Pensions Bill

Lord Flight Excerpts

Wednesday 26th February 2014 Lords Chamber

Of course, we still need to see the regulation standards that will be set. We will need an economic and practical transfer system. We will need to cope with consumers leaving employment and going off into self-employment. We also need to deal with the current backlog of stranded pots. However, above all, we need to move forward on this before the problem gets greater and the advances of auto-enrolment are undermined by a vast number of lost and unaccountable pension pots.

[Lord Flight (Con)]

My Lords, the noble Lord, Lord Stoneham, has made some very good arguments in favour of pot follows member, but I want to start—and I want to be sure that there is absolute clarity here—on the question of individuals having a choice about where they consolidate their pension savings. We are talking about the default option in discussing pot follows member versus aggregator and no more than that. When an individual joins a company scheme on moving jobs, it is quite important that he is able to choose where to consolidate his pension.

In terms of the default option, first, I have always felt strongly that the argument against the aggregator arrangements is: who chooses? That point was made by the noble Lord, Lord Stoneham. I cannot really see who is in an appropriate position to choose if we go to aggregators. Secondly, aside from the cartel point, the larger the amounts of money, the more difficult it becomes to manage that money. A whole lot of potential investments almost get ruled out because the market capitalisation of firms is not sufficiently large. Therefore, I do not see there being a huge virtue in having a limited number of colossal managers. I might add that NEST’s charges do not seem to be particularly competitive, particularly for the earlier years of membership.

To a certain extent, I believe that there are arguments for keeping all doors open but I do not feel that the case for the aggregator has by any means been won. On balance, I think that pot follows member is a better solution, essentially for the reasons given by the noble Lord, Lord Stoneham, although I shall not repeat them.

[Lord German (LD)]

My Lords, I shall try not to repeat the remarks of my noble friends Lord Stoneham or Lord Flight, but my noble friend Lord Flight makes a very important point about the default choice which is before people. That is what this amendment must seek to address but I think that it fails to do so. Noble Lords will recognise that what we have before us is a debate about either pot follows member or the aggregator; it is not a debate about choice. Except for the noble Lord, Lord Turner, who said that under certain conditions, the balance might be right, it is clear that those on the Labour Benches want to see an aggregator policy.

I accept that that is the purpose behind the amendment but that is why it is important to examine these issues. I shall say a few words about why we must have some form of automatic transfers of pensions. The main beneficiaries of automatic transfers are those people who, for the first time, are saving for their retirement, following automatic enrolment into a workplace pension, and then move jobs, leaving behind a small pension pot. A system of automatic transfers is necessary to stop the proliferation of small pots that will ensue as a by-product of automatic enrolment. The average worker in this country will have 11 jobs in the course of their working life. Automatic enrolment by 2018 will probably have 9 million people within it, and maybe even 10 million by 2020 who are new savers, saving more for their retirement than their work-based pensions. These are people who are being automatically enrolled. If we took no action the projection is that there will be around 50 million dormant workplace defined contribution pension pots within the system by 2050.

A successful system must focus on the interests of the member, allowing them to consolidate their pension savings. I notice that the noble Lord, Lord Monks, is not in his place but he is a trustee of the NOW: Pensions fund. His fund conducted research of more than 2,000 21 year-old plus people with at least one workplace pension. The result was quite clear: 39% of the individuals surveyed said that pot follows member was their preferred option compared to just 6% for the aggregator model. It was suggested that the aggregator model is so difficult to understand that people chose the easier one because they recognised its simplicity. Is it not the case that we are looking for simplicity? People were asked, “Do you want your pension to follow you, or do you want it placed somewhere else, which will be some distance from you both in employment terms and in being able to influence what it does?” People in that survey, which is probably one of the most comprehensive that we have had, said, given the choice, they preferred to have their pot following them when they changed jobs.

That suggests that explaining an aggregator model to the public, who do not understand the pensions market well anyway, would be much more of a challenge. People will not understand what is being made of their pension, seeing it going away to a distant aggregator, compared to the idea that their pension moves with them to their new employer. I do not believe that there is evidence that the interests of individuals would be best served by the undefined aggregator system. It will be difficult to administer, as my noble friend Lord Stoneham said, and will lead to the market being dominated by a few large schemes and providers, and where everyone will be guaranteed to have two pensions rather than one.

The issue raised by the noble Lord, Lord Turner, and by the noble Baroness, Lady Drake, about quality is crucial. I recognise, as we all do, that the OFT in its report on DC pension schemes said clearly that competition was not driving good value for money for all savers. That is precisely why the Government intend to legislate, and we are seeing some of that today at Clause 43 and Schedule 18, which the Government are dealing with. The whole process of raising the standard is crucial—most importantly, perhaps on charges. Perhaps my noble friend can confirm that it is the Government’s intention to introduce matters in relation to charging before the end of this Parliament.

I believe, too, that we have to consider the choices that people will have to make. Who will decide where an aggregator policy for them will be placed? How would the allocation process work? Would it be by a random list, a computer allocation or perhaps names in a hat? These are all unknowns. What happens to people’s pensions which are forced on them when they move jobs under the aggregator system is very unsatisfactory. Far better that they should have a simple system in which they have one contract with one pension which they take through with them.

However, the crucial factor is the standards that each of these pensions schemes have applied to them. That is why I welcome the Government’s initiative. I know that by the end of this year they will introduce proposals to ensure that the standards are right. As my noble friend Lord Stoneham said, we are looking for high standards, not a minimum standard, in this process.

We have before us a choice. We already have 2 million new savers as a result of automatic enrolment, and waiting will mean that many of the people being enrolled will be denied this opportunity as another scheme would have to be worked up and compared with the one proposed. The pension funds are already working with government in order to work the scheme up and to get it ready and in place. Can my noble friend tell me what progress has been made already to ensure that pot follows member is in a fair and fit state to be introduced rapidly?

We have to make a choice. It seems to me that we should choose the pot-follows-member position and thereby give greater power and greater pension outcome to millions of new savers. We should not accept the amendment.

--- Later in debate ---

[Lord Freud]

Various figures have been talked about, but I do not think I can pre-empt the answer to that question, which will be issued very soon.

In contrast to legislating radically to change the market, we see pot follows member as a way of building on the existing automatic enrolment structure quickly to reach a point where transferring pots is an integral part of the industry. Pot follows member does not prevent industry from innovating in future. Indeed, as individuals become more engaged in pension saving, they may want to be more involved in deciding where their pension pot is and in choosing a preferred scheme.

In response to the point made by the noble Lord, Lord Hutton, there is even scope to introduce an aggregator in future if there is demand for it, so we are not closing any doors by pursuing this route now.

[Lord Flight]

I think that the Minister just said it, but can he confirm what I view as a crucial point, which is that the individual is still free to choose where he might wish to place his consolidated pension savings and that we are talking only about the default option? Therefore, as people become more informed, some may choose not to consolidate in their employer’s scheme.

[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.