HC 485 Published on 28 June 2013

by authority of the House of Commons London: The Stationery Office Limited

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House of Commons

Work and Pensions Committee

Improving governance and best practice in workplace pensions: Government Response to the Committee’s Sixth Report of Session 2012–13

First Special Report of Session 2013–14

Ordered by the House of Commons to be printed 26 June 2013

The Work and Pensions Committee

The Work and Pensions Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Work and Pensions and its associated public bodies.

Current membership

Dame Anne Begg MP (Labour, Aberdeen South) (Chair) Debbie Abrahams MP (Labour, Oldham East and Saddleworth) Jane Ellison MP (Conservative, Battersea) Graham Evans MP (Conservative, Weaver Vale) Mike Freer MP (Finchley and Golders Green) Sheila Gilmore MP (Labour, Edinburgh East) Glenda Jackson MP (Labour, Hampstead and Kilburn) Stephen Lloyd MP (Liberal Democrat, Eastbourne) Nigel Mills MP (Conservative, Amber Valley) Anne Marie Morris MP (Conservative, Newton Abbot) Teresa Pearce MP (Labour, Erith and Thamesmead) The following Members were also members of the Committee during the Parliament: Harriett Baldwin MP (Conservative, West Worcestershire), Andrew Bingham MP (Conservative, High Peak), Karen Bradley MP (Conservative, Staffordshire Moorlands), Ms Karen Buck MP (Labour, Westminster North), Mr Aidan Burley MP (Conservative, Cannock Chase), Alex Cunningham MP (Labour, Stockton North), Margaret Curran MP (Labour, Glasgow East), Richard Graham MP (Conservative, Gloucester), Kate Green MP (Labour, Stretford and Urmston), Oliver Heald MP (Conservative, North East Hertfordshire), Sajid Javid MP (Conservative, Bromsgrove), Brandon Lewis MP (Conservative, Great Yarmouth) and Shabana Mahmood MP (Labour, Birmingham, Ladywood).

Powers

The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk.

Publications

The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/workpencom. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume.

Committee staff

The current staff of the Committee are Carol Oxborough (Clerk), David Foster (Committee Media Adviser), James Clarke (Committee Specialist), Daniela Silcock (Committee Specialist), Emma Sawyer (Senior Committee Assistant), and Hannah Beattie (Committee Assistant).

Contacts

All correspondence should be addressed to the Clerk of the Work and Pensions Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2839; the Committee's email address is workpencom@parliament.uk.

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First Special Report

On 25 April 2013 the Work and Pensions Committee published its Sixth Report of Session 2012–13, Improving governance and best practice in workplace pensions, HC 768. On 20 June 2013 we received the Government’s Response to the Report. It is reproduced as an Appendix to this Special Report. In the Government Response, the Committee’s recommendations are shown in bold italic text. The Government’s response is in plain text.

Appendix: Government Response

Introduction

Automatic enrolment will encourage and enable people to save more for their pension and will result in millions saving into a private pension for the first time. This is a hugely significant step in tackling the twin challenges of an ageing population and under-saving. But we recognise there is more to do to make automatic enrolment work for consumers.

We welcome, therefore, the Sixth Report of the Work and Pensions Select Committee (Session 2012-13) into governance and best practice in workplace pensions which was published on 25 April 2013. We agree that this inquiry has focussed on the key areas which will help us make a success of automatic enrolment, such as governance, costs and charges, communication and regulation. We also welcome the contributions from stakeholders and individuals in written and oral evidence.

It is vital that we get defined contribution provision right, so people can save into high quality, well-governed schemes which offer value for money and transparent charging structures. We need to ensure too that savers are supported with clear and understandable information throughout the pensions lifecycle helping them to engage and think about their future retirement income. This response sets out some of the key actions we are taking to achieve this. We have also recently announced our intention to ban consultancy charges in automatic enrolment schemes and, in the light of the forthcoming Office of Fair Trading (OFT) market study on workplace pensions, we plan to publish a consultation document on charges in the Autumn. Without further reform, automatic enrolment will mean people end up with an ever-increasing number of small scattered pension pots and thus miss out on valuable retirement income. We therefore are providing for a system of automatic transfers in the current Pensions Bill where, broadly speaking, people’s pensions will move with them as they change jobs. This will make it easier for people to keep track of their pension saving, and secure a better income in retirement.

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In its report, the Committee expressed concern about the current regulatory structure, and its ability to provide sufficient protection to all members of workplace pension schemes. It called on the Government to reassess the case for establishing one body with sole responsibility for regulating workplace pensions. We recognise the Committee’s concerns in this area, but we are not looking to change the current regulatory structure at this time.

The Pensions Regulator (TPR) and Financial Conduct Authority (FCA) certainly recognise the scale of the challenge in effectively regulating the diverse elements that make up pension provision in the UK. They are increasingly working closer together to ensure that the regulatory frameworks for both trust-based and contract-based pensions provide for a robust system of governance and fair treatment for members. In order to make this more explicit they will be issuing a joint document this Autumn.

We were pleased to note that the Committee were supportive of our intention to develop plans for defined ambition (DA) schemes. Whilst defined contribution (DC) schemes are the primary vehicle for automatic enrolment, we recognise that there is an appetite for more certainty. Therefore, alongside our work on DC schemes, our ongoing development of defined ambition pensions will be key to establishing a future pension landscape that meets consumer needs, rebuilds confidence in the system and ensures good outcomes in retirement.

Response to Committee recommendations

Scheme governance

[Paragraph 28] We believe that establishing governance committees to oversee the running of pension schemes could go some way to increasing the effectiveness of governance in contract based schemes, although we appreciate that setting up such committees may present a challenge for small and medium sized employers. We recommend that the Government and the regulators investigate ways of assisting all employers who offer contract-based schemes to set up governance committees to oversee their pension scheme and that particular attention should be given to supporting small and medium enterprises to do so. We agree that effective governance of pension schemes is an important factor in helping savers to get a good income in retirement. There are examples of good governance arrangements in both trust-based and contract-based schemes. However, we are also aware that governance is not consistent across all schemes and we are keen to explore what can be done to raise standards.

TPR has already taken steps in this area, with governance being a key element of their DC code of practice on which they have recently consulted. Effective product governance by providers is a key element of the FCA’s Principles for Business and an important focus of its supervisory approach. The FCA also requires scheme providers to pay due regard to the interests of scheme members and treat them fairly. The creation of the FCA has brought with it a renewed focus on customers with the new supervisory approach designed to ensure that firms are placing the interests of customers at the heart of their businesses.

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We are keen to build on the steps taken by these regulatory bodies and are therefore undertaking work to explore what additional governance standards might be set. This is part of our wider work to develop further quality standards for workplace DC schemes. Such standards would apply to both trust and contract-based schemes.

There are a number of facets to good governance, but one critical element we wish to explore is whether all schemes should have a body overseeing them which represents the interests of members. Within trust-based schemes the trustee board has such a responsibility and we know that in contract-based schemes some employers have a governance committee, as they see such arrangements as beneficial for both themselves and the scheme members. In this context, TPR provides employers with information on voluntary engagement, which includes information on governance committees, their benefits and limitations. TPR is updating and reissuing this guidance this Summer in addition to other employer resources to assist in the selection of an appropriate pension scheme.

However, we do not think that it is realistic to replicate the employer-specific governance committee arrangement for each employer in large scale Group Personal Pension schemes, given the number of employers involved and the size of many of them. It does not seem proportionate for all of the small and micro employers who will be setting up pension schemes as part of automatic enrolment to put individual governance arrangements in place.

Therefore we will be exploring whether there are alternative options for contract-based schemes, to avoid requiring member committees for each employer. This could be at provider level, or some intermediate arrangement, though we would not wish to preclude employers who wish to set up governance committees from doing so.

Costs and Charges in DC Schemes

Capping charges in automatic enrolment qualifying schemes

[Paragraph 45] We welcome the trend towards providers offering lower charges to pension scheme members. We note the Government’s position that it is prepared to wait before deciding whether to impose a charge cap for auto-enrolment qualifying schemes because it believes the market is currently operating well and it does not want to prevent natural competition or cause “levelling up” of charges. However we are very concerned by the potential for pension scheme members to suffer detriment where schemes persist in retaining high charges, with the accompanying potential to reduce the amount of income people receive in retirement. In the short term, we recommend that the Regulator carries out an urgent review of the “outliers” with high charges, with a view to taking action if it considers this necessary. We further recommend that the Government carefully monitors the level of pension scheme charges more generally and reviews its position on capping charges in auto-enrolment schemes frequently, at least bi-annually, commencing in 2014. It should act without hesitation if it becomes apparent that some pension scheme members are at risk of detriment from high charges.

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The OFT recently launched a market study into DC workplace pension schemes and the extent to which competition will work to keep charges low. They intend to report back over the Summer. As such, we believe that it is not necessary for TPR to conduct the review as suggested in the recommendation at this time. DWP, TPR and FCA are working closely with the OFT and look forward to receiving their findings in due course.

We want to ensure all employers, irrespective of size, obtain value for money pensions for their workers, so with this in mind, we intend to consult this Autumn on proposals which will include a cap on charges in the default funds for DC schemes. In the meantime we are continuing to actively monitor charges to ensure workers continue to be automatically enrolled into pensions which offer value for money. We have brought forward our latest bi-annual survey on charges so we can get more evidence on the type of business sold to the largest employers.

Active member discounts

[Paragraph 51] We are concerned that the use of active member discounts, which should more accurately be called deferred member charges, has the potential to reduce significantly the amount of money available to pension scheme members in retirement. We have not heard any convincing evidence for retaining these charges. Despite the Government’s assertion that its “pot follows member” approach for dealing with small pension pot transfers will take care of the problem of active member discounts, we believe that people who do not have their pots automatically transferred also need to be protected from the impact that higher charges for deferred members could have on their retirement income. We recommend that the Government bans the use of active member discounts without delay, in order to prevent consumer detriment arising from this practice. Deferred members should be protected from high or unreasonable charges in the same way as active members. That is why we extended the power under the Pensions Act 2008 to cap charges for deferred members as well as active members. Our consultation on charges this Autumn will set out various proposals including a cap on charges in the default funds for DC schemes. There will be a number of issues to consider in designing such a cap, including how it might impact on deferred member penalties.

We will also be exploring this issue as part of our dialogue with interested parties including employer, consumer and industry representatives over the Summer.

Consultancy charges

[Paragraph 61] Member-borne consultancy charging has the potential to cause serious consumer detriment and to damage confidence in pension saving and auto-enrolment. While we appreciate that the costs of complying with auto-enrolment can be a significant issue for some, especially small, employers, and therefore that it may be reasonable in some circumstances for some or all of the routine costs of a scheme to be borne by the members, we do not think it appropriate, given the existence of low-cost schemes, for members to suffer the detriment of consultancy charges. We therefore

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recommend that the Government bans the use of member-borne consultancy charging in auto-enrolment qualifying schemes without delay. Until the ban has been put in place, the Government and the regulators should issue clear guidance to the pensions industry as a matter of urgency, to clarify the level of consultancy charges that they assess as being acceptable.

We welcome the Committee’s focus and recommendation on the use of consultancy charges. We have now completed the review of consultancy charges that was underway when the Committee reported. We have concluded that existing measures to prevent advisers deducting high charges from members’ pension pots are inadequate. On 10 May 2013 we announced our intention to ban consultancy charges in automatic enrolment schemes. This will apply to DC occupational schemes and DC workplace personal pension schemes. We will lay regulations before Parliament as soon as possible. The current Pensions Bill contains a provision to allow us to introduce similar restrictions in relation to qualifying schemes.

By announcing these steps, we have sent a clear signal to the pensions industry about the risk that consultancy charges pose in terms of member detriment. We will continue to work closely with the pensions industry, the FCA and TPR to develop the regulations and ensure that an effective ban is in place as quickly as possible.

Transparency and the effectiveness of self-regulation

[Paragraph 70] We recommend that the Government review the levels of transparency across the pensions industry early in 2014. If it concludes that employers are still prevented by a lack of transparency from making informed choices about the potential impact on their employees of saving in different pension schemes, we recommend that it imposes a charge cap on auto-enrolment qualifying schemes or on the schemes which are not complying with the transparency codes and guidance issued by industry bodies. We further recommend that consideration is given to penalties and enforcement if the industry fails to self-regulate effectively within the next three years. We welcome the steps taken by the industry to improve transparency and disclosure of charges to employers and members affected by automatic enrolment. We are keen to see all parties across the industry signing up and encourage collaborative working across the industry to ensure this happens. We would like to see the industry be more ambitious in its timescales for implementation. As already noted, we intend to publish a consultation on charges in the Autumn. This will set out proposals including a cap on charges in the default funds for DC schemes. We will also consider whether any wider steps are required to improve transparency.

Self-regulation and annuity purchases

[Paragraph 77] We recommend that the Government and regulators institute a mandatory system whereby, when consumers come to purchase an annuity, their pension provider is required automatically to supply them with a comprehensive breakdown of all the different annuity rates available to them from different providers,

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including options and rates for enhanced and impaired life annuities. We also recommend that, as a last resort, the Government considers taking steps to separate the function of providing pension schemes from that of providing annuities We have been exploring how we can make the Open Market Option (OMO) the default position for annuity purchase in partnership with the pensions industry and other cross-Government representatives, via the OMO Review Group. A summary of the group’s work was provided in the DWP submission sent to the Committee. As part of this work, the group considered different options, including the two options recommended by the Committee here. After some consideration they concluded that neither recommendation would necessarily produce the desired effect.

In relation to the first recommendation, providers are not in a position to automatically quote for enhanced or impaired life annuities without the individual engaging as they need, for example, to understand the individual’s health conditions and medication. It would be difficult for providers to quote annuity rates offered by other providers as they would not have access to this information and there could be issues of competition law. Also, the range and volume of the information needed to communicate comparable rates could make retirement communications more complex and lengthy, leading to consumers becoming disengaged or simply overwhelmed by amount of information provided.

There is, in addition, the risk that some providers may exclude certain types of annuity such as joint-life products or those with inflation linked features where initial rates would be lower because of other features of the product. So individuals may not receive quotes that are suitable to their needs, or it may steer consumers towards a decision based only on rate rather than whether they want inflation protection or an income for their spouse.

The Money Advice Service (MAS) now includes impaired/enhanced life annuities in their online comparison tool and the Pension Income Choice Association are developing a directory of advisers and intermediaries to enable easier access to the support available to help people choose an annuity that is right for them. For their part, the Association of British Insurers (ABI) are looking at how to increase the transparency of annuity rates with the aim of giving a clear picture of how providers’ products fit in with the wider market.

We have interpreted the second recommendation as meaning that providers would be prevented from offering an annuity to any member who has built up their pension pot with them.

This recommendation brings a risk of consumer detriment as some individuals would benefit from staying with their existing pension provider, for example they may be entitled to guaranteed annuity rates or preferential rates for existing customers. It could also reduce choice as those with a fund smaller than £10,000 would have a limited selection of annuities available through the OMO, and for funds of less than £5,000 access to the OMO would be extremely limited.

The impact of such a change on the provider market is not yet fully known, and could be significant. A mandatory separation of providers from the annuity market may impact on organisations’ business models (as they may assume a set percentage of customers receive annuities). In the short term unprofitable organisations may have little choice but to adapt

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their business model accordingly or leave the market. In the longer term, there could be a reduction in the number of annuity providers in the market or the range of annuities that are offered.

The ABI Code seeks to separate the function of providing a pension from providing an annuity by addressing the “default “ risk—whereby an individual could “default” into signing an application form received from the provider, without considering whether that is the best deal. The ABI code has removed the application form and aims to “default” the consumer into a proactive decision.

TPR’s recent research has found that 52% of occupational schemes already provide access to an annuity broker who shops around the market on behalf of the member.

We are continuing to work closely with industry on ways to help people get value for money when buying an annuity.

Communication with scheme members

[Paragraph 91] We recommend that the Government, the regulators and the industry work together to agree on a communications format, using a language and style similar to NEST’s, that sets out the basic, essential pieces of information which pension schemes should supply to their members. This should include a clear indication for scheme members of the implications of their current levels of contributions and current scheme charges for their future income in retirement. [Paragraph 92] A lack of knowledge, understanding and financial literacy currently prevents people from being able to assess their retirement income needs and make sound decisions on pension saving. The Government must ensure that people have the best chance of reaching adulthood with the necessary tools to make informed decisions regarding saving for their retirement. We recommend that the Government encourage schools to include retirement and pension saving as part of financial literacy education On the first recommendation, we agree that good communications and well-presented information can improve members’ engagement with their pension savings and give them confidence when they need to make decisions about their savings and retirement needs. There is already a regulatory regime which sets out the essential pieces of information for schemes to supply to their members. We have recently consulted on a refresh and simplification of the DWP disclosure of information regulations which was well received. The Government response to that consultation exercise will be published in July. We will continue to work closely with the FCA to ensure that their rules around member communications work with the DWP regulations to enable schemes to provide members with clear information in an accessible format.

We are also considering bringing forward high-level best practice guidance developed in partnership with industry to help schemes produce communications that are clear and consistent and which meet the needs of members as well as meeting the requirements of the regulations. This would build on the work we have already done with NEST, TPR, ABI, the Pensions Advisory Service and MAS to promote the use of plain language in pensions information.

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In relation to financial literacy, the Department for Education has recently consulted on the National Curriculum, with proposals to make financial literacy statutory for the first time as part of the citizenship curriculum for 11 to 16 year olds. The proposal is for pupils to be taught the functions and uses of money, and the importance of planning for future financial needs. This includes personal budgeting, money management and the need to understand financial risk, all skills that should help them to make decisions about saving for their retirement. The National Curriculum for mathematics has also been strengthened to give pupils from 5 to 16 the necessary mathematics to prepare young people for making sound financial decisions.

The National Curriculum will be finalised and published in the Autumn, giving schools one year to prepare before first teaching from September 2014.

The regulation of workplace pensions

[Paragraph 104] The FSA’s approach has been to focus resources wherever it perceives the biggest risks to be at any given time. It has therefore dedicated much of its recent resources to the banking sector, because it saw this as a high-risk area. We find this attitude alarming because it fails to take account of the importance of pensions regulation at a time when careful oversight is required. We are concerned that this risk-based approach to regulation means that the regulator will not start focussing its attention on workplace pensions unless or until something goes wrong. Auto-enrolment of low income people into pension saving coupled with a risk of high-charges (including deferred member and consultancy charges) makes workplace pension saving an area where consumers need the highest levels of protection and reassurance now. We are not convinced that the Financial Conduct Authority, the successor body to the FSA for this area of pensions regulation, is the appropriate body to regulate contract-based pension schemes. If it remains the responsible body, then we strongly urge it to adopt a pensions-specific regulatory strategy and to set up a well-resourced team dedicated solely to proactively regulating contract-based pension schemes. As the successful performance of DC pension schemes relies on well supervised investments, a role which is firmly in the FCA’s remit, there will always be a need for them to regulate elements of contract-based pension schemes. Consequently there will be a number of regulators for pensions focussing on different elements and there will always be issues around where boundary lines are drawn.

We believe that the overall regulatory architecture is sound and, given there will always be a boundary between the roles of the FCA and TPR, there are no current plans to fundamentally change the arrangements for regulating contract-based pension schemes at this time. However, as the market is evolving in response to automatic enrolment, it will always be necessary to test whether the regulatory interventions in relation to particular issues are effective. We are clear that the regulators should work increasingly closer together to ensure that risks are jointly managed and members are protected regardless of how their pension is provided. This is being achieved through a variety of means.

First, the regulators have already published a memorandum of understanding setting out how they will co-operate, co-ordinate and exchange information, to improve collaboration

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on guidance, policy and standards. This memorandum will support the regulators’ work in ensuring their objectives are as closely aligned as possible to deliver appropriate regulatory outcomes for all pension scheme members.

Second, we recognise that it is necessary to better articulate the existing regulatory framework and the working relationships between regulators to ensure that the regulatory and legislative frameworks for governance of both trust-based and contract-based DC provision are consistent and sufficiently robust. As such, in the Autumn, the FCA and TPR will be jointly publishing a document that sets out how the regulation of work-based personal pensions operates.

DWP, TPR, FCA / Prudential Regulation Authority and HMT meet regularly at both working level and through a senior level forum and have a programme of work to ensure that areas of common interest are identified and regularly considered. In order to further strengthen the links between them, the regulators have also worked together on developing the principles of a good pension scheme.

The FCA is updating its pensions strategy which directs pensions activity both within its central policy team and also within its wider supervisory teams which have expertise in pensions. This strategy will inform FCA’s business plan which is planned to be published in Spring 2014. The FCA’s new approach to supervision has a focus on industry-wide themes and in January, the FSA launched a thematic review of the pension annuities market. We anticipate that there will be further thematic reviews in relation to pensions including joint working with TPR.

[Paragraph 115] We remain concerned about current regulatory gaps and the potential for further gaps to arise as a result of three regulators having a role to play. We believe that it is necessary for a single regulatory body to have sufficient powers to ensure that all members of workplace pension schemes are given adequate and consistent protection. We therefore recommend that the Government reassess the case for establishing one body with sole responsibility for regulating workplace pensions. We are determined to ensure the best possible protection and outcomes for members, which can only be delivered through a robust regulatory framework. We acknowledge the call to establish just one regulatory body, but, as explained above, it is our view that there will always be a need for shared regulation of the different components of the pensions system. In addition, we believe that it is too soon after the creation of the FCA and less than a year into automatic enrolment to consider whether the current regulatory framework and divisions of responsibility are appropriate.

The challenge remains however to ensure that the two regulators are aligned as closely as possible, and that there is a common understanding of the risks to members under both regulatory regimes. We are committed to strengthening the ongoing work that both regulatory bodies and their respective sponsoring departments are engaged in to ensure that regulation across the entire DC landscape remains focused on protecting members and preventing detriment. The role of all non-departmental public bodies is reviewed on a three yearly cycle, and TPR will be the subject of such a review this year.

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TPR and the FCA regulate through a wide range of legislation, rule-making, investigatory and enforcement powers to achieve their statutory objectives. It should be noted that there is a high level of alignment between the FCA’s rules and guidance and TPR’s regulatory approach to DC trust-based schemes, as identified in the analysis published by TPR in January 2013. But this does not mean we are complacent and we recognise that further work is required in this area to examine the scope for closer alignment of regulatory approach and the need for any additional legislative requirements.

Small pots and “pot follows member”

[Paragraph 126] We welcome the Government’s attempts to tackle the problem of small pension pots. However we remain concerned about the potential for this system to result in consumer detriment for some individuals. While we agree with the Government that people should not be auto-enrolled into poor quality schemes, it remains the case that people may be transferred from a scheme with low charges and good governance into a scheme with high charges and poor governance. If the introduction of “pot follows member” remains the Government’s preference, it must ensure, through stringent regulation, that all auto-enrolment schemes benefit from good governance and are free from high charges, including deferred member charges and member-borne consultancy charges. Our proposals to allow people to automatically transfer their pension pots to their new employers’ schemes will make it easier for people to consolidate their pension savings. This will help them to keep track of their pension saving, plan better for their retirement and secure a better income once they have retired.

We agree that automatic enrolment and automatic transfers mean it is more important than ever that workplace pensions offer a good deal to members. So we want to ensure all employers, irrespective of size, obtain value for money pensions for their workers. We intend to publish a consultation on charges in the Autumn. This will set out various proposals including a cap on charges in the default funds for DC schemes.

As well as action on charges, we are taking a power in the Pensions Bill to set other quality standards for automatic transfer schemes. As with other automatic transfer requirements, these quality standards will apply to all workplace DC schemes. This means that someone who is automatically enrolled into a DC scheme will receive the same protection as someone who is automatically transferred into one.

We agree that effective governance of pension schemes is an important factor in helping savers to get a good income in retirement. Governance will therefore be a key focus of the quality standards, along with areas such as default strategies and administration. We are working with a variety of stakeholders, including the pensions industry, consumer groups, TPR and the FCA on the development of the standards.

Risk-sharing and Defined Ambition Pension schemes

[Paragraph 143] We recognise that many millions of people will be auto-enrolled into DC schemes in the future and that joining a Defined Ambition (DA) scheme may be an option for only a small minority of employees. We therefore recommend that, while it

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investigates options for DA, the Government remains focussed on ensuring that people are being enrolled into DC schemes which offer high standards of governance and reasonable and justifiable charge levels. We expect that the majority of employers will use a DC scheme for automatic enrolment. In addition, automatic transfers will initially only apply to DC schemes. We therefore agree that as well as investigating options for DA, there is a need to focus on quality and charges in DC schemes.

Many DC schemes already offer a good deal to savers. However there may be some, now or in the future, that do not deliver the standards that should be expected. As set out in our response to an earlier recommendation, we have therefore announced our intention to ban member-borne consultancy charges, and are examining the case for a charge cap on default funds in DC schemes. We are also taking a power in the Pensions Bill to set other quality standards for automatic transfer schemes, which will apply to all workplace DC schemes.

We welcome the Committee’s comments and conclusion on DWP’s exploration of DA pensions. We intend to focus on ensuring the necessary framework is in place in time for contracting-out ending in 2016. We intend to publish a paper in the Summer to set out our position.