Pensions Bill

Baroness Drake Excerpts

Wednesday 15th January 2014 Grand Committee

[Lord Stoneham of Droxford (LD)]

My Lords, the previous two speakers have covered the main arguments that I was planning to raise, because there is concern—even from those close friends of the Minister, Steve Webb—on this issue. It is valid, therefore, to register that—there are certainly concerns in our group here this afternoon. The issues have been raised, including the issue of the inefficient market. The issue does not cover the consolidation of old pots. It considers the consolidation of the mobile or live pots. It does not raise the issue of what you do with those people in the labour force who are constantly changing jobs and the costs and the impact on their pension pots every time they do that. It also needs to address the fact that there is a smaller number of aggregators. I agree there is a problem with competition, but it is much easier to supervise them and make sure that the quality of those aggregators is adequate.

The final issue that needs to be raised is that there is a concern that without that supervision, people will be transferring into poor schemes or run the risk of doing so. They need to be protected. For all those reasons, it is right—and the noble Lord, Lord Turner, raised this point—that this is a time for reflection before we make any final decisions.

[Baroness Drake (Lab)]

My Lords, I will try not to duplicate some of the excellent contributions that have been made. Perhaps I could say that the areas of concern with pot follows member can basically be grouped into three categories. One is confidence in the basis for the Government’s decision to choose pot follows member; the second is differing views on what benefits the saver, and the third is the need to protect dormant pension pots that have already accrued.

When it comes to confidence in the basis for the Government’s decision, the noble Lord, Lord Turner, did a splendid job in identifying the limitations in the impact assessment. I stress that there are significant barriers to overcome before the Government can be confident about the superiority of the PFM model. The consequences of getting this wrong are absolutely huge.

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[Baroness Drake]

My Lords, perhaps I may reiterate for continuity that the areas for concern with PFM can be grouped into three: confidence in the basis for the Government’s decision, differing views on what benefits the saver and the need to protect dormant pots already accrued.

When it comes to the basis for the Government’s decision, where are the significant barriers to be overcome before the Government can be confident about the superiority of the PFM model? The consequences of getting this wrong are huge. Yet the transfer model is in the Bill when there are so many conditionalities still to work through, and confidence in securing lower charges, which is the main benefit claimed for the PFM model, are by no means assured.

PFM requires effective pan-industry collaboration, but what if that is not forthcoming? Are the Government confident that they can overcome industry inefficiencies and conflicts of interest, so well articulated by the noble Lord, Lord Turner? The DWP is working with the industry to find an IT solution to match pots to members. There are significant technical challenges to overcome, standardisation to be achieved and the industry as a whole has to reach a consensus that prioritises the savers’ interests. If and when that is achievable are unknowns, but the Bill locks us into pot follows members.

Some providers will have an interest in getting rid of small, less profitable pots but will also have an interest in setting a pot size cap to defend their more profitable pots. They will have a natural antipathy to an aggregator with a pot cap that increases to a certain level. However, the pot limit chosen for automatic transfer will affect the number of separate pots that a saver builds up over their working life. It is one of the issues that goes to the heart of the efficiency of the aggregator model or the consolidation model chosen. Depending on the assumptions about the aggregator or how many active member and dormant-member pots that it has, the administrative savings can be greater than those that have been estimated in the impact assessment.

The department comments in its impact assessment that, overall, the results of its modelling suggest the aggregator scheme will achieve slightly less consolidation than PFM, but that needs to be set against the greater control that an aggregator scheme could provide in mitigating other risks that come with an automatic transfer mechanism. It would also be interesting to see the results of modelling that includes today’s dormant pots. I would like to come back to this. Equally, pot follows member cannot be implemented without raising quality standards, or the Government risk transferring the savings of millions of ordinary people into myriad schemes over which they currently have little quality control.

Even if the Government succeed in getting all schemes to a minimum quality standard, there will be a wide range between minimum standard and best practice. For example, consider a modestly paid worker who leaves a good scheme provided by a major retailer and goes to work for a two-person employer running a small shop, whose workplace scheme has higher charges, poor governance and a less suitable investment strategy. Would it really be wise to default several thousands of pounds of the worker’s savings into the new employer’s scheme? Regulation could set standards for aggregated schemes above the qualifying standards for automatic enrolment schemes, raising those standards in order to mitigate the risks that can occur on transfer.

Against that, PFM increases the regulatory burden to oversee a myriad schemes into which automatic transfers would be made, rather than focusing on leveraging very high standards in a few aggregated schemes. There is the potential for significant burdens on employers involved in transferring small pots to any number of schemes. Under PFM, every scheme would potentially need to be capable of communicating with every other scheme. Aggregators could pose a lower burden, as there would be—or could be—a much smaller number of such schemes.

Automatic enrolment was intended to carry a lighter regulatory burden for employers, especially SMEs, but this seems to be rowing in the opposite direction. The National Employment Savings Trust, which embraces the most transient low to moderate market, could consequently face higher administrative costs as a result of PFM. What is the consumer detriment to NEST members whose pots are transferred into the schemes of new, small employers, and out of the protection of the high governance standards in NEST?

With pot follows member schemes, the department expects that over the long run average charges would reduce as efficiency savings are made by the industry, but a reading of the impact assessment lacks confidence. Paragraphs 67 to 69 list some of the risks to which I have referred, but paragraph 70 concludes rather sweepingly that,

“the Department would expect the gains and losses from differences between scheme charges and investment performance to cancel out on average”.

When it comes to savers benefitting through lower charges from the administrative savings that providers may make from PFM, paragraph 71 comments that,

“there is a risk that some providers will not experience the resource savings projected”.

Paragraph 72 reminds us of the,

“uncertainty surrounding the assumption over the savings that providers will make”.

This is not the firmest of springboards from which to lock into a solution on the front of a Bill. On the differing views of what benefits the saver, PFM does not currently accommodate people who leave the labour force or become self-employed, as they have no employer scheme into which to transfer their pot. Their ex-employer may nevertheless default them into a poorer personal pension because they do not allow ex-employees in their existing scheme, which I must say is a growing trend. What of women who leave to become carers, move to a new employer, or who work part-time but because of the level of the earnings trigger are not auto-enrolled into the new employer’s scheme?

As has been argued by NAPF and others, pot follows member increases the risk of charges and transaction costs being incurred on the whole pension pot, rather than on the incremental amount saved with the previous employer. If the saver works in an industry characterised by frequent job changes they will be more vulnerable to these risks, which an aggregator could reduce.

Even where individuals choose to transfer to their new employer’s scheme, they face supply-side barriers. Transfers can take weeks if not months, and complexity and lack of standardisation combine to cause delay and increase costs. At decumulation the buying power of a larger pot can be harnessed by the individual, but the buying power is even better if open-market options can be exercised in bulk. Aggregators could facilitate and do this.

I turn to the third element, which is the need to protect dormant pots that have already been accrued. A key weakness in pot follows member is that it excludes existing dormant pots. An aggregator could pool an individual’s dormant and live pots because aggregation would not depend on an active scheme member moving to a new employer. Pot follows member at the point of introduction only consolidates live pots with future live pots. Today’s dormant pots are completely ignored. No start date has been set for pot follows member, as my noble friend Lady Sherlock has indicated, but by 2016 some five years’ worth of dormant pots will have been built up under automatic enrolment, and they will be excluded from the PFM proposition. The summary of the impact assessment points out that those with dormant pots before the start date will,

“remain in their existing scheme”.

That is a key weakness in this solution. Equally, it cannot be right that they should stay with their existing scheme in every instance because some employers will simply default these pots into alternative arrangements anyway if the former employee does not voluntarily transfer. If they are not allowed the option of access to PFM or the aggregator, the employer may well default them anyway into a personal pension.

Finally, the issue of pension pots is not only a future one, it is also one of legacy. Quite a lot of work is being done on standards and reviewing legacy pots by the DWP and the OFT, and there is work to come out of the FCA. I would ask this question: is there to be no synergy on the solution to transferring small pots post-2016 under auto-enrolment, and the solution to the problems that may be revealed in the audit of legacy schemes arising from the OFT investigation? Is it really going to be a set of parallel lines in looking for the solutions to cover the legacy problem, which could also be in auto-enrolment savings pots because of the 2016 dateline and what evolves in the future?

Amendment 62ZC clearly maintains the power of the Secretary of State to make arrangements for the transfer of pension pots, because everyone sees the compelling need to have some way of aggregating or consolidating these small pots. This amendment provides an opportunity to rethink the model to be chosen, but it does not of itself substitute an alternative model. The Government can eventually decide on the alternative model, and new primary legislation would not be needed—but it would not lock us in. The effect of the amendment would not be to lock us in to the PFM model at this stage. The reason for that is, I would say, because the case is not proved, members’ interests are not truly being defended, and there is no synergy with any dormant savings that may exist prior to the implementation of PFM before 2016. I believe that all these issues need much more consideration.

[Baroness Turner of Camden (Lab)]

My Lords, I have not spoken on this item hitherto except briefly at Second Reading. In my opinion, it is one of the most important issues before the Committee. That is because it is quite obvious that the Government want people to save. Everything they have been telling us about pensions indicates that they want people to save. What happens if people do save, but then they transfer jobs? Nowadays, of course, people do not stay in the same job for their lifetime. They may have several or even many changes of job in the course of a career. What happens to the pension pots that they accumulate? If there is no safety in those pension pots, the whole thing will be a disaster. I support strongly what my noble friends have said. It is clear that this is something that requires a great deal of attention.

Is the regulator to have more powers to deal with this? It is obvious that you cannot have a situation in which pension pots are put at risk because there is no way of handling the market or for dealing with people who will be forced to make choices for which they do not have the necessary skills or experience. They cannot make the right kind of choices and they may end up with a bit of a disaster instead of a reasonable pension, or even a reasonable lump sum to place with another pension provider. Again, I hope that the Government will take seriously what has been said in this debate. It is a very important issue.

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In the case of Amendment 62ZJ, the Secretary of State is given the power to set standards that nominated transfer schemes would have to meet to avoid this. The Government believe that we should not be looking to drive up standards in a handful of aggregator schemes but set minimum standards for a broad range of schemes, so that everyone enjoys an improvement in the quality of schemes.

[Baroness Drake]

Will the Minister accept that, whereas getting every automatic enrolment qualifying scheme up to a minimum standard is an excellent aspiration, getting everyone up to a minimum standard is not the same as setting a very high set of standards for a scheme that you are using to default people’s pensions into?

[Lord Bates]

The Government are not averse to excellent aspirations in a whole range of policy areas but in that particular area we need to look at the issue of the quality. In many ways, this goes back to the introduction of auto-enrolment, when perhaps it should have been the case that scheme quality was dealt with at that time. That would have made an awful lot of sense.

[Baroness Drake]

I do not want to get into that political debate because there might be some merit in what the noble Lord said. One of the core issues is that a default pension scheme was not chosen but I do not want to drift there. However, it does not matter who should have dealt with the minimum standards for qualifying schemes and when. If the Government are going to take to themselves the power to say, on behalf of millions of people in this country, “We will automatically transfer”, then the governance standards required in the scheme receiving the pots transferred under those terms have to be pretty high, do they not?

[Lord Bates]

Yes, and our hope and belief is that there will be higher standards. That cannot be issued by diktat and has not been covered. We are simply giving the powers and setting out the framework as to how we will go about that, but that discussion has to be had with the pensions industry. The conversation is ongoing and we will certainly be reporting on that progress.

I turn to some of the specific points that have been raised. The noble Baroness, Lady Sherlock, talked about the level of support and seemed to be fairly sceptical about whether there was any.

[Lord Bates]

The noble Baroness always asks an honest and genuine question, and I am trying to give an honest and genuine response, which is to say that we are not necessarily comparing like with like here. Although people understand how the pot-follows-member scheme might work—in other words, they will have just one pot, and everything will be transferred into it—they do not necessarily understand what the noble Baroness is proposing in terms of alternatives, whether they are single, multiple or virtual aggregators. Therefore, to give a clear-cut position on that is somewhat difficult.

It was drawn to my attention today that Adrian Boulding of Legal and General, one of the largest pension providers, in today’s Pensions Expert, formerly Pensions Week, says:

“the concept of your pension pot following automatically to a new employer is now not far off. The long-term benefits of people having ‘one big fat pension pot’, as the minister likes to call it”—

I think the Minister he is referring to is my right honourable friend Steven Webb—

“will be greater consumer engagement, more informed decisions, greater buying power and better pension outcomes. All well worth striving for”.

[Baroness Drake]

He would say that, wouldn’t he?

[Lord Bates]

He might say that but he is one of the providers and I therefore think that that is certainly well worth listening to. Another reason why we have come to this conclusion is because there is a great deal of uncertainty about what is happening out there. Auto-enrolment in pension schemes has been a huge success and the previous Government deserve credit for introducing it in the 2007 and 2008 Acts, based on the recommendations of the Turner commission. The price of the success of auto-enrolment is that it is creating a larger number of smaller pension pots as people move on. Figures have been quoted of there already being 370,000, and the noble Baroness, Lady Drake, has talked about a future figure of 600,000. That means that the need to make a decision is more urgent than ever. The noble Baroness was asking, “What does the industry think? What are people actually thinking?”. Pensions Expert, in its comment and analysis section said:

“If last year was about policy, then this year it is going to be all about making things work. Government have now clearly set the direction of travel. The success of auto-enrolment—in terms of low opt-out rates—means even more small pots are going to be created than were expected. Previous estimates that auto-enrolment would create around 370,000 new pots of less than £2,000 each year now look woefully low”.

They are very clear in what they are saying: they want direction. That does not mean to say that that direction cannot be changed by a future Government—just that they are getting clear direction. We consulted about it in 2011; in 2012 we issued a response; in 2013 we actually said what we were going to do. It seems as if finally, the industry—and, we hope, members—are getting their heads around the fact that this is the preferred option and the route that we are going down to ensure that we actually make it work.

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[Lord Bates]

The noble Lord makes my point: it is more difficult to understand. What are we trying to do? We are trying to make it simpler. We are trying to get people to be able to understand it. That is one of the reasons why it appeals to people. They will only ever have one pension pot; under the other scheme they may have several; they will be able to keep track of that and follow it through. Anyway, we can discuss and debate that, but in all of the consultation that was undertaken, it was clear that there was a strong view in favour—not only from the respondents of the consultation, but also in the opinion polls that followed from the industry.

The noble Lord, Lord Turner, raised the important issue that pot follows member fails to deal with high charges. We strongly agree that driving up scheme quality is of paramount importance. This is an issue wider than just a scheme used for transfers in the aggregator model, but actually should be something that applies to all, to set minimum standards across a broader range of schemes. Therefore, in doing so, it would benefit not just those affected by these pension pot transfers, but also the existing members of those schemes.

The noble Lord, Lord Turner, said he did not accept the pot size comparisons that were being put forward. He spoke about the £2,000 limit: why was it £2,000? We actually consulted not just on £10,000: we consulted on £20,000, £10,000, £5,000, all the way down to £2,000 and even £1,000, which is similar to the amount that is currently used in the Australian model, which is often cited in this context. In all of those different levels, pot follows member came out ahead of the aggregator in terms of individual responses.

[Baroness Drake]

I would not presume to speak for the noble Lord, Lord Turner—I learn from him, not the other way around—but the point he was making was that one of the Government’s arguments against aggregator was that they would have to limit the pot size, which would introduce inefficiencies, because if they did not do so, it would distort the market. He was saying, I think, that he did not necessarily accept that that was a compelling argument against aggregator.

[Lord Bates]

It is a shame that the noble Lord, Lord Turner, is not here to respond to that himself or to clarify the point, but I take the clarification from the noble Baroness about where he was going. On the issue of how to drive down costs, the noble Lord referred to the potential and mentioned some horrendous numbers—25% or 30% of accrued pension disappearing in charges and how low it was possible to get that. There are some very interesting findings, which we are consulting on at present, about how technology would be a key ally in this. The noble Baroness, Lady Sherlock, asked about this too, wondering whether we preferred a paper-based system or an electronic system. Our preference, based on the current evidence, is invariably towards electronic, because there are associated costs every time you push a bit of paper around. I was interested to read in various articles that you might be able to get the figure for the entire transaction of a transfer down to £105 for both transmitting and receiving the amount if you do it electronically. There needs to be an electronic element to this and that probably points in the direction of a database. We are still consulting on that. We are open to advice, but that is probably something on which the industry will have to offer views.