§ 4.30 p.m.
§ Lord McIntosh of Haringey
My Lords, with the leave of the House, I should like to repeat a Statement made in another place by my right honourable friend the Economic Secretary. The Statement is as follows:
"With permission, Madam Speaker, I would like to make a further Statement on the mis-selling of personal pensions.
"On 9th July I reported to the House on the progress being made by individual firms with most cases to put right in what is possibly the most extensive scandal ever seen in our financial services industry. Each month subsequently I have published the latest facts available to me. Today I have placed in the Library further information about the progress being made.
"We are now seeing positive results from the pressure applied since this Government were elected. In May only 2 per cent. of cases had been compensated. Now there has been a sevenfold increase in the number of people receiving 482 compensation—proof that in the cold glare of publicity firms can raise their game and make progress. However, more could and should be done.
"Before I go into more detail, it might assist the House if I recall the events which led to this scandal. The Social Security Act of 1986—a much-vaunted piece of legislation by the previous government—encouraged millions of people to change sound pension arrangements for something different in the belief that they would be more secure in later life. Some will be. Not all, however. For some, the change meant a future less secure, not more so.
"Between 1988 and 1994, life insurance companies, independent financial advisers, banks and building societies, through vigorous marketing, sold over 5 million personal pensions. It soon became clear that this meant disaster for many, including hundreds of thousands in nursing, teaching and other professions who had been persuaded against their best interests to abandon the safety of their occupational schemes.
"The truth is that many firms did not abide by the regulatory rules then in force requiring them to give suitable advice. Among those firms failing their customers were many household names.
"The Securities and Investments Board in 1994 took the unprecedented step of requiring firms to review the cases of those most likely to have suffered. The scale of the problem can now been seen: some 600,000 cases are currently being reviewed and on current indications the cost of compensation will be at least £2 billion.
"Deadlines were set for completing the most urgent reviews. These were well missed. The previous government stood by and let this happen.
"On 14th May this year I met heads of 24 firms responsible for about three-quarters of the total of the cases; I left them in no doubt about our determination to ensure those wasted years would be redeemed.
"Most of the big firms are making headway; indeed, some of them have made large strides. But far too many firms—from large insurance companies to small independent advisers—have been far too slow to act. Some have hardly started. They have failed to grasp the severity of the situation.
"The experience of the past few months shows that pressure—from the Government, the regulators and the public—is working. I intend to maintain it until the review is completed. In May the regulators set hard but realistic new targets for all the firms concerned and made it clear that there would be robust disciplinary action.
"For most firms the first of these targets is to complete 90 per cent. of the most urgent cases by the end of next month. Beyond that, they must complete all their priority reviews by the end of next year—at the very latest. When they reach that target, I shall remove their names from the list which I publish each month, although they must continue to update me on their progress.
483 "The recent reprimands and fines against firms such as the Prudential, Friends Provident and DBS have attracted wide publicity. This disciplinary rigour will continue. But the Government and the regulators recognise that in respect of some companies at least these sanctions may not be enough; they are not galvanising the laggards. For them, a stronger armoury of sanctions is required. The Personal Investment Authority is working to achieve this through individual registration, and the new regime will come into force as soon as possible next year.
"Once this regime is in place, sanctions can be fine-tuned to apply pressure directly on those responsible. Individual directors, managers or salespeople found to be at fault will face the prospect of fines, public reprimands or restrictions upon the type of work in which they may be involved. In extreme cases, they could be expelled from the industry.
"The public has a right to know about these failures. At present, the PIA has the power to require firms to advertise their misconduct and the grounds on which they have been disciplined. Until now, this power has been kept in reserve. There is now every reason to use it to the full. The PIA is currently examining ways to ensure that customers are informed directly of a firm's failings.
"The Government believe the time has come for a tougher range of sanctions to come into place. The only way for a firm or an individual to avoid disciplinary action is to avoid the conduct which warrants it.
"While putting right the wrongs of pensions mis-selling has been the priority, the Government have not lost sight of the fact that the financial services industry is central to our economic prosperity and to the welfare of millions of people. However, its prosperity requires the confidence of the public. That is why the industry must act quickly to restore that confidence. If there is continuing evidence that some firms will not learn the lesson of the past few years and continue to harm investors, then we will act to clean up the industry. To this end, the PIA has the authority to intervene on behalf of the public and require that a firm ceases to market or sell some or all of its investment products for a period and puts its house in order.
"Firms whose compliance with the regulators' requirements is so poor that investors are put at risk can effectively be put out of business. The PIA will use this power wherever warranted. Candidates for this action will include any independent financial adviser or any other firm found to be using the review process as a foot in the door to sell more products.
"The regulators and the Government also have powers to protect the public by taking action to exclude senior people who are not fit and proper from involvement in financial services business. Those who are not fit and proper can be removed from their posts. We will see to it that they are removed.
484 "In the years ahead the Government plan a number of major pieces of legislation which will have a profound impact on the financial services environment. Lessons learned from the pensions mis-selling episode will be in all our minds as we go about that task—in relation to stakeholder pensions, in relation to individual savings accounts and indeed as we reform the regulatory regime itself.
"So far as pensions policy is concerned, we will not repeat the mistakes of the previous government. We will not set people up for a fleecing. We anticipate that future decisions on the regulatory approval of stakeholder pension schemes would take into account the conduct and corporate governance of those involved. This would include, of course, their record in settling cases of mis-sold personal pensions.
"I hope that by the combination of measures which I have outlined to the House today we can ensure that never again will the public be exposed to such a scandal as that which I have described today and that those who have suffered can now look to speedy redress. Justice for them has been too long delayed; this Government are determined to ensure it is delivered."
My Lords, that concludes the Statement.
§ 4.38 p.m.
§ Lord Mackay of Ardbrecknish
My Lords, I thank the noble Lord for repeating the Statement made by the Economic Secretary in another place. May I start by saying that there is nothing between us on the need for the pensions industry to right the wrongs of the pensions mis-selling. Indeed, the Economic Secretary's predecessor, Mrs. Angela Knight, made it clear to the industry that it had to put these matters to rights. However, I wonder whether the noble Lord would accept that pensions matters inevitably take a little time to be put right.
I remind the noble Lord of the time it took my noble friend Lord Cuckney to put matters right regarding the Maxwell pension fund. And that was not just mis-selling: it was pure robbery. Putting that right took a considerable time and a great deal of effort on the part of my noble friend and his colleagues. Equally, as a Minister of State in the Department of Social Security it took myself, my colleagues, our officials and indeed Members of your Lordships' House many hours—indeed months—to bring in the Pensions Act and the protection for pensioners we all judged necessary as a result of the Maxwell scandal. So the Economic Secretary to the Treasury ought to think about these examples when discussing the time it takes to put pension matters right. Nobody knows more about Robert Maxwell than she, as a one-time adviser to him, does. I would suggest that perhaps she might remember the old adage that people who live in glass houses should not throw stones.
I note in the Statement that something like 600,000 out of 5 million pensions sold are under question. The Minister seems to dissent. But that is what the Statement says: that 600,000 cases were to be investigated. Not all of them may result in a decision that they were mis-sold. 485 But we understand that the cost is likely to be £2 billion. That is something that the pensions industry should attend to as quickly as it possibly can; and that, as the Minister said, includes some household names, including some household names which the Government have decided to look to in order to help them with issues such as the Welfare to Work scheme. I hope that the companies whose top people are giving help to the Government on other matters will not find themselves sheltered from the strictures of the Economic Secretary.
The Minister pointed out that for most firms the first of these targets set by the Economic Secretary earlier in the year is to complete 90 per cent. of the most urgent cases by the end of next month; that is, by the end of December. Do I take it that we shall have another Statement in January to report progress on meeting that target of 90 per cent. completed by the end of December? It seems to me that we should have been better to wait until that important target date had passed before we had today's Statement. That leads me to believe that something of a diversionary tactic is being undertaken here to take our minds away from the scandal of Formula One and tobacco sponsorship.
I return to the 600,000 mentioned in the Statement. How many are likely to opt back into SERPS? Have the Government any estimate of that? How much is that likely to cost SERPS in the longer term? Still on the question of SERPS, how many are likely to opt back in from perfectly good schemes which have been damaged severely by the Chancellor's pension tax? When thinking about the £2 billion that we are discussing in relation to pensions mis-selling, is it not remarkable that the Chancellor's pension tax will take £5 billion every year from pension funds up and down the country, including, for example, county council pension funds which must find £3.7 million per year from council taxpayers in order to undo the damage done by the Chancellor's pension tax? Perhaps I may even tempt the Minister to name and shame the Chancellor for his pension hit.
I notice that, the Statement having been very strong, the Government realised, by doing a little bit of simple arithmetic, that on their calculation £4.4 billion of the pensions were not mis-sold. There are many people who, if it had not been for the 1986 Act, would not have any provision at all. Indeed, as far as I understand it, the Government intend to build on private pension provision in various ways in order to encourage even more people to take out pension provision.
Therefore, I conclude by saying that I agree with the Government in their Statement that the financial services industry is central to our economic prosperity and to the welfare of millions of our people. I suggest to the Government that perhaps a little moderation in their tone sometimes might be called for if they wish to encourage that industry and encourage the people who are currently without pensions and who will need the assistance of the financial services industry in the future if they are to have the pensions that they need and deserve.
§ Lord Ezra
My Lords, I too thank the noble Lord for repeating the Statement on the pensions mis-selling 486 problem. I make it quite clear that on this side of the House, we fully support the prompt action which the Government are taking. We hope that it will yield positive results.
There is a reference in the Statement to priority and the most urgent of the 600,000 cases. What do those represent and what will happen to the remaining cases? The Government are apparently going to take firms off the list once they have dealt with the priority and urgent cases. But will those firms be examined in relation to their dealings as regards the remaining cases?
Dealing with this particular problem is only one part of the issue, as the noble Lord repeated in the Statement. It is essential that no further scandal of this sort should occur in the future. The Government have indicated that they intend to take major measures to deal with that, which we shall no doubt debate in due course. But is the noble Lord aware that at present, there is vigorous selling of what are described as draw-down schemes which are phased retirement plans offered to those who are likely to retire in the near future? Is he aware that it has been stated that those draw-down schemes are more risky than annuities and are not for people who need maximum income from their pension funds?
It seems to me that this whole area of pensions selling raises many questions and that while one issue is being dealt with, the skill and innovative experience of those selling the pensions means that another scheme is devised which may theoretically be perfectly proper but nevertheless can lead people into making the wrong decisions. How is that ever-changing approach to pensions to be dealt with so that those who are investing in those schemes can he assured that they receive the right advice and are not misled by over-enthusiastic salesmen?
§ Lord McIntosh of Haringey
My Lords, I am grateful to both noble Lords for recognising the need for prompt and effective action to deal with the scandal of pensions mis-selling. I believe that the noble Lord, Lord Ezra, goes further than the noble Lord, Lord Mackay of Ardbrecknish, meant to go or, indeed, did go in welcoming such prompt action. The noble Lord, Lord Mackay, was more concerned to defend the record of the previous government than he was to analyse the options open to us to improve the situation in relation to mis-selling.
Of course the noble Lord is right that the Economic Secretary's predecessor, Angela Knight, recognised the need for action. But as the Statement makes clear, since only 2 per cent. of cases had been compensated by 14th May, which was soon after we took office, it cannot be said that the action taken was exceptionally effective.
The noble Lord is quite right to say also that pensions matters take time. But the test of that and the test of whether effective action is indeed being taken is to be seen in the difference between those firms which have taken effective action and have clearly been dealing with the problem and those which have certainly not taken effective action and still find themselves at the tail end, being named month after month by the Economic Secretary to the Treasury in the lists which she places 487 in the Libraries of both Houses. The noble Lord wishes to revert to the fraud and theft carried out by Maxwell and he is fully entitled to do so. But he must recognise that the scale of what we are describing now is perhaps 20 times greater than that for which Robert Maxwell was responsible.
The noble Lord, Lord Mackay, referred to the figure of 600,000 in the Statement. As the Statement makes clear, that figure is the number of cases currently being investigated. There are more cases coming forward—probably up to 1.5 million cases in the end—which are of lower priority where the threat to people's pensions is less urgently seen because the time scale is further away but he is certainly not entitled to draw the conclusion that 4,400,000 pension schemes were properly sold.
The noble Lord raised the question of whether there will be another Statement in January. There will certainly be another monthly statement of defaulting firms in January. Whether there is a Statement to the House is a matter which has not yet been decided. The noble Lord questioned the need for this Statement. When we are making progress towards the additional sanctions in particular as regards individual registration and sanctions against individual managers and directors, it is only right that Parliament and the pensions industry should know about that at the earliest possible opportunity.
The noble Lord will have observed also that there was the statement on 28th October last at which the Financial Services Authority was introduced. He will know that at that time, before and subsequently, our determination to reform the structure of financial regulation has been made very clear. That is extremely relevant to the other issue which was raised; namely, whether there will be comparable failings in the pensions industry in the future.
The noble Lord asked me how many will opt back into SERPS. I do not know, and I do not think that those whose cases are being investigated know that at the present time. Of course the noble Lord is right that if a significant number opt back, that will affect the cost of SERPS, but it may do so in "netting out" against stakeholder pensions or against other pension provision which it is the intention of the Government to introduce in the coming years.
The noble Lord made his usual reference to advanced corporation tax. I expected that; indeed I would have been disappointed had he not done so. It is noticeable that the good schemes which are taking effective action to deal with mis-selling of pensions have shown no signs of being deterred from taking that action by the decisions which the Chancellor took in the Budget. It is the anomaly between the good schemes and the bad schemes which shows the degree of mis-selling.
The noble Lord, Lord Ezra, referred to the 600,000 cases. I can confirm that as they are the ones currently being investigated they are the most urgent cases. The noble Lord asked me whether we can be sure that there will be no further scandal. We cannot be sure of that but we are taking action through the establishment of the 488 Financial Services Authority, through the Bank of England Bill which will transfer financial regulatory powers from the Bank of England to the FSA, and through subsequent legislation to ensure that we have a more effective and more powerful regulatory authority in the financial services industry. I am grateful to the noble Lord for what he said about sales skills in the pensions industry and the drawdown schemes which are starting to emerge. Of course the regulators will have to be vigilant to ensure that sales of this kind are properly assessed, and to ensure that there is no comparable mis-selling.
There is a specific argument for drawdown schemes. I do not think it is fair to say that they are always inappropriate. They can be taken up by those who retire when annuity rates are low. They can be appropriate. but like all complicated schemes people who are considering taking advantage of them should take independent advice before committing themselves. However, as regards the Government, it is the continued forceful pressure on mis-selling of pensions and the continued pressure for an improved regulatory regime which is at the core of our response to this scandal.
§ 4.55 p.m.
§ Lord Dean of Harptree
My Lords, while I recognise that tough measures are amply justified in dealing with this blot on what is otherwise an industry with a good record, will the noble Lord assure us that the Government recognise the vital importance of encouraging all forms of legitimate saving for retirement, and that there will be no further Budget raids on the resources of occupational pension schemes?
§ Lord McIntosh of Haringey
My Lords. I have no difficulty in confirming the importance which the Government attach to all forms of saving for pensions, whether public or private. However, I shall not commit myself to future Budget provisions.
§ Lord Taylor of Gryfe
My Lords, first I declare an interest as a former director of an insurance company. I fully support what is being done by the Government. I am not so sure that I fully support the threatening, aggressive language of the Statement. This is a complex issue. We are talking about examining hundreds of thousands of policies to make sure that they come within the categories that have been cleared. I support the scheme completely. I was a director of Friends Provident. Friends Provident was formed by Quakers in order to give people a fair deal. Friends Provident is jealous of its reputation but it came under the hammer and was fined substantially under the provisions which are legitimately imposed. Is there an adequate appeal procedure against the substantial sums that are being lodged against insurance companies bearing in mind the complications of giving fair treatment and obtaining acceptance and co-operation from the industry rather than simply threatening it with deadlines?
§ Lord McIntosh of Haringey
My Lords, I have no natural tendency to aggressive language. In ideal circumstances I would agree with my noble friend that 489 aggressive and threatening language is not appropriate. However, I must say that a certain amount of aggressive and threatening language from Government Ministers appears to have been necessary and appears to have had some effect. In those circumstances I suggest that the remedy is justified and that our natural tendency—which is universal in this House—to be gentle not just with each other but also with the outside world, perhaps could be put on one side.
My noble friend also asked me about Friends Provident and whether there is any appeal procedure against the fines imposed by the Personal Investment Authority. As my noble friend recognises, Friends Provident was fined £450,000 and it has not appealed against that fine. Of course in their regulatory activities the regulators are working within the civil law—they are working within the context of contract law—and if any pension company thought that there was severe injustice in the fines being imposed, there is no doubt that company would have a remedy because there has to be due process of law. However, it is significant that not only has Friends Provident not appealed but none of those firms which have been fined has appealed.
§ The Earl of Onslow
My Lords, I hope that the noble Lord can help me a little. If there is a bigger take up of SERPS, has he any figures to show what the unfunded pension liability would be in the year 2010 and beyond because that has a great bearing on what happens to European monetary union? The German pension, as we all know, is totally unfunded—and the liability is enormous beyond the year 2010—as is the French and the Italian pension. Up until now we in this country have had a nice balanced funded and unfunded pension liability. That is my first question.
My second question is: In the early '80s we made it illegal to have fixed commission rates for salesmen. Would it not be better to go back to a fixed tariff of pension salesmen's commissions so that there would be no necessary advantage in selling one form of pension over another because the commission to the salesman or to the broker would therefore be higher for pension A rather than pension B?
§ Lord McIntosh of Haringey
My Lords, the noble Earl raises two important and interesting questions to which I should love to respond at length. As regards his first question on SERPS, I suspect that is a little remote from the mis-selling of personal pensions. I suspect that whatever the actuarial calculation might be, it ought to be seen in the context of the whole range of pension provision which I think the noble Earl recognises as being necessary if we are going to secure not just our old age but that of our descendants in the next century. In order to get the total picture what we fund through SERPS has to be set against what we do not fund through, for example, non-contributory pension schemes in the public sector. I am sorry but I have forgotten the noble Earl's second question.
§ Lord McIntosh of Haringey
My Lords, I suspect that that is a counsel of perfection. I suspect that had it been possible to have fixed commissions, someone would have found a way of doing it. The difficulty with commissions relates not just to the total amount of commission but the proportion of the commission which is charged against the proposal in the first year of its life.
§ Lord Stewartby
My Lords, does the noble Lord accept that one of the problems which has caused much of the delay, even in the case of those firms which have made a serious effort to put things right, has been that a high degree of precision has been required in reaching terms for settlement? Although a high degree of precision is, in itself, desirable, it is a factor which has led to the dragging out of a number of cases further than we would have hoped. Having said that, does the noble Lord accept that the companies in this market place which have made the best progress have been those where the importance and urgency of the need to put things right has been recognised at the highest level—at the level of the chairman, the chief executive, the board of directors and senior management? Will he tell us whether it is his view, and that of his honourable friend, that the top levels of those firms which have been rather more laggardly in the process have now got the message that it is a matter to which they have to give high priority within their own businesses?
§ Lord McIntosh of Haringey
My Lords, those, too, are interesting questions. I rather agree with the noble Lord that those firms which have been successful in dealing with the problem of the mis-selling of pensions have been successful because they recognise the problem at a high level. If the problem had been recognised at a high level when the pensions were being mis-sold in the first place, we might not have the same kind of problem that we now have. It is the PIA's move towards individual registration which will penalise those senior managers in the laggardly firms who have not been taken the action necessary to deal with the problem promptly. It is for that reason that individual registration and penalties are necessary.
The noble Lord's first question related to over-precision in dealing with these cases. I am not sure that that is the case. A considerable number of cases are now being resolved by the firms conceding compliance and causation, and accepting that they have a responsibility to restore the situation without going into too much detail in the individual case. Again, I rather think that as clearer patterns of mis-selling emerge, the need for greater precision will diminish.