Pensions Bill

Lord Stoneham of Droxford Excerpts

Wednesday 15th January 2014 Grand Committee

[Lord Turner of Ecchinswell (CB)]

My Lords, I would like to speak in support of this amendment. When the Pensions Commission addressed the issue of private pensions eight years ago, we had two absolute priorities. The first was the use of inertia through auto-enrolment to increase the number of people involved in savings schemes. I think we all agree that the degree of support for that principle across society, industry and the political parties has been most heartening, and indeed we are now seeing auto-enrolment coming through with a considerable degree of success. Our other absolute priority followed from the first one because once you auto-enrol someone into a pension, you have to make sure that there is good value. It was to bring down the extremely high costs of pension provision for people on modest or low incomes in small and medium-sized enterprises. We observed that if people went through the private competitive system, by the time they retired, 25% or even more of their entire pension pot had disappeared in cumulative charges over the years. We believed that it ought to be possible to get that figure down to something like 5% or 10%, which makes an extraordinary difference to someone’s income throughout their retirement. We are talking about people living with incomes in retirement that are 20% or so higher than they would otherwise have been.

Those extremely high costs derived from the fundamental inefficiency of the market for private pension provision. It is a system absolutely shot through with market failure where the process of trying to provide in a competitive fashion simply does not work well. We have heard already from the noble Baroness, Lady Sherlock, the quote from the Office of Fair Trading on that.

To get the costs down, it is important to ensure that there are low costs for active members in the scheme to which they are contributing, and it is also important that low charges are levied on those who have already accumulated pots, and on those pots derived from past employment. That requires two things. First, it requires measures to facilitate or require the consolidation of pots, thus removing the costs of multiple proliferation, which are of no benefit either to the industry or to the individual. Secondly, it requires measures to ensure low costs in the scheme into which we consolidate. Again, it is good that a consensus has emerged over the years on the importance of those objectives. I recognise that the pot following the member is proposed as being one way to that end, but I am concerned that while it achieves the first of the two crucial objectives of consolidation, it does not necessarily achieve the second. It does not necessarily achieve low cost in the scheme into which the person is being consolidated because there are dangers that PFM could involve people being consolidated into a scheme where they are paying higher charges than they were paying into the scheme they had been contributing to, and higher charges than necessary. I believe, therefore, that the aggregator option may be the better one and that it needs to be looked at carefully and fairly.

I agree that there are some trade-offs here, but I am not convinced that the impact assessment which has been put before us is a good and fair assessment of that trade-off. The key argument in the impact assessment is that if we go down the aggregated route, we would need to apply it only to “the smallest unprofitable pots” to ensure that the aggregator scheme did not monopolise the market. It states then that the department has interpreted that for the purposes of assessment by assuming that you would aggregate pots only up to a maximum of £2,000, because that was the figure which was suggested in discussions with providers. That compares with the £10,000 assumed when it looks at the pot follows members. Indeed, it is quite noticeable that when it looks at the PFM option, it gives us a set of impact assessments for a variety of options—£2,000, £5,000, £10,000 and £20,000—but when it turns to the aggregator model, it considers only the £2,000 maximum pot.

I accept that if it was really necessary and unavoidable that if we go down the aggregator route we apply it only to pots of up to £2,000, that might be a good argument for taking the PFM route. But I believe that there is no such necessity and that the logic in favour of it is invalid and needs to be challenged. The argument is that a higher level would interfere with the effectiveness of competition in the market and lead to dominant aggregators. However, the whole of the edifice of auto-enrolment, of NEST and of the regulations relating to value for money is based on the recognition that we are dealing with massive market failure and that we cannot rely on fair competition. We cannot therefore consider the argument that some dominant aggregators might emerge to be a valid argument against aggregation. Indeed, dominant aggregators will only emerge if they are lower cost, and that—to go back to my earlier point—is the absolutely central thing and the criteria above all on which we should focus. Will we get the costs down? Will we reduce the total reduction in yield?

I do not believe, therefore, that the danger that the aggregators may become relatively dominant in the market—which is really the only argument put forward against it in the impact assessment—is a valid argument against aggregation. I would urge that, to have a useful impact assessment, we should be considering a range of options with a higher maximum of £2,000 transfer. I see no inherent reason why we should consider having no limit; I certainly believe that if we are to have a fair comparison, we should be thinking about the same limit that applies to the PFM option. I believe, therefore, that this choice between PFM and aggregation should not be concluded at this point. It requires more flexibility and thought to enable further consideration. I am personally, in my gut, in favour of the aggregator limit option, and I think it will be favoured over time, but all that this amendment does is keep that flexibility open for future consideration without the need for later primary legislation. I certainly think that that is required.

[Lord Stoneham of Droxford (LD)]

My Lords, the previous two speakers have covered the main arguments that I was planning to raise, because there is concern—even from those close friends of the Minister, Steve Webb—on this issue. It is valid, therefore, to register that—there are certainly concerns in our group here this afternoon. The issues have been raised, including the issue of the inefficient market. The issue does not cover the consolidation of old pots. It considers the consolidation of the mobile or live pots. It does not raise the issue of what you do with those people in the labour force who are constantly changing jobs and the costs and the impact on their pension pots every time they do that. It also needs to address the fact that there is a smaller number of aggregators. I agree there is a problem with competition, but it is much easier to supervise them and make sure that the quality of those aggregators is adequate.

The final issue that needs to be raised is that there is a concern that without that supervision, people will be transferring into poor schemes or run the risk of doing so. They need to be protected. For all those reasons, it is right—and the noble Lord, Lord Turner, raised this point—that this is a time for reflection before we make any final decisions.

[Baroness Drake (Lab)]

My Lords, I will try not to duplicate some of the excellent contributions that have been made. Perhaps I could say that the areas of concern with pot follows member can basically be grouped into three categories. One is confidence in the basis for the Government’s decision to choose pot follows member; the second is differing views on what benefits the saver, and the third is the need to protect dormant pension pots that have already accrued.

When it comes to confidence in the basis for the Government’s decision, the noble Lord, Lord Turner, did a splendid job in identifying the limitations in the impact assessment. I stress that there are significant barriers to overcome before the Government can be confident about the superiority of the PFM model. The consequences of getting this wrong are absolutely huge.