produced by the actuaries are extremely inaccurate.

Occupational pension schemes were originally invented as a reward for long service and loyalty. They became an anchor, and indeed a threat which inhibited mobility of labour. At the same time, the assets became an important item in the balance sheet. There is no harm in that. But it became a major factor in takeover bids, and, as we now know, was a temptation to use the assets as collateral.

That threat does not apply to the money purchase schemes, where policies are in individual names and are unlikely to be acceptable as collateral even if offered. Many excellent occupational pension schemes are run by our greatest companies, which are exemplary. Of course they serve a wonderful purpose for those people who will spend 40 years in one job. But there are not so many of them today. It will no doubt be the job of this House to work out a suitable plan when the pensions Bill is finally brought before us. I have various suggestions to make in that direction.

As I said, many of the occupational pension schemes are based on money purchase, and the money purchase principle is the one that will be most effective. The cost of occupational pension schemes of some 15 to 16 per cent. of salary is ludicrous. If you put that money into a personal pension plan, you would end up with telephone numbers.

I am confident that my noble friend's plans to remedy these problems and faults will be successful. I look forward to hearing his reply.

7.46 p.m.

Lord Desai

My Lords, we are grateful to my noble friend Lord Haskel for bringing this matter before us. It is of some interest that this particular problem of pensions has been discussed again and again lately, more by this side of the House; indeed it is we who initiated the discussion. We discussed the matter last June when my noble friend Lord Jay, who unfortunately is not in his place, initiated a debate.

The reason is that it is quite clear that in occupational schemes and in personal pensions there has been something akin to a disaster over the past few years. That disaster was not only foreseen; it is a manufactured disaster. When we look at the history of how the transfer to personal pensions was encouraged, indeed debated, we see that in a sense not enough care was taken to make sure that what people were being sold was properly vetted and tested.

The enthusiasm for the transfer to personal pensions was such that one almost suspects—one cannot quite allege it —that misinformation was generated: a price distortion. In a free market if you had price distortion and signal distortion wrong decisions would be made. I do not say this lightly. The noble Lord, Lord Jenkin, made a remark about individuals taking responsibility. The nice thing about this episode is that the individuals who were responsible for the disaster have not taken responsibility. Mr. Norman Fowler, who was Secretary 'of State at the time, would seem to be very proud of what he did. In his memoirs, Ministers Decide, he says: Yet in many ways the most spectacular success has been the new pension options. Over four million people have taken out personal pensions. Over 800,000 people are now covered by new occupational pension schemes. Contrary to the industry's predictions, existing company schemes have not collapsed. The public have been provided with more choices, and have shown that they want a pension which is theirs by right". The estimate of how many people got it wrong is, I agree, perhaps not as high as 83 per cent. That was a false figure. Perhaps it is only as many as 500,000 people.

The noble Lord spoke about selling a car. The context is quite different. The person who sells a car does not have to know whether the buyer has the income to pay for it. But it is irresponsible to sell an unsafe car. That is the problem. The fault does not lie with the purchaser but with the seller.

The noble Lord, Lord Lawson, who at the time was the Chancellor of the Exchequer, wrote in his memoirs: First, the tax reliefs enjoyed by occupational pension funds were extended to personal pensions whose promotion had been one of the main purposes of the Fowler reforms. They were taken up on a positively embarrassing scale, partly because Norman had persuaded me to provide, at least on a temporary basis, excessively favourable National Insurance contribution rates for those who contracted out of the State Earnings Related Pension Scheme in order to invest in a personal pension scheme". The Chancellor of the Exchequer was embarrassed by the concession he had made. Obviously, he made the concession because a propaganda campaign had been mounted, which was close on misinformation, generating anxiety about SERPS.

Noble Lords have spoken about mobility and how, in our great and changing age, many people want to change jobs. While it is true that occupational pension schemes discouraged mobility, SERPS did not do so. If people had been concerned only with mobility, they could have stayed in SERPS.

Let me quote what my noble friend Lord Jay said during the debate on 15th June this year. He offered a quotation from Michael Prowse, one of our better economics correspondents, who wrote in the Financial Times: The original SERPS had all the virtues of a good pension scheme. It offered exceptionally low administrative costs, job mobility and maximum security in old age. Nothing in the private sector can match this combination of virtues". —(Official Report, 15/6/94; col. 1750). That was said in the Financial Times, not in Tribune—and not by me, either.

Let us be clear that SERPS was a good scheme. First, the Government started to undermine the benefits under SERPS; and then they spread the rumour that, because the dependency ratio would change, SERPS would become too expensive. A moment's thought would show that how a society pays for its pensions is a kind of macro-economic point. Those who are in work pay for those who are retired, whether it is a funded or an unfunded scheme. If those who are in work refuse to pay for those in retirement, there will be only inflation and a strain on resources. Basically, in such a transfer between generations—this is a sound economic theory; I know what I am talking about—there needs to be a scheme which comprises low administrative cost, low risk to the taker and good information and is one from which society as a whole can benefit.

I respect the free market. Some of my best friends are free marketeers. However, in the free market lodge, there is a strange contrast between the UK and the USA. In the USA there is a free market but they have zealous regulators. They do not just believe in laissez-faire; they believe in competition. They believe in the free market, an open society and transparent information. They believe in thorough regulation. In the UK, especially over the past 10 years, in enthusiasm for the free market we have let these schemes go on and, four or five years later, various people have paid the cost of unregulated free enterprise. In a sense much of the privatisation and deregulation has been an outdoor relief scheme for the City, which has made a lot of money out of it. There was a market failure and no proper regulation. No one was in place to regulate the kind of schemes that insurance companies were selling. It was not even asked whether they had properly trained staff. Staff training for financial operations is only now beginning to occupy the minds of people in the City. There was self-regulation and of course it failed.

Only after some 500,000 people have lost something on their personal pension—that is 10 per cent., which is a high risk factor—and only after occupational schemes have failed do we have a stream of reports: the Goode Report; the Government's response to the Goode Report, in two volumes; and another little response to the Goode Report. There will also be legislation. Why could it not have been seen beforehand that a disaster would be bound to happen if such a huge reform were mounted and it was not checked out whether the seller had the capacity, authority and information to be a good seller—especially if the attractiveness of one asset as against another was being distorted, basically bribing people to buy that asset.

The Government want to have free markets and believe that deregulation means no regulation. Deregulation makes a move from what is perhaps an over-interventionist scheme to one where a proper choice can be made with full information about the costs and benefits of the choice being made. What happened in the case of personal pensions? The SIB said—again, it is not lightly said because the SIB tries to be extremely polite about these matters— The City is satisfied from all the information it has that some of the business was done in a materially non-compliant way and some of the investors concerned will be found to have suffered loss as a result of unsuitable advice". How lovely! Only this afternoon there was a Statement read in this House from the Secretary of State for Social Security. He was pursuing people who were scrounging and defrauding the social services. They were probably defrauding the social services of £10 or £20 each, which is not very much. The suffering of the 500,000 people in those personal pension schemes far exceeds the amount of money which at the next Tory conference the Secretary of State for Social Security will boast about having saved. Nothing has been done to punish the people responsible. No Minister has apologised in public, either in this House or the other place. It is assumed to be due to market failure and the fact that this sort of thing happens. People have to be responsible for what they undertake, and the buyer should beware. But what about the seller? Why does only the buyer have to beware? Why is something not done about the seller? Why are not proper regulations laid down?

It is very easy to say that it was done "in a materially non-compliant way". More simply, people were lied to. That is what it was. It was mis-selling. I am sorry to say that there has been very little done about mis-selling.

If we are to have a free market, we should adopt the American standard. We have to be aware that free markets fail. The answer often is not intervention but regulation —intelligent regulation. Let us have that. It was a mistake to undermine SERPS. Having lost the one good pension scheme that we had, we have undertaken more expensive ones. I believe that we shall have to spend a lot of time getting back a properly supervised and properly regulated pension scheme in which people will have confidence. To restore confidence in the pensions industry will take a very long time. It will be very costly.

8 p.m.

Lord Meston

My Lords, the first part of the Motion for debate this evening calls attention to the consequences for those who transferred from occupational and other pension schemes. The problem concerns not just those who transferred out of existing schemes—those are people who can be identified —but also those who opted not to join established occupational schemes, who are less easily identified. They will have to be identified as the mess created during the 1980s is cleared up in the course of the 1990s.

It is now clear that the consequences have indeed been serious for a large number of people; just how serious and how many people were affected we shall probably never know precisely. I suggest that there is a heavy onus on the pension companies to try to find out as quickly as possible. It is a truism that existing pension entitlements which were transferred by people in their thousands were hard earned. That looks to the past. For the future, the preservation of the values of accrued pension rights during the 1990s and beyond becomes an all the more important part of everyday life as people live longer and no real job security can be assured.

The activities of those who misadvised and misled people into entering unsuitable pension arrangements with hidden costs have created a large additional measure of anxiety and uncertainty in the lives of those who relied on such people and on their representations. They paid a high price for flexibility and choice, and other slogans which lay behind the move to opt out of schemes to which people already belonged.

The exposure of this disaster—I fear that is not an overstatement of what happened—led to a large amount of finger-pointing and buck-passing. The pension companies and their commission-driven agents must obviously take the main blame and bear the main cost, presumably at the expense of their shareholders and other policyholders. I welcome the remarks of the noble Lord, Lord Jenkin of Roding, in his description of the improvements in the culture of the present pension market. I hope he is right and I hope that the enlightened self-interest of the pension companies will ensure that there is no repetition of this sort of mishap in the future. I cannot help fearing that he may be over optimistic.

The DSS can be blamed for advertising to encourage people to opt out of occupational schemes in favour of private plans. As the noble Lord, Lord Jenkin, observed, the trustees of existing occupational schemes can be blamed for not advising caution. Employers can perhaps also be blamed for not advising caution in a situation in which they stood to save the cost of their contributions to the existing schemes if employees could be encouraged to go elsewhere. Certainly the SIB can be blamed—as it has been—for not acting faster, thus delaying both relief for investors and increasing the final bill for the pension companies.

As matters stand it seems that people also lay blame on administrators of occupational pension schemes—including the Treasury in respect of public-sector schemes—for putting too high a price on allowing reinstatement into their schemes. Finally, as we heard from the noble Earl, Lord Clanwilliam, among others, individuals themselves may be blamed, particularly if they have to fight for the compensation to which they feel entitled, for allowing themselves to be misled. There is an unattractive prospect of pension companies and their agents and independent advisers arguing that they in fact offered no advice, or no advice which could have been expected to be relied upon by the individuals whose business they were seeking.

The second part of the Motion for debate requires attention to remedies and future protection. It seems that there must be two priorities. The first is to ensure that the victims are identified and are then compensated fully and quickly. Like any other victim of somebody else's culpable acts or omissions, those individuals should be restored to the position in which they would have been had they remained where they were. I entirely accept that that exercise may not be easy and that there may be difficulties of computation and projection. But the Government owe a responsibility to provide publicity corresponding to the publicity which enticed people out of existing schemes in the first place. They have a responsibility also to exert pressure in the appropriate quarters so that victims do not have to cross a legal minefield full of arguments which anyone can see could be levelled about disclaimers, limitation periods and the like. It should not be too much to hope or to expect that pension companies, anxious as they properly are to restore confidence, will accept liability and that in the great majority of cases the only discussion will be about quantum and the method of compensation.

It is also to be hoped that in more difficult cases, where those being offered a compensatory sum can justify the need to have a second opinion on the amount being offered or the method of compensation, the pension companies will, where appropriate, pay for independent actuarial advice. I am afraid that that 'regrettably raises the problem behind the old saying that if you put a question to two actuaries, you are likely to obtain three different answers.

The second priority is to ensure that, so far as possible, this does not happen again. The pension companies will surely be looking at their commission structures; that means not only at the way in which commission forms the major part of the agent's remuneration, but also at the way in which commission is higher for some types of product than for others. For example, as I understand, it a lower commission is typically payable for a single premium plan than for an annual premium plan. Obviously that can affect the advice that is given to the individual consumer. In that respect the proposed introduction of a declaration to the consumer of the commission payable to the intermediary or agent is long overdue and we all look forward to the improvements that that will undoubtedly bring about.

I suggest that the Government must take a hard look at the regulatory and statutory framework. I am sure there can be no doubt in anybody's mind that the Financial Services Act would not have left Parliament as it did had the mess now revealed been properly foreseen at the time. The Companies Act 1989 made some changes; but they do not go far enough and there remains a great deal of red tape behind a bewildering array of acronyms.

This is not the time and place to analyse the weaknesses of the present structure with the delegation by the SIB to various SROs. The clear lesson is that the structure involving the SIB providing guidance—and little more than guidance—to SROs, albeit a reduced number of SROs, has not proved adequate. What is now needed is one overall regulator concentrating expertise in a single body and possessing true independence from the financial services industry and from the Treasury; a body willing to defend the consumer and willing to take on the government of the day. If that is not possible in the short term, at the very least the SIB should now be accountable to Parliament and not merely obliged to report as at present. I suggest that the lesson to be learnt is that, unless there are fundamental changes, regrettably something like the disaster described by the noble Lord, Lord Haskel, will happen again.

8.9 p.m.

Lord Peston

My Lords, I congratulate my noble friend Lord Haskel on his clear and cogent introduction to this debate. Perhaps I may also say how much I am looking forward to the speech of the noble Lord, Lord Mackay of Ardbrecknish. Everything he has to say in your Lordships' House is interesting and sometimes it is even convincing. But let me say that I do not remotely regard this topic as being about social security. It is about economics, industry, finance and regulation, which is why I am speaking.

Perhaps I may say a few brief words on the facts. I do not know where the noble Earl, Lord Clanwilliam, got his figure of 500,000 from. The Securities and Investments Board itself has said that nearly 1.5 million people have been wrongly advised in a personal pension plan. Estimates of the compensation bill range from £1 billion to £4 billion. The noble Lord, Lord Jenkin of Roding, used the expression "relatively small proportions". The numbers seem quite large to me. I also have to tell noble Lords that it is always dangerous to discuss matters like this in terms of ratios.

The Earl of Clanwilliam

My Lords, I may be wrong in the figure of 500,000, but the point at issue is that no one is going to know how many have been mis-sold until the industry has sent out its letters and replies have been returned. Any figures that are mentioned in the meantime are pure speculation.

Lord Peston

My Lords, I certainly agree with the noble Earl that we need more convincing figures. But I am not convinced that any figures up to now are pure speculation—most certainly not. The main point I wanted to make about ratios per se is that, if you are one of those who has suffered, the only ratio that interests you is 100 per cent.—namely, you. That is what we ought to be concerned with.

Turning to matters of principle, we all accept, I am certain, the vital importance of the pension decision. Unlike most ordinary purchases, a mistake has long-term consequences, and when those consequences are adverse they are extremely difficult, if not impossible, to rectify. Again following the noble Lord, Lord Jenkin of Roding, of course individual people have to take financial decisions, frequently involving pensions. I readily agree that many are capable of doing so sensibly. I myself have done precisely that, taking advantage of the very generous tax concessions which one gets under a Schedule D form of income. But it is known and well established that quite a lot of otherwise rational people blunder when it comes to financial matters. They are naive, they are trusting and they are excessively optimistic. That is why consumer protection is so important. I hasten to add that by "protection" I do not mean compulsion. In the end, while intervention can help, someone who is intent on financial self-destruction cannot be prevented from doing so. But that is not the point. The real point concerns what kind of protection is required.

The point was made by my noble friend Lord Desai that central to any form of protection is information and, if I may add to that, information that is readily comprehensible. Secondly, there really must be much stronger constraints on the hard sell. No one should be allowed to sign a binding contract in this area without a cooling off period of significant length, but that cooling off period should require at the end a positive decision—namely, it is now my decision to go ahead—rather than the negative decision that people like—namely, if you do not hear from me, let it go ahead. That will not do in this case.

Next—and this, I agree, is an extremely difficult matter —all purchasers should have access to advisers with no financial interest whatever in the sale of the pension. All financial products should carry a financial health warning. That should be in large print and not in print smaller than anything else in the advertising or other relevant documents. In terms of pensions, what we are saying is that, at the very least and in very clear terms, all purchasers should have been informed that, while what they are being offered is hoped, even expected, to give them a net benefit compared with what would otherwise be the case, there is a distinct possibility that it will not. In addition—this again has been raised by my noble friend and by other noble Lords—there should be a proper and easy-to-use procedure for the redress of grievances. That is less to protect the foolish and the greedy and more to protect the trusting. That is what has gone wrong here. Those people who believed in the probity of our financial institutions—notably in the insurance companies, the pension funds and related financial concerns—have been let down and they should never have been let down. That will simply not do.

Who is to blame? Many noble Lords have asked that question. The Government, initially, were seriously at fault. They were partly seriously at fault because of their antipathy to public expenditure and partly because of an ideological commitment to the market, which I increasingly believe they never had the faintest understanding of. My noble friend Lord Desai has made that very clear. They mouthed the words of the free market but they had no idea of what they were talking about. But—I say this to my near namesake, the noble Lord, Lord Meston—it is not the case that when we were discussing legislation on this matter there were no warnings. The dangers that were involved were made very clear, both in connection with these matters and in connection with financial regulation and self-regulation generally.

There is nothing surprising about what has happened. We are unhappy about it but certainly there were warnings. Therefore, the Government cannot possibly be allowed to wash their hands of any or all of this. What has really emerged —here I echo the remarks made by other noble Lords—is the failure of financial self-regulation.

What worries me—this is a broader question than simply to do with pension mis-selling—is that in all sections of the financial services industry the rules are being consistently and comprehensively flouted. The Consumers' Association has published research confirming that. In several different issues of Which? it has published evidence of bad advice and commission bias among the banks and building societies and among mortgage brokers with regard to mortgage advice. They have given bad investment advice to people who have been made redundant. To say the least, the advice given about life insurance has been mixed. I am certain that the article in the September 1994 issue of Which? would be of some interest to the noble Lord, Lord Jenkin of Roding. I can tell him that it is definitely in the Library. Therefore, what we ought to be saying is that the lessons required here are lessons about regulation. I have to say that I no longer believe that self-regulation is remotely viable. We must have statutory regulation, but of a simple kind.

Coming to my final remarks, the real villains of the piece are the sellers of the pensions themselves. We have to decide whether what we have witnessed is simply senior managerial incompetence—a failure both to set standards and to control the lower level staff—or whether it is much more serious still; namely, whether monetary greed was the root cause, the desire to make a quick buck. I should like to believe—although given this choice, it is not much of a choice—that our insurance companies and pension funds are not greedy: they simply did not do the job properly. Perhaps both factors were at work.

Despite all the talk about these matters being difficult to calculate, that it is difficult to get evidence and that actuaries are not helpful, the fact remains that the outcome has been that pensioners have suffered and will continue to suffer unless something is done. Given that, it must also be the case that shareholders and some managements have gained. If those who have suffered are to be compensated—I believe they must be—then those who have gained—the shareholders and managers—must pay. They must bear the cost.

My noble friend Lord Haskel, I assume tongue-in-cheek, suggested that perhaps future buyers of such products would pay with higher premiums. We must distinguish always—economists are very keen to distinguish this—the "will" from the "should". It would not surprise me in the least if those of us who are still buying insurance of various sorts are asked to bear the cost. I think that that may be what various parties will try to make happen. There is not the slightest doubt in my mind, however, that we should not be asked to pay for that. There is no doubt in my mind that the cost must not come from raising insurance premiums. It must come from the shareholders who freely bought the shares, if I may take a free market view, and from the management who freely took those decisions. They must now bear the consequences of their actions.

Finally, because noble Lords will be upset if I do not say this, the Government cannot be allowed to get off the hook. They cannot say that this is a matter for the Securities and Investments Board and the industry. The Government must show some leadership quality and get things done. And in the light of what we have heard today, they must get things done rather quickly.

8.20 p.m.

Lord Mackay of Ardbrecknish

My Lords, as a number of noble Lords have pointed out, choosing a pension is one of the most important financial decisions that most people will ever have to make. I believe that it comes second only to buying a house. I therefore welcome this opportunity to explain what the Government and the regulators are doing to ensure high standards of investor protection and to provide remedies where these standards have not been met.

During the debate, we have heard from noble Lords who have considerable knowledge of the pension industry and involvement in company pensions schemes or in life companies. We have also heard from two economists—we may have heard from more than two, but we have certainly heard from two whom I recognise from our previous debates on financial subjects.

Personal pensions play an important role in the Government's strategy for bringing about a sustained improvement in the general level of income of those who have retired. I doubt whether any noble Lord would disagree with that. The availability of occupational 'pensions and personal pensions widens choice and encourages more people to plan for their retirement and to build a solid base of funded pension provision for the future.

The noble Lord, Lord Haskel, mentioned future problems due to the fact that a smaller working population will be paying for increased provision for a large elderly population. That is precisely why the Government took measures in the mid-1980s to widen choice and to give people more ways in which they could make provision for their retirement.

Before we reformed pension law in the 1980s, employers could require people to join their scheme as a condition of employment. Where no employer's scheme was available, people had no option but to contribute to SERPS. We ended compulsory membership of a particular scheme and gave people the freedom to plan for the pension which best suits their needs, whether it be state or non-state, occupational or personal. As my noble friend Lord Jenkin mentioned, before the reforms, no one who changed jobs had the right to move his or her pension. Now everyone has the option of transferring accrued pension rights. Those who chose not to transfer now see their pensions protected against inflation. People also have the right to make top-up payments either to their employer's scheme or by way of free-standing contributions.

By widening choice in this way, the Government have enabled more people to make appropriate provision for their retirement. This strong foundation of privately funded pensions leaves us well placed to face the challenges of the next century.

It is well worth putting the numbers on the record because several noble Lords have referred to the number of people who are involved in making their own pension provision either through occupational pension schemes or through a personal pension scheme. The latest figures that I have available show that 10.7 million people of working age are in occupational pension schemes and that something like 60 per cent. of them are in the private sector. Furthermore, 3 million people of working age have a preserved pension from a former employer and a further 1.5 million people have a preserved pension from a former employer and are now members of their current employer's scheme. Noble Lords can therefore see that a considerable number of people are involved in occupational pension schemes. In addition, 6.5 million people who are retired right now are receiving at least one occupational pension. Currently, 20 million people have rights in an occupational pension scheme.

People with personal pensions are additional to that number. Since June 1988 we have now reached a situation where 7.8 million people are in personal pension schemes. It is well worth saying that it is thought that about 6 per cent. of that population were opt-outs and that about 13 per cent. were non-joiners of their occupational pension scheme. That comes to slightly less than 20 per cent. of the total number of people who have taken out personal pension schemes.

An effort has been made to quantify the number of people who acted after advice from a personal pensions salesman. It would appear that, on opt-outs, about 4 per cent. of the total took such advice. The number amounts to just over 300,000 if my arithmetic is correct. Of non-joiners, the proportion is 7 per cent., which amounts to just over 500,000 people. Those are the figures with which we are dealing.

People will, of course, be willing to save for retirement if they believe that their pension rights will be secure. That means that they must receive the information that is required to enable them to make an informed choice. The noble Lords who are economists told us that that was an important part of the operation of the free market. I agree. People have to be able to rely on the highest standards of expert advice. They must be able to have confidence that the regulatory framework will protect their interests against the unscrupulous and the incompetent.

The Securities and Investments Board, the chief investments regulator, has taken a series of steps to ensure that investor confidence is maintained. First, it identified the problem; publishing evidence last December that many sales of personal pensions appeared to have fallen short of the required standards. Then it acted to prevent the recurrence of these problems. Now, with the help of expert advice from the life and pensions industry, SIB is ensuring that remedies are provided where necessary. I believe that that is an example of an effective regulatory regime.

The board's recent statement sets out how compensation should be provided for people who have personal pensions instead of being in an occupational pension scheme and who now face financial loss as a result of bad investment advice. As my noble friend Lord Jenkin of Roding rightly pointed out, that does not mean that anyone who changes his or her mind is entitled to compensation. The question is whether bad advice was given. If anyone with a personal pension is found to face financial damage as a result of mis-selling, he or she will be entitled to redress. The aim will be to restore people to a financial position equivalent to that which they would have had if the mis-selling had not taken place.

There is at present no way of knowing the eventual total cost. I am not a clairvoyant and I shall resist the invitations to speculate. We must all wait for the reviews to be completed. It is, however, clear that there will be a substantial call on the financial services industry. Investors can be reassured that the industry as a whole can and will pay. In cases where the firm responsible has ceased trading, that will entail calling on the industry's compensation scheme.

The SIB statement sets out in detail how firms responsible for sales of personal pensions should review their cases; how they can identify mis-selling and damage to investors caused by it; and, where mis-selling leading to financial damage has occurred, how appropriate redress should be provided. The details of the review process and the formula for redress have been drawn up with the assistance of experts in the life and pensions industry and in the legal and actuarial professions. The regulators will now ensure that firms responsible for past pensions business take the necessary 'steps to review their casebooks. The Personal Investment Authority has set up a pensions unit to examine cases sold by firms which are no longer in business. It has also set up a pensions helpline. I advise the noble Lord, Lord Haskel, that its hours of opening are similar to those of our very successful helplines in the Department of Social Security, so I do not think that his criticism was merited.

Many people will be contacted by the firm which sold their pension, or by the pensions unit, and asked for information to help decide whether further investigation is required; SIB is distributing an explanatory leaflet, the Investor's Guide, which will also be available from libraries and citizens advice bureaux.

It will take at least two years to carry out the reviews in an appropriately thorough and systematic way as the interests of both personal pension holders and other policyholders require. The first cases to be reviewed will be those where financial damage caused by mis-selling is most likely and where this could have the most immediate impact. These priority groups include the cases of investors who have died, retired or are close to retirement. However, any personal pension investor who seeks it will have his or her case reviewed whether or not he or she is in a priority group.

These reviews will no doubt show that many people who transferred to or opted for a personal pension were given good advice. Where redress is required, its form will depend on the circumstances of the investor. Where possible, it will often be desirable to reinstate people in their occupational schemes. If this cannot he done, the personal pension will usually be topped up.

The action announced by SIB relates to people who bought personal pensions in preference to an occupational scheme. There are many others who would otherwise have been contributing to the State Earnings Related Pension Scheme (SERPS). SIB is also investigating, with the help of DSS, whether there has been mis-selling to people in this position. SIB intends to publish its findings in this further review next year. If a problem is revealed, SIB will prescribe appropriate remedies.

The Government are also taking action to make sure that the arrangements for redress are brought into effect as efficiently as possible. The public service pension schemes, such as those for teachers and nurses, are allowing current employees not only to rejoin for future service but also to have their pension rights for previous service restored at reasonable cost. I very much hope that occupational schemes in the private sector will adopt the same approach.

The Government have also clarified the tax treatment of compensation payments. All the remedies are designed to put the investor in an equivalent financial position to that which would have been the case if the mis-selling had not occurred. The Chancellor intends to introduce legislation in due course to ensure that an investor in that position will have the same tax bill as if there had been no compensation payment for mis-selling.

Some noble Lords have suggested that, as the Government were responsible for the introduction of personal pensions, the taxpayer should provide compensation. There is no case for this. The concerns that have been identified—

Lord Peston

My Lords, I do not think anybody said that today, did they? I may have missed it, but I do not think that any of us suggested that the taxpayer should bear this cost. I am sorry to have interrupted the noble Lord.

Lord Mackay of Ardbrecknish

My Lords, perhaps I was rather taking that out of what one or two noble Lords had said: that the Government were responsible and ought to take the blame. I was rather going ahead of myself there, and deducing that that probably meant that the Government should pay compensation. If I jumped to a wrong conclusion, as has been indicated to me, by the shake of his head, by the noble Lord, Lord Desai, then I happily withdraw that suggestion.

Lord Desai

My Lords, perhaps I meant that they should have resigned sooner, but that is all.

Lord Mackay of Ardbrecknish

My Lords, that is nothing new. The noble Lord thinks that the Government should resign every day, and I have no doubt that he will go on for a good many years thinking that the Government should resign. However, perhaps I may say that in 1988 when we launched personal pensions, the main booklet for employees did carry a very clear "health warning", if you like—good company pension schemes may well remain the best choice for most people entitled to join them. My noble friend Lord Clanwilliam made that very point, that some people must have been very foolish to think they could get a better buy by taking themselves out of an occupational pension scheme where their employer contributed a significant amount of money to their retirement package.

Having said that, however, there is no doubt that personal pensions remain a flexible and entirely suitable way of saving to provide a secure income in retirement for a great many people. They can make it possible to maintain a mobile and varied career with a good pension, and also of course those jobs and careers where there is not an occupational pension. These advantages will no doubt ensure that personal pensions will continue to appeal to many people. I have no doubt that they will continue to have a significant role to play in future pension provision.

However, for people to choose personal pensions with confidence, they must be able to rely on high standards of professionalism on the part of those responsible for selling them. They must be able to trust advisers and sales staff to recommend suitable products. That is why SIB defined new and tougher standards for future sales of personal pensions. Everyone who has mentioned it, I think welcomes and approves of things like full commission disclosure. As a result of SIB's new standards, investors choosing between occupational and personal pensions now get a "reason why" letter to explain each personal pension sale, backed by sophisticated analysis of their own personal circumstances.

The regulators are following this up with more intensive supervision of sales. The Department of Social Security has also issued guidance to employers about the advice they may give to any of their employees considering a personal pension. These new standards are backed up by more demanding training and competence requirements. Financial services firms are already implementing the new standards. So people making decisions about whether to buy a personal pension instead of belonging to an occupational scheme can have confidence in the quality of the advice they get.

My noble friend Lord Clanwilliam asked me about the SIB's approach to the independent financial advisors, and how many, if any, of them would be driven out of the industry. We recognise the value of independent financial advice in providing customers with additional information and extending choice. Of course we regret any failures among independent financial advisors. However, where they have failed to meet regulatory standards they must accept responsibility for providing a remedy, and, unless investors know that this will happen, they will not have confidence in that sector, or possibly in the industry as a whole.

The noble Lord, Lord Haskel, seemed to feel, as perhaps did the noble Lord, Lord Peston, as well, that there was need for more statutory regulation. However, we believe that we already have regulation enough within the statutory framework and we do not believe that the costs and disruption of a major change to the system would in fact be justified. Both noble Lords suggested that policyholders should not be expected to meet the bill for mis-sold pensions. It will of course be some time before individual companies can assess their exposure and decide how it should be funded. As the prudential regulator, the DTI has written to all life companies setting out the general principles which should be followed when making this decision. Firms with shareholders should consider whether their funds should meet some or all of the cost, while with-profit offices which have sufficient free reserves will be expected to use these funds rather than cutting current policyholders' bonuses. The overall effect will be that policyholders' interests should be protected as far as possible. All policyholders of course do have an interest in knowing that, when investors lose as a result of a firm's failure to comply with the rules, they will receive redress. With-profits policyholders will also benefit from seeing that their company maintains its reputation, restores consumer confidence and so attracts new business.

The noble Lord, Lord Desai, took us down the SERPS trail, if I may call it that, and indicated that perhaps people ought not to have been encouraged to move into private pension provision there. Perhaps I can say to him that, of the 5 million people who have taken out a personal pension in place of SERPS, more than 40 per cent. are making contributions on top of those received from the Department of Social Security to boost their income in retirement: that is new money being invested to provide extra security in old age and money that could not have been paid into SERPs. So I do not think the argument on that score is entirely one-sided.

The noble Lord, Lord Peston, suggested to me that all financial products should carry risk warnings. Could I say to him that the new disclosure regime involves a "key facts" page, which includes risk warnings and this document has been market tested on consumers to ensure that we, the consumers, can easily understand it. So I hope that the noble Lord will consider that to be a step forward.

Again, a number of noble Lords "dipped their toe" into the question of occupational pensions, and of course that is going to be the subject of many happy hours of debate, as I described them earlier today, when we come to consider the pensions Bill which will shortly appear. I will say more when we come to that, I have no doubt. Of course we have to tackle that problem—a problem coming from the erosion of confidence caused by Mr. Robert Maxwell. I understand fully the difficulties that the Maxwell pensioners have had, just as I understood some of the difficulties some of my friends had when huge writs were served on them by Mr. Maxwell to try to get them to keep their mouths shut when they dared to criticise someone whom, I regret to say, far too many people considered for many years to be a great man.

Perhaps I may conclude by saying that the regulators' central aim has been to devise a mechanism which ensures that where harm has been done it will be put right. They have sought to do that reasonably and fairly, working with the industry to secure a just outcome as quickly as possible, while minimising administrative costs. Although their approach has been criticised from various, and sometimes contradictory, directions, as is the way with such things, the Government believe that the SIB has acted with commendable thoroughness and independence.

I have no hesitation in concluding that the system of regulation in which the SIB takes the prime role, and which benefits from major practitioner input, is sound, and working effectively to protect investors. The reforms instituted by the SIB review last year are beginning to bear fruit. The financial services industry plays an important and growing role in a sophisticated modern economy such as ours. Increasing affluence means that people will more often have resources available for investment and will want to invest. They must be able to invest with confidence. A clean, well-regulated market is in the interest of consumers and financial services firms alike.

8.41 p.m.

Lord Haskel

My Lords, the hour is much later than we expected and so I shall not detain your Lordships for long. We have had a debate which covered several Government departments: investment and savings; finance and regulations; the benefits system. Noble Lords have spoken on all those aspects, and I thank them for their participation. All noble Lords have shown a concern for the consumer, and many have spoken of the need for better regulation.

The noble Lord, Lord Jenkin, spoke of the need to speed up the review which is in progress, and I heartily agree with that. The noble Earl, Lord Clanwilliam, spoke of the need for caveat emptor, and I repeat the response given to him by my noble friend Lord Desai: in today's world, the seller is responsible for the suitability of the goods that he is selling.

I agree with the noble Lord, Lord Meston, about the importance of pensions at a time of job uncertainty. I thank my noble friend Lord Peston for speaking about the need for proper regulation. I agree with him entirely. I was pleased when the Minister told us that he recognises the need for proper regulation, but we shall obviously not agree about how that will be achieved. On this side of the House we are agreed that it will be achieved only if the regulator is not dependent upon those people in the industry who pay to keep him going. What we heard from the Minister about consumers' interest was partly, satisfactory, but we are all agreed that it is necessary for the consumer to be protected adequately, because otherwise the confidence in our financial institutions, which we all agree is important, will not be restored. Unless that is restored, we are all losers.

We shall have another opportunity to debate these matters when the pensions Bill, as promised in the gracious Speech, is before us. In view of that, I beg leave to withdraw my Motion for Papers.

Motion for Papers, by leave, withdrawn.