Pensions Bill

Baroness Turner of Camden Excerpts

Wednesday 15th January 2014 Grand Committee

[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.

[Lord Bates (Con)]

My Lords, I can certainly assure the noble Baroness, Lady Turner, that we will take very seriously what has been said this afternoon because it comes from such authoritative sources. We have had a high-quality discussion, as is typical of this entire Committee. In fact, at one point I think that we had a Turner commission quorum. This is a very important discussion. We are agreed about the urgent need to tackle small pots and to keep people engaged as regards the value of their savings with a view to their increasing them and being able to purchase a bigger pension when they retire. The savings culture to which the noble Baroness, Lady Turner, has just referred is at the heart of this amendment and the proposals we have put forward.

First, I wish to put some general remarks on the record and, in so doing, speak to government Amendments 62A and 62B, standing in the name of my noble friend Lord Freud. I will then turn to the issues and questions raised and, I hope, give noble Lords some comfort on them.

I think it is worth starting on a note of consensus. Clearly, there is a strong sense that the issue of the proliferation of small pots is one that needs to be addressed. There is some disagreement about how we get there—an issue on which we have consulted extensively since 2011. We announced our preference for the pot-follows-member-model in 2012 and reiterated it in the Command Paper published last year. A full and proper policy-making process has been followed in coming to this conclusion. These amendments seek fundamentally to change our proposals to a type of aggregator model, where pension pots will be moved to a separate nominated transfer scheme. We consulted on the option of an aggregator and there was no clear consensus for a particular type of aggregator. We received views on single, multiple and virtual aggregator models and only 19% of respondents preferred a multiple aggregator which these amendments seek to introduce. Therefore, these provisions, while providing a broad framework, legislate specifically for the pot-follows-member model, providing a clear direction to drive development of the detailed transfer process and to enable the industry to plan for the future.

I will take some time to set out why this Government believe it is right to take this approach. The rationale behind automatic transfers has always been to ensure that individuals have better retirement outcomes and we believe that pot follows member will help to achieve this because it brings greater pension pot consolidation. The proportion of people reaching retirement with five or more dormant pots could fall from one in four without reform to nearly one in 30. We estimate that pot follows member will halve the number of dormant pots and make net administrative savings of £6.4 billion by 2050. That is a key point because the administrative costs of pensions are at the heart of what we are talking about in terms of charges, so therefore reductions in costs mean a bonus for the savers.

In contrast, by their very nature, aggregator models mean less consolidation than pot follows member. Individuals will have at least two pots in a single aggregator model and they could have many more in a multiple aggregator model. Our research shows that a single aggregator scheme would achieve only around half the net present value of a pot-follows-member system to the new employer’s scheme. Given that people are more likely to engage with pension saving as they see their pot grow, coupled with the fact that most annuity providers require a minimum of at least £5,000 or £10,000 in a pension pot to achieve the market option to which the noble Baroness, Lady Drake, referred, consolidation is a key objective to achieve greater results and economies from the purchase of annuities.