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Mike Penning:
My hon. Friend touched on an enormously important point when he used a simple analogy to explain the dangers of the scheme. Continuing the budget airline scenario, if he had said to British
Airways 10 years ago, “Don’t worry, your market is safe because there is no competition, and by the way, there is a budget airline that is going to do Paris for £15 and Barcelona for £14”, BA would have laughed at him. What happened, as we know, is that budget airlines have been a huge success and millions of people who were flying with the big airlines and paying a fortune have gone over to those airlines. That is my fear in the pensions context.
John Penrose: My hon. Friend anticipates the point that I was coming to. There is an argument that because personal accounts are an ultra-cheap, ultra-simple alternative, they will not compete with existing occupational schemes because they are designed in a different way and they do not provide the additional flexibility and levels of outcome that occupational schemes provide. However, that assumption has not, to my knowledge, been tested anywhere. As my hon. Friend points out by using the airline analogy, it is possible that there will be a knock-on effect, as budget airlines had on full service airlines.
My concern, and the point to which I would like the Minister to respond, is this: are we trusting to luck and hoping that the difference in design will do the trick, or do we have concrete evidence to guarantee that it will do the trick? If it does not, and we do not have that concrete evidence, trusting to the differences in design will not be enough to ensure that there is no levelling down. We will need more. If that is not new clause 6 and its associated amendments, then what is it? We must have solid guarantees or solid evidence that the differences in design will make a material difference. I hope the Minister will be able to offer us those assurances.
Mr. Mike O’Brien: Opposition Members have tabled a number of amendments for today’s debate and I fully understand the concerns expressed in them. I hope I can reassure them that the Bill as drafted will achieve the outcome that they are seeking. We share the goal of more people saving for retirement, and more people contributing for longer and contributing more for longer.
Mr. Mark Hendrick (Preston) (Lab/Co-op): My hon. and learned Friend speaks of more people contributing—often people from very poor backgrounds. He knows that some people have been contributing to pension funds for many years, but their pension fund may go bust and they may fall ill with a terminal illness. That is a serious matter, which new clause 22 deals with. I am concerned that we might not reach that proposal in the course of the debate. What is his opinion on the situation that I described?
Mr. O’Brien: I do not know whether we will be able to debate that new clause, given the issues before us, but I assure my hon. Friend that I am very conscious of the concerns that he expresses about people who find that they have a terminal illness and are unable to make a claim on the Pension Protection Fund if their pension scheme has failed and they are under the prescribed age. I propose to suggest an amendment in due course, to be tabled in another place, in order to ensure that those who are affected in that way can get some sort of help. The aim would be that provided they could show that they meet certain conditions, they would get some significant payment to help them through the difficulties that they faced.
We all want to achieve the aim of getting more people saving, but we need to address the issues arising from the combination of individual inertia and commercial viability, which have resulted in large numbers of moderate to low earners currently not saving enough for their retirement. The Bill provides for the establishment of what has been described as a budget airline type of pension scheme. I am not sure whether I want to follow that analogy too far— [Interruption.] The hon. Member for Hemel Hempstead (Mike Penning) suggests that all the budget airlines have been successful, but Freddie Laker might have disagreed.
We want to provide a basic scheme that will be of sufficient quality to enable people to save for their future and provide them with a reasonable income. The key problem is what happens in relation to the current better employers’ schemes—not all of them are better—where the employer may be making a bigger contribution and may find that with personal accounts, the minimum contribution will cost him less. The employee may even be making a bigger contribution to an existing scheme and may find a smaller contribution to a personal account temporarily advantageous to him and his family.
How are we to prevent levelling down? The straight answer is that we cannot prevent it. We can reduce the likelihood that it will happen and take reasonable steps to mitigate the factors that might cause it. We have already discussed one of the ways of doing that: restricting transfers in and out of personal accounts. Someone with a current pension scheme will not be able to transfer in at the start of personal accounts in order to level down. Also, we are not looking to have people transferring out of personal accounts. Preventing people messing about and transferring in and out is a mechanism to reduce the likelihood of levelling down.
Also, there is a maximum contribution annually that people can make—£3,600. Many people will want to make a higher contribution, but we have indicated that on 2005 figures that is the level of annual contribution that we want. We have carried out surveys of employers to ask what they are likely to do if they have the option of continuing with their current scheme or moving to personal accounts. Surveys suggest that most employers would stick with what they have. No doubt some employers will see an advantage in levelling down, and I cannot give the guarantee that the hon. Member for Weston-super-Mare (John Penrose) seeks from me, that it will not happen. However, the scheme designs that we have put in place will reduce the likelihood of its happening and hopefully mitigate the possibility of its doing so on a significant scale.
The other way in which we have tried to deal with the matter is keeping the scheme simple. The hon. Member for Weston-super-Mare said that it was important to keep these things simple, and I agree entirely. So does Paul Myners, the chairman of the Personal Accounts Delivery Authority. In his evidence to the Committee, he said:
“Keeping it simple is critical to the successful delivery of personal accounts. Every further bell or whistle that is added to the scheme will have to be paid out of people’s retirement income.” ——[Official Report, Pensions Public Bill Committee, 15 January 2008; c. 8, Q33. ]
That is exactly right. It is a view that is broadly shared. It is also one of the ways in which we can reduce levelling down. People have requirements from their
pension scheme. If the scheme on offer is kept simple, and if it will provide some of the bells and whistles with a higher contribution, we envisage that they are likely to stay with it.
The hon. Member for Weston-super-Mare asked how we would measure an acceptable outcome. We want to ensure that we get considerably more people saving. The aim—we need to look at the ambitious end—is to have up to 9 million more people saving, and up to £10 billion more saved. If, as the hon. Member for Eastbourne (Mr. Waterson) has suggested, more people were saving but no more was being saved, it would not be a successful outcome. We need more to be saved, and we need more people saving. We need outcomes where pensioners are basically better off, which is why we are all involved.
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The Bill makes it clear that PADA is primarily tasked with setting up the scheme. The principles provide the operational framework within which it will carry out that task, and they are fundamental to how it will design the scheme. The hon. Member for Eastbourne has acknowledged in the drafting of new clause 6 that the authority cannot be tasked with achieving each principle in absolute terms. The principles are there to guide it in setting up the scheme.
The combined effect of the principles and the package of proposals elsewhere in the Bill is to focus personal accounts on the target group I mentioned and to provide safeguards in scheme design that will minimise adverse effects on existing good-quality provision. In setting out those principles, we are asking the authority to consider the effect on future members of the personal accounts scheme, the overall additional burdens on employers and the impact on the broader pension industry, including members and prospective members of qualifying pension schemes.
We must be realistic. Inevitably, there will be competing priorities, and the authority will need to make judgments about the suite of principles that it needs to deal with to provide the best solution in the circumstances, which is why we have used the phrase “have regard to”. For example, the authority will need to evaluate the various options for investment fund choices in the light of members’ preferences for fund choices and membership costs. It will need to consider the options carefully, so that the provision of investment choices does not get in the way of our aspirations for a low-cost scheme.
Clearly, we cannot predict precisely how individuals, employers and industry will respond to the introduction of those reforms. We are seeking to ensure, in so far as it is possible, that we get the best impact out of personal accounts without experiencing the problem of levelling down. It is an important issue, which is why we have always made it clear that personal accounts are being introduced to complement, rather than replace or undermine, other good-quality pension provision. The Bill will introduce an additional pension product.
This is the core of our ambitions, so the principles require the authority to have regard to encouraging and facilitating participation across the qualifying schemes.
When Tim Jones gave evidence to the Pensions Bill Committee, he discussed the gap in the current pensions market, stating that
“the market correctly recognises that it is a very difficult sector to address because of the very large number of small employers and the costs of approaching it”.
He made clear the authority’s role, saying:
“It is our job to address that target market”. ——[Official Report, Pensions Public Bill Committee, 15 January 2008; c. 17, Q21 .]
We are focusing on the target market. However, other individuals who are not quite in the target market, such as the self-employed, may find in particular circumstances that they want to contribute as both an employer and an employee and build up a pension pot and personal accounts. We are happy for the self-employed to do that.
There is an issue about people who are not employed. At the moment, they would not be able to use personal accounts. We want to see whether we can get a situation where we can prevent levelling down and make sure that we keep the current provisions for employers, so pension schemes continue. There is an element of employer inertia as well as employee inertia—we expect most people who are in pension schemes to stay in them. Employer inertia means that if an employer has got a pension scheme, we expect them by and large to stick to it.
On workplace personal pensions, amendment No. 29 relates to the treatment of insurance-based products. I want to make it clear that that is an issue for Ministers and Parliament to decide and does not relate to PADA principles. Workplace pensions are an important and growing part of the pensions market. As the hon. Member for Eastbourne has said, membership of workplace personal pension schemes forms around 47 per cent. of current private sector pension membership, which represents around 3.3 million employees involving a total contribution of around £6.7 billion each year. There are 2.1 million members of workplace pension schemes with an employer contribution of 3 per cent. or more.
We are currently in the process of seeking clarification from the European Commission that from 2012 automatic enrolment into workplace personal pensions is compatible with European consumer protection legislation. We continue to support the Pensions Commission’s aim of automatic enrolment across all employers and all workers, and we hope that the work that we are doing with the European Commission will allow us to maintain that position. However, it is difficult to be precise about the timetable for resolving this issue with the European Commission. It is therefore essential that we retain flexibility within the discussions with the Commission. That is why we have a provision in the Bill to enable us to create an exemption, as the hon. Member for Eastbourne has indicated, from the employer duty automatically to enrol employees using workplace personal pension plans. If activated, that exemption would provide employers who meet the prescribed requirements and offer their jobholders membership of a qualifying workplace personal pension with relief from the duty automatically to enrol, provided that they use an enrolment process prescribed in the regulations.
The issue is difficult, and I am grateful for the way in which the hon. Members for Eastbourne and for Rochdale (Paul Rowen) have approached it—I have briefed them
privately on the situation in more detail. I am also grateful for the contributions from a range of stakeholders outside government, including the Association of British Insurers, the National Association of Pension Funds, the CBI and the People’s Pensions Coalition—we all share the same aim. There is, as the hon. Member for Eastbourne put it, a plan B, but I would rather stick with plan A and see whether we can deliver it.
Mr. Waterson: I am grateful to the Minister for his summing up, particularly his helpful summary of amendment No. 29, which raises some important issues. On levelling down, I am pleased that he has conceded that the aim is to produce not only more savers, but more savings. We must keep our eyes on the ball, because it would be an utter disaster if we were to end up with the same amount of savings or, even worse, with the Pensions Policy Institute scenario in which fewer savings are redistributed around the system.
I do not know whether I always talk about budget airlines when I compare the personal accounts system with other pensions—it is, perhaps, the vanilla option. It is important to keep in mind that it is designed to do something for people without any provision at the moment. The Minister said that we cannot prevent levelling down. Technically, that is true, but it is equally true to say that at the moment there is nothing stopping levelling down from happening. The real concern is whether the introduction of personal accounts will encourage levelling down when it is coupled with other issues, such as the pensions regulator’s consultation on longevity assumptions. One of the PPI scenarios is absolutely disastrous: the one that shows personal accounts reducing the pensions savings pot, which would be an appalling result. It is important to raise that issue, which is one of the twin major concerns behind the Bill in not only our view, but that of many other people.
The debate has been useful. The issue is ongoing and we will continue to debate it. No doubt the Minister will have more news for us in due course about group personal pensions. In the meantime, I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.
‘Before the coming into force of this Act, the Secretary of State shall announce to Parliament his intention as to the timing of the implementation of section 5 of the Pensions Act 2007.’.— [Mr. Waterson.]
Brought up, and read the First time.
Mr. Waterson: I beg to move, That the clause be read a Second time.
Madam Deputy Speaker: With this it will be convenient to discuss the following:
New clause 16— Earnings link —
‘The Secretary of State shall announce to Parliament his intention, as to the timing of the implementation of section 5 of the Pensions Act 2007, no later than the publication of the Pre-Budget Report for the financial year 2009-10.’.
New clause 21— Uprating pensions in line with earnings —
‘The Pensions Act 2007 is amended as follows—
“In Section 5, subsection 4, delete from ‘means’ to end and insert ‘the tax year beginning 1st April 2009’.”.’.
Mr. Waterson: We come to one of those totemic pensions issues. Whatever audience I am speaking to in whatever part of the country, somebody will always raise the issue of the earnings link and its breaking in 1980. I could go into a history lesson about why that happened when it did, and talk about the fact that the earnings link was a relatively new concept that had been around for only a few years before the change. However, doing so would not be particularly profitable.
What is important is that there is now a consensus that the earnings link for the state pension should be restored. Indeed, I remind hon. Members that that was in our manifesto at the last election. Now that the Government have joined that consensus, nobody is arguing the opposite—except conceivably, I suppose, the Liberal Democrats, who are still peddling their citizens pension concept. We will no doubt hear more about that in a little while.
This debate is particularly timely, given that issues of pensioner poverty are very much at the forefront of the news. There is, of course, the controversy over the 10p rate of income tax and the effect on some 5.3 million people, a significant number of whom are pensioners, particularly women pensioners. There is also a question of whether the official inflation rate is relevant to pensioners. Some experts think that pensioners face a rate of inflation that is more like 9 per cent. because such a large proportion of their income is devoted to utility bills and council tax, which has gone up by 120 per cent. in my constituency in the past 10 years.
The other day, during Work and Pensions questions, I made the point that a significant and growing number of pensioners are using their winter fuel allowances to pay for soaring council tax bills and basic foodstuffs. I also made the point, although it seemed to annoy the Minister somewhat, that, according to the latest European Union figures, Britain is fourth from bottom of the poverty league in Europe and that only pensioners in Spain, Latvia and Cyprus are more likely to fall into poverty.
Given that restoring the earnings link is a matter of consensus, its time has presumably come—the Government should certainly consider it seriously. What is their current position? Their stated position is that they intend to restore the link
“subject to affordability and the fiscal position”
in 2012. At the very latest, the link will be restored
“by the end of the next Parliament”—
It is important that I come back to a point that I made in a different context a little while ago about the Turner package of reforms that has emerged from the Pensions Commission: there is always a danger in decoupling the provisions. It is important to remember that Lord Turner and his colleagues proposed that uprating should begin in 2010.
The feeling in the Conservative party—and in others as well, it would appear—is that the time has come for Ministers to make a decision on when the restoration of the link will take place. Will it be in 2012 or 2015? Is the get-out clause of affordability still relevant, and is it likely to become more relevant as the economy moves in a downward direction?
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