Staying the course

Delays in implementation, rising costs, means-testing, levelling down. With so many of the contentious issues of the Government’s pensions reforms rising to the surface again, what does Angela Eagle, minister for pensions and the ageing society think has happened to that hard-won consensus?

“Since the legislation has been passed there has been a fallow period where people have been reverting back to their own particular issues that they had to compromise on to come to the compromise in the first place,” says Eagle. “People have begun to pick them up again and there has been a lack of coverage and appreciation of the overall picture. The more that happens, the more that creates a circumstance where people think that the consensus isn’t worth having, the more we put the entire proposals in peril.”

Keen to bolster that wilting consensus, Eagle is looking to remind stakeholders why they agreed to the auto-enrolment and personal accounts project in the first place.

“Some people who are getting back on their particular hobby horses need to focus on the bigger picture again and realise why we’re doing this. And that is because we have got a market failure for medium and low earners in the private sector who are unable to take advantage of reasonable low-cost pension saving, who are facing, if we don’t deliver this consensus and don’t deliver these reforms, an old age that is not going to be very comfortable,” she says.

“If they were to fail, and I’m not saying it’s likely, but if they were to fail or to be abandoned the problems that were addressed in the Turner commission will not go away. We will have just wasted 10 years,” she says.

So with Conservative pensions shadow Nigel Waterson calling on the Government to hold back from signing contracts with suppliers until after the election, how much consensus does Eagle think remains?

“The consensus was put together after a great deal of work, not only intellectual, but compromise on all sides and I expect that it will go ahead despite some of the pre-election noise that is being made,” says Eagle. “Some of that is the traditional manoeuvring that you get around an election. I don’t know what is going on inside Nigel Waterson’s head, you’ll have to ask him, but I am proceeding on the basis that it is full steam ahead,” she says.

Eagle describes the current phase of pension reform as going some way to equalising the disparity between public and private sector pension provision.

“It is important for levelling up the difference between public sector pension provision, which 85 per cent of people in the workplace enjoy and that in the private sector where only 30 per cent of people are guaranteed an employer contribution,” she says.

“So it is a key market failure at the moment that we do not have a good low-cost second-tier provision option in the private sector.”
As last month saw the withdrawal of another company from the tender process for personal accounts, has the Conservatives’ apparent coolness on the project made life more difficult for Pada?

“I do not think this is the case. Pada would have been expecting to get down to two tenders by or around now,” she says.

In hindsight, in light of the way the consensus has been at least percieved to have been damaged in the last couple of months would it have been helpful if the Conservatives had been forewarned about the 36 month roll-out for micro employers?

“This is an operational issue. The key thing about the rollout is that the 18 months that was mentioned during the process of getting the legislation through Parliament was a best guess without looking at any of the details. When you hear operational people in Pada, many of whom have got very good records of operational delivery in other areas, come to you and say we are dealing with 10 million people and one million employers and our best estimates are that we can do this safely in 36 months rather than 18 months, you listen to them.

“What you don’t want is a system where you are working to deadlines that are unrealistic which is bound to fail. In terms of Nigel knowing anything about it there is nothing unusual about this. It wasn’t an announcement, it was consulting on what we think is the best way of delivering this with secondary legislation. This is consultation and if Nigel or (Lib Dem pensions shadow) Steve Webb have views on this I would want to hear them,” says Eagle.

And what is the DWP doing to address the charges that the complexity involved in becoming an exempt scheme could lead to mass leveling down?

“We are consulting very closely on all this complex secondary legislation. I want to be as flexible as it is possible to be but still be able to deliver a robust process. I hope people will realise from the response to the first batch of regulations that people realise we are listening,” she says.

“But we also have to recognise there are over 1 million employers who do not offer any workplace contribution at all, so a shift from where we are now to a post-implementation world is bound to impact.

As implementation approaches, those voices warning of the problems caused by means testing are becoming increasingly loud. So does she think the DWP’s earlier research into the issue that concluded 95 per cent of personal account savers would be no worse off by staying in compared to 5 per cent who will not, the methodology of which has been questioned by some, has silenced that particular debate?

“We have done the best modelling we can and that has come up with this 95/5 per cent figure. I don’t think that is a bad ratio. 70 per cent of the people in the scheme will end up getting out twice what they put in. That is a pretty good deal,” she says.

And is Eagle convinced that the tabloids will tell their readers that they should not opt out after being auto-enrolled?

“It would be nice if they would. I hope so because I think it is in everybody’s interest for this to work. When the Turner commission first met and when the proposals were finally released, the White Paper and then on to the legislation, there was a good debate around whether this was the right way forward.”

The Conservatives have been talking about the attractions of offering savers early access to some of the money in their personal account. Eagle thinks that such a move would amount to a massive gamble on an as yet untested product.

“Some people who are getting back on their particular hobby horses need to focus on the bigger picture again and realise why we’re doing this. And that is because we have got a market failure for medium and low earners in the private sector who are unable to take advantage of reasonable low-cost pension saving”

“If it went wrong it would completely blow the entire reform because nobody would trust any of the products that were being automatically enrolled into and then we would have mass opt outs,” says Eagle.

Eagle adds that the DWP has no plans to level the playing field between trust- and contract-based pensions in terms of refund of employee contributions and is yet to be convinced the issue is a problem.

“Setting up a trust-based scheme isn’t exactly a walk in the park. There is a great deal of other regulation that you have to put into effect and the thing people talk to me about with trust-based schemes is how we can actually make them less highly regulated rather than more. It is swings and roundabouts. I am happy to look at evidence people have got that some scheme they are in competition with is at some advantage, but I haven’t seen any evidence that either side is at a disadvantage to the other,” she says.

And what of talk of launching master-trust plans that can sidestep the RDR on commission?

“We would always keep an eye on developments in the market and if that demonstrated there was some unfair advantage going on then we will take that very seriously. But I have yet to be convinced that there is. If there is evidence out there, then get it into me,” says Eagle.

“Markets are dynamic, and with the arrival of personal accounts there will be some shift in and around the market and we will keep our eyes open for that. But we don’t think at the moment that there is any evidence to demonstrate that we should deal with the vesting point and the differences between 30-day cooling off periods in contract-based schemes and the two-year period in trust-based schemes.”

Despite the potential for regulatory arbitrage, Eagle does not think that there should be a single regulator and set of rules across trust- and contract-based schemes.

“We only had the Thornton review look at this issue in 2007, and all the major players in the industry, the CBI ABI and NAPF basically said we think the cost of creating a regulator would outweigh the benefits,” she says.

With some in the industry questioning whether the government will be happy to continue to effectively give away extra tax relief for pensions through salary sacrifice arrangements, she does not indicate any prospect of a change of policy in this area. “In terms of the announcements we have made, there has been no change,” she says.

When it comes to changes in the annuitisation process, Eagle seems more open to change than any of her predecessors, issuing a warning to providers that give loyal or apathetic customers poor rates that she will take action if better outcomes are not achieved by more people.

“As with a lot of these things, if you buy it from a house provider you might not get the best deal, let me put it that way. Those that are providing bad deals for annuities for existing members at the moment need to be aware that that sort of structure can’t continue,” she says.

“I would want every individual to know that they should shop around. If there was ongoing evidence that people aren’t doing that, and they are getting worse results as a consequence, then I would want to look to see whether we could change the structure to ensure that the default mechanism was a better deal.

She also believes more work needs to be done to ensure that the buying of annuities happens in the most efficient way.

“We are not there yet. It is taking far too long for money to be released from pension funds. The ABI is working closely with us to shorten the unacceptably long waiting times and there has been good progress in that we’ve gone down from 30 days to close to 11 days, but I would like to see a lot more of this made electronic and easy so we are not having unacceptable delays before monies are released,” says Eagle.

As to an actual commitment to a change of policy in this area if empowering consumers with more information does not work, a strategy some would argue has been tried and has not succeeded, Eagle is cryptic, but does offer encouragement to those campaigning for big changes. “We are looking at the evidence, we are seeing whether what we are doing with open market operations is going to have an effect and if it doesn’t have an effect then the next approach is more obvious, isn’t it?”