The Minister of State, Department for Work and Pensions (Baroness Sherlock) (Lab)

My Lords, I shall speak also to Motions J, J1, K, K1 and L. As I have previously outlined, we cannot accept Lords Amendment 13 on small pots or Amendment 13B within Motion D1, tabled by the noble Baroness, Lady Altmann, which would extend the dormancy period for automatic consolidation from 12 months to 36 months or 24 months respectively. Extending the threshold would materially lengthen the period for which a pot remained dormant. This would be detrimental both to individual members, who would incur multiple sets of charges for longer, and to the wider scheme membership, which, in effect, subsidises the small deferred pots, which are uneconomic for schemes to administer. We estimate that extending the dormancy period from 12 to 24 months would generate additional industry costs of around £25 million a year, which would most likely simply be passed on to members. The Government did not invent this scheme. The 12-month timeframe formed part of the proposal that was consulted on in 2023 with stakeholders across the pension industry and consumer representative bodies, and it reflects a supported middle ground. The previous Government concluded that a period of 12 months struck the appropriate balance, allowing eligible pots to be identified for consolidation while seeking to avoid certain situations; for example, where individuals who, for a range of reasons, may have temporarily ceased pension contributions but remain with their existing employer and are likely to return to pension saving. The 12-month figure was not plucked out of thin air; it was a judgment underpinned by consultation and evidence, not speculation. It is supported by a strong set of safeguards, most notably the individual’s right to opt out of consolidation. Throughout the development of this policy, my department has engaged with a range of stakeholders, including consumer representative bodies. For example, Which? was part of our small pots delivery group, and it welcomed the safeguards that we have put in place, which it agrees are sufficient. I understand from previous debates that noble Lords, including the noble Baroness, Lady Altmann, have concerns that 12 months might be too short for certain individuals, particularly those who take career breaks, say, for maternity leave or caring responsibilities, and experience fluctuating earnings. But the 12 month dormancy period is triggered only where no contributions have been made for a full year. Periods of paid maternity leave, for example, would see contributions continue, and a pot would become dormant only after 12 months of unpaid leave. Currently, only pots worth £1,000 or less will be eligible for consolidation. For context, a full-time worker on the national living wage would typically exceed that threshold after nine months of saving. That means that individuals with longer periods of continuous employment are unlikely to have pots that fall into scope. It cannot be a common occurrence that someone who has saved less than £1,000 and then had no contributions for at least 12 months would recommence saving with the same employer once it had entered dormancy. Nevertheless, we recognise that such circumstances could occur. That is why we have built strong safeguards into the policy. Most importantly, every member will receive a transfer notice ahead of any consolidation, giving them a clear opportunity to opt out if they judge that consolidation is not in their best interests. Finally and crucially, the Bill already requires regulations to set a minimum 12 month period for a pot to be classified as dormant. That threshold could be set at a longer period or extended in future through secondary legislation if the evidence justified such a change. I think we all agree on the need to consolidate small pots to protect savers and all other members from multiple years of charges on multiple pots eating away at their savings. I hope that the noble Baroness, Lady Altmann, can see that extending the dormancy period would harm the vast majority of members in a known and avoidable way to add further protection for a very small number of hypothetical cases. The best way to protect those cases is through building full and proper safeguards into the policy, which is what this Bill does. After that compelling argument, I hope that she will be willing not to press her amendment, when we come to that point. Lords Amendment 77 would require the Secretary of State for Work and Pensions to conduct and publish a review of the long-term affordability of public service pension schemes. The Government cannot accept the amendment as it is unnecessary and technically defective. It is unnecessary, as detailed information about the cost of the unfunded public service pension schemes is already publicly available. The OBR undertakes analysis of both the near-term and long-term cost of the schemes, including the Treasury’s central measure of affordability: 50-year projections of pension payments as a proportion of GDP. Contrary to suggestions made in Committee and on Report, the cost of the schemes is forecasted to fall under this measure, from 1.9% to 1.4% of GDP. On Report, we heard suggestions that savings arising from the Hutton reforms had not and would not materialise. That is simply incorrect. The coalition Government forecasted savings of around £400 billion by 2065 as a result of the substantial reforms made to the schemes in 2014-15, but implementation of the reforms was, in effect, set back because the courts found that the way in which the coalition Government had introduced them was discriminatory on grounds of age. That incurred costs of around £17 billion, but crucially, it will not impact the savings going forward. Those are the key drivers behind the fall in costs over the long-term. Every four years, detailed actuarial valuations of each of the schemes are undertaken and published. They set out the cost of providing benefits to current staff and the cost of meeting all accrued liabilities. The valuations test the cost of the schemes against the cost control mechanism, introduced by the coalition Government as part of the Hutton reforms, and they provide for benefits to be adjusted if those have deviated from target levels. Pension costs are also set out in the financial accounts for each of the schemes and collectively in the whole of government accounts. This information is produced in accordance with international accounting standards. The amendment is not necessary because the risks arising from changes to longevity are already managed in the design of the schemes. This came up on Report. The retirement age in the schemes, except those for police, firefighters and the Armed Forces, is the state pension age. In any case, the cost control mechanism would be triggered if costs rose due to longevity improvements that were not managed by changes to state pension age. The suggestion made on Report was that the fact that some of the public service schemes are operated on a pay-as-you-go basis means that they must be unaffordable, but “unfunded” does not mean “unaffordable”. In general, the Government do not pre-fund future liabilities by holding assets at all. Details of the Government’s policy on whether to hold assets in relation to specific liabilities is set out clearly in Annex 4.16 of Managing Public Money, should anyone want to look it up. There is clearly an opportunity cost to holding assets in a fund, which are invested with the sole objective of having enough returns to meet future liabilities. Holding funds can create technically allocative inefficiencies across the public sector. The liability can clearly be more efficiently managed in the round with other unfunded liabilities, met out of general taxation as they fall due. The amendment would not work, because it would require the Secretary of State for Work and Pensions to undertake a review on a matter that does not fall within their responsibilities and for which statutory responsibility sits elsewhere, including with the devolved Administrations. Comprehensive information is already available, published and regularly updated on the cost of public service pensions. There is demonstrably already transparency on all the points raised by noble Lords during the debates, and the amendment is, in the Government’s view, therefore unnecessary. We will continue to ensure that public service pensions are properly costed, transparently reported and kept under review through existing mechanisms. So, I hope that the noble Baroness will not press her amendment. I turn to Amendments 78 and 86. These amendments engage Commons financial privilege. The House of Commons has therefore disagreed with the amendment and has not offered any further reason. As noble Lords will know, it is a long-standing convention that this House does not insist on amendments which the other place has rejected on grounds of financial privilege. But I will briefly explain why the Government do not agree with the policy intent. These amendments would not do what I suspect the movers hoped they would, which is to enable the PPF to pay lump sum payments to its members on top of the periodic compensation it provides.