Pensions Bill

Debate between Lord Hutton of Furness and Lord Freud

Wednesday 26th February 2014 Lords Chamber

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con)]

My Lords, I feel rather privileged to have been here this afternoon to hear a pantheon of some of the leading pension thinkers in the country concentrate on an issue. As a result it has been a very interesting debate. Clearly we all agree that this is a very important topic. We need to find a solution to the issue of small pots and I will make a case for why the Government believe that automatic transfer is the right solution and why we do not need any alternative provision.

We are clear that the pot-follows-member model, with small pension pots automatically moving and being combined with the individual’s current live workplace pension, will lead to increased consolidation of pension pots, better outcomes in retirement and better member engagement, as well as administrative savings for the industry. The pot-follows-member model builds on the essential foundation of automatic enrolment —the employer/employee relationship that is proving so successful in driving retirement saving, including among those who have never had a pension before. Employees identify with this relationship and with the idea of pots following them to their new employer.

My noble friend Lord German mentioned the research carried out by NOW: Pensions. It showed that 39% of individuals would like their pot to follow them automatically compared with 6% who wanted their pot sent to an aggregator scheme. For the purposes of that research, NOW: Pensions defined the aggregator model as a pot that is automatically moved to a central scheme that meets certain standards. This definition, although high level, is helpful because otherwise we have no clear sense of what an aggregator actually is. Indeed, these amendments do not help define what an aggregator is or how it would work. In fact, these amendments—which have been revised since we discussed them in Grand Committee—appear to be even less workable than before. For instance, they appear to give the decision about where to move the pot to the ceding scheme. By definition, the ceding scheme is the scheme with the least interest in the individual and their outcome in retirement because it is losing the pot.

This seems entirely counterintuitive when compared with the successful current account switching service—CASS—that helps customers move banks. This service puts the onus on the new bank to ensure that the switch happens, because it was recognised that the bank gaining the account will have more interest in making the move as smooth as possible than the old one. It is perhaps not unreasonable that when people move employers and join a new pension scheme they will expect the new scheme to do the work of transferring the pot for them, as happens when they switch their current account, but this would not be true under a push transfer model which these amendments would introduce.

I agree with my noble friend Lord Flight, who points out a real problem with the proposed aggregator model. It really is not clear who chooses where the pension is aggregated. There are other fundamental flaws, such as the lack of any provisions to ensure that the same scheme is used each time—someone could end up with pots in multiple aggregators, undermining the core aim of consolidation. Moreover, there is no definition of what an aggregator is, who could set one up and what the criteria for doing so would be. This lack of clarity will not help the industry in driving forward the development of the implementation model. Noble Lords may say that this detail can be worked out at a later date, but it is exactly this detail that needs to be resolved before any measure can be put on the statute book.

I have real concerns that the House is being asked to accept a theoretical concept, with all the details to be entirely devolved to secondary legislation, but I also have issues with the concept itself. The Government welcome the recent Office of Fair Trading report and accept its conclusions. The OFT was damning of the pensions market, saying that,

“the combination of a complex product and weaknesses in the buyer side of the market means that competition cannot be relied upon to drive value for money for all scheme members”.

We have heard the argument that the introduction of automatic transfers into aggregators will shake up the market and essentially skew it in favour of consumers by ensuring that all can save into large schemes that provide excellent value for money. However, I believe that the aggregator model would skew the market in favour of large providers and would reinforce the dominance of a few big players.

I believe the assumption is that aggregators would in some way be licensed and that schemes would have to meet certain standards to be able to act as aggregators. This would favour current large schemes that have the business model to enable them to accept large numbers of pots from individuals with employers they have previously had no contact with. Alternatively, if the large players in this market do not take the challenge, the Government would have to subsidise an aggregator scheme, which would raise state aid issues in Europe.

Aggregator schemes would enjoy a huge advantage over the rest of the market. They would be the default destination for almost all pots and, as the consumer would not be making an active choice, there would be no incentive to innovate. We have estimated that there will be three-quarters of a trillion pounds in lost pots by 2050, which is a lot of money—

[Lord Hutton of Furness]

I am very grateful to the Minister for giving way. Can he tell us what assumptions underpin the figure that he has just given to the House?

[Lord Freud]

Those figures are pretty detailed and I will write to the noble Lord with them if I do not get a detailed breakdown in the next minute or two—which I might. It is a huge amount of money, which the noble Lord will appreciate as well as anyone else, and it is a lot of money to have in a complacent and stagnant market. If, as the noble Baroness, Lady Drake, suggested, employers could choose the aggregators, and these aggregators were to become open to active members, this market dominance would be complete.