That leave be given to bring in a Bill to require employers to pay pension contributions into a pension scheme of the employee’s choosing; and for connected purposes.
This is the moment that the House has been waiting for all day. I have a problem, and I am not the only one with this problem. In fact, many millions of people have this problem too. The value of the problem is huge—at least £37 billion—and its scale is matched only by the level of public ennui. Yes, I am talking pensions, and not any old pensions but lost and deferred pension pots.
The occupational pension system in this country was designed for a time when most people had a job for life, but gone are the days of retiring after 40 years of service at one company, leaving with a gold watch and a gold-plated pension. It is now the norm to hop between jobs. The average person will now have 11 employers over their lifetime. I am in my 50s, and I now have nine different pensions.
Millions of people have been building up multiple pension pots, one for each job. This has been massively accelerated by the Government’s highly successful introduction of auto-enrolment in 2012, which brought pension saving to new groups that had previously been absent from the system, including low earners. Participation in workplace pension saving among eligible employees increased from 55% in 2012 to 88% in 2021, which is a welcome development, but the result is an explosion in the number of people with multiple deferred pension pots. Sometimes the pots are quite large and sometimes very small, containing just a few hundred pounds or even less.
The Pensions Policy Institute estimates that there were 8 million deferred pension pots in 2020, and I have seen other estimates of up to 11 million. Unless something is done, the PPI estimates that the number will rise to 27 million by 2035. Data from the Association of British Insurers suggests there are 2.2 million deferred pots containing less than £1,000. These pots are difficult to manage and easy to lose. The PPI estimates that the value of lost pension pots has grown from £19.4 billion in 2018 to £26.6 billion last year.
This makes it hard for people to track their total pension savings and, therefore, to plan properly for retirement. Charges for these small pots can erode their value to literally nothing, leading to greater poverty in old age. Managing these small pots can be loss-making for pension companies. It is a lose-lose situation for pension members and pension providers and, overall, it erodes public support for pension saving.
The Government recognise the problem and have taken various steps over the years. They made it possible for pension holders to consolidate pension pots, which is welcome, but it can be fearsomely difficult because of the overwhelming bureaucracy. Later this year, the Government are launching a pensions dashboard. Again, this is welcome, and it will give people a single view of all their pension pots in one place. It will make it easier for people to see how much they have in savings, and for them to manage those savings. It might even reunite some people with their lost pensions pots. Those are both good initiatives, but neither tackles the problem of multiple pots being created in the first place.
The Government are now looking at further measures to tackle the multiple pot problem. A small pots working group was launched in 2020, and the Government launched a consultation on the issue at the end of January 2023. As the name implies, the working group’s focus is on small pots. Although there is no set definition, a small pot generally contains less than £1,000 and has been inactive for over a year. Small pots are a particular issue for pension providers because there are so many of them and because they lose money, but there is also the issue of multiple larger pots.
The solution chosen by the Government will shape the pension landscape for a generation, so it should benefit both pension members and pension providers. The Government need to make sure that we do not end up with a solution that works well for the pension industry but less well for pensioners.
The consultation launched in January by the Department for Work and Pensions seeks evidence on three proposed solutions to the multiple pots problem, as the Under-Secretary of State for Work and Pensions, the hon. Member for Sevenoaks (Laura Trott), is well aware: first, a default consolidator; secondly, a system in which the pot moves with a pension member to a new employer’s scheme; and thirdly, a member exchange. All three solutions have merits, but another policy, which is not being actively considered at the moment, has been adopted by many other countries—the so-called pot for life.
The objective of a pot for life, sometimes known as the lifetime provider model, is that workers have a single pension pot that they can easily manage and know the extent of their savings. Their own pension contributions, and those of their employer, are paid into that pot. Members can remain with the same provider for their whole working life, even when they switch job. They can change provider if they want, but it is their choice. On starting a new job, the employee gives their bank account details so that their salary can be paid, and their pension details so that their pension contributions can be paid. It is a solution that puts engaged pension members, rather than their employer or pension provider, at the centre of the system.
The pot for life is different from the “pot follows member” solution, in which the employer chooses the pension provider, such as their corporate scheme, into which the existing pension pot of new employees is transferred. In the “pot follows member” regime, someone who has 10 jobs over their lifetime will have their pension transferred between 10 providers. This can be expensive and confusing. A person with two part-time jobs will end up with two different pensions, through their two different employers, at the same time.
All this is solved by the single lifetime provider, or single pot, model. Countries from Australia to New Zealand, from Chile to Mexico, have adopted the model. This is clearly a big change from where we are now, and I am not suggesting that we should suddenly go to an automatic lifetime provider for all, which would be impossible practically, but there are many different ways of setting up the lifetime provider model.
What I am proposing is a small legislative change that gives employees the right to opt out of their company pension scheme without losing pension contributions. A new employee would be given the right to direct their own and their employer’s contributions to a provider of their choice, perhaps to an existing fund or to a new one. When they change job, they could make sure their new employer’s contributions go into their own pension pot. The employer’s contributions would be required to be of the same value as the contributions it makes to its existing company scheme, to make sure that employees who opt out are not penalised.
One concern that has been raised is that the proposed model would increase employers’ administrative costs, particularly for small businesses, as they would have to pay contributions to multiple schemes, but I think that argument is overegged. Pretty much all companies now have automatic payroll systems or a payroll service provider that can pay salaries into different bank accounts and pension contributions into different pension funds.
There are concerns about the impact on existing company pensions, but that can be easily mitigated. It is an opt-out system, so the change can be gradual and the effect on existing schemes incremental. After a long time, when the scheme has bedded in, a future Government might decide to make it automatic, as has happened in Australia. The industry may want to set up a platform to process all the different payments.
My proposal is a supplement to, rather than a replacement for, the different proposals that the Government are currently considering. My proposal will not deal with the existing stock of millions of deferred pension pots, which the consolidator model would help to address, and it could exist alongside the “pot follows member” regime. Employees would be given a choice of solutions. If the overall solution is better in the long term for pension members, we should pursue it.
Some in the industry might need educating on the wisdom of this solution, but many in the industry are already supportive. As I came into this place, I received an email from Hargreaves Lansdown, whose permission I have to quote it. It said:
“This is an approach which Hargreaves Lansdown has supported for many years. We believe that it is a vital part of the puzzle to drive up engagement with pensions, especially with so many saving in DC pots.”
Other countries have gone down this route and have had a positive experience. Australia and New Zealand have seen reduced transfer costs in the industry, as pension members do not have multiple pots that need to be consolidated. It has also helped to reduce member charges, as they do not have multiple pots all accruing their own separate charges. Of course, there are economic, technical and cultural differences between the UK and these countries, but that does not take away from the general principle.
Ultimately, it is my belief that pension savers should be at the heart of our pension system and that the north star of our pension policy should be a pot for life. That means that people know exactly what they have in their pension pot, helping them to make informed decisions about their level of contribution and to plan for their retirement based on this knowledge. Such an approach would help to restore trust in our great pensions system. A solution to multiple pension pots should help engaged pension members while protecting the less well engaged. It should not be skewed by only addressing the providers’ concerns with small pension pots. That is why I want to legislate to require employers to pay into a pension scheme of the employee’s choosing. I commend this Bill to the House.
Question put and agreed to.
Ordered,
That Anthony Browne, Damian Green, Richard Fuller, Gareth Bacon, Mr Jonathan Djanogly, Mrs Flick Drummond, Mrs Pauline Latham, Alexander Stafford, Andrew Selous, Selaine Saxby, Douglas Chapman and Wendy Chamberlain present the Bill.
Anthony Browne accordingly presented the Bill.
Bill read the First time; to be read a Second time on Friday 17 March, and to be printed (Bill 264)
Public Order Bill (Programme) (No.3)
Motion made, and Question put forthwith (Standing Order No. 83A(7)),
That the following provisions shall apply to the Public Order Bill for the purpose of supplementing the Order of 23 May 2022 (Public Order Bill: Programme), as varied by the Order of 18 October 2022 (Public Order Bill: Programme (No. 2)):
Consideration of Lords Amendments
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(2) The Lords Amendments shall be considered in the following order: 5, 6 to 9, 36, 1, 17, 20, 21, 23, 27, 28, 31 to 33, 2 to 4, 10 to 16, 18, 19, 22, 24 to 26, 29, 30, 34, 35 and 37.
Subsequent stages
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