Pensions Bill - continued          House of Commons

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Impact on employers

341.     Many employers already support their employees in saving for retirement by providing a workplace pension and making contributions towards it. The measures being introduced in this Bill that arise from the deregulatory review aim to reduce the legislative burdens governing the schemes that these employers run. In the period to 2050, the present value of the savings to employers from these measures could amount to around £4.4 billion. However, the aim of these measures is for employers to use these savings to continue providing high quality schemes.

342.     The introduction of automatic enrolment and a minimum employer contribution will lead to both administrative and contribution costs for employers. The majority of these will fall on employers who currently do not provide pensions to their employees.

343.     Total administrative costs for those employers automatically enrolling their workers into the scheme established under clause 50 are estimated to be £300 million for the first year, with ongoing costs of around £89 million per year. Firms using an existing scheme will face total administrative costs of £50 million in the first year and ongoing costs of £12 million per year. The majority of firms not using the scheme established under clause 50 already run an occupational scheme and these costs are therefore considerably lower than the costs of introducing automatic enrolment into the scheme established under clause 50.

344.     The total cost of contributions made by employers is estimated to be around £2.9 billion per year, equivalent to 0.7% of total labour costs. Research shows that most employers expect to use a range of mechanisms for managing these costs, including absorbing increases, passing them onto consumers via higher prices or through slower wage growth.

Impact on government

345.     There will be costs to government in relation to implementing these changes, arising, for example, from providing information to employers on their new duties and setting up the compliance regime to regulate the duty on employers to automatically enrol eligible jobholders into a workplace pension scheme.

346.     As described above, the increase in private pension savings generated by these reforms will increase the tax relief paid on pension contributions. The annual cost to the Exchequer could be around £1 billion once contributions have been fully phased in. The employer contribution could also have an impact on the Exchequer. If employers choose to fund their contributions out of company profits, there would be a reduction in corporation tax paid. If it were funded through reduced wage growth, the Exchequer would forego employee income tax and National Insurance contributions from both employer and employee. The impact on the Exchequer could be a further £0.7 to £1.5 billion in 2014.

347.     The costs to government of these changes will be partially offset by higher private pension saving, increasing future tax receipts and reducing the number of pensioners on income related benefits.

348.     There will also be a need to finance the cost of set-up and early years operation of scheme established under clause 50, in the period before revenue from membership charges builds up. This finance could potentially come from private sector sources, public sources or a mixture of both. The intention is that the scheme will be self-financing over the long-term and any Government support will not unfairly subsidise the scheme and must comply with European Union competition and procurement rules. Thus, these costs are ultimately funded by scheme members, in keeping with the aim that the scheme is self-financing in the long-term. Any funding solution will need to balance the need to deliver value for money for members, achieve commercial viability, and ensure affordability for government. It will also need to comply with European Union legislation on competition and public procurement.

349.     The Personal Accounts Delivery Authority is currently advising on the design of the scheme and the implications this will have on the cost of building the scheme. The overall cost of the scheme established under clause 50 will not be finalised until the Authority has completed the commercial procurement process. This cannot take place for some time after the Bill has received Royal Assent. The Government is unable to publish its current estimate of the cost of the scheme for reasons of commercial confidentiality and the risk that this could influence future negotiations.

Impact on industry

350.     The Government considers that these changes will have a positive impact on the financial services industry, although it is possible that some firms or parts of the industry will benefit more than others. It is expected that new commercial opportunities will arise from an expansion in the sector as a whole, with an estimated 6-9 million people newly saving or saving more in workplace pensions.

351.     Scheme qualifying tests will enable employers to fulfil their new legal obligations by continuing to provide high quality pensions or choosing from the products offered by existing providers. The deregulatory measures in the Bill will also reduce the cost to employers of operating defined benefit pension schemes.

352.     Private sector firms will also provide the services needed to deliver the scheme established under clause 50. Procurement of these services will be carried out by competitive tender and in accordance with the Public Contract Regulations.

Competition impacts

353.     The scheme established under clause 50 is being introduced to fill a "missing market" by providing a retirement savings vehicle for moderate to low earners and those working for small firms who are currently without access to good workplace pension provision.

354.     Specific measures, such as a prohibition on transfers and a limit on contributions, will be introduced to ensure that the scheme established under clause 50 acts to complement, rather than replace, existing products. However, some employers may be able to exercise a choice between the scheme established under clause 50 and other types of pension scheme when fulfilling their legal duty. Where this is the case this should improve competition, helping to bring down prices and improve service quality.

355.     Additionally, the scheme established under clause 50 will be delivered using capabilities procured from the private sector and will give rise to contracts which could improve competition in a range of markets. All contracts will be let in accordance with the Public Contracts Regulations (2006).

Impact on the macro economy

356.     These reforms are likely to have a relatively small effect on economic growth. While increased saving may cause a very small fall in economic growth in the short-term, it should quickly return to the level it would otherwise have been. In the long run, the additional saving generated could result in incomes rising by around 0.2 per cent as measured by Gross National Product.

Gender Impacts

357.     The reforms in this Bill are intended to deliver improved private pension incomes for both men and women.

Race Impacts

358.     Automatic enrolment is targeted predominantly at low to moderate earners currently not saving in a private pension with a 3 per cent or more employer contribution. Black and Minority Ethnic individuals form 12 per cent of this group compared with 9 per cent of all employees aged 22 to state pension age. Automatic enrolment could mean that many individuals in Black and Minority Ethnic groups who would otherwise not have saved will start to do so.

Disability impacts

359.     The reforms contained in this Bill are expected to have an equivalent impact on disabled people in employment, compared to people without a disability.


360.     Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement about the compatibility of the provisions of the Bill with the Convention rights (as defined in section 1 of that Act). The statement has to be made before second reading. The Secretary of State for Work and Pensions, Peter Hain, has made the following statement:

    "In my view the provisions of the Pensions Bill are compatible with the Convention rights."

Part 1: Pension scheme membership for jobholders

361.     Chapter 1 of this Part may give rise to issues under Article 1 of the First Protocol ("A1P1") because it will result in active membership of a pension scheme without the individual's consent. That membership means that the employer must deduct the individual's pension contributions from their wages and pay them (together with the employer's contributions) directly to the scheme.

362.     No such person is deprived of their contributions if they do not wish to make them. They have a statutory entitlement to opt out and to information that will enable them to make an informed decision. The Government therefore considers that these provisions are compatible with the Convention rights.

363.     Actual contributions will be calculated by reference to "qualifying earnings". People with other earnings will not be entitled to the benefits arising from automatic enrolment. It is possible that this difference of approach would engage Article 14 because a person who does not attract automatic enrolment may receive less benefit for the same work then a person who does.

364.     It is unlikely that Convention rights would be engaged in these cases, but even if they are any difference of treatment is justified and proportionate. Mandatory employer contributions are being introduced to encourage saving for retirement by a large group of moderate to low earners who are not currently doing so. The lower earnings limit is intended to maximise participation rates whilst ensuring, so far as possible, that saving is targeted at the people who are most likely to benefit from it in retirement.

365.     Chapters 2 and 3 relate to compliance with the new employers' duties. The enforcement of obligations on employers arising under Part 1 are likely to engage Article 6. The rights which follow will be appropriately respected by a combination of the proper exercise of the Pension Regulator's discretion and a right of appeal to the Pensions Regulator Tribunal.

366.     In the Government's view, it is most unlikely that any corresponding entitlement for jobholders could arise: any such entitlement would be a consequence of membership of the relevant pension scheme. Entitlement to contributions would therefore be a matter for the scheme and then, as now, the trustees would be obliged to act in the best interests of the beneficiaries in pursuing any debt. Individuals would be able to raise any complaints with the Regulator or the Pensions Ombudsman in any event and judicial review and actions under trusts rules would also be available in the usual ways.

367.     The provisions of the Bill allowing for the creation of a new pensions scheme and establishing a trustee corporation, Chapter 4 of this Part, do not directly give rise to any material issues in relation to the Convention rights. They will enable the scheme to include everything that would normally be included in a scheme of this sort. The Secretary will of course be required to exercise powers in relation to the scheme in a way which respects the Convention rights.

Part 2: Simplification etc

368.     Clause 79 is intended only to affect future pension rights. In the government's view, these are not certain enough to engage A1P1 rights but, even if they are, this provision is not a deprivation and is justified. It reflects changes already made to the Limited Price Indexation cap, reduced inflation generally and is in the interest of all scheme beneficiaries collectively.

369.     The consolidation of additional state pensions effected by clause 80 is unlikely to be an interference with A1P1 rights, not least because there is no right to receive an additional pension of a particular amount. In any event, it is intended that individuals will have the same, or a very similar, additional pension as without consolidation. A determination of the amount of an individual's entitlement can be appealed to an independent tribunal.

370.     In the Government's view, the extension by clause 81 of the assessed income period does not engage A1P1 rights because no one will have less entitlement to state pension credit after the extension than they did before. In the unlikely event that there was an arguable difference of treatment on age grounds, then such difference is justified because the reality of the position is that people aged 75 or over are likely to have a more stable retirement provision.

Part 3: Pension compensation

371.     Pension sharing enables the assets of a couple to be divided by the courts on divorce, dissolution or annulment. In the absence of this Part, the fact that a person's pension scheme had been taken over by the Pension Protection Fund (by reason of the employer's insolvency) would prevent compensation from the fund being shared in the same way. The intention of these provisions is therefore to achieve consistency which is otherwise missing. Making a sharing order would engage A1P1, but the changes will increase flexibility and, with it, the courts' ability to balance the interests of the parties to achieve fairness.

372.     Although compensation under the pensions protection fund may give rise to A1P1 rights, the Government considers that the changes made by clause 96 will not engage that Article but, if they do, that they would plainly be justified. Those changes will provide a better match than at present between the entitlements a person would normally expect to receive under their pension and those which would arise should that scheme be taken over by the Fund.

Part 4: Miscellaneous

373.     Changes were made in 1990 in relation to public service pension schemes to prevent widows and widowers from receiving two annual index-linked increases on an element of the public service pension attributable to their late spouse's employment. Clause 101 corrects a defect in those changes and adds similar provision in relation to surviving civil partners.

374.     The current legislation could result in under-indexation for some widowers compared to widows and over-indexation for some civil partners relative to widows. The Bill will correct the defect that results in unintended discrimination against widowers. It may result in a reduction in future pension payments from public service pension schemes to some civil partners. Even if the latter does engage an A1P1 right, it is justified in order to avoid continuing to awards above-inflation increases to a small number of surviving civil partners.

375.     Clause 102 makes an amendment to the PA 1995, to ensure that a surviving civil partner can receive their partner's war pension. It places such people in the same position as a surviving spouse. In the Government's view there is no question of it giving rise to a Convention rights problem.

376.     Finally, clause 103 ensures that members of the Polish forces, who are entitled to a war pension by virtue of their service under British command in the Second World War, do not lose that entitlement if they move back to Poland, or did so after April 2004. Only those people exercising a right of free movement under European law benefit from this change: people who moved to Poland before May 2004 do not. In the Government's view, this is not discriminatory in Article 14 terms, but it is in any event justified because veterans who moved to Poland before May 2004 are eligible for assistance there.


377.     None of the measures in this Bill has any effect on or is affected by any European Directive.


378.     The provisions of this Bill would be brought into force by an order or orders to be made by the Secretary of State with the following exceptions:

  • In Part 1, sections 50 to 56 and 61 to 67 (power to establish a pension scheme, and provisions relating to the Personal Accounts Delivery Authority) would come into force on the day on which the Bill becomes an Act.

  • Clause 81 (extension of assessed income period for those aged 75 or over) would come into force on 6 April 2009.

  • Part 5, except the repeals, would come into force on the day on which the Bill becomes an Act.

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Prepared: 6 December 2007