Pensions Bill

Baroness Sherlock Excerpts

Wednesday 26th February 2014 Lords Chamber

Moved by

[Baroness Sherlock]

23: Clause 33, page 16, line 37, leave out “of which the person is an active member”

[Baroness Sherlock (Lab)]

My Lords, I remind the House of my registered interest as the senior independent director of the Financial Ombudsman Service. Amendment 23 stands in my name and in the names of my noble friends Lord Hutton and Lady Drake. In moving Amendment 23, I shall speak also to the other amendments in this group. These amendments may look lengthy but their aim is remarkably precise.

Amendment 23 is very simple. It would retain the power of the Secretary of State to put into place the consolidation of small pots but would remove the part of the sentence that limits this to the “pot follows member” form of consolidation. This sounds technical but really it is not; it is about fairness. As the state is enrolling people into a pension scheme without their explicit consent, surely it has a very high duty of care to them to ensure that the money they are putting aside is not lost through excessive charges or poor investment choices driven by inadequate governance.

“Pot follows member”, or PFM in the jargon, is the Government’s solution to a problem. I shall comment on the problem, demonstrate why I believe that the Government’s proposed solution is flawed and propose an alternative. The Government believe that action is needed to address the large number of dormant small pension pots that arise under auto-enrolment when employees move to new jobs, which they do on average 11 times in their career. We on these Benches agree that action is needed but we do not agree with the form of action proposed. The impact assessment confirms that the Government considered two default transfer options: first, pot follows member, where the small pension pot would follow the member to their new employer’s pension scheme; secondly, an aggregator scheme, where small pension pots would be transferred to an aggregator, such as NEST. The Government had two options but I believe that they chose the wrong one. However, I do not propose to substitute my judgment for that of the Government; rather, this amendment would simply increase the choice available to them. As it stands, Clause 32 allows only for pot follows member. Our amendments would enable the possibility of the Government using an alternative default aggregator model without the need for new primary legislation.

I would like to set out the context. The core issues of trust and confidence are still centre stage in getting people to start, and continue, saving for their retirement. This Bill, and auto-enrolment itself, should give people the confidence they need to save for their old age, but how can we demand that people save if they do not trust the savings vehicles and do not trust the pensions market as offering value for money? The pensions market is not a typical retail market where the consumer chooses the product. Under auto-enrolment, the consumer does not choose the product; the employer does. The only choice for the employee is either to stay in or to opt out and lose the employer’s contribution to their pension. There are also many intermediaries in the pension supply chain. Pensions are complex products, lacking transparency. While many large employers may have the resources to pay for good product advice or assessment of fund performance, SMEs may not. The demand side is weak.

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[Lord Freud]

I can confirm my noble friend’s question—or I can give the answer to confirm it.

At this point in time, when we are just starting out with automatic enrolment and successfully getting people saving for the first time, we need to make it as easy as possible for them to build their pension. We need to use inertia in the right way. That means moving a small pension pot to the current live pot where the individual can see it growing, rather than sending it off to a scheme with which the individual has no engagement and in which they have no interest.

Now is not the time to break the link between the individual and his or her employer. Automatic enrolment is going well, with 3 million individuals newly saving and less than 10% opting out. It is reinforcing the workplace pension as a key element of the benefit package that employers offer their staff after decades of decline in occupational pensions.

I have heard the argument that these amendments are designed to give the Government another option, which appears on the surface to be a generous approach. Providing the Government with greater flexibility is one thing, but listening to the debate today, I suspect that few on the Opposition Benches want the Government to have the flexibility to chose anything but the aggregator model.

In practice, the amendments will leave us in limbo and bring back uncertainty at a time when industry is beginning to get behind, and position itself to deliver, pot follows member. As my honourable friend in the other place announced on Monday, officials are currently exploring the feasibility of using HMRC’s PAYE data and system to help us to deliver a secure, efficient and straightforward pot-matching element to implement the process.

In response to the assertion of the noble Baroness, Lady Sherlock, that pot follows member would be hard to set up, we have recently had some very positive workshops with industry representatives and HMRC. The model is already inspiring some exciting and innovative approaches to transferring money with an employee as they move jobs. The cost of the transfer was specifically mentioned by the noble Baroness, Lady Drake. It will be the same for an aggregator as for pot follows member. Altus has challenged the claim that pension transfers are too hard and too expensive by stating that transfers for ISAs and funds cost £1 or less, and that this can be replicated for pension transfers.

After two years of discussion and debate on this issue, even if we cannot agree with the Opposition on the right delivery model, I hope that we can agree that we need to take a positive step forward. On the “pause to reflect” point made by the noble Lord, Lord Hutton, I do not believe that we are rushing into this measure. We first consulted more than two years ago and followed up with two policy papers. We also held extensive discussions with industry and consumer groups within that period. I urge the noble Lords to withdraw their amendment to allow us to work together, and work with industry, to make automatic transfers a reality.

[Baroness Sherlock]

My Lords, I thank all noble Lords who have contributed to what has been another classic House of Lords debate. I particularly thank my co-signatories to this amendment, my noble friends Lord Hutton and Lady Drake. The Minister referred at the outset to a pantheon of pensions expertise, and indeed it has been. The noble Lord, Lord Bates, joked in Grand Committee that the Pensions Commission was almost quorate since two of its three members were gathered there. I say to the Minister, as I said then to the noble Lord, Lord Bates, that if I were sitting where he was and this pantheon was sitting opposite me and telling me that I was wrong, I would be pausing, just as my noble friend Lord Hutton suggested.

A number of arguments have been made today. The Minister says that the Government have been discussing this for two years but this House has not. When we discussed it in Grand Committee, I do not recall hearing a single supportive speech for pot follows member. I am glad that the researchers of the noble Lord, Lord Stoneham, moved him from his position then to the position that he articulated so clearly today, but I do not think that anyone in this House has heard those arguments made until today. I am glad that we have heard them, and very glad that the Minister has been doing work with the industry to get it ready to deliver what will be this Act. However, it is still a Bill; it is not an Act and this House has every right to make its own decisions. Whatever decisions Parliament makes, I have no doubt that at that point the Minister and his colleagues will go out there to deliver.

What arguments have we heard today against our enabling amendment? First, we have heard that it is not clear what the choice is. Well, that is the point: the amendment says to the Government, “Go back and think again. We will work with you if necessary, but think again”. It is said that there will be a delay. Yes, there will be a delay, but the wrong thing would be to rush ahead and make a decision because you want it now, if the consequences would be very serious because it is the wrong decision. This is too serious to rush into. A lot of criticisms have been made so far. For example, the Minister says that the way in which this amendment is constructed would leave the choice of the aggregator with the outgoing employer. If the Minister looks again at Amendment 23J, he will find in fact that it says that regulations may do one of two things. There is a big “or” between the two; it is either push or pull. Everything about these amendments is constructed to say that we recognise there are choices to be made but think that the Government have not given enough thought to what should be the right way forward for consumers.

We have heard nothing to counter the arguments made across the Benches here. What about all those who leave employment? What about the self-employed, who make up the fastest-growing sector: where do their pension pots go? What happens to the pension pot of the seasonal cricketer mentioned by the noble Lord, Lord Turnbull? I am sorry, but I live in Durham and our cricketers are mostly in the England teams, so I cannot advise him there. However, I can tell him that that person would really struggle under pot follows member. What about all those people in mini-jobs who will find themselves in a position of not having a single employer? Much has been said about the relationship between employer and employee, but the truth is that every model of pension scheme struggles with employee engagement. As the noble Lord, Lord Flight, pointed out, the whole point of this is that it addresses only the position of those who make no active choice themselves, yet those are the people to whom the state owes the greatest responsibility. These are the people whose funds we are moving, without their explicit consent, from one employer to another.

Much has been made of the fact that we want all the schemes to be of the best quality, but let’s get real—the OFT has already said that the market is not working. The noble Lord, Lord Turner, has described the challenges they found: people are learning when they come to retire that between 25% and 40% of their pension pot has gone in charges. If the Government really are committed to tackling charges I would invite the Minister to intervene again and to give a proper answer to his noble friend, the noble Lord, Lord German, about when the Government will cap pension charges. If he will not tell us now, I have a very simple solution for him—he can vote for our amendment in the next group and cap the charges tomorrow.

[Lord Freud]

I really do need to take up the invitation. I think that we have made it clear that we will deal with this within this Parliament, which I think means by a date some time in May. I think that that is fairly clear.

[Baroness Sherlock]

It is interesting, my Lords. What has happened—without wishing to pre-empt the next debate—is that the Opposition pushed the Government to do this but the Government said that it was not necessary. The Minister then went out to consultation and suddenly seemed to get cold feet, and he put it on hold for a year. There is a very small window but I am delighted to hear it. But the Minister can vote for our amendment and need not wait. The Government are again being invited to do it, and my noble friend Lord Hutton has very powerfully made the case for why they should.

I have been careful to try not to put my personal preference in the proposals, but I would be happy to join the Minister in a proper cross-party, consensual discussion about the way forward. The Labour Party introduced auto-enrolment and I pay tribute to the Government for taking it forward. We all share a common objective: to get as many people as possible saving for retirement. They can do so only if they have trust and confidence in the pensions market and in the schemes they are investing in. If they do not have that confidence they will not save and we will all be the poorer. The best way to do it is to ensure that there are schemes in which people can have confidence. I believe this is the right way forward and I wish to test the opinion of the House.

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Moved by

[Baroness Sherlock]

41A: After Clause 51, insert the following new Clause—
“Review of provisions
Within one year from the date of enactment, the Secretary of State shall, following the completion of a public consultation, lay before both Houses of Parliament a report assessing the impact of the provisions contained within this Bill on the following—(a) current and future recipients of the state pension;(b) members of private pension schemes;(c) women born between 6 April 1951 and 5 April 1953;(d) the level of knowledge among young people of state pension entitlement and private pension provision; and(e) such other matters that the Secretary of State for Work and Pensions and the House of Commons Work and Pensions Committee deem relevant.”

[Baroness Sherlock]

My Lords, Amendment 41A in my name and that of my noble friend Lord Browne calls for the Secretary of State to review and report to Parliament on the impact of the Bill on specific groups. I recognise that the department undertakes research, but this amendment picks up on something slightly different: the impact on specific groups about which concern has been expressed during the passage of the Bill through Parliament, or where provision is in effect a work in progress.

This is a major Bill that will have a significant impact on the majority of our citizens—indeed, on pretty much all of those who have yet to reach state pension age. If the Bill proves to be even half as good as the 1948 Act, it may be in place for a long time. The amendment calls for reviews of provisions made in the Bill to check that we have got it right and to enable us to make any necessary adjustments for those who are unfairly disadvantaged, or where provisions seem not to be working as we might have hoped.

Paragraph (a) of the proposed new clause calls for a review of existing and future beneficiaries of the state pension scheme. When there are winners and losers we should review that to make sure that we have got the balance right. We should also include within the review an assessment of whether transitional arrangements are adequate and working.

Paragraph (b) relates to the operation of private pension schemes. Given the debates this evening, I hardly need detain the House further by sharing our views on whether the private pensions system is working well; I think that we all know that there are challenges. Some of the changes that are needed, such as to the annuity market, may well need primary legislation, but many will not. The review will take the opportunity to look at whether the various changes, legislative or not, which the Government have made and promised, are working effectively.

Paragraph (c) relates to the concerns expressed by many women born between 6 April 1951 and April 1953. I am sure that all noble Lords have had many communications from women in that category who are affected. In Grand Committee, the Minister was pressed by various noble Lords, including my noble friend Lady Hollis and the noble Lord, Lord Paddick, to be clear as to whether or not this cohort of women would be better or worse off under the new system. The assumption of the Government is that they will be better off, but I never got a satisfactory response to the question I posed in Committee as to why the Government think that women born between 1951 and 1953 are better off under existing arrangements, and yet also claim that women will mostly be better off under the new pension arrangements. I still do not quite understand how both can be right. The amendment asks the Government to report to Parliament on the actual impact of these provisions, rather than simply relying on analysis of what the impact is likely to be.

Paragraph (d) focuses on the need for a review of the knowledge of young people of the system. Young people currently face a challenging work environment with high youth unemployment, the potential for high debts if they go to university and astonishingly high rents. We may safely conclude that, for most of them, concern about living in poverty in their dotage is not chief among their concerns, so a call to start contributing to an auto-enrolled pension may not ring loud. Yet that is of course the very best time to address those concerns.

Better financial education is needed, coupled with information about the importance of providing in future for their retirement. We owe it to young people to encourage them to consider making pension provision as soon as they are able to do so. This amendment seeks to keep track of the Government’s strategy to ensure that our young people are armed with a greater understanding of the need to proactively engage with pension decisions.

This is a far-reaching Bill and we should therefore make sure that we have got it right. Paragraph (e) of the proposed new clause recognises that the Select Committee, and indeed the Government, may identify other matters that should be reviewed and reported to Parliament.

The principle underpinning the Bill is that people should have a state pension that is simple to understand and that they should take responsibility for saving for their old age through work-based pensions. We also need to have it acknowledged today that the state owes a duty of care to the large numbers coming under auto-enrolment. In light of the broad consensus that industry must improve its standards and reduce its charges, its progress towards that should be monitored by Parliament. The amendment sets out a method of parliamentary scrutiny to ensure that we have got it right and that the Pensions Bill will last us, as the Minister aspires, for decades to come. As there will be an election before enactment—and, of course, a change of Government, one hopes—the amendment is prudent. I recommend it to the House. I beg to move.

[Lord Freud]

My Lords, I do not think that anyone in the House can be under any misapprehension but that the Government value extremely highly the role of evidence, analysis, consultation and evaluation in policy-making. Our approach to designing this once-in-a-generation package of pension reforms has been heavily informed by a robust and wide-ranging evidence base. However, looking at the text of the amendment and its timing, I must make clear that the provisions on the new state pension, and many of the other provisions in the Bill, will simply not have been commenced by spring next year—the time used in this amendment. Therefore, all that would come out of such an amendment would be a rehash of the information that has already been provided to Parliament: there would be nothing to add. We have no particular objection to this amendment in terms of sentiment, but its timing is just not appropriate.

I will not spend a lot of time going through all the issues, which we have gone through in huge detail over the past weeks and months. However, I will touch on how we will monitor the impacts in the future and what the plans are. It is clearly imperative, as the noble Baroness said, that a set of reforms of this nature is accompanied by a strategic approach to monitoring at sensible intervals. I am not saying anything that noble Lords will disagree with when I state that pensions is a very long-term policy area, and that the impact of many measures will not be felt fully for decades.

As a society we are asking people to do more to think ahead and plan for their retirement. As a Government it is our duty to do the same in looking at the retirement outcomes of the population as a whole. Our retirement outcomes framework, published in September 2013, provides an overview of projected future retirement incomes, looking at the impacts of government pension reforms as a whole and across state and private systems.

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[Lord Freud]

I am happy to make sure that we itemise those in a way that will help noble Lords keep an eye on what they need to monitor as we go along.

We will update the modelling as evidence becomes available on the impact on work and saving of automatic enrolment, the single-tier state pension, and state pension age changes. As noble Lords will know, the department conducts a six-monthly tracking study of attitudes and behaviours in relation to pensions, later life and automatic enrolment. A similar exercise will start after Royal Assent, to monitor awareness and understanding of the reforms.

We are committed to the principle of post-legislative scrutiny, but such scrutiny must have scope to provide insights beyond the impact assessment and consultation practices to which we are already committed. I know that the noble Baroness accepts the point on timing, but the timing of this amendment would not add materially to the powers of the Work and Pensions Select Committee. Indeed, there is an awkwardness about the timing, because it straddles the next election. However, we look forward to continuing to develop pensions strategy with that committee’s input.

I know that the noble Lord does not appreciate my asking for the other side to withdraw this amendment and not press it to a vote, but that is the position I am in. Maybe there is more warmth to my request than there has been this evening.

[Baroness Sherlock]

My Lords, that would not be hard. I thank the Minister for that response, and I thank my noble friend Lady Hollis for pressing him for more detail on how this will be monitored in future.

I am very grateful to the Minister for setting out the Government’s commitment to post-legislative scrutiny and for setting out his commitment to making sure that the impacts of the Bill are analysed carefully, and with the use of evidence. I will press him to do two things. The first is to give particular attention to the two groups mentioned by my noble friend Lady Hollis. The women born from 1951 to 1953 feel very strongly that they have missed out on something important with this. If the Government turn out to be right, and they are better off under the current system, it is important not just that the Government find that out but that they share that knowledge as widely as possible. If that is the case, those women will be reassured—and, if not, they have a right to know anyway. Can the Minister also look at the position of those who would have been affected by, for example, the removal of derived rights, and whether the transitional protections are working well for them?

Secondly, as well as all the work that has been done to an appropriate timescale, will the Minister give some thought to how that might best be shared with the House? The proceedings have been very good as the Bill has moved through Parliament. A lot of issues have been raised—in this House in particular—and a lot of expertise has been brought to bear on this, and we have all learnt a lot from the process. Having done that, rather than have the results of it disappear into the department, marvellous as it is, it would be helpful if they could come back out so that we can all learn from that, both for the Bill and for future legislation. However, I will take his assent to those marvellous suggestions as read, and on the basis of that—and because he asked so nicely—I beg leave to withdraw this amendment.

Amendment 41A withdrawn.