Contribution
If the noble Baroness could have just a bit of patience, I am just coming to that. I ask her to bear with me for a moment.
Either of the noble Baroness’s proposals to extend the period of dormancy would delay the consolidation of genuinely dormant small pots, leaving inefficiencies in the system for longer, resulting in higher costs for schemes and for members through higher charges.
Where someone holds several small pension pots across multiple schemes, they will find themselves subject to multiple sets of charges over a number of years. The longer the dormancy period, the longer that members will face those charges. It is well recognised that many schemes apply a flat-fee charge structure, particularly those most affected by the proliferation of small pots, and that can compound the issue. For example, a saver with three separate small pots held across three schemes, each applying its own annual flat-fee charge, could see those charges accumulate over an extended dormancy period. If the period were lengthened to 36 months, they could face four more annual charges. Given the relatively low value of many small pots, such cumulative charges represent a significant risk of detriment to the member.
On the point about people taking a career break with the intention of returning to work, in the majority of cases such members will be adequately protected by the 12-month dormancy window. The noble Baroness, Lady Stedman-Scott, mentioned maternity leave. This was looked at carefully during the consultation. Where someone is on paid maternity leave, employers should carry on paying pension contributions. Where contributions are being made, the pots are not dormant, so any period of dormancy would not start until no contributions were paid, and those pots would not be subject to dormancy criteria and would not be consolidated.
Anyone taking an unpaid break that lasts longer than 12 months would find that the system included various safeguards. First, every member will get a transfer notice before consolidation takes place, giving them a clear opportunity to opt out if they judge that consolidation is not in their best interests. As we develop the delivery design, we will look to explore different forms of communication to understand how they can best support members’ engagement with the process.
Secondly, under Clause 115, the Government are taking a power to require employers to provide updated information to schemes periodically. We will consult on how that should operate, but if subsequent evidence shows that career breaks present a genuine issue, we could simply require employers to notify schemes where a break was planned or under way. Where appropriate, that would allow such pots to be made exempt from consolidation under regulations made under Clause 25.
However, the current evidence does not indicate that this is expected to be a widespread problem. As I said earlier, the 12-month timeframe formed part of the proposal consulted on with stakeholders across the pensions industry and consumer representative bodies in 2023 and represents a supported middle ground—long enough to ensure that pots are genuinely dormant, but not so long as to delay consolidation unnecessarily. It is essential that the policy maintains the right balance between operational efficiency and member protection. Just to be clear, the Bill currently requires the regulations to set a minimum of 12 months for a pot to be classified as dormant. That means that if evidence suggests that extending the period is necessary, that period could be set at a higher level or it could be extended subsequently through secondary legislation.
We all want to avoid negatively impacting individuals who take periods of unpaid leave, but if we think about it, applying a blanket extension to the dormancy criteria cannot be the right way to provide that protection. A more appropriate approach is to design the policy framework with the necessary safeguards built in from the outset, and that is what we have done. Introducing a universal increase to the dormancy period would exacerbate the risk of detriment for everybody involved.
Finally, government Amendment 51 is a minor and technical change. It replaces “specified” with “prescribed” in Clause 23 to ensure consistent terminology throughout the Bill. The amendment improves clarity and brings the clause into alignment with the drafting used elsewhere in the measure. In the light of what I have said, I hope that the noble Baroness will withdraw her amendment and that the House will support government Amendment 51.