Since the coalition came to power in 2010, Steve Webb has been charged with the task of implementing auto-enrolment (AE). Helen Morrissey spoke to the pensions minister about the first year of AE and further challenges.
Now, I’m not going to pre-empt the consultation by saying, ‘and it’s going to be so-and-so’, but the challenge is to make sure that when people are defaulted into auto-enrolment and then defaulted into a particular investment fund and have made no active choice at any point, they are properly protected. And that really is the challenge for us. But we do think charges matter and we do need to be sure people are getting good value for money.
Similarly with automatic transfers, if they transferred – without actively choosing – from an old scheme to a new scheme, for example, we need to be confident they’re not going from something that’s good to something that’s bad. So we have to have minimum standards and charges are an important part of that.
Is there not a really good case to be had for deciding that what’s good for AE schemes should also pass into legacy schemes as well?
Clearly, there’s a lot of focus on automatic enrolment, but there’s a lot of people out there who are already in pension schemes, some of which they entered into 15 or 20 years ago. They may be facing relatively high charges or exit penalties or whatever and I think there’s a balance to be struck there.
Those were legal contracts entered into at the time with the rules as they were so there’s a limit to the extent to which you can say, ‘Well, we now know that they weren’t good value, so we’ll rip up a contract.’ On the other hand, if people are being exploited, we need to think about whether there are ways of enabling them to get out of those schemes in a fair way, so that’s certainly something we will be looking at.
In July you said you were talking to a number of the larger UK schemes about collective defined contribution (DC). Where have you got to with that process?
Steve Webb: This autumn we’re publishing the next phase in our defined ambition (DA) programme and this is now gathering pace because we need to get on with it.
We’ll be setting out a range of risk-sharing options including a sort of flexible version of defined benefit (DB) (where people are offering something that relates to what you earn but with much more flexibility than in the past) as well as varieties of DC which either share risk between the employer and the employee – so they perhaps have some sort of element of guarantee but an element of variability – or pool risk within the members of the scheme, which is what collective DC does.
My interest in collective DC is that – if you look around the world at where people say the best pension schemes are, whether it’s the Netherlands or Denmark or wherever – they very often have this collective feature to them. So we’re keen to explore that. It’s quite a big change for Britain and we’d need to think this through carefully and look at some of the risks, but we certainly want to keep that door open and look at what we’d have to change legislatively to facilitate that.
It is an issue that’s been spoken about at length for several years now. Do you think the appetite for it is starting to change and maybe build a bit of momentum?
Well, one of the opportunities of AE is that if you’ve got another six to nine million people coming into DC pension saving, which is probably what we’ve got, there’s ultimately going to be an awful lot more money and a lot more scale, and scale is what you need in workplace pension provision, of course. So there is an appetite for this, I think.
The people and the firms that have moved out of DB may be interested in something better than a sort of minimalist DC, so I think there is potential here now.
With many millions of people coming into pensions via auto-enrolment, we are going to be left with many, many small pots and your preference is to go with pot-follows-member. There’s been a lot of discussion about this in the industry. What would you say about that?
I think most people recognise that if we want to avoid having tens of millions of small pension pots, we need to take action. And although you could shunt all these pension pots off to the home of lost pots, that would be a provider with which people had never had any contact. It would be another pension scheme of which they were a member alongside their current membership and what we want is consolidation and engagement.
So we think the pot should follow you where you go, but we are talking about new, DC auto-enrolment pensions. We’re not talking about complicated pensions with guaranteed annuities and all the rest of it.
That’s not what we’re talking about. Simple pots of money that go with you and with which you then start to engage. We think this is quite a revolution in pension saving.
We’re tackling a difficult problem but it’s an opportunity as well to get people interested in pension saving. So we’re legislating for it now and we’re driving ahead with that.
Did you at any point consider putting auto-enrolment back to try to help the small employers?
Well, someone said to me the other day that it’s the ninth anniversary of the Turner Review. We’ve been talking about this for an awfully long time. There’s always a reason to put it off, but what do we do? So we rescheduled the roll-out so the smallest firms employing fewer than 50 people don’t come in until after April 2015 and we’re phasing the contribution so the mandatory minimum of 1% from the employer and 1% from the employee is only on a band of earnings. It’s only on the people who aren’t already in the scheme, and it’s tax-deductible. We couldn’t be tip-toeing in more if we tried.
