 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Pensions Bill |
Pensions Bill |
The Committee consisted of the following Members:Mark Hutton, Committee
Clerk
† attended the
Committee
Witnesses:Niki
Cleal, Director, Pensions Policy
Institute.
Chris Curry, Research
Director, Pensions Policy Institute.
Public Bill CommitteePensions Bill
Thursday
17 January
2007
(Morning)
[Janet
Anderson
in the
Chair]
9.3
am
The
Chairman:
Good morning everyone and
welcome to this oral evidence session on the Pensions Bill. This
morning we will begin by hearing evidence from representatives of the
Pensions Policy Institute. Welcome to our meeting. Would you like to
introduce yourselves to the
Committee?
Niki
Cleal:
I am Niki Cleal, director of the Pensions
Policy Institute.
Chris
Curry:
I am Chris Curry, research director of the Pensions
Policy Institute.
The Minister for Pensions Reform (Mr. Mike O'Brien): Thank you for the research that you have done, which I have read. Unfortunately we do not seem to have a copy of it, but I have read it and am very grateful for it. One of the key issues you have been looking at in relation to personal accounts has been the issue of whether it pays to save, but I want to ask you about the extent of the problem of as to whether it pays to save under the current provision. What are your views on that? Are any obvious ways to resolve it?
Niki
Cleal:
I think that the reasoning behind your question is that
issues around the interaction between private savings and means-tested
benefits apply today. To a certain extent I think that that is true,
but there are some quite significant differences between the target
market for personal accounts and some of the people who actually save
today. One of the key features of the target market is that they are
likely to be on low earnings and therefore are disproportionately
likely to be eligible for means-tested benefits. While you are right
that the effects do come into play today, there are reasons to think
that some of the issues may be more acute in relation to personal
accounts, given the nature of the target
market.
Mr.
O'Brien:
I am not sure that that answers my question at
all. What I was asking you is whether that issue exists today and to
what
extent.
Niki
Cleal:
It does exist today. The existing system involves
pension credit, housing benefit and council tax benefit, which affects
the choices made by people today. However, there is something unique
about the type of market we are concerned with, which means that it is
an issue to look at in the context of personal
pensions.
Q
8282
Mr.
O'Brien:
Do you accept that some people who are
auto-enrolled today are on relatively low incomes, may have broken work
records or be on means-tested benefits? Tesco does auto-enrols its
staff it and large, reputable organisations ought to do so. I assume
you agree that there are mechanisms today that
could enable someone to get up to £16,000 back from a smaller
pension pot, and there is also the opportunity to take 25 per cent. of
the pension—if the figure is greater than that—in a
lump-sum payment. There are also measures such as savings credit that
attempt to address some of these
issues.
Niki
Cleal:
I agree with all of those statements, but it is
important to remember that average contributions in today’s
pensions market are higher than the 3 per cent. minimum that will be
put into personal accounts, so we are talking about a minority of
people.
Niki
Cleal:
I really believe that the proposals may help in some of
these cases. In fact we have done some work, commissioned by the former
Equal Opportunities Commission, that looked at some changes to the
contribution limit. We found that increasing the contribution limit
could
improve—[
Interruption.
]
The
Chairman:
My apologies for interrupting the Committee, but
apparently we have a problem with the sound recording and we do not
know why. I suggest that we suspend for five minutes and we will see if
we can put that right. My apologies to
everyone.
9.10
am
Sitting
suspended.
9.13
am
On
resuming—
The
Chairman:
We have sound recording back, so we can
recommence our proceedings. Thank you for your patience. Had you
finished your question, Mr.
Waterson?
In
the summary of your research you have identified at-risk groups; for
example, people who are likely to be renting in
retirement. Tantalisingly, that only takes us so far.
If you were trying to identify the numbers of people in those
groups, going forward, what kind of further research would you need to
do? What kind of access to modelling would you
need?
Niki
Cleal:
I will say something about the at-risk groups
and then pass on to Chris Curry to take the modelling part of the
question.
You
are absolutely right that we conducted some analysis, looking at which
groups of people are at risk of seeing lower returns in personal
accounts. A particular group that we identified was people who may rent
in retirement, because of the interaction with housing benefit. They
were in our high-risk group. In terms of the numbers of people that
that might affect, about 20 per cent. of current pensioners
are eligible for housing benefit. We project that that may decline to
around 15 per cent. of pensioners by 2050. That is one
group.
A second group which might be
affected is older people on low earnings who have not yet made any
saving. There is an interaction here with pension credit. We feel these
groups are at risk of lower returns. Chris will say more about what
further modelling work could be done to get a handle on how many people
fall into those
groups.
9.15
am
Chris
Curry:
Thank you, Niki. Mr. Waterson spoke
about trying to have a reliable estimate of what might happen in the
future. The first thing to say is that this is not an exact science and
I do not think you will ever get what you would see as a reliable
estimate. You would have a guide, perhaps, to the order of magnitude of
the groups involved. The difficulty is that you would need a lot of
detailed information on an individual basis about how people progress
through life. Clearly, we do not know exactly what people will do, so
that has to be based on assumptions and, to a certain extent, on
equations. What you need is a model that takes individuals now and
looks at them as they progress through life—and models their
interactions with the workplace and breaks for having
children—as well as existing and future pension provision. In
the UK, there is only one model that works in that particular way: the
PenSim 2 model run by the Department for Work and Pensions.
Theoretically, if you could
calculate on an economy-wide basis in the same way as we and the
Government have done for certain individuals, it would be possible to
run that model and see how many people might fall into particular
groups under one or two different scenarios. Then you might be able to
get some idea of the relative proportions of people in respective
groups. We would have to be led by the Department’s analysts as
to whether that is technically feasible. In theory, it is feasible, but
it is worth continuing discussion with the Department to see whether it
is something that would be possible in the
future.
Mr.
Waterson:
I have a couple of follow-up points. You
recently updated your projections on likely means-testing levels after
the reforms and narrowed the gap between the Department’s
estimates and your own, but there is still a gap. Can you explain,
partly for members of the Committee who have not seen the research, why
there is a
gap?
Chris
Curry:
Certainly. There are two main reasons for the
difference. There are slightly different assumptions underlying the
models used by the Department and those we use. Those relate to things
like developments in the labour market and how quickly certain
components of income will grow over time. That is driven by the second
point, which is that the models work in very different ways. The DWP
has a very sophisticated individual model, which builds up a complete
life history for a series of individuals based on a very detailed set
of equations, but it is ultimately based on assumptions about what will
happen in future. In effect, it builds one particular picture of what
the world will look like between now and 2050 for the individuals
involved. It then calculates, on an individual basis, what will happen
to those people and their incomes, and aggregates that to get the
numbers eligible for means-tested benefits.
With our smaller budget and
fewer resources, the models we use work in a slightly different way.
They look at what happens at an aggregate level across the economy on a
year-by-year basis, but do not break it down to the individual level.
We end up with a projected income distribution for pensioners in the
future, based on and consistent with what we think will happen at an
aggregate level. Our model does not break this down into each
individual’s work history, but bases it on the current
distribution of pensioner incomes. These are two different modelling
techniques with slightly different assumptions, but the underlying
message—both in the Government’s projections and in
ours—is that it looks as though future pension credit
entitlement is likely to be reduced compared with today. Compared with
what was in place before the last Pensions Act, there is certainly a
substantial reduction. What we find in our modelling is that there is
potentially more uncertainty about what will happen to pension credit
in future than the Department might find in its own. That could be
because we tend to change more of our assumptions when we look at
different scenarios. The Departmental model is based purely on a single
set of assumptions and a single projected
scenario.
Mr.
Waterson:
In one of your research papers, you estimate
that the cost of a pension income disregard of £12 a week would
be around £600 million. The Government take the view that it
would be substantially higher. Do you
agree?
Chris
Curry:
I have not seen any Government estimates, so
it is difficult for me to comment on how those estimates would have
been made or what they show. The £600 million figure that we
used was the estimate of the first-year costs of introducing it in 2012
and applying the £12 disregard to all private pension income at
that point for the existing stock of pensioners. Our initial work
suggests that the costs should not increase substantially over time,
but that is something we are looking at
further.
Gordon
Banks (Ochil and South Perthshire) (Lab): Do you think
that the proposed legislation assists in the “it pays to
save” debate that is being generated in the UK? Do you think
generally that the Bill in its present form will actually build
confidence in the aspect of pensions and empower pensions even
further?
Niki
Cleal:
I think that is an important question. It is important
in this debate not to lose sight of the bigger picture. We have talked
a lot about the “at-risk” groups, but we must remember
that many people will benefit from the reforms. Our analysis shows that
there are particular benefits for young people, those in their 20s in
2012. Many of them may be working today for employers who do not offer
any contribution at all. They will now be eligible for a 3 per cent.
contribution for the first time if they do not opt out. Clearly that
will be a positive thing if the reforms are successful and if people do
not opt out and if employers do not change their
behaviour.
So, yes,
there is potential for this Bill to have a positive impact. That said,
there are these important issues for certain groups. We must look
carefully at the incentives and the likely returns for some of those
“at-risk” people that we have been talking about. So that
is the answer to the first part of your question. Sorry, I have
forgotten the second part.
Gordon
Banks:
I asked whether the Bill generally will increase
the standing of pensioners in people’s
minds.
Niki
Cleal:
Yes, trust and confidence. I think for
many people, this may be the first time they have engaged with saving
in a pension product. The impact this will have on trust and confidence
is largely going to depend on how successfully it is implemented in
2012 and whether or not some of these issues we have been talking
about, such as “it pays to save” are addressed in
advance.
The risk is, if there are
stories in the media saying that Mr Jones, who has done the right thing
and saved all of his life, is no better off from having saved in a
personal account, whereas Mrs. Smith down the road, who did
not save, is equally well off—that will not be a positive thing
for trust and confidence. So if some of the issues we have been talking
about are addressed, then yes, the Bill could potentially have a
positive impact on trust and confidence.
Gordon
Banks:
Many people choose to save for their retirement in
various different ways, through investments or pensions. Starting with
the new generation that will be caught at this early age and will have
this opportunity through auto-enrolment, will the Bill be a fundamental
step as to how people prepare for their retirement? We might see people
getting used to saving through a pensions programme and as they move to
better paid jobs, they may have already bought into the concept of
saving through pensions and be less tempted to go and try to save
through other mechanisms such as property investment.
Niki
Cleal:
I think that potentially there an
important cultural shift here. Auto-enrolment may fundamentally change
the culture around pension saving in this country. It is a very
different proposition to have been auto-enrolled into something, with
the right to opt out, from having to make an active
choice.
There is a
real opportunity here for a cultural shift, particularly among young
people who we know are some of the groups that are currently
undersaving. But, at the end of the day, whether or not that is a
positive cultural shift will depend on what happens at implementation:
how the scheme is perceived and how the media report on it at the time.
All those issues are very important. I think that there is an
opportunity there, but there are some challenges that need to be
overcome to get to that
point.
Q
85
Mr.
John Greenway (Ryedale) (Con): Could you say a little
more? Mr. Banks touched on what I wanted to ask. In your
paper, you talked about the importance of generic advice. We are all
working slightly in the dark in that we do not yet know what Otto
Thoresen is going to come up with, but if what you just said is to have
real impact in a positive way, then the generic information, which the
Bill already accepts will have to be provided to individuals, is going
to be complex. You seem to be suggesting that in some way people will
have a different view as to whether they should remain in or out,
depending on their own personal circumstances. I wondered if we could
tempt you to make some suggestion as to how you think the generic
advice, the generic information, could be presented in a way that
enables people to make the right judgment—without them having
individual advice, because that would clearly not be available to the
vast majority.
Niki
Cleal:
That is a very important issue. When we
conducted all this analysis, we had to ask ourselves what we concluded
from this. Are we suggesting that people should not be auto-enrolled? I
must say that we did not conclude that. We concluded that this meant it
was very important that people are given generic advice and information
that helps them to make the right decision for their circumstances. For
some people, the right thing for them to do will be to opt out of the
system.
What the
analysis does show is that it is quite complex for people to work out
what they should do, but there are some indicators—flags, if you
like—which, if built into the generic advice system could help
people to make the right decision. For example, if someone is in their
mid-50s or early 60s, they are not a home homeowner, they have no
intention of purchasing a house and they do not have a lot of
additional savings and wealth already, if they start saving in a
personal account at that point in time, then they are probably only
going to lose eligibility for pension credit and housing benefit. It
depends on their income, obviously, and on their level of other
additional savings, but if the generic advice system has some kind of
flag in it, suggesting that someone in that set of circumstances should
be told that this is a decision they need to think about very
carefully, then perhaps there is not a
problem.
Our analysis
shows that there are lots of different things that you have to
consider. What has someone been earning? Currently? How old are they?
What level of assets do they own at that point? What other savings do
they have? There are a number of factors that come into play here. I
hope that Otto Thoresen and his team can find a way of enabling a
generic advice system to cope with those different characteristics, but
it does seem to me that it will be challenging. We will wait and see
what comes out of that
review.
9.30
am
Mr.
Greenway:
They will produce a structure—potentially
not dissimilar to what you suggested. But there are two very subjective
points in your answer. You said, “They do not have a lot of
income.” Well, how much? “They do not have a lot of
savings”. Well, how much? I think that the question
Mr. Banks asked is absolutely right on the button, because I
suspect that financial media are going to do these sums. They will put
in the press what they think “not a lot of income” or
“not a lot of capital savings” actually means for people
in certain circumstances, so I suspect there will be a culture that
tells people in certain categories just to opt out. This brings us to
the key issue of how we can make it more worthwhile for these people to
save. In your paper, you suggest increases in trivial commutation
limits, capital disregards and so on. Have you done, or would you be
prepared to do, some modelling of what those proposals would mean in
public spending terms for people of certain ages, over certain periods
of time? Over the next four or five weeks, members of the Committee can
propose an amendment that says “This is the plan”, but
the Minister will say “Hang on, what is the cost of
this?” Members on both sides of the Committee want to resolve
this, but not in a way that has uncosted implications for public
expenditure.
Chris
Curry:
I am very glad you raised that point. We have
been looking at the public expenditure implications of some of the
things you have mentioned. It is still early days in the process, but
we have looked, for example, at the costs of changing trivial
commutation limits and increasing the capital disregards within
income-related benefits to enable people who have only relatively small
sums in a personal account, or other forms of saving, to take a lump
sum. The work we did for the then Equal Opportunities Commission
suggested that that would have a cost of about £500 million in
2012, increasing to about £1.4 billion by 2050—not an
insignificant sum. There are public expenditure costs within
that.
We have also
done work for B&CE looking at the costs of introducing an income
disregard for private pensions within means-tested benefits. There, we
looked only at the cost in 2012, which was around £600 million
for disregarding the first £12 of all private pension income.
But public expenditure is only one side of that. There are also
benefits. We can model some of these, such as people being better off
and having a clearer incentive to save, although we cannot say how many
people actually act on that clearer incentive. Our initial work in both
areas has identified that there is certainly potential for these
measures to help in the “pays to save” situation, by
making it clearer that people would benefit from being auto-enrolled in
a personal account and remaining auto-enrolled.
There are also drawbacks. The
trivial commutation option might mean people having more lump sums, but
a lower income during their retirement, which might not be a desirable
outcome. A pension income disregard would introduce further complexity
into an already complex means-tested benefits system. We feel this is
probably the start of the process, rather than the end. We would be
very happy and keen to engage with all stakeholders in taking a step
back and looking at what we would ideally like the system to achieve
and the parameters involved in that—such as what a realistic
public expenditure total would be, and what the trade-offs would be
between complexity and making it clear that it will pay to save and
that there will be value from staying opted-in. That is something we
would like to progress. Realistically, it would be well beyond the Bill
timetable, but I think it is worth starting the process in the
relatively near future to allow the debate that goes on throughout the
Bill to take place in the knowledge that these issues can be
addressed.
Q
86
Mr.
Wayne David (Caerphilly) (Lab):
Just to put your
comments, analysis and research in some kind of context, will you say a
few words about what the Policy Institute is? What are its aims and
objectives?
Niki
Cleal:
We are constituted as an educational charity.
Our charitable objective is to inform the public policy debate on
pensions and retirement provision. It is very much a policy-focused
objective. We are not in the business of giving individuals advice
about their own personal circumstances. We have been established since
2001. A core part of our capability is a suite of models that we have
developed with support from the Nuffield Foundation, which enables us
to model the pension system in the UK, both for different types of
individuals and also in aggregate terms by considering
the expenditure implications of different policy changes. That
analytical capability underpins a lot of the research that we
do.
We are independent
and apolitical. Many research institutes or think-tanks have political
affiliations; we do not. We have a mixed funding base and we try to
ensure that we are not over-reliant on any single source of funding. As
director, I report to a board of people in eminent places in pensions
and related fields. We have a couple academics, some industry people, a
lawyer, an accountant; we try to ensure that we have a range of
expertise. I am very fortunate to be supported by an excellent team,
which includes economists and actuaries. That, in a nutshell, is the
institute.
Niki
Cleal:
Absolutely.
Q
87
Mr.
Waterson:
Can I move on to the other big issue that you
have dealt with a good deal? That issue is levelling down and the
likely effect of personal accounts on existing pension provision. I
have two related questions. You describe one of your scenarios as a
“pessimistic scenario”, but as potentially disastrous in
public policy terms. How likely do you think that that scenario is? Do
you accept that, if personal accounts are to be dubbed a success, they
have to produce not only more savers but also an overall increase in
savings?
Niki
Cleal:
Yes. I will say a little bit about the work
that we did, and that you did too. We did some scenario analysis that
looked at what we would see in terms of outcomes and the total flow of
money going into the system under different scenarios of how employers
might respond. The most optimistic scenario that we looked at was that
employers would auto-enrol all their people into existing schemes,
where they exist, on existing terms. Unsurprisingly, what we found was
that by 2050 there would be an additional £10 billion going into
the system. That would be a very positive
outcome.
At the other
extreme, which Nigel alluded to, we looked at a more pessimistic
scenario, which was what would happen if all employers levelled down
their contributions to 3 per cent. In other words, where they are
offering an existing scheme of more than 3 per cent. they ratchet that
down, over time, for new employees. Unsurprisingly, you see a
£10 billion decrease in pensions contributions in the
UK—a very negative
outcome.
In terms of
which outcome is likely, it is very difficult to put a probability on
that. All that we can say is that auto-enrolment will increase costs
for some employers. Where employers are offering existing schemes with
contributions significantly more than 3 per cent., which is many of
them, the introduction of auto-enrolment will increase their costs
substantially. At this stage, it is very difficult to say how employers
will respond. They may simply wear the additional costs and auto-enrol
all their people on existing terms. Equally, they may decide that they
cannot wear that additional cost and that they may need to make some
changes to their scheme—for new members in particular. They may
close their exiting scheme to new members or they may make some changes
or introduce a different type of scheme. So, it is very hard to say
where we will end up.
One of our scenarios was based
on evidence from a survey conducted by Deloitte at the end of 2006. We
called that scenario “the modelled employer response”.
Deloitte had asked employers how they thought they might respond. The
outcome of that scenario was a small, overall positive effect—an
additional £2.5 billion going into the system above what would
have happened in the absence of reform. Within that scenario many
employers said that they would make changes to their existing schemes.
It is hard to predict the future on this; there is real uncertainty. I
know you are taking evidence from some employer groups this afternoon,
and I am sure you will ask them how they think their members will
respond to these reforms.
The second part of your
question was whether the reforms would not only increase the number of
savers, but increase the level of saving. My very strong view is that
the reforms should aim to do both, and that if we simply increase the
number of savers by transferring money from one set of people to
another, I question whether that is a positive outcome. In a sense,
that is a matter for the Government. It is their reforms and the
important thing is that the Government are very clear about their
policy objective. Is it both increasing the number of people saving and
increasing the total amount of saving?
Mr.
David S. Borrow (South Ribble) (Lab): I would like to go
back to this issue of uncertainty and your modelling of groups that
were at risk of being better off opting out than opting in. I
understand that point in relation to groups in their 50s or 60s,
because the date of retirement is touchable. But the other part of
uncertainty is the value of the state pension. It is interesting that
many people in their 20s and 30s assume that the value of the state
pension will deteriorate. Therefore, whatever your modelling may be for
someone in their 20s or 30s, looking at pension provision in 40
years’ time, it is a risk to assume that the existing basic
state pension and pension credits regime will be in place. However much
we may wish that to be the case, there is a great deal of risk that it
may not. It may be better in 40 years or it may be worse. Therefore, it
strikes me that, at that age group, having a big pension pot that is
theirs is a positive thing because of the uncertainty around state
provision in 40 years when they may be looking at
retirement.
Chris
Curry:
I think many people would agree with you on
that. The savings decision and savings behaviour are very complex. It
is a very well established research finding that many people do not
expect the state pension to be worth very much at all in future.
However, it is also equally well established that many of them do not
do anything about it. So, what people expect and how they react are not
necessarily closely linked together. As for the research we have done
on the value of saving, I do not think it would be realistic to expect
people to look at it and work out for themselves which situation they
are in, what their internal rate of return is going to be or whether
they should then invest £5, £10 or nothing at all
.
What I think is
important is how people perceive the system to be, and how they have
seen the system work for other people. One of the things that often
affects people’s behaviour is the behaviour of their parents,
their peers or other people they see in similar
situations. While for many people, especially the younger groups, it
would almost certainly be in their interests to remain enrolled into
personal accounts, there is a danger that if they see people who have
been enrolled in the past and are coming up to retirement and do not
seem to have benefited from it, they will automatically assume that
this will happen to them. They have to have a concept of what might
happen in future. They might not believe that everything will be there,
but it is easy for them to base their decision on what they can see in
front of them.
It is
also true that it is quite easy to use perceptions as a barrier to
saving. So if they think they might not do very well out of
it—even if it can be demonstrated that they would do—just
the thought that they might not benefit is sometimes used as an easy
excuse and an easy way of not saving the money, especially if it means
a difficult decision between how much income they have today in their
pay packet and how much they will have in
future.
Niki
Cleal:
May I just add to that? The point behind the
question is a very important one. There is an implicit assumption
within our modelling that today’s benefit structure will still
exist in 30 or 40 years’ time. That is a strong assumption. It
is easier to point out some of the implications for people when they
are that bit closer to retirement, when they can make an informed
judgment about how likely it is that the Government are going to change
the benefit structure—within the next five years is a much
shorter time horizon than a 40-year
prospect.
That said,
our analysis has shown that the issue is much less acute for younger
people in general. In a sense the analysis suggests that, for younger
people in general, this is less of an issue anyway. It is more of an
issue for older people in particular
circumstances.
9.45
am
The
Chairman:
My apologies, but we must now move on to the
next witnesses. Thank you very much
indeed.
We are now
going to hear evidence from the British Chambers of Commerce and the
Federation of Small Businesses. Would you like to introduce yourselves
to the Committee,
please?
Natalie
Evans:
I am Natalie Evans, head of policy at the
British Chambers of Commerce. We represent 100,000 businesses across
the UK, through an accredited network of 56 chambers of commerce. We
represent businesses of all sizes and across all sectors, but at the
heart of our membership are small and medium-sized
businesses.
Bob
Compton:
I am Bob Compton. I am a director of a
company called ARC Benefits, which is a small, independent pensions
consultancy. We employ five people. I have been involved as a pensions
consultant in the industry for over 30 years and have acted as a
pensions policy adviser to the British Chambers of Commerce for the
past two and a half to three
years.
Mike
Cherry:
Good morning, my name is Mike Cherry. I am
the current chairman of the financial affairs committee at the
Federation of Small Businesses, which obviously covers pensions issues.
I run a manufacturing business up in Staffordshire for my day
job.
Q
88
Mr.
O'Brien:
A fundamental question—is your
organisation broadly supportive of the terms of the Bill, of the
concept of automatic enrolment and of more people saving? If so,
why?
Natalie
Evans:
Yes, we are supportive. We all agree on the
need to encourage people to save. We have been broadly supportive of
the Bill. Obviously, from an employer’s point of view, this is
going to be a huge change. Many employers, particularly small and
medium-sized employers, do not offer pensions. Instituting the new
scheme is going to mean huge costs and changes for them. What we are
really concerned about is making sure that this works, because both
employers and employees want to encourage saving. We want to make sure
that, from the start, this works so that it can do what it is intended
to
do.
Mike
Cherry:
We are certainly in favour of the intention
behind the Bill. We would certainly hope that it enables the smaller
businesses and their employees to save for their future. What concerns
us considerably is the cost, as well as the administrative impact, that
it is likely to have on the smallest employers. We have also made it
very plain that we believe there needs to be very effective
communication from the Government informing people as to the reasons
why they need to be saving for their future and to restore confidence
in the very word
“pensions”.
Q
89
Mr.
Waterson:
I have two issues to raise. First, what evidence
do you have from within your own organisations about the attitude of
your members to the issue of levelling down? Once personal accounts
come in, there will be a tendency for them to get out of existing
pension schemes and point their employees in the direction of personal
accounts.
Bob
Compton:
About two years ago, the British Chambers of
Commerce asked the various chambers it represents to put a
questionnaire to their members. A year prior to that there was a
similar survey. There was concern that some companies would level down.
The results of those surveys are now two or three years old, and
potentially out of date, and life has gone on. The main concern at that
stage was the thought of employers being forced to make compulsory
contributions to pension schemes. There has been a sea change since
last year. It has been accepted that compulsory contributions will
apply and I think there is general acceptance that one has to get on
with making sure that once the personal accounts system is up and
running it works efficiently and with the minimum of disruption to
employers’ businesses.
As to whether or not companies
would level down their benefits, the chambers’ typical member
companies are small to medium-sized businesses. Very few of those
companies have what I would regard as being final salary type pension
schemes, but they would have a lot of personal pension schemes or
money-purchase type arrangements. We have not really got any more
recent feedback from companies as to their intentions. The DWP has
surveyed companies, and has published the
results.
Mr.
Waterson:
On a separate issue, are you
concerned that the Bill as it stands does not contain any specific
proposals for assisting smaller businesses in the introduction
of personal accounts? What kind of assistance would your organisations
like to see for helping smaller businesses through this
period?
Natalie
Evans:
Yes, we are concerned, and we have raised that
issue on a number of occasions. Obviously, we are concerned about the
cost of implementing the scheme and have called for some assistance
with the costs of the administration of set-up—perhaps a one-off
payment—particularly for small and medium-sized businesses that
have no pension provision. We also think that communication is going to
be absolutely vital in helping businesses understand what their
responsibilities are, and in helping employees understand what this
personal account is. Important funding needs to be put into a wide
communication scheme. Help for small businesses on set-up costs is
crucial. We understand the Government saying they will not make
decisions and give numbers now, but we think some kind of commitment
will help to alleviate some of the concerns of small businesses as they
begin to understand the implications of this
scheme
Mike
Cherry:
I think we have a slightly different take on
levelling down. Our membership is over 210,000. The vast majority of
that is made up of small businesses with an average number of employees
of around four or five. Levelling down is not really an issue for our
members. Affordability is the key issue, not only for our members in
their own right as owners or directors of their businesses but,
crucially, for the employees of those businesses. Levelling down is not
really a question, because many of them do not have pension schemes
available at the moment. We do very much seek, and have been seeking,
both financial assistance and to get the DWP to understand the impact
any administrative burden would have on these businesses. Both of those
are key issues as far as our members are
concerned.
Nick
Ainger (Carmarthen, West and South Pembrokeshire) (Lab):
Following on from the questions about levelling down, Mr.
Cherry, do you offer a pension scheme to your
staff?
Mike
Cherry:
We do not. We have stakeholder pensions
available should they wish to take them up, but the business cannot
afford it on an ongoing basis, nor do our employees see any reason to
put money into a pension scheme at the moment. Quite honestly, they
believe that the national insurance they pay today will pay for their
pensions in the future, whereas of course it will not because that
national insurance contribution is paying for today’s
pensioners.
Q
90
Nick
Ainger:
Mr. Compton, you were indicating a
different view from Mr. Cherry of the surveys that we have
done. On levelling down, do employers fear that if they are offering
their own occupational scheme and not all their staff are in it, the
risk for them is that they will be faced with the additional costs of
the new scheme together with the costs of an existing scheme? There is
then a possibility that levelling down would come in. Is that a fair
assumption?
Mr.
Compton:
That is a fair assumption. The
National Association of Pension Funds, which represents larger pension
schemes that provide valuable benefits, has made it clear that in terms
of the work that it has done
it would be a travesty if personal accounts came in and created a
scenario in which everyone dropped down to the level of what the
personal accounts de minimis is. The British Chambers’s
membership is made up of a whole range of companies from the very large
to very small, but the majority by number tend to be in the five to 50
employee group. Typically, those companies will have some form of
personal arrangements, stakeholder arrangements, or group money
purchase type contracts, rather than big final salary schemes. The
results of the surveys that we had two to three years ago clearly show
that there were concerns, but when you ask those questions, you are not
necessarily hitting the right person who understands the issues.
Personal pensions will not come into effect until 2012 so although
people such as myself are aware of the issues, a large number of medium
to smaller-size companies are oblivious to what is going on currently.
The issue needs to be communicated out and managed
effectively.
Q
91
Nick
Ainger:
The reason behind my question is that I had made
the assumption, particularly in relation to larger companies, that
virtually all their staff would be in the company occupational scheme.
Therefore, there would be no additional costs for that particular
company if all its staff were in the company scheme and it would be
only those companies with a mix of people—some who are in and
some who are not in—that would face the additional
administrative and financial
burden.
Bob
Compton:
I think you will find that every company in the UK,
whether or not it runs a pension scheme, will have a problem with
picking up employees who are currently not in its scheme unless it is
in the public sector. Prior to, I think, 1998 companies were able to
operate automatic entry to their pension schemes. That was stopped by
the Government of the day to allow personal pensions and people to opt
out to personal pensions. For many years the pensions industry and
pensions’ managers of larger schemes generally have looked
forward to the opportunity of getting automatic enrolment into their
schemes. There is a large number of people who have opted out of good
company schemes because they chose to do other things, such as invest
in houses. Those people will need to be picked up by those companies
offering good schemes. That issue is a genuine
problem.
Q
92
Andrew
Selous (South-West Bedfordshire) (Con):
I would like to ask you a bit more about the compliance regime, penalty
notices, records and information, inspections and so on. I do not
expect any business to welcome naturally what that entails, but at the
same time, I imagine that in terms of issues of competitive advantage
your members would be quite keen for that to be an area that is
properly enforced so the good employers who are making their
contributions are not undercut by people who are managing not to do so.
I would be interested to hear your general comments on what is in the
Bill at the moment and perhaps what we as a Committee need to do to
have an effective compliance regime that it works well with the least
amount of
interference.
Bob
Compton:
From the BCC’s perspective, in
the discussions that we had with the Department for Work and Pensions
in the autumn of 2006 we made it clear
that we felt that in the past, occupational pension schemes had been
voluntarily provided by a large number of employers. We are trying to
encourage that and to ensure that any form of compliance regime insists
that rogue employers who are not complying with the new processes do
so. Processes need to be in place to ensure that there is compliance,
but they need to be light touch to ensure that the vast majority of
well-meaning employers who are delivering and will be complying with
the regulations are not overburdened by red
tape.
10
am
At the time we
recommended that the pensions regulator should be the body that
oversees that process. The regulator so far has done a very good job in
terms of what it set out to do with regard to improving trust in
occupational schemes. But the regulations as set out in the current Act
are very heavy-handed in approach. The regulator having the power to
send an inspector on to employers’ premises, wherever those
premises may be and at a time they deem as being reasonable, seems
totally over the top to determine whether an employer is running access
to a voluntary pension arrangement or a personal pension arrangement
system.
It would seem
much fairer if those employees working for employers who were bending
the law could blow the whistle to the regulator and the regulator then
had powers to direct the company to act correctly and, if the company
fails to act correctly, to impose a direction to make it happen. The
regulations appear to be belt and braces and over heavy. The current
regulations in the Pensions Act 2004 should be sufficient to provide
some form of checking up on the poorer
employers.
Mike
Cherry:
The idea of a light touch is something that
we have encouraged all the way through. My feeling on reading the Bill
was that there is far too much emphasis on so-called rogue employers
not wanting their employees to deal with it so they do not have to have
a pension scheme for them. That is way over the top, as Bob has said.
Where an employer is failing to deal with pensions, there should be
clear information, advice and assistance to help them to comply in the
first instance. It is only those employers who really will not, rather
than cannot for any reason, who need to be taken to task. This goes way
over the top. There is far too little emphasis on assistance for the
smaller employers and far too much emphasis on compliance at the
moment.
Q
93
Andrew
Selous:
So you are saying that the help and information
provided to small businesses will be critical for the success of
this?
Mike
Cherry:
It will be absolutely critical because 40 per
cent. of our members do not have a pension scheme at the moment.
Communication on whatever comes in—our concerns are very much
around whatever does come in on the administrative side—will be
crucial for the employer and the employees to understand what they need
to do. That must be kept to a minimum. We are already faced with far
too much regulation, which is taking time resource out of our ability
to run our businesses effectively. I am very concerned about the
administrative effect of any new regulation that is coming
in.
Natalie
Evans:
I think, as Mike said, our
concern is that it seems to come from the standpoint that employers
will not want to comply and will be bad and whatever. From our
perspective that is not what employers will want to do. I imagine that
there will be teething problems when this comes in because, as we have
all said, it will be a huge change for a significant number of
employers. A light touch is needed in the first instance to help
employers who are not perhaps doing it entirely correctly, but more due
to them not quite understanding what they are doing than out of ill
will to their employees. We feel that there needs to be a light-touch
regime. Of course employers who are not complying and who are blatantly
flouting the rule need to be dealt with. We just feel that there is a
perception that employers will go in with that attitude. We do not
think that they
will.
Q
94
Gordon
Banks:
I think that I need to declare an interest.
I am a member of the Federation of Small Businesses.
I approach this next batch of questions from my business background.
Most of the issues have been touched on but the burden to small
business concerns me. If I was not sitting here now in 2008 having been
in this House for three years I probably would not know about these
pension provisions and the potential onus on my business. I am
concerned about the overall burden and about the exposure that small
businesses may face when they fail, as opposed to when they
deliberately try to prevent the process from going forward.
The point about information is
perfectly correct: we must have quantity, not quality. I know the
amount of stuff that comes into a small business, and we have to have
quality, not quantity. The business I am involved in offers pension
provision, and people opt out when it is offered at an earlier age. As
they become more mature, however, they opt in and they invariably turn
around say, “I wish I’d done that 10 years ago. That is
what I should have done.”
I can
therefore see an awful lot of benefits to auto-enrolment, but I am
concerned about the burden that small businesses will face and about
the possibility of them inadvertently being drawn into a position where
they are vulnerable to challenges over their competence and so on. That
is more of a statement on which I would like some comments than a range
of questions.
Mike
Cherry:
I would
obviously wholeheartedly agree with Mr. Banks’s
comments. Effective communication must not just be a matter of saying
that the business can point its employees to a website or that it can
go there itself; we must have effective communication with all
businesses in plain and simple English so that they clearly understand
what they need to be doing to comply. Most businesses, as you have
already heard, will want to comply, and they often want to comply with
all regulations; what causes most problems is the vast quantity that
land on our desks when we are trying to run our business as well. Of
course, there is the cumulative effect of all regulation, not just this
one piece, which is coming in in
2012.
My other
concern—this is on the cost basis—is that the figures
that the Department for Work and Pensions has come up with in the
impact assessment seem to be bear no relation to what I fear may come
in, although there is not yet any detail behind that. We would ask the
Committee to look closely at that part of the impact
assessment.
Q
95
Mr.
Greenway:
I have a suspicion that many of the firms that
are your members employ either agency workers or those with
self-employed status. Would that be correct?
Natalie
Evans:
We will have members like that,
but I am not sure whether they would be the
majority.
Mike
Cherry:
We obviously will have some, but as to
quantity, I could not tell you.
Q
96
Mr.
Greenway:
There would be no point in my asking you my next
question unless I had clarified that. Have you already had concerns, or
do you anticipate concerns, about the definition of a worker and the
potential inclusion of agency workers within it? An additional
complication is that if an agency supplies a worker to a firm, and the
firm has control over the day-to-day delivery of his work, there may be
some confusion about who is responsible for auto-enrolment. I wondered
whether the issue has crossed your radar and, if so, what your feelings
were.
Bob
Compton:
Perhaps I can answer on behalf
of
BCC. About a year or so ago, when we were doing one of
the surveys, we were looking at the issue of agency workers. There was
not much coming through, although I know from the discussions that we
want to be having with the Personal Accounts Delivery Authority about
the development of the mechanics of the personal accounts system, that
clear instructions need to be given to small employers as to where the
responsibilities lie.
If there are agency workers,
either the company or the agency will be paying those employees’
wages. So, it requires that the systems and processes developed take
into account that group of workers, and that the communication material
supplied to those employers and agency providers makes their
responsibilities very clear. I agree that it could be a major cause for
concern and for people complaining, and for the pensions regulatory
inspector coming along to knock on the door at 7 o’clock in the
morning to say, “Can we come in and search your
books?”
Q
97
Mr.
Greenway:
I want to ask you something else. Therefore, I
will not labour the point, other than to say that, if, over the course
of the next few weeks or even months—the Bill will go to another
place after we have dealt with it—you think that some
clarification by amendment would be helpful, I am sure that we would be
very happy to have that debate in
Committee.
The other
question that I wanted to ask you was about the concerns you may have
as to the responsibility that may rest with employers from relatively
small firms—I have had a lot of sympathy for what Mr.
Cherry has said about the difficulties that small employers
have—for the provision of information. That leads to the concern
that, in the long run, it may be seen as the employers’ fault if
people have been auto-enrolled, and that turns out to have been the
wrong course of action. My own view is that we still have to get this
area of the Bill
right.
Mike
Cherry:
Our concerns very much mirror your question.
We have stated clearly all along that any contract should be between
the employee and the
central body, and that the employers should not be involved in any way
in trying to give or offer advice because of those concerns further
down the line. If they do try to give advice, clearly it would need to
be recorded in some minute detail, which would be another
administrative burden on the owner-manager. They do not have the time
to be doing that, and they certainly do not have the expertise to be
offering advice. Therefore, any advice should be given to the employees
outside of anything that the employer should be required to do. If the
employee wants to take further advice, there are plenty of financial
advisers outside with whom they can find it. It should not be
incumbent, we feel, on the employer at all.
Bob
Compton:
From the BCC’s perspective, I agree
with everything that Mike Cherry has said. That has been our line from
day one.
Under
auto-enrolment, if someone has opted out the company may, after three
years—subject to the time period laid down by the Secretary of
State—go for an automatic re-enrolment. That means that you may
not only have to keep records of the contributions of those who are
making payments, you have to keep a record of when an employee opted
out, potentially.
Our
view is that the processes for record information should be kept by the
agency that is running the personal account system, and not by the
employer. In my own business there are five people, and we run a
reasonably generous pension scheme for them, but we have problems with
the insurance company in terms of the collection mechanism and them
keeping track of the records. Where you have a third party in a
national scheme, with hundreds of thousands of employers all going to
the same organisation, anything which puts a burden on the
employer—the employer being the person who is responsible for
that—will be detrimental from the employees’ perspective,
because the employees’ first port of call must be to the agency
running the administration of the pension scheme for any queries,
questions or advice, and not the employer.
Mr.
Borrow:
I want to touch again on the question of
communications. One of the things that has always struck me about
Government-business relationships is that Government are very good at
communicating with large companies, and large companies have the
resources to communicate with Government. Therefore, models and systems
are set up which are suitable for large
companies.
Organisations
such as your own, which represent small businesses, have the job of
putting forward their problems, but in my experience of meeting your
organisations and your members, those proprietors of small businesses
who actually participate in consultation communications are unusual,
and very untypical of small
businesses.
10.15
am
I am trying to
get to the extent to which your organisations have
the capacity to communicate to the DWP in terms of how that
communication of the new system should be, how the regulation should be
laid and what sort of form-filling is suitable. That communication is
difficult, because the person I meet when I go to one of your events,
the business person who comes to a
business breakfast that I hold in my constituency, is not from the
typical company with four, five or 20 employees because, by their very
nature, they are too busy running their businesses to come to speak to
politicians and Government and everybody else. One of the problems that
Government have is consulting with those people who will have the most
difficulty in implementing whatever comes out of here. I would like
some comments around that.
Mike
Cherry:
The Federation operates in a slightly
different way from the other business organisations in as much as we
are led by members, not by employees. We obviously have some very good
staff behind us, but the organisation is member-led. It is very
difficult to say that the organisations should in any way be made to
try to communicate out to our membership. We have the ability to
communicate to our membership, but that should not be something that
Government feels they can use to reach all small businesses. You have
heard Natalie say that the membership of BCC is about 100,000. The
Federation has around 200,000 members, yet between us that is a very
small percentage of all the small businesses—according to the
Government’s own figures there are around 4.5 million I believe.
I feel that there should be a duty on all the regulators to communicate
effectively, directly to those businesses. In their databases they have
a record of all those businesses, including those below the VAT
threshold. The duty should be on the regulators to clearly communicate
what is required, in plain and simple English. It cannot be up to the
organisations to try to do the Government’s job for
them.
Natalie
Evans:
I agree with Mike in that we will do all we
can to give out information and help our members to
understand their obligations and what is happening, but we are a very
small representation in terms of the world of business. That is why
simplicity in the system, getting the system right and understanding
the difficulties for employers over implementing this is going to be so
crucial. The simpler the scheme, the easier it will be for everyone to
understand how it works and to be able to comply. The more complicated
the scheme is, the more difficult that
becomes.
Communication
is essential, as is starting very early. Telling people now about
personal accounts, getting messages out to employers even if there is
not a lot of detail behind them—not waiting until everything is
in place and then suddenly going out with lots of information—is
crucial. It has to be a cumulative campaign. The simplicity of that
which you are asking employers to do is crucial to helping them to
understand how to do it. Making the scheme simple and simple to run,
and giving simple and clear guidance to employers about what they have
to do, will be far more effective than any of us going around knocking
on the doors of all the small
businesses.
Mr.
Borrow:
I was not implying that either of your
organisations should try to give the
information.
Natalie
Evans:
No.
Q
98
Mr.
Borrow:
What I am trying to probe is
whether or not your organisations have the capacity to help the
Government tailor the communications message in the most effective
manner. That is the key thing.
Mike
Cherry:
On anything that the Government want to bring
in, if they first communicate with us, and with the Chambers and any
other business organisation, we will be only too pleased to offer a
constructive input at the outset—rather than later down the line
when we have to be critical, perhaps—so that we can make sure
that what comes through to our members is the best possible advice that
we, jointly, can provide to
them.
Bob
Compton:
The BCC, an enterprise operation that is
based in the Midlands, has worked with the DWP on communication
exercises with employers. One of the comments, when I first got
involved with the BCC on pensions issues, was that if the BCC has
looked at material that is educational from the employer perspective,
about what employers are supposed to be doing—as opposed to the
material that you get from the Inland Revenue or VAT people on what new
employers do in terms of tax demands and processes—that is more
likely to be well received by employers, because that material would
have been vetted by people who understand businesses and are involved
in running businesses. Certainly the BCC would be willing to work with
whatever organisation—the personal accounts delivery authority,
the pension regulator, the Department for Work and Pensions or the
Treasury—in developing methodologies that get communication
across effectively. That is back to the point that you cannot do it all
alone. It is impossible. It is a big task. If you have the weight of
the industry representative organisations backing some of the material
that goes out, it has got to be more helpful for those organisations
that are not party to those industry
organisations.
Q
99
Danny
Alexander (Inverness, Nairn, Badenoch and
Strathspey) (LD): Your views on the way in which the
information should be provided to employers, and the role of the
Government on that front, are very clear. I wanted to ask you a bit
more about the provision of information to employees, because in an
answer to an earlier question Mr. Cherry made it clear that
he certainly did not see a role for employers in providing advice to
their employees about the decisions that they should be making about
whether to opt out. Do you think that there should be a duty on
employers to provide information to employees about personal
accounts?
Secondly,
Mr. Cherry again made the point that there are lots of
financial advisers out there who can offer people advice; but
obviously, for people on low incomes, accessing advice from a financial
adviser could be expensive and it is therefore unlikely to happen.
Therefore, what is the role of the Government in ensuring that there
is, at the very least, generic financial advice available to employees,
so that they can make a rational decision about whether to opt
out?
Bob
Compton:
From the word go we have been very clear
that employers should not be seen as the first port of call for advice
for employees on the personal accounts system, but naturally employers
will be seen as where you have got to go for advice. The view has been
that it must be made clear in any literature that the Government, the
regulatory authority or PADA produce, that they are the source for
advice and information such as through websites or other material. The
employer can be the conduit for passing
initial information out to employees, but is not to be responsible for
giving the advice out. The employees should be given notices and
information about where they can go to seek advice if they are not
getting it direct from their employer for whatever
reason.
Danny
Alexander:
So you would say that there is some role for
employers in providing information, but no role at all in providing
advice.
Bob
Compton:
Employers should not be seen to give
any form of advice. If you talk to independent financial
advisers—and I am not one—they are very concerned that
employers are not deemed to be giving advice. It is so important that
there is generic advice out there. Obviously, for personal accounts to
work, they must work well for the majority of people, but there are
certain categories of employee for whom it would not be advantageous to
join. There are issues affecting people relatively close to retirement,
where there is a time scale to build up; those issues can be dealt
with. There is also a means-testing issue about whether someone is
better off not saving at all, in comparison with someone who has saved,
on a low income, with benefit being topped up to the same level as the
other person’s. Those issues need to be dealt with but it should
not be for the employer to advise people on
them.
Mike
Cherry:
My concern is that you have mentioned the
word “duty” and I always get worried when I hear about a
duty on employers. It always seems to be one-sided. We have always
maintained on the pensions front that the responsibility should lie
with the individuals to provide for their future pensions. Clear advice
should be given to them on what their current national insurance
contributions are not actually providing for, and why, and what they
have to do for themselves. It should not be a duty incumbent on the
employers, but we will act as a conduit, certainly. But I do get
worried when I hear that word
“duty”.
Q
100
Andrew
Selous:
Could I ask about the regulatory
impact assessment? Mr. Cherry said earlier that you thought
that it was perhaps a little optimistic. If you were able to quantify
that, it would be
helpful.
Mike
Cherry:
I am looking specifically at the Pensions
Bill impact assessment dated 5 December, where the costs in year 1 and
the ongoing costs for the microfirms and the single-person director
firms do not seem to bear much relation to what I think I am going to
have to do as an employer to understand the regulations or the pensions
issues, what my employers are probably going to ask me about and the
ongoing costs of how it is going to be
managed.
We have, from
the outset, tried to suggest that PAYE was the collection vehicle, but
for practical reasons it seems that that is not able to be used. So
there is going to be an on-cost there for a different system that will,
in some way, mirror what happens with PAYE. That is a doubling of what
the employers already have to do and I do not see how it bears any true
relationship to the costs that are shown in the impact
assessment.
Natalie
Evans:
We have had Manchester Business School do some
research into costs. It came up with a figure, if an entirely new
system was implemented, of well over £1 billion. It has done
some new work based
on the KPMG administration burdens data on the
position if some personal accounts payments were bolted on to payroll
software. The administration of the national insurance element of
payroll is £283 million, so we in Manchester Business
School think that that is a more realistic base cost, in terms of
compliance costs for that regime being the same for personal accounts.
Again, we agree that the impact assessment costs underestimate the
costs for small and medium-sized
businesses.
Q
101
Mr.
O'Brien:
I am surprised to hear you say that, because
Manchester Business School has been assisting DWP and the other groups
that have been looking at these figures. We took significant care to
consider the detailed analysis done by Manchester Business School, with
your assistance, and the figures in the table, which you have referred
to, which include about £70 of ongoing cost for a microbusiness,
about £80 for a larger small business and about £10 for a
single-person director firm, include things like opportunity cost lost,
so they are quite robust in terms of the costings that are
included.
When I first
looked at the figures, I questioned their size as an ongoing cost
annual figure. We went back and did further research and double-checked
our figures and not only are these fairly robust, but to some extent,
when you look at what is in there, they might well be padded. It is
curious, when we are talking about these sorts of figures—about
£70 a year for small
business—that there should be substantial concern about that,
because we are talking about less than £2 a
week.
Natalie
Evans:
From our perspective, we are working in the
dark somewhat, because we do not actually know what the mechanism is
going to be for payment collection. So in some senses we are talking on
the basis of very little knowledge: obviously the costs will vary
greatly depending on what payment mechanism is
decided—
Q
102
Mr.
O'Brien:
Well, in a sense you are not, are you? Bob is
running an insurance company that is today dealing with him in terms of
the collection of his insurance. I do not know what it is or what the
circumstances are, but we do know that many people in small businesses
will do exactly what Bob has done. They will decide not to go to
personal accounts. They will decide to go to insurance companies with
whom they have a current relationship or with trust-based pension
schemes with which they have a relationship—whether a personal
pension or whatever—and they will then be able to continue with
that relationship and continue dealing with
them.
It being
after twenty-five minutes past Ten o’clock,
The
Chairman
adjourned the
Committee without Question
put,
pursuant
to the
Standing
Order.
Adjourned
till this day at One
o’clock.
|
| |
| ©Parliamentary copyright 2008 | Prepared 18 January 2008 |
