My Lords, I can certainly assure the noble Baroness, Lady Turner, that we will take very seriously what has been said this afternoon because it comes from such authoritative sources. We have had a high-quality discussion, as is typical of this entire Committee. In fact, at one point I think that we had a Turner commission quorum. This is a very important discussion. We are agreed about the urgent need to tackle small pots and to keep people engaged as regards the value of their savings with a view to their increasing them and being able to purchase a bigger pension when they retire. The savings culture to which the noble Baroness, Lady Turner, has just referred is at the heart of this amendment and the proposals we have put forward.
First, I wish to put some general remarks on the record and, in so doing, speak to government Amendments 62A and 62B, standing in the name of my noble friend Lord Freud. I will then turn to the issues and questions raised and, I hope, give noble Lords some comfort on them.
I think it is worth starting on a note of consensus. Clearly, there is a strong sense that the issue of the proliferation of small pots is one that needs to be addressed. There is some disagreement about how we
get there—an issue on which we have consulted extensively since 2011. We announced our preference for the pot-follows-member- model in 2012 and reiterated it in the Command Paper published last year. A full and proper policy-making process has been followed in coming to this conclusion. These amendments seek fundamentally to change our proposals to a type of aggregator model, where pension pots will be moved to a separate nominated transfer scheme. We consulted on the option of an aggregator and there was no clear consensus for a particular type of aggregator. We received views on single, multiple and virtual aggregator models and only 19% of respondents preferred a multiple aggregator which these amendments seek to introduce. Therefore, these provisions, while providing a broad framework, legislate specifically for the pot-follows-member model, providing a clear direction to drive development of the detailed transfer process and to enable the industry to plan for the future.
I will take some time to set out why this Government believe it is right to take this approach. The rationale behind automatic transfers has always been to ensure that individuals have better retirement outcomes and we believe that pot follows member will help to achieve this because it brings greater pension pot consolidation. The proportion of people reaching retirement with five or more dormant pots could fall from one in four without reform to nearly one in 30. We estimate that pot follows member will halve the number of dormant pots and make net administrative savings of £6.4 billion by 2050. That is a key point because the administrative costs of pensions are at the heart of what we are talking about in terms of charges, so therefore reductions in costs mean a bonus for the savers.
In contrast, by their very nature, aggregator models mean less consolidation than pot follows member. Individuals will have at least two pots in a single aggregator model and they could have many more in a multiple aggregator model. Our research shows that a single aggregator scheme would achieve only around half the net present value of a pot-follows-member system to the new employer’s scheme. Given that people are more likely to engage with pension saving as they see their pot grow, coupled with the fact that most annuity providers require a minimum of at least £5,000 or £10,000 in a pension pot to achieve the market option to which the noble Baroness, Lady Drake, referred, consolidation is a key objective to achieve greater results and economies from the purchase of annuities.
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Inertia is being successfully harnessed to build pension-saving, and this principle is being employed in automatic transfers. We hope, however, that over time member engagement will increase as individuals see their pension pots grow, even when they change jobs. The key to building increased engagement is to maintain the relationship between employer and employee in the workplace and keep a track of where their savings are.
Pot follows member aligns with automatic enrolment in this respect; when an individual joins a new employer, they will be automatically enrolled and in many cases their small pension pot will also be transferred. That is in many ways the synergy that was being looked for
and is delivered by this model. By contrast, if a pension pot gets sent, by default, to some organisation that the person has no relationship with and may never have heard of, the chances and opportunities for them to engage are more remote—not impossible, but more remote. Choosing or being allocated to an aggregator scheme also brings complexity for both the individual and the employer. We know from all aspects of business that where there is complexity there is also cost, and one of the objectives is to reduce the level of charges. Support for our simpler, employer-focused solution is demonstrated by recent NOW Pensions research showing that more than one-third of workers, 39%, would like their pension pot to follow them automatically when they join a new company compared with just 6% preferring the aggregator model.
I would like to stress that a system of automatic transfers is not a device for bringing further radical changes to the pensions market. We are already making significant changes to the private pensions industry, both through automatic enrolment and the introduction of new requirements around minimum quality standards, which I shall return to later and which were raised, rightly, by several noble Lords. We believe that the industry will be able to deliver a system of automatic transfers only if it is focused on improving consolidation in workplace schemes. An aggregator approach risks significant market upheaval at a time when we want the industry to focus on delivering better workplace schemes.
Before I conclude I want to address some of the points raised in the debate, and a point on scheme quality, which we will come on to more in Clause 41. One consistent argument for the aggregator is that it helps to prevent member detriment by ensuring pots are transferred to good aggregator schemes. I think that we need to be slightly careful here, in having this debate and in talking about good and bad schemes. There should be no such thing as a bad scheme. This is a regulated industry; if there were a bad scheme, it should have been closed down and it should have been drawn to our attention. So we are simply talking about differences in terms of the charges—and I shall come on to that later.
In the case of Amendment 62ZJ, the Secretary of State is given the power to set standards that nominated transfer schemes would have to meet to avoid this. The Government believe that we should not be looking to drive up standards in a handful of aggregator schemes but set minimum standards for a broad range of schemes, so that everyone enjoys an improvement in the quality of schemes.