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This is not, by any stretch of the imagination, an attempt to reopen the Turner settlement, which was based on a series of compromises and took into account
different views, including those of the CBI and all sorts of others. However, let us remember that an overall contribution level of 8 per cent. will not deliver a very comfortable retirement. It is a massive step forward for people who have no provision at all at the moment and should have, but there is concern that the mere arrival of personal accounts will have an effect on existing, more generous pension provision.
The point of new clause 6 is straightforward: to say that there should be a duty on PADA to minimise the effects of the introduction of personal accounts on existing pension provision. I cannot really see why the Government should not accept a new clause along those lines with alacrity, because it has been pretty clear since the Turner report that we are all on the same wavelength and believe that we should focus on the so-called target group set out by Turner, which is predominantly people who have no existing pension provision. It will be the ultimate tragedy and irony at the same time if, after this process, we end up increasing the number of savers but not the amount of savings, and if all we do is recycle roughly the same amount of savings in the pensions system, or even worse. I shall come to that possible scenario in a moment.
Our approach in Committee, and to some of these amendments, has been shot through with attempts of all sorts to erect a kind of Berlin wall between personal accounts and existing pension provision, whether by banning transfers in and out or by banning contributions above a certain level. It is still a matter of regret that the figure of £3,600 a year, which is firmly on the record as being the Government’s position on the maximum annual contribution, is not in the Bill, but so be it. We have tried to put it in the Bill and, in true form, have failed dismally at every attempt. In other ways, too, we have tried to ensure that there will be no interference with existing provision by the new personal accounts system.
We must turn again to our old friend the Pensions Policy Institute, which has done impressive work on levelling down. If I remember rightly, it was funded by the Nuffield Foundation. As the PPI put it:
“Levelling-down refers to the risk that, in response to the Government’s proposals, employers may decide to close existing occupational pension schemes that offer more generous pension benefits to their employees and instead enrol employees into the new personal accounts.”
“Levelling-down is an important policy issue.”
I entirely agree with that. It is one of the two most important policy issues surrounding the Bill. As the PPI said:
“There is a lot of uncertainty about how employers will respond to the reforms”.
It modelled various effects: those of no reform, of employers continuing to offer pensions on their existing terms, of what it calls “cost control”, and of the modelled employer response. Those models produced wildly different projections of what could happen. The PPI made the point that without any reforms at all
“there could be a decrease in annual total pension contributions from around £40 billion in 2006 to around £30 billion by 2050.”
So on one level, doing nothing is not really a sensible option.
The PPI also looked at the very optimistic scenario of pension contributions increasing by about £10 billion annually. It then considered what it called a
“very pessimistic and extreme scenario”
that could involve the shrinking of the market below its current level, even with personal accounts being taken into account. That is an extremely sobering scenario, but, as the PPI continued:
“In reality, employers are likely to respond in a variety of different ways.”
It referred to work done by Deloitte and Touche in 2006 showing a possible total annual pension contributions increase of £10 billion compared with a position without the reforms. However, the worrying part is that the PPI then stated:
“But this initial increase could wane over time as employers respond to the reforms by closing existing schemes to new members”.
To adopt the expression used by the Minister in the previous debate, I do not think that there will be some big bang, with levelling down happening between one day and the next. Much more likely is that there will be a gradual process of attrition, as people move from job to job and find that pension schemes are closed to new members.
6.30 pm
I cannot say what will happen, and neither can the Minister or the PPI. In its written evidence to the Committee, the institute said:
“Overall, the jury is still out as to whether the Government’s pension policy will deliver both more people saving and more saving and better retirement incomes...However, the interaction of the reforms with means-tested benefits and the risks of employers ‘levelling down’ their pension contributions both pose real challenges to the success of the reforms.”
That expresses better than even I can the concern lying behind new clause 6 and the other amendments. No one can predict how employers will behave, so any measure that will minimise the effects of levelling down—including the duty in new clause 6 that would require the PADA itself to minimise that effect—is to be welcomed.
A related but separate issue is covered by amendment No. 29. Much concern has been expressed about workplace pension plans and group pension plans. If a solution is not found to the problem posed by GPPs, the process of levelling down could be turbocharged. The industry consensus is that we need that solution now, not in 2012. The National Association of Pension Funds said that the EU’s directives on distance marketing and unfair commercial practices may prevent auto-enrolment being applied to workplace personal pensions.
“We believe that the UK Government should continue to seek clarification from the EU on whether automatic enrolment can apply to WPPs in the UK under the proposed reforms. However, if agreement cannot be achieved, the NAPF believes that a solution can be found that would allow auto-enrolment in to WPPs in a manageable and affordable way, by establishing WPPs under master trusts.”
The Association of British Insurers shares the concern about the present uncertainty, although its alternative solution is to institute streamlined joining for those in
GPPs. Some 2.5 million people are in those pensions, making up some 40 per cent. of all employer provision, and the ABI states:
“We are particularly keen to ensure that these schemes can be preserved within the new system as they tend to offer better arrangements to employees, and continuation will save employers from a costly and complicated review of pensions provision.
Given the current scale of the GPP market...the potential damage to pension savings is very high.”
“Failure to secure a safe future for GPPs will prompt widespread levelling-down of pensions, something the Government is so keen to avoid. The average employer contribution to a GPP is 6 per cent. If this was reduced to the Personal Accounts 3 per cent. level, some £900 million of contributions would be lost by employees.”
That is incredibly important, as losing the more generous provision would give real impetus to the levelling-down process. The ABI goes on to say:
“A solution must be found now—not in 2012.
2012 is still four years away, and uncertainty in the GPP market now means that financial advisers...may hold back from recommending new schemes. The impact of this is very real, especially for middle-age savers—for a 40 year old man, such a break in saving could reduce retirement income by up to one-fifth.”
Similar concerns have been expressed by the CBI and by Norwich Union, while the Equality and Human Rights Commission said:
“We are concerned about Clause 3(5)...We understand that the Government is not entirely satisfied that auto enrolment is currently possible into commercially based personal pensions under European directives. The Government has recognised the concern that we and others have and we urge them to continue their discussions with Europe or investigate alternative solutions such as master trusts to ensure the vital principle of auto enrolment is not breached.”
It is clear that the Government should pursue a twin-track approach on this matter. They should continue to have discussions inside the EU to see what can be done. Resolving matters such as this usually takes some time, but the Government also need a plan B in case the talks do not work out. We need a workable exemption to automatic enrolment in GPPs, so that we can get the policy aims back on track—that is, to deter levelling down of existing provision, and to encourage people to continue in the schemes and to join them in the foreseeable future.
There is a real worry in the industry, and an uncertainty that cannot be allowed to continue. The concern is that a gap in pension provision could have a real effect on the retirement income of many people. I hope that the Minister will tell us what progress has been made with the EU, and what his fallback position is if the talks do not work out.
The problem of levelling down is a huge one, and I commend the new clauses and amendments to the House.
Paul Rowen: I shall be brief, as the hon. Member for Eastbourne (Mr. Waterson) has covered most of the relevant points. He made the problems to do with levelling down very clear, showing that employee contributions of 6 per cent. could fall to 3 per cent. The Bill is aimed at ensuring that people who currently are not saving for their pensions begin to do so, and we do not want employers to reduce the level of their contributions.
The number of people in the private sector with open defined-benefit schemes has fallen from 5 million in 1995 to 900,000 now, and that is a serious problem. The hon. Member for Eastbourne quoted what the ABI said about the 2.5 million people currently in GPP schemes. The ABI also showed that a person of 24 in a GPP scheme earning £15,000
“who retires at State Pension Age would...receive an annual pension income of £10,000, compared to around £6,500”
if he or she had a personal account. If that were to happen, it would completely defeat the purpose of the Bill.
The Minister told me last night that he would speak today about the two EU directives that the hon. Member for Eastbourne mentioned. It is clearly important for the industry that we get a solution to the problems that they pose. If we can ensure that we are levelling up rather than levelling down, we will have achieved our purpose, and we need an assurance from the Minister to that effect. He must also make it clear that the problem of auto-enrolment is being dealt with, as the current interpretation of existing EU directives could have a devastating effect on the industry.
Mike Penning: May I say what a brilliant speech my hon. Friend the Member for Eastbourne (Mr. Waterson) made? That is not to say that he has not made brilliant speeches before. He managed to pull together a great many amendments in one speech. He said at the start of his remarks that he felt as though he were going to a scrap yard, getting several pieces of a car and putting them back together. In north London, that is called a cut-and-shut. I will deal with the cut, if that is okay.
My hon. Friend and the hon. Member for Rochdale (Paul Rowen), the Liberal spokesman, talked about levelling down. It is imperative that that does not take place. If the Bill is to introduce new people to pensions that will get them off means-tested benefits, it is crucial that we have a level playing field. Now that we are talking about levels, it sounds as though we have moved from the car breaker’s yard to a building site. As I say, a level playing field is crucial. We must give no one an opportunity to cut their responsibilities and make people who are already in pension schemes slip backwards, or to encourage those people to move into the personal account schemes that we are talking about. That is imperative; if we do not ensure that, it will defeat the whole object of the Bill and we will go backwards, not forwards.
Mr. Mike O'Brien indicated assent.
Mike Penning: I notice that the Minister is nodding, so perhaps I have said something that we agree on. That is unusual for me.
There are shady business men dealing with pensions all over the show. There must not be a back door; there must be no opportunity for them to slide backwards. If there is no independent way to make sure that that does not happen, it is important that the people in charge of schemes make sure that it does not happen. The Conservative and Liberal Democrat Front Benchers have spoken of the evidence that outside organisations with concerns have provided. We must put a stop to the problem, and that is why I support new clause 6. The Minister may well give us very good reasons why we
should not add the new clause to the Bill, but if we do not, will he give the House, the country and, more importantly, future pensioners assurances that there will be protection for those already in a scheme?
I am told that I pick on Tesco too often, so I shall refer not to the Tesco pension scheme, which the Minister mentioned, but to another one, on to which people are automatically enrolled; they are on very low earnings, and may be working part-time. One can easily see how that sort of scheme, which has very low premiums going into it, could easily be drawn backwards and be subject to the levelling down to which my hon. Friend the Member for Eastbourne referred, making it simpler for employers to let someone else take the responsibility. That would be disastrous for the Bill, and for the many people whom we are trying to encourage to have faith in pensions. We have to be honest with ourselves; we know from our constituencies that there is not huge faith in pensions. We know all too well how many people who come to our surgeries are concerned about the issue. That is true not just in my constituency, which has been affected by the Dexion situation and occupational pension scheme issues. Pension schemes in general are not the flavour of the month.
The purpose of the provisions is to encourage more people to come into the pensions arena and to have confidence in pensions. If we are to do that, we need new clause 6, or something very similar that will allow people to believe that those who are already in low-income and low-premium schemes will be protected. At the same time, the personal accounts scheme that we are talking about should have the benefit of keeping people out of means-tested benefits. I accept that the Minister is in a very difficult position, as he is trying to bring that about with the consensus that he has managed to get. That would all be lost if we ignored the concerns that have been raised. I will not read out the comments of all those who have lobbied us on the issue; some of them have already been read out. There is a genuine argument to be made, and there is genuine concern that it is all too easy to slip backwards, instead of going forwards, which is what we all want to happen as a result of the Bill.
John Penrose: I want to join the consensus among Members on both sides of the House about the critical importance of preventing levelling down, and therefore of accepting new clause 6 and its associated amendments.
6.45 pm
It is worth pausing for a second to understand precisely what we mean by levelling down, as we have been using the term to cover a variety of things. It is worth remembering that, for several years, employer contributions to pension schemes have fallen, not because of the Government’s plans for personal accounts, but because of other external factors, partly economic and partly to do with changes in pensions and tax laws. As a result, occupational schemes are already suffering from a degree of levelling down. It is crucial that we do not accelerate the decline and push contributions even further down to the residual, basic level that will be established by the personal accounts. It is crucial that the issue is not left to chance, and that we do not just trust to hope on that point.
Let us imagine the scene in any company’s boardroom when the topic of the establishment of personal accounts arises. Companies with occupational schemes could do one of four things in the face of the personal accounts legislation. They could decide not only to make their existing occupational scheme available to everybody in the firm, as the rules require them to do, but to increase the contributions for each of those people. That would be a marvellous solution; I sincerely doubt that many people will opt to do that, but it is a theoretical possibility.
Companies could also opt to keep contributions at the same level, but to broaden coverage to everybody in the firm. That would obviously increase the total cost of the company’s pensions contribution, potentially very substantially. I do not know whether that would count as remaining the same; I suspect that we should count it as levelling up, because it would extend existing high-quality coverage to more people. I suspect that everyone, in all parts of the House, would welcome that outcome hugely.
As a third option, a company could decide to maintain its overall pension contribution at current levels, in pound terms, while spreading that benefit among a wider range of people—that is, while extending the scheme to cover everybody in the firm. That would not reduce the total pension contribution made by the company, but it would reduce the amount received by each employee. I do not know whether we are counting that as levelling down. Clearly, on a macro-economic scale, it is not levelling down, but would be maintaining pension contributions at existing levels. I suspect that many of us would not regard that as a bad result; it would extend the coverage of occupational pensions significantly, while keeping them at a high level of quality.
The fourth option is the one that we are all worried about: a company may decide not to keep its existing level of contributions constant, but absolutely to reduce its contributions, while extending the coverage of the scheme to all employees. We need to be clear that that is the worst possible scenario. I suggest to the Minister—I shall be interested to hear his views—that any of the other three options would be at least acceptable, if not an outright victory, and would allow us to consider that we had avoided levelling down. I hope that he will oblige us by explaining precisely what he would, and would not, regard as acceptable.
There is an argument that the design of personal accounts is, in itself, a good weapon against levelling down. Personal accounts are the budget airline solution to pension coverage; the legislation deliberately sets out to create an ultra-simple, ultra-cheap, no-bells-and-whistles, no-frills product that is not terribly flexible—a good, basic, plain vanilla product that will suit a large number of people who are not currently covered. It can be argued that that in itself will distinguish personal accounts from existing occupational schemes, because those occupational schemes tend to be higher-cost, to require higher contributions and to be a great deal more flexible. They also have a fair number of additional features that personal accounts will not have.
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