Pensions Bill

Lord Stoneham of Droxford Excerpts

Wednesday 26th February 2014 Lords Chamber

[Lord Hutton of Furness (Lab)]

My Lords, I am happy to have the opportunity to make a brief contribution to the debate on this amendment. It is the first time that I have put my name to an amendment in this House. I have done so because I believe that this is a very important point in the progress of the Bill. Clause 33 is to be welcomed in principle. It is the first time that a Government have addressed the problem of the large number of small pension pots that are out there. We need a solution to that problem, so I absolutely welcome the Government’s attention to this policy. We all know that one of the by-products of auto-enrolment —it is a very good policy which clearly at this early stage is encouraging more people to save—is that we will see many more of these small pots created. It is certainly not in the interests of pension savers for these small pots simply to stay where they are.

I do not want to repeat the very able arguments put by my noble friend on the Front Bench, by my noble friend Lady Drake and, indeed, by my noble friend Lord Turner, but I will make a slightly different point. Your Lordships’ House has heard the technical arguments, which are complicated and difficult to digest. I come at this debate from a slightly different angle, having been a former Pensions Minister. There are many other former Ministers in this House and I hope that the international fraternity of former Ministers, who are represented so well in this House, will understand this point. There comes a moment in the gestation of any policy when it is necessary to take a step back to be sure about it and to satisfy yourself that the policy is the right one—particularly given the fact that, as my noble friend Lord Turner said, if we do not amend the Bill, we will make the transfer of these pension pots compulsory and run the risk that people could lose out. That is a real hazard of which we need to be aware. In my experience, the best time to take that pause is before you take that step; you should not to do so once you are committed to it, perhaps irrevocably, and when some people will lose out as a result.

I have been in this House and another place long enough to know the difference between a destructive amendment and a helpful one. I definitely would not have put my name to this amendment if I thought that it was in any way a torpedo below the waterline of the Government’s policy. It gives the Government the opportunity to take stock of the situation. There are serious concerns about the impact assessment undertaken to support the policy. Many others have spoken of their concerns about the impact assessment. It would be a misstep on the part of this House to take a decision on the basis of what we have been presented with. The impact assessment is simply not reliable enough.

All the amendment does is invite the Government to take another look at this policy. It does not rule out pot following member, if that is what the Government are committed to doing; it simply gives them the opportunity, without coming back to this place, to follow the path of aggregation. Many of us believe that the opportunities of aggregation have not been fairly and fully explored by the Government. We should look again at the issue of aggregation, but I do not want to mandate that as a policy for the Government. That would not be right, but it would be absolutely sensible and in the interests of millions of pension savers for us, at this very late hour, to take a step back—not to rule out the possibility that this might be the eventual path that we follow, but to allow us, and Ministers in particular, to take another look at the benefits of aggregation. I genuinely think that that would be the right course of action for Ministers to take at this moment, and I hope that the House agrees with that.

[Lord Stoneham of Droxford (LD)]

My Lords, it is a good thing that in this debate no one disputes the need to consolidate pension pots to ensure that savers keep track of their pension savings and get the best return with the lowest charges. Nor does anyone dispute that inertia is an accepted principle to encourage savings through auto-enrolment, and should now be followed to encourage consolidation of pension pots. Let us remind ourselves that this measure covers people who do not want to opt to do things according to their own decision. It deals with people who are not at the moment making a decision as to what to do with their pension pots and it runs the risk of leaving them stranded.

We have to make a choice between two options—pot follows member to their new employer or the aggregator system. Let us also remember that this amendment merely delays a decision in order to allow more consideration. I do not want to make a political point, but this issue should have been addressed earlier and the problem is mounting. We know that in Australia, for example, as a result of changes made 20 years ago, there are 30 million stranded pension pots. That demonstrates that the sooner we get a consolidation process in place the better.

I have spent the past couple of weeks since Committee looking at the alternatives. One thing I think that we have to challenge is the ongoing closed nature of the pension sector, which relies on passive, uninformed and, sadly, often uninterested consumers, while the providers have a self-interest in prolonging obscurity and lack of information, leading to higher charges and lower performance.

The aggregator model basically assumes that competition and greater accountability cannot open up this marketplace. However, there is no clear proposition of what the aggregator model will actually be like. Will it rely on a small number of large schemes dominating the market, or will there be an unlimited aggregator model in which any scheme that meets certain criteria on charges and governance can act as an aggregator? There is no clarity about who will be responsible for selecting the aggregator scheme for the individual’s pot as it is to be transferred on moving jobs. Would it be done by the individual’s old employer, the old scheme, the new employer, the new scheme or by some form of automatic allocation?

The aggregator model is promoted as a safe haven for accumulated pension savings, with the implication that higher governance standards and restricted charging will offer greater security than pot follows member. I have to say that there is a difference in outlook on the process of reform between the two sides of the House on this issue. The aggregator model, by breaking the link with the employer’s current live scheme, will make it more difficult for individuals to understand where their money is and to engage with their retirement savings. An aggregator model will be a further distortion of competition in the pensions sector. We know that the sector is overconcentrated at the moment; we will merely be making it worse. Size also promotes complacency and inefficiency, and could increase risk where competition is weaker. It does not seem logical to attack regulated cartels in the energy and banking sectors but promote them in the pensions sector. The aggregator model will exploit inertia, too. Once the aggregator has the worker’s first pot, it is likely to receive subsequent pots because the consumer will make no active choice and there will be no incentive to innovate or improve performance.

In the member follows pot proposal we are providing two countervailing forces. There will be greater transparency for the consumer, who will remain close to their pot and will have a greater opportunity to understand the pension provision they are making, as well as its return and its charges. The employer will also be motivated to make the best provision for their staff in order to motivate them and keep them. The pot follows member proposal would be a more natural evolution of the market. An aggregator would be an irreversible sea change, as so much money would be concentrated in aggregator schemes that you would not be able to change the consolidation model without breaking up the aggregators.