My Lords, while all progress towards allowing transfers into NEST and removing the contribution limit is to be welcomed—and it is—and even if some of us would prefer a greater speed of progress, I rise not to make a political point but to raise my concerns about inefficiencies that will remain in the private pension system because of the rules around transfer into NEST.
This statutory instrument will allow bulk transfers of members’ assets only where the employer is a participating employer in NEST for the purpose of contributing to employees’ contributions. This excludes bulk transfers where the employer is not a NEST participating employer; that is, it is discharging its new employer duties through another scheme. This restriction produces two inefficiencies. The first is that employers will increasingly have closed DC schemes. As companies merge or take over, they will close DC schemes, or they may set up less generous new DC schemes in the light of the coverage of the workforce that flows from auto-enrolment, or they may set up new trusts that set the rules giving the employer more powers. Whatever the reason, there will be some employers who will look to bulk transfer out a DB scheme that is closed to new members. I do not make these up as hypothetical examples; I have experience of all these issues, and I think that they are a growing phenomenon.
Employers may transfer out the assets in these closed schemes into a product proposition that is not covered by the charges and quality standards set for auto-enrolment schemes because, of course, they are no longer being used for auto-enrolment purposes. Such employers will be denied access to NEST, so what could have been an efficient, quality-controlled means of bulk transferring the assets of closed DC schemes is denied because of the way in which the transfer rules are set.
2.15 pm
The second inefficiency is that, increasingly, employers will default ex-employees out of their workplace schemes if they, the ex-employees, do not effect a voluntary transfer themselves within, say, six or 12 months of leaving the company. Again, that is not a hypothetical; I have practical experience and knowledge of those practices. These ex-employees may well be defaulted by their employer into a personal pension with weaker charge and quality standard controls.
“Pot follows member” will not of itself solve the totality of this problem. If there is a £10,000 limit, there will be a large population of people. It takes only 10% of contributions from the £25,000 pensionable pay over four years to reach that limit. It will not affect the workforce that has already left and been caught up in these situations. Small pots are being created all the time now, and even when the Government introduce pot follows member, it will be trialled with the largest providers, so there will be a tail of time. I also understand that it will not cover trust schemes. For a variety of reasons, pot follows member will not provide a complete
solution to the increasing incidence of employers saying, “When you leave my employ, you leave my scheme. If you do not arrange your own transfer, I will default you into a personal pension”.
I appreciate that this statutory instrument will stand, but I ask the Government to reflect on what is happening in the workplace and how the inefficiencies that I have identified could be more efficiently addressed if more employers were allowed to transfer ex-employees or assets in closed DC schemes into NEST. I do not think that that would fall foul of the argument that it gives economic advantage to NEST, but it would certainly give merit to the argument that it would give greater protection to a particular group of ex-employees or employees in closed schemes where it is an area of the private pension system where there are still quite significant inefficiencies.
I genuinely do not make a political point, because I know that the SI will stand, but I ask whether, between now and whenever the full freedoms come into place, more could be done to reflect on these inefficiencies.