Contribution
My Lords, I am grateful to the noble Baroness, Lady Noakes, for introducing her amendments. The Government think it essential that pension schemes remain competitive post scale and we expect that schemes with scale, as well as market disruptors, will continue to innovate and drive competition. We actively encourage competition through the provision of the new entrant pathway to allow new innovative schemes to enter the market.
The scale measures place a requirement for a main scale default arrangement at the centre of the scheme, to deliver scale and the benefits that that can bring. Amendments 114 and 115 relate to measures on consolidation and addressing fragmentation within schemes that are in the market. There is currently significant fragmentation within the market, with high numbers of default arrangements that do not ultimately serve member outcomes.
While I recognise that much of the fragmentation is a product of history in contract-based schemes, we have seen that the number of default arrangements is increasing across the market and in a number of master trusts. We do not want to see the same issues arising over time as exist in GPPs, where members are in too many default arrangements that do not offer value.
Let me be clear: the measures in Chapter 4 do not cap or limit the number of default arrangements, nor do they impact on the ability of a new entrant to enter the market. What we want to see is default arrangements being created where this meets and continues to meet genuine member or employer need in tandem with the scale measures. That is why we are introducing measures to prevent new default arrangements from being operated without regulatory approval and carrying out a review into current arrangements to establish where they should be consolidated or the reasons for them to continue.
Amendment 114 seeks to require the review of default arrangements to consider the extent to which arrangements contribute to innovation and competition. I agree with the spirit of this amendment, but I do not think that it is necessary. The review must already consider the circumstances where it is appropriate for non-scale default arrangements to continue operating and it is right that competition and innovation will be part of that work. The review will consider how competition and innovation have driven the operation of non-scale default arrangements and what they are expected to deliver for members.
Amendment 115 seeks to require that regulations under Clauses 42 and 44 will have regard to competition and innovation. Again, I agree with the intention behind the amendment, but it is unnecessary. I shall explain why. It is reasonable to expect that the regulations that set out the criteria in which regulators can approve new default arrangements will include innovation and competition. Indeed, we expect these arrangements to meet a specific need or offer something different to the market. It is also reasonable that these will be considerations in setting out where non-scale default arrangements will have to be consolidated. However, as the Bill sets out, those regulations already have to take into account the conclusions of the review, and that will consider competition and innovation.
Amendment 105A seeks to require regulations across the scale measures to have regard to innovation and competition. I reiterate the Government’s support for an innovative market, and we expect providers to continue to innovate. The amendment is not needed to achieve that but, although well-intentioned, the duty that the amendment would introduce ignores the policy objectives of the scale measures and the benefits they are expected to bring. To be clear, the benefits of scale include lower charges, diversified investments and improved governance. We are already creating space in the market for innovation through the new entrant pathway and, as previously outlined, we still expect the market to be competitive.
More than that, though, we need to remember something crucial about the nature of the DC market. A competitive market is vital but we also have to recognise that the ultimate beneficiaries—the members—do not select their scheme. That is done by the employer. Employers are the decision-makers on pension provision. They are the buyers in this market and they will try to do the best for their workforce, but ultimately, of course, their focus will be on current rather than past employees. We therefore need to drive schemes to deliver for all members, not just those who are actively contributing, and too narrow a focus on competition and innovation will not do that. The needs of members should be paramount.