House of Commons Hansard Debates for 3 Nov 1998 (pt 23)

7.32 pm

Dr. Vincent Cable (Twickenham): It is somewhat intimidating to speak after two of the House's leading experts on pensions--the right hon. Member for South Norfolk (Mr. MacGregor) and the hon. Member for Birmingham, Edgbaston (Ms Stuart)--both of whom spoke eminently good sense in a non-doctrinal manner, leaving the rest of us with a rather reduced amount to say.

I should like to pursue the "who-who" question of who benefited from pensions mis-selling and who is now paying for it. It has been estimated that about £11 billion will have to be paid in compensation for pensions mis-selling, and it would be a useful exercise to trace where that £11 billion might have gone.

Four categories of people or institutions benefited from pensions mis-selling, the first of which--as the hon. Member for Grantham and Stamford (Mr. Davies) said in a couple of interventions--was composed of salesmen and executives. They benefited from mis-selling, but have fled the scene. Moreover, under the current regulation system, they were not liable for those transactions. They cannot be traced, and carry no personal liability for events.

The second set of beneficiaries comprises the companies, or some of them, that sold the pensions. They benefited from enhanced earnings, and therefore improved share prices and improved dividends. Nevertheless, there remains the fundamental question--which the hon. Member for Edgbaston pinpointed at the beginning of her speech--of where within companies the benefits accrued. Did they accrue to shareholders, or to current policyholders? Moreover, how should costs now be spread between those two groups? I shall return in a moment to the latter point.

Other groups of beneficiaries of pensions mis-selling have not been mentioned. One major group were employers generally. As employers did not have to make contributions, companies earned 5 to 12 per cent.--a large sum. Strangely, although we attach great stigma to those who gave bad or inadequate advice, it has never been suggested that employers in either the private or public sector were reprehensible for failing to warn employees of the cost of not maintaining their occupational pension scheme.

A fourth set of beneficiaries comprises occupational pensioners themselves. They have benefited from the fact that transfers out of occupational schemes were often made on very disadvantageous terms. Everyone with an occupational pension is therefore better off because of pensions mis-selling. They may not be aware of that

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benefit or feel a sense of guilt about it, and it is almost certainly impossible to trace them, but great income redistribution among pensioners has been occurring, for which there is no account.

The problem is that people in several of those categories can no longer be traced, so that the £11 billion cost will have to be paid by specific groups that can be identified and targeted. Although it is absolutely right that the Government should have aggressively pursued the compensation issue, and that pensioners should be compensated promptly when possible, as several hon. Members have already said, two specific categories have been forced to carry a disproportionate share of the costs.

One of those categories is independent financial advisers. Although I do not want to labour the point--my hon. Friend the Member for Harrogate and Knaresborough (Mr. Willis) has the largest number of IFAs of any constituency and will speak later in the debate about that issue, which has already been clearly stated--IFAs are, in some but not necessarily all cases, being punished not for mis-selling but for lack of foresight, which is the crucial distinction. The only appropriate basis for compensation would be what an occupational pension scheme would have produced for the pensioner when the private pension was sold. That principle of compensation is not being observed.

As the hon. Member for Edgbaston eloquently said, the other category of people with whom we are concerned is current policyholders. Ministers have said that, as a matter of principle, within companies, shareholders should be carrying the cost burden of pensions mis-selling. However, it is not clear how the matter is being pursued, or whether the burden is being carried appropriately. It would be helpful if the Minister dealt with the matter in his reply.

I do not want unduly to delay the House, but I conclude with a couple of forward-looking conclusions. Although it is easy to be wise and virtuous in hindsight, the key issue for us is to determine what lessons we have learnt from the whole sorry escapade.

The first lesson should be the danger of dogma, and that a "one size fits all" approach to pensions was not right. Although personal pensions--which many of us have--were a good advance, and are appropriate for those who are occupationally mobile, they do not fit everyone, just as owner-occupation is not the only style of housing. I hope that we, and especially the previous Government, have learnt a lesson about such an approach.

Mr. Quentin Davies: Before the hon. Gentleman leaves the first conclusion, will he say whether he agrees that it suggests that, in pensions, CAT marking is no substitute for advice?

Dr. Cable: The hon. Gentleman is right. CAT marking creates an expectation, at least in some people's minds, that the Government stand behind a financial product. In 10 or 15 years, perhaps there will be people who believe that they have been sold products that had an implicit Government guarantee. We can all appreciate the dangers of that.

The hon. Member for Grantham and Stamford has led me to my second and final comment. The conclusion that we should draw from the matter is that the principles underlying financial sector regulation are complicated.

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It is very difficult to strike the right balance between over-regulation and under-regulation. We have been through a phase when, arguably, financial services have been under-regulated, and the only relevant principle was caveat emptor. That is a correct principle, as people should be careful when they are buying, but we know what happens when that principle is dominant--there is dishonesty, and people lack the information to operate properly in the financial services market.

Now, however, there is a danger of lurching in the opposite direction, with the system becoming over-regulated so that products are priced out of the market, and providers do not offer new products. We have to get the balance right. That is why it is absolutely crucial to have legislation as soon as possible on financial services regulation. That will help us to understand whether the right lessons have been learnt and the right balance struck.

7.39 pm

Mr. David Kidney (Stafford): As the hon. Member for Twickenham (Dr. Cable) said, we have heard a number of constructive speeches that have drawn on the lessons of the past and sought to apply them to the present and the future. Today's debate is particularly well timed as the Government are about to embark on some enormous policy changes. The first, which has been alluded to several times today, is the long-awaited Green Paper on pensions, setting out the next generation of pension policy for Britain. We are all looking forward to that important document, particularly to see whether it includes a new design of stakeholder pensions or citizenship pensions for those such as carers who are unable to make continuous contributions.

The second policy change, involving the new individual savings accounts or ISAs, starts next April and has also been mentioned in the debate. There are implications for ISAs as a result of pension mis-selling in the past.

The third development in the near future, to which the hon. Member for Twickenham referred at the end of his speech, is the draft legislation in respect of the Financial Services Authority. The hon. Gentleman looks forward to reading the Bill when it is published, but it will obviously be based on the draft Bill on which there is currently consultation.

Clearly, there are important lessons to be learned from how the regulations under the Financial Services Act 1986 operated when pensions were being mis-sold as to what should be in the next financial services and markets legislation.

Fourthly, I should mention almost as a footnote to the debate on pensions, that a draft Bill was published for consultation over the summer on pension sharing between spouses when marriages break down and how existing pensions should be split.

For all those reasons the timing of the debate is most apposite. However, for the Treasury Select Committee on which I am pleased to serve, the timing of the debate is slightly awry. As hon. Members will see from the Order Paper, although the minutes of evidence from hearings held over the summer are available to inform today's debate, the Select Committee report has not yet been published. Perhaps hon. Members will take it as a plug that the report will be produced very shortly. I hasten to

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add that what I say now is entirely my own view and not the view of the Treasury Select Committee or the contents of its report.

The value of the debate lies not in the apportionment of blame, although I am happy that many hon. Members accept that things went wrong and that there are lessons to be learnt. Rather it is to face up honestly to what went wrong and to identify the lessons to be learnt so that we can avoid making the same mistakes again and anticipate offshoots of those mistakes arising in future.

It is helpful, however, to ask what went wrong and to say, as my hon. Friend the Economic Secretary to the Treasury did, that between 1988 and 1994 some 5 million personal pensions were sold in Britain. Astonishingly, more than 2 million of them need to be reviewed for the possibility of mis-selling.

What is meant by mis-selling? According to current regulations, three criteria have to apply. First, did the seller breach a regulation requirement at the time of the transaction? In other words, was there a compliance fault? Secondly, has the buyer suffered a loss? Thirdly, was that loss caused by the seller's compliance fault? If the answer to all those questions is yes, it can be said that the pension has been mis-sold.

So how did buyers lose out? Overwhelmingly, as the hon. Member for Maldon and East Chelmsford (Mr. Whittingdale) pointed out, the problem affected people who were persuaded to opt out or not to join or to transfer away from an occupational pension scheme, thereby usually losing the benefit of employers' contributions. The Financial Services Authority estimates that about 1.4 million personal pensions sold at that time will be found to have been mis-sold at a total cost to the financial service industry of a massive £11 billion, including the compensation paid to individuals who were mis-sold pensions and the administrative costs to the companies involved.

My hon. Friend the Member for Birmingham, Edgbaston (Ms Stuart) mentioned the actuaries Bacon and Woodrow, who estimated total costs of £22 billion, but most in the industry have difficulty with that estimate.