My Lords, as we move on to Part 5 of the Bill on private pensions, I want to take the opportunity to remind the Committee of my interests in the register. I have a remunerated interest as the senior independent director of the Financial Ombudsman Service.
This group of amendments looks lengthy, but its aim is remarkably precise. Amendment 62ZC to Clause 32 is actually very simple; it retains the power of the Secretary of State to put in place the consolidation of small pension pots but removes the part of the sentence that limits this to the pot follows member form of consolidation. I will focus my contribution on Amendment 62ZC, as the other amendments in the group address the consequences arising from that specific change. The Government believe that action is needed to address the large number of dormant small pension pots which will arise under auto-enrolment when employees move to new jobs, as they do on
average 11 times in their careers. We from these Benches agree that action is needed, but not the form of action proposed.
The impact assessment confirms that the Government considered two default transfer options. The first option would be pot follows member, where small pension pots follow the member to the new employer’s pension scheme. The second is an aggregated scheme in which the small pension pots are transferred to an aggregator such as NEST. The Government had two choices, and I believe strongly that they made the wrong one.
As it stands, the clause allows only for pot follows member. Our amendments would allow the possibility of using a default aggregator model without the need for new primary legislation. I propose to comment on the problem in order to demonstrate why I believe that the Government’s proposed solution is flawed, to put forward an alternative, and then pose some questions to the Minister. I promise to do it as quickly as is practical.
I turn first to the context. The core issues of trust and confidence which we have discussed previously are still centre stage in getting people to start and to continue saving for their retirement. We were reminded afresh by my noble friend Lord Hutton that we do not have a savings culture in this country in Committee last week. This Bill and auto-enrolment need to give people the confidence that they need to save for their old age. but how can we demand that people save if they do not trust the saving vehicles and they do not trust the pensions market as offering value for money?
The pensions market is not a typical retail market where the consumer chooses the product. Under auto-enrolment, the consumer does not choose the product at all—the employer does. The employee choice is either to stay in or opt out and lose the employer contribution completely. There are also many intermediaries in the pension supply chain. Pensions are a complex product; they lack transparency, and while large employers may have the resources to pay for good advice and assessment of fund performance, SMEs may not. The demand side is weak.
The pensions market also has some very big players who offer pension fund products, asset management, and annuities. The OFT says that the four largest players have between them 68% of the assets, 76% of the schemes and 61% of the members. The results are predictable; the combination of a concentrated supply side and a weak demand side is bad for savers and allows conflicts between the two to go unresolved, which is not in savers’ interests. Those characteristics of the pension market combine, as the OFT report puts it, to make the market “dysfunctional”. The OFT concluded that,
“competition cannot be relied upon to ensure value for money for savers in the DC workplace pensions market”.
Future clauses and amendments deal with the criticisms raised by the OFT in its report, but this clause and our associated amendments deal specifically with the challenges of small pension pots created by auto-enrolment. The Government estimate that 50 million pension pots will be created by auto-enrolment by 2050, 12 million of them under £2,000. Already, one in six people have lost track of their pension pots, and
there are 1 million unclaimed pension pots out there. The evidence is clear that the Secretary of State needs power to make regulations automatically to transfer and consolidate small pension pots. We all agree that a default consolidation mechanism is needed for those people who do not make an active choice to transfer their pensions. The point of contention is how this should be done.
6.15 pm
Given the state of the market, so well captured in the OFT report, pot follows member raises some significant risks. I may come back to those at a later stage. There are also major challenges associated with the setting up and administration of pot follows member. Some significant criticisms have been made of the pot follows member model of consolidating pension funds, most notably by my noble friend Lady Drake in her excellent Second Reading speech. The National Association of Pension Funds concludes that the system of pot follows member,
“could harm members’ savings and would be disproportionately complex for the industry to implement. We estimate that savers could lose a sizeable proportion of their savings if they move from a good scheme with low charges and good governance, into a bad scheme with high charges and poor governance. The approach also exposes individuals’ entire savings to market risk when they transfer”.
We need to find a solution that helps savers but does not expose them to unnecessary risks. When he replies, will the Minister respond in detail to these criticisms of pot follows member? Will he also tell the Committee which organisations in the field of pensions are backing the Government’s choice of pot follows member? I think that the Association of British Insurers still is, but is anyone else? Why have the Government not given more weight to consumer opinions? The DWP’s own survey said that 61% of people chose an aggregator. By contrast, the National Association of Pension Funds, the CASS Pensions Institute, Which?, the CBI, the EEF, Age UK, the TUC and the Centre for Policy Studies all backed an aggregator approach for consolidating pension funds. That is a broad church of employers, staff representatives and consumer interest groups as well as academics and independent experts, and they all believe that aggregators would meet the needs of savers better. I suggest that they would meet the needs of employers better too.
There are different ways to pursue aggregators: the NEST model we all know is working well. CASS has another model and the National Association of Pension Funds has developed a third and has done detailed work on a model that would incorporate elements of PFM with an aggregator model. I am not going to try to prescribe an aggregator in detail today, but it seems to be a pre-requisite that we have an opportunity to hardwire into aggregators features that will inspire trust and confidence and reassure savers who are sceptical of the pension industry. This could include certification of aggregators and a public service obligation that would require them to accept automatic transfers in from pension schemes. It is interesting that the NAPF takes the view that with a robust regulatory framework for aggregators and quality standards at an appropriately high level, it is likely that only a small
number would be accredited. That makes a significant difference to the likely burden on the employers who are operating this.
The case is strong, but before I conclude, I would like to ask the Minister a few questions. First, how is information to be handled within the sector? The Pensions Minister in another place expressed an interest in a national computerised pension database, preferably funded by the industry. Can the Minister tell us whether he has made any progress on this matter? Secondly, the Bill has not yet set a date for the start of automatic transfer of schemes. Can the Minister tell the Committee whether that will apply only to pensions accrued after the date of enactment in April 2016? Would it apply to pension pots that are currently active? Why are the Government not considering a solution that could provide for future dormant small pots and address a wider range of problems related to legacy dormant pots?
We all want consolidation of pension pots; we all want an automatic transfer system. Our preference is for an aggregator model, but all this amendment does is to allow that aggregating option to be included in the Bill, which would allow an aggregator model to be developed and operated without the need to have recourse back to further primary legislation. I hope very much that the Government can accept this. I beg to move.