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"member" has the meaning given in section 101AA(5);

"permitted way", in relation to a cash transfer sum, means any of the ways specified in section 101AE(2) in which the sum may be used;

 
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"relevant benefits" means benefits which are not attributable (directly or indirectly) to a pension credit;

"reply date", in relation to a member whose pensionable service has terminated, has the meaning given in section 101AC(3)(c).".'.—[Malcolm Wicks.]

Brought up, and read the First time.

1.14 pm

The Minister for Pensions (Malcolm Wicks): I beg to move, That the clause be read a Second time.

Mr. Speaker: With this, we may take Government amendments Nos. 147, 156, 157, 159 to 164 and 171.

Mr. Wicks: Although the Opposition would prefer me to move the new clause at the end of Blackpool pier, I am—rather conventionally and conservatively—in the House of Commons, which is appropriate.

New clause 24 introduces a new provision that will increase opportunities for pension saving for early leavers. It will give them the choice of a cash transfer sum to be taken to a stakeholder or other appropriate scheme, or a refund of their contributions. Occupational pension schemes can have rules that require employees to be members of the scheme for a specified length of time before they secure rights under the scheme. That is known as a vesting period. Legislation provides that a vesting period cannot be longer than two years.

When members leave a pension scheme after their rights have vested but before their pensions are payable, their pension rights must be preserved in the scheme, or transferred to another scheme or arrangement. However, at present, employees who leave during a vesting period may find that the best they can get is a refund of their contributions, less tax. We believe that more employees, especially those who change jobs frequently, should be given greater opportunity to build up pension rights. The new clause will apply to employees who have been members of an occupational pension scheme for at least three months but leave before the end of a vesting period.

The trustees of the scheme will be required to inform the early leavers of their entitlement to the choice between a cash transfer sum and a refund of their contributions. They will have to set out the value of each option, tell the members about the types of scheme to which a cash transfer sum may be transferred, and give them a reasonable time in which to decide. Supplied with sufficient information to make an informed choice, early leavers should, in future, be in a better position to make positive decisions about their pension savings.

Younger people in particular, who may expect to have several relatively short-term jobs at the start of their working lives, may be more attracted to joining a scheme, when one is on offer, if that means that they can start to build up savings for a pension. Hon. Members may recall that, in our Green Paper, "Simplicity, security and choice: Working and saving for retirement", we proposed that rights in all schemes should vest immediately. The quid pro quo, to avoid schemes having to administer very small pensions for many years, was that trustees should be able to transfer small pension rights below a de minimis value to a stakeholder scheme, so long as the member did not object.
 
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Consultation on the proposals produced several concerns, to which we gave careful thought. There was much anxiety about imposing extra administrative burdens on schemes and about the risk of trustees facing mis-selling claims if they transferred de minimis amounts without the members' consent. On the other hand, the proposals were warmly welcomed by consumer groups, especially those such as the Equal Opportunities Commission, which took the view that they would be of particular benefit to many women. We therefore drew up the revised proposal as set out in the subsequent paper, "Action on occupational pensions".

We believe that the amendments present a balanced way of improving opportunities for pension saving for early leavers without the disadvantages of the original proposals. They put the focus on individuals making an informed choice about their pension savings. Although we acknowledge that there will be some extra administrative requirements on schemes, they should be less burdensome than the original proposals. Many schemes that operate a vesting period already provide contribution refunds under their own rules. All schemes already have to have arrangements in place to calculate transfer values. The extra administrative load in those cases will be in presenting the options to members. It is not great when compared with the potential benefits for members.

We estimate that funding costs could be approximately £50 million a year for all occupational schemes and that additional administration costs will be around £9 million a year—clearly, with greater impact on companies where there is a high turnover of staff. Those additional costs will of course be incorporated in the revised regulatory impact assessment for the Bill.

On the other hand, the benefits for individuals could be significant. Let us consider, for example, the case of an employee who is a member of a defined contribution scheme for 18 months, earning £20,000 a year. If employee contributions were 3 per cent. of earnings and employer contributions were 4.5 per cent., a refund of contributions would be £900. Depending on investment return, a cash transfer sum might reasonably be between £2,000 and £2,500. That would provide a significant boost to personal saving for retirement. The clause itself is quite complex because it inserts a new chapter 5 into part 4 of the Pension Schemes Act 1993.

Mr. Steve Webb (Northavon) (LD): That example is in the guidance notes that have helpfully been provided to Members. Rather than giving the figures of £2,000 and £2,500, as the Minister has just done, the notes cite a figure

"of the order of £2,385",

which is quite precise. Are these amounts determinate? The Minister's figures had a range of about a quarter. Is there a formula involved, or do we not know what the figure will be? Perhaps there is some discretion as to how much will be involved. I am slightly puzzled by this discrepancy.

Malcolm Wicks: It will depend on returns on investments, and things of that kind. The information note gave a very precise figure, and perhaps we have very precise calculators at the Department for Work and Pensions. I have now given the House a range of between
 
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£2,000 and £2,500, which might be more realistic. If I can give the hon. Gentleman more guidance in writing, I will do so. The main point that I am trying to make is that, in introducing this choice, we are determined that the individual making the choice should have proper information, because a transfer will often be the most sensible option for a younger person, or anyone else, to choose. The differences between taking the money, as it were, and the transfer value will be quite considerable.

Part 4 of the Pension Schemes Act 1993 deals with protections for early leavers. The new chapter 5 contains many of the provisions that apply to current rights to transfer values for members whose rights have already vested by the time they leave pensionable service. I assure the House, therefore, that the significant length of this clause does not represent some new substantial burden of regulation. It is rather a self-contained section of legislation in which some of the existing requirements on transfers are brought together to underpin the new option for employees. This forms a complete legislative guide for schemes to operate.

The clause provides that the scheme's trustees or managers must give early leavers sufficient written information for them to be able to make a choice of taking either a contribution refund or a cash transfer sum, as I have just noted. They must be given a reasonable period of time to make this decision. The notice issued to them must have a date by which they need to confirm their choice in writing. A code of practice produced by the regulator will set out what is a reasonable time, and the regulator will be able to impose sanctions on trustees or managers who fail to comply with the obligations in the legislation.

If a member elects to take a cash transfer sum, the trustees must ensure that it is used in a way permitted through this clause. Permitted options include transferring the sum into another occupational pension scheme, transferring to a stakeholder scheme or other personal pension, or purchasing an annuity. The clause also provides that, if a member fails to inform the trustees or managers in writing of his choice by the reply date, or any later date allowed, the trustees may by default pay a contribution refund. The scheme will not then be left with an obligation to hold on to small amounts of pension and maintain records of them for an indefinite period.

I believe that these new provisions will be of significant benefit to early leavers in future, and I commend them to the House. I should add that amendments Nos. 147, 156, 157, 159 to 164 and 171 are technical consequential changes—to existing definitions, for example—as a result of new clause 24. I ask hon. Members to accept the amendments.

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