New Clause 13 - Scale of pension schemes

Part of Pension Schemes Bill – in a Public Bill Committee at 3:15 pm on 4th November 2014.

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Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 3:15 pm, 4th November 2014

It is a pleasure to respond to someone else’s new clause for a change. Oddly enough, my little note has that word, “reject”, on it, for reasons I will explain.

Let me start with a point of agreement. Clearly, other things being equal, there are potential advantages to scale, but the hon. Gentleman talks as if scaling up is not happening. My first observation is that considerable consolidation is happening. “Organic” is probably not the right word, because we do a lot of intervening in the market, but substantial consolidation is happening. Scheme trustees and employers are deciding in certain circumstances that it would be better to be part of something bigger, and they are closing down existing schemes and merging and so forth.

To give a sense of the consolidation that is going on and the number of people who are actually in large schemes, in 2013 more than half of active members of private sector occupational defined-contribution schemes were in schemes with more than 10,000 members. The hon. Gentleman suggested—he did not say this exactly, but one might have inferred it from the tenor of his remarks—that lots of people are in tiny little schemes. More than half of all people in that type of scheme are in schemes with more than 10,000 members, so that is 700,000 out of 1.2 million active members. At the start  of this century, in 2000, the figure was only 100,000 out of a total of 800,000, so there is a clear trend towards consolidation. Active members in small and medium private sector DC schemes have decreased from 300,000 over the same period to 100,000, people are heading towards the larger schemes.

The numbers show that schemes are consolidating. In the past four years alone, the number of small and medium occupational DC schemes fell by more than 40%, from 3,300 to 1,950. The number of micros fell by 10,000, from around 45,000 to around 35,000, and the number of large schemes remained relatively stable, so consolidation is happening, which is an entirely good thing. Schemes proactively look at what they are doing and work out whether they could do things better. The hon. Gentleman goes much further than that. He proposes that we force the process, and that is where we have concerns.

Forcing scale does not automatically drive good governance, investment expertise or low costs. We are already driving up standards and making sure schemes are run at the right scale through our governance requirements and our charge cap. A scheme that is too small to deliver a default fund for less than 0.75% cannot be used for auto-enrolment. I often think that the hon. Gentleman’s contributions are slightly stuck in a time warp of pre-auto-enrolment, pre-charge cap and pre-governance. He is legislating for the future, not the past—or he should be. The 0.75% charge cap is a pretty tough test. If someone is running a sub-scale small scheme that cannot deliver, they will not be able to use it. We are making sure that the inefficient, badly governed small scheme cannot continue, but the efficient, well governed one can. Again, it is the blunderbuss approach against the subtle approach. It is going with organic consolidation, rather than forcing the pace; it is the heavy hand of regulation against the nimble, light-footed regulation that we are so famous for.

We argue that consolidation and scale have their place, but we object to forcing the pace. Agreeing with what sufficient scale means and policing it would be very difficult. My hon. Friend the Member for Gloucester made a powerful point. The new clause would require the regulator to force schemes to merge where the regulator thought they were not of sufficient scale, but merge with whom? How does the regulator look at the tens of thousands of schemes and spot one that is sub-scale? How do they force it to merge with another scheme that will probably have another set of trustees, who might not want to be merged?