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.
I move amendment No. 1:
To delete all words after "That" and substitute the following: "Dáil Éireann resolves that the Pensions (Amendment) (Transparency in Charges) Bill 2021 be deemed to be read a second time this day nine months, to allow for, amongst other things, an examination and assessment of the issues pertaining to the provision of information to pension scheme members in relation to costs and charges incurred by pension schemes and, if deemed to be required, to identify and develop the appropriate policy responses and associated methodologies."
I am happy to accept the amendment to the amendment tabled by my Labour Party colleagues and I am grateful for their consideration in this regard. The nine-month timed amendment to the Bill will allow for consideration by my Department of the provision of charges-related information to pension scheme members and to report to the Dáil. I thank Deputy Nash for his work on preparing the Bill and providing the House with an opportunity to debate this matter. I fully accept the spirit in which this Bill is being brought forward and I agree that improved pension costs transparency and better outcomes for pension savers are always desirable. The availability of comprehensive and transparent information on costs and charges is important, and helps consumers to decide whether investments represent value for money.
Prior to commenting on the Bill itself, it is worthwhile to first note that the Government continues to progress several key initiatives, or has recently implemented policy measures, which will lead to considerably reduced administrative costs for pensions and improved costs transparency which I will now briefly set out. For the purposes of transposing IORP Il requirements, regulations signed in April 2021 require trustees to draw up and provide scheme members with an annual pension benefit statement containing key information about the pension scheme. Those regulations require that the statement contain information on pension projections and costs incurred by the scheme over the past 12 months, and provide that such information should be clear, succinct and comprehensive and avoid the use of jargon. Given the recent introduction of these requirements, it would be more appropriate and prudent for a sufficient period of time to have elapsed prior to introducing or implementing additional requirements.
The Roadmap for Pension Reform 2018-2023 highlighted the very large number of private pension schemes in Ireland, numbering approximately 160,000. It also highlighted concerns regarding the professional fees charged to these schemes both for administration and investment advice, and the standard of governance of these schemes. The roadmap sets out an approach to reforming the pensions market and rationalising these schemes, which will contribute to lower overall pension costs in the future. Charges incurred by schemes should also be considered in the context of ongoing work to develop a master trust regime which will realise significant consolidation of pension schemes. This will enhance scheme governance, achieve economies of scale and result in reduced administrative costs to schemes. Research has shown that larger pension schemes incur lower pension costs, particularly across defined contribution pension schemes. Deputy Nash will also be aware that I wrote to the Pension Council in March of last year requesting that it consider the issue of pension costs in Irish schemes, including issues with regard to the transparency of these costs. Specifically, I asked the council to consider the merits of introducing a cost transparency Initiative, similar to that in the UK, Denmark and the Netherlands. The council's report was recently completed and its recommendations are currently being considered by my officials. That examination will require consultation with the Pensions Authority, as well as other Departments prior to determining the appropriate policy responses. I hope Deputy Nash will appreciate that the introduction of new provisions into the Pensions Act, such as those proposed by the Bill, would be premature until that examination has been finalised, which is why we have suggested a timed amendment today.
In March of this year, the Government approved the final design principles for the automatic enrolment supplementary retirement savings system. A general scheme for the legislation has recently been approved by the Government, and work in this regard is ongoing in conjunction with the Office of the Parliamentary Counsel. It is envisaged that the system will impose a charges cap on auto-enrolment providers. It is essential that any information provided to scheme members is, as required by IORP Il, set out in a clear manner and presented in a way that is easy to read. The complex nature of the proposed statement as set out in the Bill, while obviously introduced with best intentions, raises concern as to whether it can achieve the intended policy objective of providing such clarity and, as such, whether it would comply with IORP Il information-related requirements. People are often reluctant to engage with pensions and the more detailed and complex the information, the less likely they are to engage with it. In addition to these concerns, the statement proposed by the Bill will necessitate complicated calculations in such matters as benefit projections and anticipated reduction in yields. Again, I fully appreciate the Deputy's intention here, but this measure would increase the administrative burden on schemes, as well as resulting in higher costs arising from the engagement of specialists such as actuaries to provide these calculations. As we know, if a scheme becomes more costly to run, this will negatively impact on the pension payments ultimately payable to scheme members.
I will now turn to the provisions in the Bill. The Bill, as drafted, applies to all pension schemes. However, it would not be possible to apply most of the provisions to defined benefit schemes given that administrative costs are ordinarily borne by the sponsoring employer rather than the individual pension saver. The Bill sets out detailed and complex provisions in relation to the matters that shall be specified in the proposed statement of the impact of charges. This includes projected level of benefits, the number and amount of charges incurred in the next 12 months which must be expressed in three different ways, and the anticipated reduction in yield. This is problematic as some charges may not be known 12 months in advance, and would depend on the contributions made and investment growth achieved. In addition, previous research has highlighted that charges communicated in percentages appear difficult to understand.
The Bill proposes that the statement should contain information on reduction in yield in percentage and cash terms. Reduction in yield represents just one method of expressing total charges and it may not be the most appropriate in the context of the impact of charges on a pension scheme. In any case, reduction in yield cannot, by definition, be expressed in cash terms.
The Bill also proposes that the statement shall be provided within seven days of any increase in the number or amounts of charges. Any charges based on accumulated assets would result in the charges increasing when assets do. Every such increase would automatically trigger an obligation to issue a statement resulting in a higher administrative burden and costs being incurred by schemes. There are a number of other technical difficulties with this Bill which need further consideration and remedy as it progresses.
As I have already outlined, any new proposals must take account of the existing information-related requirements imposed on trustees, as well as the various policy initiatives currently under way. This is to ensure that the proposals do not add greater complexity and duplication for pension savers and schemes. I am of the view that the timed amendment will provide an opportunity to consider the approach to the information on charges in a holistic and integrated manner. I again commend the Deputy for his work in preparing the Bill and am happy to engage with him in the months ahead as we look to progress measures to ensure pension schemes have greater transparency, which is certainly something on which we all agree.
The Deputy mentioned lower paid workers who do not have pensions. More than 700,000 working people in this country do not provide for a pension. That is why I have introduced the auto-enrolment scheme, which means that one's employer will match every €3 one saves, and the Government will top it up with a further €1. For every €1 saved, there will be a pot of €7 in total. We are progressing that legislation. It is my intention to move it on as quickly as we can and get it operational by January 2024. That is the plan. A good deal of work is being undertaken at the moment in that regard. I thank the Deputy for bringing forward this Bill. We all agree we need transparency for costs and charges in pensions. There is no doubt but that it is difficult to understand. We are happy to work with the Deputy on this Bill.
I welcome this legislation and commend Deputy Nash and the Labour Party for bringing it forward. It is a piece of legislation that Sinn Féin will support. This Bill has a simple objective and it is something that should be done. The Government should not be slow to intervene when it comes to retirement income and the protection of income after retirement. We have seen that all too often in the past. I am reminded of the defined benefit schemes which saw employers walking away and employees left high and dry. There was a lack of protections around those defined benefit schemes and the Government did not intervene.
As has been said more than once in this debate, pensions are a minefield. That in itself puts an awful lot of people off a private pension. Part of the problem is that people naturally ask themselves if a pension is worth it, how much money will they get at the end of it and what it is going to cost. If the answers to those questions are not clear at the start, more and more people who could do so will choose not to establish a private pension. That is a part of the problem when we look at the low level of coverage that exists. There is an over-reliance on the State pension for people in retirement.
Of course, when we speak in particular about private pensions, we must note that they are out of the reach of many workers in this State. That is particularly true of people of my generation who are struggling with high rents and struggling to put together a deposit for a home. Those costs mean it is difficult to put money aside for a pension. However, in respect of occupational pensions, in particular, where employees pay into a pension, we need far greater clarity and transparency.
Auto-enrolment is important to protect the pensions and incomes of workers on their retirement. It is also why getting auto-enrolment right is so important. We need to supplement people at their retirement and the State pension is not enough. Like the generation before us, many people in the years ahead will not be in a position to pay off their mortgages before they retire. With that in mind, the State pension will not be enough and a supplementary pension will be important. In 2018, I put together the Sinn Féin submission for the Strawman consultation on auto-enrolment. One of the key points we made at that time was the need for transparency around fees and charges. That will be key in auto-enrolment. It also needs to be embedded into the pension system across the board. I welcome what the Minister has said about auto-enrolment. We need that to be rolled out as quickly as possible.
On a wider note, we need greater transparency across the board. There have been a number of references to statements, including annual statements, being issued to people and the need for clarity in information. That is important. I welcome the Minister's press release this week which contained a commitment to ensuring the Government will provide PRSI statements relating to the State pension. That is very important because in many cases, people do not have the information. In some cases, people reach or get close to the State pension age and do not have enough contributions. By the time they realise that, it is too late. It is important that people have clarity around auto-enrolment and all other pensions, including the State pension.
As I have raised with the Minister before, we should be moving to the digital era and developing an application for pensions. I hope we will see that with auto-enrolment. To encourage people to remain in that scheme, they need an application on their phones. They need to be able to click in and see their pension pots growing. That will hopefully keep them within the scheme, especially when they are going to have many other costs. People will not always be able to find money easily to set aside. I hope that a State pension application will be considered so people can see what they are getting when they pay their PRSI. They can be notified through the application when they have made enough contributions to entitle them to something under the treatment benefit scheme. All of that is helpful and would provide clarity and transparency for people who pay tax in this State and who should be rewarded for that. In many cases, people do not understand because they are without the knowledge and do not have the information easily to hand in respect of what they are getting back for the PRSI they pay, which includes the State pension. I hope that will be looked at.
It is welcome that the Minister has agreed to work with Deputy Nash on this legislation. I hope we will see movement on this issue and that the Government will not be slow to intervene when it comes to pensions across the board, not just in respect of the State pension.
I have listened to the contributions of Deputies Nash and Kerrane. I again thank Deputy Nash for giving the House the opportunity to debate this important issue. I know it is an issue in which the Deputy has a keen interest.
I will reiterate some of the points I made earlier. We all know that improved pension cost transparency and better outcomes for pension savers are always desirable. It is a complex world when one starts to look at pensions. If one goes to someone to get advice about pensions, one needs to be awake because there is a fair bit of information to take in. The closer one gets to pension age, the more conscious one becomes of how important it is. That is why I would encourage young people who are starting off to save a little and do so often to try to build up that pension pot.
The availability of comprehensive and transparent information on costs and charges helps consumers to decide whether investments represent value for money. As I said, since 2021 trustees are required to provide scheme members with an annual pension benefit statement containing key information about the pension scheme, including pension projections and a breakdown of the costs incurred over the past 12 months.
As I said, the Government is progressing work on a number of key pension policy initiatives that will, among other things, improve the transparency of pension costs. This work includes advancing reforms as set out in the roadmap for pensions reform, progressing recommendations set out in the interdepartmental pension and taxation reform group report, the introduction of an auto-enrolment retirement savings scheme, and the implementation of a master trust regime. That will facilitate significant consolidation of pension schemes and the Pensions Council's report on cost transparency which, as I said, has been recently completed and is being looked at by my officials. As outlined, it is essential that any new proposals are considered in an integrated manner, taking account of the existing information-related requirements imposed on trustees as well as the various pension policy initiatives under way. This is to ensure that proposals do not add greater complexity and duplication for pension savers and schemes. The timed amendment will provide an opportunity to examine and consider the approach to the provision of charges related to information to pension scheme members.
I thank Deputies Nash and Kerrane for their contributions. Their Bill was well timed as this is a week when there is a big focus on pensions. It is also good that people realise they need to read the smaller print to make sure they are getting the information they need to make informed decisions. At the end of the day, everybody has to make their own decision but they need to make sure they have all the information that enables them to do so.
I move amendment No. 1 to amendment No. 1:
"To delete all words after "deemed to be read a second time this day nine months, to allow for" and substitute the following: "an examination, assessment and report to the Dáil by the Minister within that period on the issues pertaining to the provision of information to pension scheme members in relation to costs and charges incurred by pension schemes and identifying and developing the appropriate policy responses and associated methodologies."
People's eyes glaze over when we talk about pensions, unfortunately.
That is not reflected in the attendance or contributions this evening, notwithstanding Deputy Kerrane's presence. Her interest in this matter and support for the intentions of the Bill is appreciated. It is Thursday evening. It has been a busy week that will only get busier so I am grateful to those who are present. I appreciate it.
I will not dwell on matters any longer except to thank the Minister for her interest in this and her pledge to work with me and my Labour Party colleagues to deliver on the principles of the Bill. We may differ on some elements of it but there is a degree of unanimity on what needs to be done. It seems to me there may be no requirement for me to move my amendment to the amendment. The Minister has made it clear that she will report back on progress, within the framework of the principles of this Bill, within nine months. That is the case and it is on the record of the House, and I know the Minister is a woman of her word. I look forward to working with her on that. I am happy to withdraw my amendment based on the Minister's commitment.