It is noted, thank you.
I also remind Members that we must stick to the timings in the programme order the Committee has agreed. I hope that I do not have to interrupt any of our evidence givers mid-sentence, but I will do if need be. For the record, please will the new witnesses introduce themselves to the Committee?
Good afternoon, and thank you for coming before us. May I ask you about the revised implementation date that is in the Bill, and whether you think it gives employers and pension schemes enough time to make the necessary changes?
Darren Philp: The first thing to say is that we very much welcome the Government’s proposals for a single-tier pension, which provide a good foundation on which people can save for their retirement. As a whole, the National Association of Pension Funds is very supportive of the provisions in the Bill.
We all know that the timing is very tight. I think that the Government, in their White Paper, said that they would introduce the reforms no earlier than 2017. That has been brought forward to 2016, which will cause issues for our members in terms of the abolition of contracting out and making changes to their schemes to enact the reforms, but they see it as a great opportunity to provide a good foundation for pensions. Even though the timing is tight, if we get the detail and the regulations early so that we can start planning, it is probably doable.
Dr Braun: I echo that. We very much welcome the Pensions Bill and the clarity it brings to people about what the state provides, and the need to save on top of that if they aspire to a higher standard of living in retirement. Also I would note the link to the social care work that is going on and the Care Bill, which are, of course, very strongly linked and are also coming in in 2016. We think that although the timing is tight, as my colleague says, we should work towards that date.
Welcome, and thank you very much indeed for giving your time to come to see us. Are you satisfied with the provisions in the Bill that would allow employers to amend pension scheme rules to take account of the ending of contracting out, or the statutory override, as it is called?
Darren Philp: From our perspective, it was really important that the Government include the statutory override in the Bill. Employers who are contracted out of the state second pension currently receive a national insurance rebate. They pay lower national insurance contributions, but have to provide increased benefits through their defined-benefit schemes to offset that. It was important to have the statutory override; without it, my earlier comments on the timetable for delivery would have been very different. It is important that the override stay there.
There remain issues to resolve about whether the override applies to protected persons, such as those who are covered by legislation from former nationalised industries, for example; I think there are still decisions to be made on that. There are also issues that we need to work through with regard to how employer statutory override applies to a multi-employer scheme, but this is something that we are working through with officials in the Department. I repeat my call: the earlier we can see draft regulations and the earlier we can see the detail, the sooner we can work through that and the sooner schemes and employees can start to plan.
Are you satisfied with the proposed new arrangements for the Government to review every six years whether increases need to be made to the state pension age?
Dr Braun: It is very sensible that the Government should take account of the latest developments in longevity. We know that often in the past, the official estimates were not very accurate and underestimated what was happening, so it is a sensible thing to do. For some people perhaps it raises the fear that there will be further adjustments upwards all the time in terms of the state pension age. What is sensible is that, actually, there will have to be additional legislation, so it is not an automatic mechanism that raises the state pension age. If I remember rightly, the report will have to look at longevity developments, but also at other factors, so things such as inequality in life expectancy, for example, could also be taken account of. We think that that makes sense.
Darren Philp: Yes, I think it is a sensible provision. Changing the state pension age is a big deal: it has big implications for individuals’ lives and big fiscal implications as well. Having a rolling review to ensure that the state pension age stays in tune with changes in longevity, basing that on an independent report from the Government’s Actuary’s Department and having it discussed by an independent body to present Ministers with all the facts, analysis and evidence—that has to be an improvement for policy making. I very much welcome what the Government have said on this.
I would like to see some certainty for individuals. It would be a shame if we were changing state pension age every five or six years; people need time to plan, especially if they are saving in defined-contribution schemes. I would like to see something in the legislation that said that the Government will give at least x years’ notice, with x being 10 or so, to give a bit more certainty.
May I ask the panellists about their views on the Bill’s provisions on and the Government’s approach to stranded small pots—how to transfer pension pots automatically? What is the NAPF’s position on pot follows member and what is the ABI’s position on that?
Darren Philp: Our starting point is that we agree that dealing with small pots is a potential issue. The Department for Work and Pensions statistics say that, by 2050, there will be 50 million very small pots. Consolidating those—going for “operation big fat pot”, as the Pensions Minister calls it—has to be the right approach on one of the objectives that what we want to achieve.
We are on record as having quite strong reservations and concerns about the pot follows member approach. One of our key concerns is the potential for pots to be transferred from an employer who is running a good scheme, with good governance, low charges and good investment returns, into perhaps a less well run scheme with higher charges. Equally, it could go the other way around, but there could be a pensions lottery aspect to that, which we want to avoid. One of the things that this debate has sparked is a debate about scheme quality. That is an important debate, so that is really good and we welcome that.
We also need to think about investment when it comes to small pots. There is a potential for individuals to suffer some detriment for being out of the market at any particular time. It raises liquidity issues around pensions funds’ investment. Will DC pensions be more likely to invest in more liquid assets because there is always the risk of their being transferred at short notice?
A lot is going on in pensions at the moment. We have auto-enrolment, which is a huge change for the industry. We all know that it has gone very well so far, but next year will be a crunch point, with lots of employers are coming on to their staging dates. The Pensions Regulator has a big job to stage all those employers on to the reforms. That places capacity and advice constraints on the industry, too. I have to ask: what is the rush? This is a big issue. It will be a big issue in the future, but let us stop, think, and check that we have the right approach. For the record, the NAPF is very much in favour of an aggregator solution, whereby you have a series—not just one—of well run, low charge, well governed aggregator schemes that could be used to consolidate individuals’ pots.
Dr Braun: It is absolutely right to help people merge their small pots. We know that people lose track, and that can be quite detrimental when you actually reach retirement. Last year, we looked at what people want and found that the overwhelming majority of people prefer that their pot follow them around, which is intuitive in terms of ease and not having to do anything, so it is not very surprising. Of course, how that is made to happen is an entirely different matter. Our members have started to do a bit of work on how the central database solution would look and what it would involve. What they found is not terribly surprising, but the implications are huge. For example, it is very important in terms of consumer protection to be sure that the money goes from where the employee left to where the employee will now be, and that we can authenticate and validate identities not only of employees, but schemes; also, the processes must be cost-effective and run sensibly.
Basically, there is a huge amount of work to be done and it will take a huge amount of work to go through the regulations to put it into place. Much like my colleague said, there is a lot of other things going on in pensions, and we are now concerned that this could come at the expense of automatic enrolment just at the time when we need all our focus on automatic enrolment. We have only one chance to get that right, so rather than embark immediately on the next project, we should take a little time and then take the next step forward.
Darren Philp: If I can add a couple of points, the pensions market is changing: we are seeing the advent of what we call master trusts—multi-employer schemes, low charges and good governance—and I think you will be seeing consolidation in the industry over the next five to perhaps 10 years. Reviewing the transfers point then might make more sense, rather than setting up a huge infrastructure now, only for us to get halfway there through market consolidation.
Yvonne mentioned burdens. This comes up around our council tables all the time and is probably the issue that is most exercising people at the moment in terms of not only consumer detriment, but the burdens that it places on the industry at a time when a lot of change is going on.
You mentioned the costs to industry, but you will have seen our impact assessment, which shows very substantial net savings to the industry for not having to hold tens of millions of pots. I am interested to know whether you think that that is fair or not.
Can I probe the NAPF line on multiple aggregators? It is very helpful through evidence sittings to hear an alternative proposition. The Bill has a favoured proposition that we have not really seen fleshed out. Have you set out what a multiple aggregator model would look like? Presumably every member of the public has to be tied up to their own aggregator; they also have their current pot and their previous pots of a middle size that were not small enough to be auto-transferred. Do you think you would get the consolidation and engagement that we need?
Darren Philp: In terms of the impact assessment, yes, that is the impact assessment that we have got. It was done about a year ago, I think, and the policy has developed somewhat since then in terms of ideas about a central database for monitoring small pots and stuff. One of the things that we would call for is a revisiting of that impact assessment to ensure that it is up to date. There is a difference between some of the long-term costs and savings associated with this measure and some of the short-term change. I have no other evidence to dispute the Department’s figures in the long term, so we have to take those as they are.
Looking at the next 10 years or so, the interesting questions are the extent to which the impact assessment has taken into account changes within the market, and how we think the market will go. If you take the NAPF vision of how pensions should operate—you have probably all heard me talk about super-trusts before—we would have large-scale, multi-employer schemes that are well governed with independent trustees, and far fewer schemes. Doing the analysis on that basis might yield—I say might, because I have not done the analysis—a different answer regarding the potential cost of business. That is why I would delay the change.
In terms of multiple aggregators, we were presented with two options and there is no perfect solution. We recognise as much as anyone that there are issues to be resolved with multiple aggregators. There was some talk about having just one aggregator, and I know that that would cause concerns about market distortion and market dominance. We accept that, and as an organisation we are happy to work with the Government to try to sort the issue out.
I believe you can get there through consolidation. As the market evolves over the next 10 years or so, the likelihood of people changing jobs and moving schemes will become reduced somewhat, and that will be the time to look at a slightly different solution. That does not directly answer your question, Steve, about whether we have sketched out the different aggregator approaches, but we are happy to pick that up with the Department, should the Department wish.
Can I take you to clause 32, which is about short-service refunds? The clause removes the facility to refund pension contributions to employees who leave a scheme after a short period and for the employer’s contributions for retained within the scheme. Do you regard that change as potentially detrimental to pension schemes? A short no would be fine.
Darren Philp: No, I do not think it is detrimental. May I make two points? The Minister correctly identified a couple of years ago that there was a difference between group personal pensions or insurance-based schemes and trust-based schemes. It is important that every pound that people save counts, so I do not think that anyone would argue against the policy intent of removing short-service refunds. My point is that that is intrinsically linked with the discussion we were just having about pot follows member. If we remove the restrictions from 2014, which I think is the proposal in the Bill, without having a proper system of transfers in place, we could make that system of small pots worse. I see the two as being conjoined in policy direction, but I agree with the intent of removing short-service refunds in the long term.
Dr Braun: We probably see it slightly differently, in the sense that in contract-based provision we have no short-service refunds: your first pound is saved, your first pound vests. In many ways, the short-service refund is an anachronism that does not fit particularly well with automatic enrolment any more. It is coupled with the small pots solution, but if we are taking longer to sort out that issue, I am not sure that people should necessarily be losing out, especially given that they would lose their employer’s contribution and would receive back only what they had paid in. That, in many ways, is not the vision of automatic enrolment. We accept that the two are linked.
Can I pursue the small pots aspect and relate it to wider aspects of the private pensions part of the Bill? The NAPF did a piece of research on pot follows member and the potential costs and benefits of that approach. Can you say a little about it?
Darren Philp: We looked at the potential impact on an individual’s pension pot from a pot follows member approach versus an aggregator approach. By nature, that was quite stylised—it had to be, because we cannot predict the future. We randomly picked a series of high charging and low charging schemes, applied someone’s typical working life, moving from employer to employer, and overlaid stock market performance. What that showed—the example we quoted—was that you could get a 25% difference between outcomes or the size of the pension pot in an aggregator versus a pot follows member approach.
That is a stylised example showing what could happen. It could happen the other way round, but that is the lottery point. People are not going to be engaged when their pot follows the member. They can say that they do not want that to happen—they will have that right—but most people will not be engaged like that. Managing and preventing that consumer detriment was the important message that we were trying to get across.
Dr Braun, so you recognise the figure in the NAPF’s research of a potential 25% reduction in pension pot size? Is the NAPF research a robust piece of research?
Dr Braun: I will have to write back to you in detail on that. I do not recognise it, but I would like to make a broader point. We do not want a pension lottery for anybody. Automatic transfers will be a problem if people get transferred into worse pension schemes with much higher charges, but that is an equally grave concern for the people who are already in that pension scheme. It is actually a much broader question than just one about transfers. We need to make sure that everybody is in a pension scheme, whether transferred into it or starting out, that is good value for money. You are probably familiar with our survey last year, when we looked at newly set-up automatic enrolment schemes and found that they were at 0.52% annual charges, which is the lowest they have ever been. We think it is important to bear that in mind in this whole debate. Of course, it speaks only for our membership.
It is nice to see the NAPF and ABI with us today. I will ask a few round-up questions.
Do you have any particular queries or concerns about short-service refunds under clause 32, the ban on consultancy charges, which was a recommendation of the Select Committee, and above all clause 42, which deals with the new objective for the Pensions Regulator to
“minimise any adverse impact on the sustainable growth of an employer”?
At an earlier sitting of the all-party group, there was a suggestion that you felt this needed fleshing out in a bit more detail. Would you like to comment on any of the aspects that the Committee should consider?
Darren Philp: On short-service refunds, I have said all that I need to say. On consultancy charges, I think the approach is sensible: we had to act, we had to act quickly, and that was the option on the table at the time. I would like to make a point on some aspects of auto-enrolment. The Government have a sensible policy of excluding certain groups of workers from auto-enrolment where it just does not make sense to auto-enrol them, but I caution against allowing that to become a back door to removing small employers or great swathes of people from auto-enrolment. I have not picked up that that is the intent, but it is really important that we do not do it.
I am sure that we could have a separate session on the objective for the Pensions Regulator, but we regard it as a step in the right direction. Defined-benefit schemes are under significant pressure at the moment. All we are asking is that the regulator takes into account some of the wider economic pressures on schemes—the economic climate is incredibly difficult at the moment—to make that they are not forcing schemes down the wrong route.
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions of this panel of witnesses. I thank both of you, on behalf of the Committee.