Pension Contributions Motion for leave to bring in a Bill (Standing
Order No. 23) 3.11pm Anthony Browne (South Cambridgeshire) (Con) I
beg to move, 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...Request free trial
Pension
Contributions
Motion for leave to bring in a Bill (Standing Order No. 23)
3.11pm
(South Cambridgeshire)
(Con)
I beg to move,
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 (), 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 , , , , , , , , , , and present the Bill.
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)
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