Pensions: Occupational Pensions

Baroness Drake Excerpts

Wednesday 1st February 2012 Lords Chamber

[Baroness Drake]

My Lords, my first involvement with NEST is a matter of record. I thank my noble friend Lord McFall for securing this debate and I give recognition to his work on pensions.

Active membership of workplace pension schemes is now at its lowest level since the 1950s. Although I am relieved that the revised timetable for auto-enrolment has been published, I desperately hope that there will be no further delay. In fact, I plead with the Government that there should be no further delay.

For workers to persist in saving for their pension, they have to have trust and confidence. Auto-enrolment will mean that millions of workers begin saving through the capital markets, and the fiduciary duties and behaviour of those managing their assets are going to be of great importance. Trustees have a duty to act in the best and sole interests of the beneficiaries, but the auto-enrolled world coincides with an increasing move to contract-based provision, where fiduciary duty, managing conflicts of interest and governance standards are more ambiguous. To quote the Secretary of State, Vince Cable, in the foreword to A Long-Term Focus for Corporate Britain, returns can be,

“captured by a small number of intermediaries at the expense of the many who provide the capital”.'

A powerful, much needed benefit of establishing NEST as a not-for-profit trust is that it has already started to drive up standards in the industry. Otto Thoresen, the director-general of the ABI, recently acknowledged at the Work and Pensions Select Committee the role of NEST in driving a higher standard of behaviour in the market. Downward pressure on charges and upward pressure on standards of governance—these are the early impacts that NEST is having.

No one who has seen NEST’s approach to governance or investment strategy can doubt the absolute focus on delivering a product for ordinary people. It has transformed thinking around the design of default funds. However, NEST’s influence on the market has to be strong and sustained over a long time. The product restrictions on NEST, the transfer ban and the contributions cap must not be allowed to undermine that influence as the 2012 pensions market, with extensive contract provision, starts to take shape.

The potential cost-efficiency of NEST should not be inhibited. As these restrictions play out in practice, we are now finding that they add complexity to the NEST product rather than simplicity to the employer experience. They may force employers to make multiple-tier provision or sign up for a scheme that does not offer some workers best value.

The transfer restriction also prevents NEST acting as an aggregator of pension pots. With automatic enrolment and job churn, there will be millions of small pots in the system which will be vulnerable to high charges and neglect if they are not steered into a safer harbour.

The Government have acknowledged that the case for reform is clear. That reform must include a role for NEST, which must be fit for purpose in protecting the pension pots of ordinary people.

The importance of NEST in driving up standards in the pension industry should be neither underestimated nor undermined. On the eve of auto-enrolment, we see emerging issues, such as providers selling short-service refunds as a propositional benefit to employers, with the consequential loss of up to two years’ pension saving for the worker. There is also the establishment of multi-employer “master trust” schemes by providers with senior executives in trustee roles. How do they manage conflicts of interest? Will such trustees be able to sack underperforming fund managers if they sit within the same corporate entity?

The Secretary of State has reserved powers to set charge caps and I hope that he will monitor closely the emerging evidence. Low charges are essential to the public credibility of automatic enrolment. I also hope that the Government take the opportunity of the Financial Services Bill to strengthen the requirement on regulated bodies to have a duty of care and to act responsibly in the interests of the consumer.

There is increasing recognition of the importance of the alignment of interests between pension scheme governance and the member. NEST has this alignment at the core of its governance. Indeed, it was heartening to see Otto Thoresen at the Work and Pensions Select Committee arguing forcefully that the industry has really got it in terms of the need to make pensions work for the saver. It was equally heartening to hear him accept that some would be cynical of this claim, based on the industry's past behaviour in this area.

I urge the Government unequivocally to confirm that they accept that a successful and thriving NEST has an essential role to play in driving up standards in the industry, in pension provision and in the interests of all those workers who will be auto-enrolled in saving for their pensions. I urge them to take such steps as are necessary to ensure that the role that NEST will perform in raising the standards in the market place is maintained, including removing restrictions to allow it to continue to do that.