Thursday, 22 September 2022
Pensions (Amendment) (Transparency in Charges) Bill 2021: Second Stage [Private Members]
I thank the Minister for the intentions she has expressed, which are appreciated. I am more than happy, as are my Labour Party colleagues, to work with the Minister on what is a very important Bill. The Minister probably knows from her own experience - although maybe not this week when there was huge, intensive interest in pensions more generally - that when we discuss tensions people’s eyes tend to glaze over. That is unfortunate.
We are were living in the midst of a serious cost-of-living crisis. We have all seen the basic prices of food, energy of housing and of basic goods escalate before our eyes over the past year. Too many people have experienced firsthand the permanent cost-of-living crisis in our dysfunctional housing market. Often when I talk about housing, I describe it as the most significant investment anybody is likely to make in their lifetime. The second most important investment anybody is likely to make involves taking out private occupational pension. One would imagine that we would have the same kind of interest and the same kind of transparency, dare I say it, around pensions as we have in the context of mortgage products. However, the reality is that we simply do not. When it comes to pensions, the fees and charges that are associated with those unnecessarily complex products are rarely understood. This is despite such products often being the second most significant investment we will make during our working lives.
Such a lack of understanding is not due to ignorance or a want of trying. It is no reflection on people who might consider themselves, rightly and objectively, to be smart, intelligent or numerate. Even the most diligent individuals are left baffled by the byzantine private pension structures and the charging schedules that we have in this country. When we dig beneath the surface, it is clear that Irish pension fees are completely out of kilter with the reality in our counterpart EU member states. This is not a new problem. For years, various Government and international reports have highlighted the problem of high charges and high management fees. They have also noted a culture of concealment within the Irish pension market, something that this Bill aims to address.
That is what is at the heart of this Bill: transparency. As far back as 2012 a report from the Minister’s own Department noted that there are significant deficiencies and inconsistencies regarding pension transparency. It too noted little evidence of a culture of providing clear information in a simple manner. Nobody could have been surprised when they read the 2014 OECD report - an independent report from an internationally respected think-tank - on Ireland’s pension fees which stated, “One of the most patent signs of a governance failure in [Ireland's] private pensions system is the high charges often observed”. Where there are governance failures, it is up to a regulator to intervene. Those are strong words: “governance failure”. Where the regulator is not empowered to intervene, it is up to this Legislature to intervene and provide the legislation within which a regulator might work to represent the best interests of citizens and consumers. The report to which I refer cited how Irish pensions were “substantially above the charge levels observed in the best performing countries like Denmark or Sweden, where total management fees are below 0.5%”. It is not unusual in Ireland to see management fees of 2% to 3% or maybe more. That is absolute scam being perpetrated on hard-working people.
In short, the evidence shows that not only are costs higher, but they are too often hidden from unsuspecting pension customers. Indeed, the latter often allows the former to occur. An interesting 86-page study was provided to me last year. It further reiterated these points. It gave us more objective evidence as to what is going on in the Irish pensions market and it provided some significant information. This thorough document sets out how the impact of the charges, particularly annual management charge, can wipe out up to 60% of the final pension pot after a worker and their employer spent years putting it together. The study takes the case of a 32-year-old woman who is earning €50,000 per year, which is a modest and reasonable income, although these days one would wonder. She will retire in 2057 at the age of 68. The report shows that a pension product with 3% of an annual management charge and 3% contribution fee will create a pension pot of €686,000. The pension contributions by the individual and employer would have been €418,000. Fees going to the advisers will be an eye-watering €300,000. This is an astonishing figure. If the pension fees were 1%, for example, which they should be, the pension pot available to the individual would be €1 million, or an extra €356,000 in total.
Although the total cost of fees can be argued over by the actuaries, nobody in this Chamber can credibly deny that transparency and high charges are not a real problem. Indeed, this is a problem that the Minister has acknowledged, to be fair. Her decision to call on the Pensions Authority to introduce a cost transparency initiative in response to the publication in April 2021 of this Labour Party Private Members' Bill was welcome. From a recent reply to a parliamentary question, I understand that the report in question was recently completed. If the details are available, I would welcome an outline of the recommendations in that report and an indication of when the Minister intends to make its findings public.
Such action will be necessary to restore confidence in this Government’s capacity to effectively regulate and protect pension customers. Indeed, such transparency with regard to charges is crucial in the context of the long-awaited introduction of auto-enrolment. Thousands of workers currently without pensions need to know they can trust the fund with their hard-earned money. With our pension pot already evaporating into thin air due to inflation and other factors, they will not welcome the idea of a future pension pot being further eroded by less than transparent fees. As it stands, most ordinary pension customers are already paying extraordinary sums of money and excessive annual management charges, contribution fees and so on. In real terms, their pension pot, which is a product of their endeavours in life, is being drastically eroded by up to one third in some cases, as I have explained previously. Critically, this means - and it is something that will be of concern to the Minister for Social Protection - less money to pay the bills in old age, a lower quality of life and ultimately poorer health outcomes. We know from research that those with smaller pension provision and with less of a pension to rely on have poorer health outcomes and that poor pension provision naturally leads to a shorter and less healthy life. If this Bill is passed, however, it will be a first step in protecting the hard-earned pensions of citizens. I am not overstating or making any excessive claims about what this legislation will do, but it certainly will help. It will finally require pension trustees to provide clear and concise information about the number and amount of charges under the scheme in both cash and percentage terms. Put simply, it would mean that pension customers will be able to see exactly how much they are being charged. They will also see how this will have an impact on their final pension pot without having to decode the complicated small print. In short, these changes will radically transform the information available to savers to enable savers to make informed decisions themselves. It will ensure that they can reliably compare products in order get the best value for themselves in retirement. The time to act on this now. Not only is action required to protect current future pensioners who are doing their best to put away an adequate nest egg for retirement, but it is needed now. It is also required, I hope the Minister will agree, to protect the public finances and to ensure that there will be less strain on the Social Insurance Fund into the future.
Pension deductions by employees and employers totalled €2.5 billion and €2 billion, respectively, in 2019 alone. This comes at a significant cost to the Exchequer as well, in terms of the of the generous - by international standards - pension reliefs that are available to encourage people to save for their retirement. That is something that we do not always consider when we discuss pensions more generally. It is essential that we ensure that the very significant reliefs provided to incentivise pension savings are no longer cannibalised by costly pension charges. We also need to make sure that this multibillion euro pensions industry is finally made honest.
We saw, a decade ago, how our unaccountable banking sector got too big for its boots and behaved recklessly as a result. We are still living with the consequences. This ultimately had a disastrous knock-on effect for people in the real economy - and consequences that are still evident today. There are many good and professional people, such as brokers and others working in the system, all across what is a valuable industry for this country in terms of employment. They do a very good job, and do their job professionally and ethically 99.9% of the time. This legislation is about making sure that we have the kind of transparency that people who are saving so much for their retirement really need. There is a real risk that a lack of transparency, trust and openness in our pension market may lead to similar mismanagement to that experienced in the banking sector with equal, if not greater, consequences for savers and the State.
That is why, in addition to this transparency in charges legislation, I think it is time that we had a full pension market review. Similar to the recent banking review initiated by the Minister's colleague, the Minister for Finance, the review would bring together all relevant stakeholders and allow the public - because at the end of the day, this is about the public - to come together and have a real say on the future of the industry on the island and how it is going to work more effectively. It is deeply disappointing that in response to a recent parliamentary question on the issue the Minister stated that she does not have any intention of holding such a review. I ask her to keep an open perspective on that question.
I thank the Minister for her time today and for coming in here herself to take this Bill, as the senior Minister in the Department. We need full transparency in relation to charges, fees and pension funds. It is interesting that the experience in Europe is very different from the experience here. It is time to bring the stakeholders together to chart a course for the sector, one that has transparency, accountability and affordable fees at its heart.