Pensions Bill

Lord German Excerpts

Wednesday 26th February 2014 Lords Chamber

[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.

[Lord Turnbull (CB)]

My Lords, I have not previously intervened in this debate. I declare an interest as a director of a life insurance company, the Prudential, which is not a big player in this market, but the views I will express are my own.

My first point relates to the high rate of change in our economy and society, which was remarked upon by the noble Lord, Lord Hutton. People are increasingly likely to adopt more flexible employment patterns. Does a seasonal worker—let us say he is a county cricketer who is not good enough to have a central contract with the England team but plays cricket in the summer and works in a fitness centre in the winter or, like Alec Bedser, humps bricks and builds up his strength—alter his provider season by season? How would you make that kind of system work? The pension pot follows member would not necessarily work for those kinds of people.

Secondly, the life expectancy of employers is not as great as one might think. Only 18 of the original FTSE 100 members are still in the index—some of them have gone out of business or been taken over and broken up—and turnover is likely to be even greater at the SME level. So relating pensions to one’s employer is not necessarily the best thing to do.

The noble Lords, Lord Stoneham and Lord German, have tried to argue that the aggregator model will provide a comfortable ride for the existing incumbents and will create mega-providers. However, who are the providers of pot follows member? They are the existing pension providers. We should not make the easy assumption that one model is anti-competitive and will produce a concentrated market and the other will create a highly diverse and competitive market. They each have their own faults and we should not attribute a monopoly of virtue to pot follows member.

That is why this amendment, which provides a degree of choice, is valuable. It would give us a chance to rethink the circumstances in which aggregator is better and to answer the many questions that have been raised, and to rethink the circumstances in which pot follows member is the superior solution.