 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
WitnessesDavid
Yeandle, Engineering Employers
Federation
Neil Carbery, Head of
Pensions and Employment, CBI
John
Cridland, Deputy Director General,
CBI
Ian Farr, Chairman, Association of
Consulting Actuaries
Lord Turner of
Ecchinswell, Pensions Commission
Jeannie
Drake, Pensions Commission
Professor
John Hills, Pensions Commission
Mike
O’Brien MP, Minister of State, Department for Work and
Pensions
Caroline Rookes, Director of
Private Pensions, Department for Work and
Pensions
Public Bill CommitteeThursday 17 January 2008[Sir Nicholas Winterton in the Chair]Pensions BillWritten Evidence to be reported to the House.PE 17
CBI
PE 18
Unite
1.3
pm
The
Chairman:
This is another session in
which we take evidence from distinguished witnesses. I welcome David
Yeandle of the Engineering Employers Federation; Neil Carbery, head of
pensions and employment at the Confederation of British Industry; John
Cridland, the deputy director-general of the CBI; Ian Farr, chairman of
the Association of Consulting Actuaries; and Keith Barton, honorary
secretary of the Association of Consulting
Actuaries.
I
say again for the benefit of both members of the Committee and
witnesses that questions and answers must relate directly to the
legislation that we are considering. I do not want rambling questions
or rambling responses relating to any matter other than the legislation
that we are considering. We have Ministers here, so I call Mike
O’Brien, to put the first question to our
witnesses.
Q
103103
The
Minister for Pensions Reform (Mr. Mike
O'Brien):
May I ask our witnesses whether their
organisations broadly support the Bill as it stands? Some of you may
wish for additions to it—I know the Association of Consulting
Actuaries does. As the Bill stands at the moment, do you give broad
support to its principles, and, if so,
why?
John
Cridland:
The CBI does, indeed, broadly support the
Bill. What is particularly significant about the Bill is the consensus
that has been built up about the need to tackle the gap in pension
provision that is going to increase in significance. Those on lower
earnings do not currently have the benefit of employer-supported
provision. Thanks to Lord Turner’s report and the resulting
debate, it is now clear that something is needed to help those
people.
There are
aspects of the Bill where the CBI would not have started from the same
place. Our small business membership is concerned about the
practicality and cost impact of a form of soft compulsion. That is not
something the CBI would have proposed, but we are quibbling about it.
It is a necessary act, and we can acquiesce in it to achieve the
purposes of the
legislation.
David
Yeandle:
Thank you. My response is along the same
lines as that of my colleague John Cridland. We have consistently
supported the Government’s pensions reform agenda for the last
two or three years, and we see the Bill as the final piece in the
legislative jigsaw to implement these proposals. We are particularly
pleased with the introduction of personal accounts, which we have
always supported, in terms of both the auto-enrolment
of employees and the modest compulsory employment contribution. We think
that it will provide an important opportunity to save for retirement
for many people who do not have that opportunity
today.
We are also
very pleased that, as part of the Bill, there will be we what we regard
as an equally important part of the Government’s pensions reform
programme: the start of what I hope is going to be a rolling programme
of deregulation of personal and occupational pensions. We have some
issues of detail as far as the Bill is concerned. I suspect we may
cover some this afternoon. There are also some issues along the lines
John mentioned—particularly relating to support for small
businesses—which we think need to be addressed, but not
necessarily during the course of the Bill
itself.
The
Chairman:
Thank you. I call Ian Farr. I am happy for him
to make one or two introductory remarks in answering the
Minister’s question, but they must be related to the
legislation.
Ian
Farr:
We broadly support the Bill, and the extension
of pensions to people who do not currently have them. We also support
the reduction in the 5 per cent. cap for the revaluation of deferred
pensions in existing defined benefit occupational pension schemes, but
we are concerned about the probability of levelling down. Like all the
major pension organisations in this country, we are concerned that, as
yet, there is not nearly enough in the Bill to protect the good
occupational schemes that currently exist—or did exist a few
years ago until the great switch happened. That is why we would wish to
see a
change.
Q
104
Mr.
O'Brien:
John Cridland mentioned the importance of
maintaining the consensus around the Turner commission proposals. Is
that a view that everyone shares? Can you say why it is so
important?
David
Yeandle:
Certainly, we very much support the concept
of building the consensus. Frankly, we would applaud the Government and
the Opposition parties, as well as all stakeholders, for the way they
have worked at this over the last two to three years. This is such an
important issue for the long-term future—not only for all of us
in this room, but for our children and grandchildren—that it is
really important we try to get a degree of certainty about the way
things are going to go in the future. Although there will obviously be
issues of detail between different groups and different parties, the
broad consensus that we go forward with the Pensions
Commission’s proposals is something that we very much
support.
Q
105
Mr.
Nigel Waterson (Eastbourne) (Con): May I direct a question
at the employers’ organisations, and come back later to the
actuaries? I have two issues in one question. Do you support the
approach that the 3 per cent. contribution level should be enshrined in
legislation so that it can only be changed in the future by primary
legislation? Could you expand a bit more on the sort of help your
organisations would like to see proposed for the smaller employers, as
clearly there is an issue about extra costs and
administration?
John
Cridland:
We very much welcome the fact that
3 per cent. is enshrined in legislation. My earlier comments
gave an impression of how far the small business community has already
needed to move to acquiesce with this legislation. It is vital in
giving confidence to the small
business community that when we talk about 3 per cent. employer
contribution, that is precisely what we mean. If you look at the
Australian experience, to take an analogy, we have seen their figure
start low and then move progressively over a period of years. Clearly,
it will be for Parliament in future years to decide whether pension
provision is adequate; these things are not set in stone for ever. But
it would have been very uncomfortable for small businesses to believe
they were being taken on a journey where they did not know the
destination.
The
particular proposals that we have brought forward on support for small
businesses will, in a sense, loom as we move toward 2012, but I will
ask my colleague, Neil Carbery, to outline the particular proposals we
have.
Neil
Carbery:
Our initial thinking on support for small
businesses was to put in place a time-limited package of support to
help with the implementation phase, because our key issue here is that
a lot of the businesses we are talking about are not complex in their
HR practices. Many of them are running paper-and-ink payrolls and so
forth. Our initial proposal was that there might be a 1 per cent.
reduction in the level of contribution expected from businesses with
fewer than 50 employees for a certain period of time. We are still in
discussions with the Department for Work and Pensions about this and
are happy to take those discussions forward. Our estimate was that the
cost of that kind of employer support over the introductory period of
personal pensions would be about £850
million.
David
Yeandle:
In exactly the same way as the CBI,
certainly one of the major planks of our representation to the
Government over the last two to three years has been to stress how
important it is in terms of building confidence for employers, and
particularly small employers, that the 3 per cent. minimum employer
contribution is on the face of the Bill. I am extremely pleased that it
is there, and that the Government have clearly indicated that it will
be introduced on a phased basis over a shortish
period.
We
believe, like the CBI, that there is a real issue
about smaller employers, because of course all employers—large
and small—will benefit from the phased implementation and the
fact that the 3 per cent. figure appears in the Bill. But there are an
awful lot of small employers who, for the very first time, are now
going to making pension contributions for their employees. So we do
think there is a strong case for a relatively modest financial support
package to be introduced and to last for a relatively short time when
the scheme comes in in
2012.
We
also think compensating some of these smaller employers for making
contributions would send a very important message to the small business
community. Clearly, that community and the employees in them are very
much an integral part of the target market. It is really important that
the small business community is seen to be as supportive of the
Government’s proposals as possible. If the Government were able
to make a gesture towards them in this way, that would be extremely
helpful and would, I hope, avoid some of the problems that might
otherwise occur in parts of the small business
community.
In
terms of the methodology, our members are very clear that, if there
were to be any support, it needs to be done in such a way that it does
not disadvantage the very people who work for the small employers who
make up many of the people we try to support. We would not want, for
example, an exclusion for small businesses or a longer phasing-in for
small businesses. The idea that we have been exploring and trying to
cost—although that is increasingly difficult—is to make
provision so that a proportion of the employer contribution that is
being paid into the employees’ scheme is refunded to the
employers over a two to three-year period. They would get small
compensation back for what they put in—not the full amount, but
a phased reduction. I can give more details about that, if that would
be of any
assistance.
1.15
pm
Q
106
Mr.
Waterson:
Let me raise it now, although it moves us on to
a different subject, which is the issue of deregulation—or
simplification, however you want to call it. I was in Holland last
week, hearing about the benefits of the flexibilities in their system,
especially conditional indexation. Would Ian and Keith like to
elaborate on the kind of flexibilities we might be able to build into
the system through the Bill? What could encourage employers to keep
existing defined benefit schemes open and, perhaps, stem the tide of
levelling down when the time
comes?
Ian
Farr:
Conditional indexation—what we have
proposed—is not a panacea. We and all the national pensions
bodies that support this believe that it could stop the dramatic shift
from defined benefit to defined contribution schemes that we have seen
over the past 10 to 12 years. We reckon that there are now only about
900,000 active members in private sector open defined-benefit plans,
compared with 5 million in 1995. That is a drop from 5 million to
900,000 over 12 years. In the public sector, of course, the total of
active members has stayed at about 5 million throughout the whole
period.
There
is an urgency to this. Our proposals are aimed at medium to large
employers that want to, and are prepared to, share some of the
investment risks of longevity with their employees. At the moment,
these employers do not really have that choice because legislation bans
conditional indexation, which is why you have seen so many final salary
schemes replaced by defined contribution money purchase plans. We think
that there is scope for a middle way—conditional indexation,
which has worked so successfully in
Holland.
Why
conditional indexation? Because conditional indexation—not being
a panacea—is a natural step. It offers a genuine middle way
between defined benefit and defined contribution; it has been well
tried and tested in the Netherlands; it requires only small changes to
the law; and it could be implemented
quickly.
Keith
Barton:
For the avoidance of doubt, what we mean by
conditional indexation is that members’ benefits would increase
depending on financial health. We have thought through this very hard
and there are important safeguards to avoid abuses. In the normal
course of events, members would receive their benefits in
full—they would be indexed each year in payment and in the
period prior to payment. But if things went wrong and if there were
investment problems, there would be the opportunity to hold off those
increases
for a period until the funding and investment conditions improved and
the fund was again able to afford full
indexation.
It
is an important safety valve. One of the reasons why pension schemes
are closing at the moment and have been closing in droves over the past
10 years or so is that there is no safety valve. An employer who
commits to a current scheme of a DB nature has to guarantee every
single benefit. There is very little opportunity to be flexible if
things do not turn out quite as the employer planned. Our schemes would
give that flexibility and, we believe, would encourage a reversal in
the trend from final salary plans straight to defined contribution
schemes where members are at great risk of making poor investment
decisions and ending up with poor
benefits.
Q
107
Nick
Ainger (Carmarthen, West and South Pembrokeshire)
(Lab): On the risk of levelling down, in the paper that you
submitted to the Committee, you indicated that you had undertaken a
survey in February 2007, covering 336 schemes with 2.1 million members.
In the survey, did you ask the employers whether the 3 per cent. level
would encourage them, irrespective of where we go with conditional
indexation, to change their existing occupational pensions? If only
part of their work force was covered by their own scheme, were they
concerned that the introduction of the new scheme would increase their
administrative costs and so on? Therefore, was that another
encouragement for them to switch from a more generous
scheme—from their point of view, in terms of their
contributions—to the 3 per cent. scheme? I hope that that was
not a rambling
question.
Ian
Farr:
I think that some levelling down is almost
inevitable. If you have an employer with a pension scheme where the
contribution is 10 per cent. and 30 per cent. of the staff are members
and then, through auto-enrolment, the proportion of staff who are
members rises to 60 per cent., to stop the outgoing pensions
contributions doubling the employer could reduce the contribution by a
half to 5 per cent. There will be a concern among finance directors
about the membership doubling from 30 per cent. to 60 per cent. and the
10 per cent. contribution doubling. Therefore the danger is that the
finance side of the house might say that they want to reduce the
contribution down from 10 per
cent.
I
accept there is an argument that would say that perhaps it is better
for society as a whole if there are 60 per cent. in the pension scheme,
with a 5 or 6 per cent. contribution, than only 30 per cent. with a 10
per cent. contribution. We do not have strong views about that but we
think that levelling down is almost inevitable with some employers,
looked at from the financial point of
view.
Q
108
Nick
Ainger:
My question was whether you had addressed that
issue in the survey and what responses you had had from those
companies?
Keith
Barton:
Unsurprisingly, we did not ask precisely that
question but we asked similar questions. One question
was, “Will auto-enrolment into the new style of schemes lead
you”—the employers surveyed—“to considering
abandoning your present occupational schemes in favour of personal
accounts for all members?”. The headline figure from the survey
was that 15 per cent. of all employers said yes and 85 per cent. said
no, but there was quite a bit of skewing. Among smaller employers,
around a third said that they would consider abandoning their current
schemes and two thirds said that they would not. The survey was
undertaken early in
2007.
Q
109
Nick
Ainger:
May I just clarify that point? The employers who
responded to the survey were those who were already paying more than a
3 per cent.
contribution?
Keith
Barton:
Almost certainly. Three per cent. is a
relatively modest level of pension contribution, although it is better
than no contribution at all. The existing schemes surveyed would almost
certainly have been paying considerably more than
that.
Q
110
Mr.
John Greenway (Ryedale) (Con): I was going to ask about
this later on, as I suspect Mr. Waterson was, but we will
deal with it now. I wanted to ask a question of the
CBI.
To
what extent do you think that the fact that, to all intents and
purposes, there will be no transfers in or out of the schemes would be
a disincentive for the kind of levelling down you have described?
Employers would then be left with frozen schemes to administer at a
cost.
Keith
Barton:
Are you talking about the conditional
indexation
schemes?
Mr.
Greenway:
No, I am talking about the fact that, not
surprisingly—and I share your sentiment on this—employers
have only so much money to spend on pensions and they will be tempted
to level down. If they levelled down, by saying “We’ll
just auto-enrol everyone in the personal accounts
scheme”—that was Mr. Ainger’s
question—an occupational pension scheme would then become a
paid-up frozen scheme. The Government’s clear intention is that
the benefits that employees have should not be transferred into their
personal accounts. Would that not be a disincentive to people doing
that very thing? It has been suggested to us that it is, but you are
the professionals so I would be grateful for your
view.
Keith
Barton:
I think that it is only a small disincentive.
Our survey suggested that only 15 per cent. would consider ending their
current arrangements in favour of personal accounts. That is a
relatively small number. If an employer wanted to abandon its current
arrangement and there were no good alternatives, such as a risk-sharing
scheme of the type we proposed, I do not think that the administrative
difficulties of operating a paid-up plan would be seen as
insurmountable.
Q
111
Mr.
Greenway:
That is very helpful. Coming
back to the conditional indexation issue, you will be aware that on
Second Reading I made known my support for what you have said. Two days
ago, the TUC, with the support of the charities for the elderly,
expressed some reservations about conditional indexation, and I
think we reached a point where they would support
further review on trying to find a middle way, rather
than have all the risk resting with employers or employees. Have you
done any work or given any thought to features other than conditional
indexation, which might lead to a sharing of risk? If we were to have a
further review of this, it would have to be on the basis that we might
find some other golden solution. I suspect you have looked at all the
possible solutions and concluded that there is no golden solution other
than the one you
propose.
Ian
Farr:
As I said, our solution is not a panacea, but
those of us who have been thinking about this for a long
time—not just the Association of Consulting Actuaries but all
the other national pension bodies, including the National Association
of Pension Funds—believe there is an urgency to this. This is
why I asked to make an opening statement.
When I read
the account of Tuesday’s proceedings, I was concerned that the
people made comments to the effect of “Let’s get the
personal accounts bedded in, see how they bed in, and then, after 2012,
have a look at risk-sharing”. That is far too late. By then the
20 per cent. of defined benefit schemes that remain open will be down
to zilch, particularly as employers, on the lead-up to the introduction
of personal accounts, will be reviewing their existing provision.
Whatever is going to be done has to be done now and, as far as I am
concerned, there is complete unanimity among all the national pension
bodies as regards the urgency of the situation and the need to get
something into this Bill.
That leads to
the practicalities, and it is pie in the sky to try to get an amendment
in to cover all sorts of different risk-sharing, so what is the most
practical one that is workable, taking account of the current regime?
That is what we have come up with. It is the natural step. We have
already seen some final salary schemes—such as those at Tesco
and the Royal Mail—move towards average earnings schemes
instead. That is going with the drift of the wind. However, rather than
having mandatory indexation in career average schemes, this would give
conditional indexation in average salary schemes, because not every
employer can afford to take on all the risk. Our view, our research and
our professional judgment is that this is the practical way forward
and, indeed, virtually all the major consulting actuarial firms who
advise medium to large employers believe that if this went through,
many of their employer clients would go for the middle way, rather than
switching from final salary to money
purchase.
Q
112
Mr.
Greenway:
That is very clear, and your answer is so full
that I do not need to ask you another question on it.
May I turn to
the general issue of employer duties? I want to raise the issue of
advice and information. What is your feeling—particularly those
of you from the CBI—about who should be responsible, not just
for the provision of information but for the accuracy and good sense of
that information? Do you and your members have concerns that, in the
fullness of time, there might be some attempt to suggest that the
information provided by employers was quasi-advice that and the
employer would be responsible for that? Should PADA and the Government
be responsible for the accuracy of information, given that this is
going to be an execution-only, non-advised
product?
1.30
pm
John
Cridland:
We are absolutely clear that it is not a
reasonable responsibility to place on a small employer, particularly as
the constituency of employers we are trying to reach are those
who—even in the days when pension schemes were very much in
vogue and very generous as we look at them now with the benefit of
hindsight—even in those days, this target group did not feel
they could voluntarily contribute to pensions. They thought it was
beyond them. These are small businesses that are starting up, focused
on survival and very much unable to take on broader employment
responsibilities that medium to large companies are able to take. Even
if we persuade those companies to honour the spirit of this
legislation—we will make a major effort so to do—it is
simply a bridge too far to think they can part of the advice network.
They neither have the competence nor the intention to play that
role.
In
conclusion, I wish to return to my point about consensus around the
Turner proposals. I think Lord Turner well understood this point. He
understood that we were segmenting the market and going for a part of
the market that previous pension initiatives, including stakeholder
pensions in recent years, had not met satisfactorily. He understood
that that would only work if the measures, both in terms of
administration for auto-enrolment and the fiscal measures, were kept
very, very simple. We would have all made a huge mistake if we allowed
mission creep to occur; if we go back to saying that advice is
essential at the point at which people make decisions. It is not the
employer’s responsibility to provide the advice, and if that is
the case, we have a reasonable expectation both in letter and in spirit
that small employers will operate auto-enrolment fairly and properly,
so that the part of the community that currently gets no support gets
its 3 per cent.
Neil
Carbery:
Our membership will not have any great issue
with distributing generic information that comes from the delivery
authority to employees, but I think that is as far as the
employers’ responsibilities can go in this area. Any form of
liability would be treacherous.
David
Yeandle:
I would very much like to support what my
colleagues have said. There is no doubt, talking to our
members—large, medium-sized and small— that they are
extremely nervous and apprehensive about getting involved in the
provision of information, and certainly not advice. It is not just the
potential legal implications—we may be able to build something
around that—but there are broader employee relations
implications that may worry companies.
We very much
support the whole concept of risk-sharing. It is something we think
should be encouraged more widely than it currently is. It certainly is
a differential between the DB and DC schemes. Indeed, some of our
larger member companies have already gone down that route. But I think
it is a real problem for medium-sized companies, and one way in which
the Government could seek to do something to move the debate forward in
this area—this does not involve legislation—would be to
provide some very good guidance in terms of examples of the sorts of
risk-sharing schemes that have already been introduced by companies,
including how they have gone about them and how they communicated them
to their employees. This guidance should be readily accessible to
smaller businesses, so they could look at what is available, since
there are lots of different types
of risk-sharing to choose from. I am always in favour of things that do
not involve legislation: it is usually cheaper and quicker. We
certainly put this in our response to the Lewin-Sweeney Report, and I
would very much urge the Government to look very seriously at this,
rather than necessarily introducing further legislation which I am
frankly not convinced—certainly from talking to our
members—they are crying out for, in terms of conditional
indexation. I think they believe there is something out there already
they can
use.
Ian
Farr:
I support Mr. Yeandle’s
proposal—he made it to the deregulatory review, which I think
has taken it up—to make public the ways that risk-sharing can be
carried out. The trouble is that there are not that number of ways.
Also, to do meaningful risk-sharing and to go for a true middle way, it
has really to be an employer that can accept some risks; you are into
the medium to large employers. The medium to large employers already
have advisers—typically consulting actuaries, I am
afraid—and they have been advised for years on all the ways of
doing it. The publication of such ways for the small employers is
useful, but many of those small employers will not be able to afford to
share risks. Therefore, I am sceptical whether it would lead to much
progress.
Q
113
Gordon
Banks (Ochil and South Perthshire) (Lab): I would like to
go back to some of the issues that we have touched on briefly and
explore them a little bit
more.
I
come to this discussion from a business background, having run my own
business since 1986. My first comment—probably for the CBI and
the Engineering Employers Federation—is that I have concerns
about how Government and Government bodies disseminate information to
businesses, especially small businesses. Small businesses are often too
busy being small businesses—certainly too busy to go and look
for the relevant information—to make sure that they are
compliant. They are often far too busy to be members of organisations,
such as those you are representing here
today.
That
leads me to what concerns you might have over inadvertent
non-compliance, from the employers’ point of view, while bearing
in mind that there is a responsibility to seek the right balance
between the employer’s rights and obligations and the
employee’s rights. I am thinking of things like the re-enrolment
periods, which we discussed this morning with other witnesses and which
mean that records are going to have to be retained for significant
periods of time. I have another point to make on information, but
perhaps you would like to
comment.
Neil
Carbery:
You are absolutely right. This is a key
constituency that we have never previously reached, as a nation, in
terms of pensions saving. It is the corner shop, the
hairdresser—businesses with limited capacity for regulatory
time. That is why we were very keen when talking to DWP—there
are some very stringent penalties in the Bill. The most important thing
that we have learned through the process of the last few years, looking
at areas like the national minimum wage, is that the pensions
regulator, as the designated authority, will have to take an approach
that is based first on support. The first step here has to be support
and help to comply. The pensions regulator must have the budget to be
able to do that. A sliding scale of penalties after that is perfectly
acceptable to businesses—no one wants to
defend rogues. But, from our point of view, we are looking at making
sure that the first time the regulator steps into your business to say,
“Why is something wrong here?”, it is not bashing your
door down; rather it is saying, “You are not doing this”,
“How can we help?” and “What information do you
need?”
Gordon
Banks:
Mr. Yeandle was going to make a
contribution and I wanted to come back on another question about
generic
advice.
David
Yeandle:
Yes. The problems of inadvertent
non-compliance are inevitably going to be there. The pensions regulator
is going to have a hugely important role in this, in terms of the way
it addresses it. That is going to be a real challenge for the Pensions
Regulator, because it is going to be dealing with a very different
group of employers from what it has historically. Historically, it has
tended to deal with the larger companies. It is now going to be dealing
with the little chip shop, the little corner shop and the hairdresser,
most of whom, frankly, have never heard of the pensions regulator. When
they get the first piece of paper from it, they are going to wonder
what it is all about. There is a huge educational
exercise.
Picking
up your point about repeat auto-enrolment, you are right that there is
a problem. That is why we, certainly, are very much in favour of repeat
auto-enrolment on a fixed date, such as the start of the tax year. We
think that that would avoid a lot of unnecessary paperwork being kept.
It would certainly make it a lot easier for small employers if they
knew that it had to be done on a fixed date, rather than their having
to worry about when Joe or Mary might have joined. That might mean that
some people would be re-enrolled on different time scales—it
would not always be three years for everybody—but doing it on a
fixed date would, we feel, be an awful lot easier, especially for
smaller employers, and would particularly avoid inadvertent
non-compliance, which I think is exactly your
point.
Q
114
Gordon
Banks:
On the issue of the generic advice and your
concerns, obviously we do not know what the content of the generic
advice will be. It is very difficult, as we all know, to get a
one-size-fits-all scheme that does the job 100 per cent. Do you have
comments relating to the difficulties that that might
produce?
David
Yeandle:
No, other than that it is incredibly
difficult, but it is a challenge for all parts of Government in terms
of how they get information across to the small business
community.
David
Yeandle:
Yes. It has to be written in a format that
those involved will understand. I think that it is going to be quite a
long process. The process of education needs to start well before 2012
because we need to get the message out to the community. The first
occasion will not be enough; a drip, drip, drip will be needed over two
or three years. We all have a role in that in our different
ways.
Q
115
Danny
Alexander (Inverness, Nairn, Badenoch and Strathspey)
(LD): I want to return to the question of information and
advice that was touched on. There appears to be a consensus among you
that it is not the
role of employers to provide advice. I want to ask two things. First,
what is the role of employers in providing information? Should they be
expected to provide information to their employees themselves, or
should they simply be expected to be a conduit for information that is
prepared and provided by the Government or the personal accounts
delivery
authority?
Secondly,
in relation to the point on advice that Gordon Banks raised, there
clearly will be some people for whom automatic enrolment in a personal
account could be the wrong decision. That advice has to be more than
generic; it has to have some personalised quality. In that case, is it
the role of Government rather than the role of PADA to provide that
advice?
John
Cridland:
I think that generic advice can be very
powerful in this area, notwithstanding the difficulties that we have
already touched
on.
I
am involved as an employer member of the steering group for the
Government’s financial capability initiative, which is looking
at generic pensions advice alongside other forms of generic financial
advice to students, families having children and a whole range of
groups that often get themselves into deep difficulty. We have found in
the financial capability exercise that it is possible to cast quite
generic, quite short and pithy advice that is nonetheless quite
meaningful to the constituency, and to use a series of intermediaries
to reach groups in a way that we had previously not managed to do. I do
not understate the difficulties but I am quite optimistic that that
will be
possible.
In
relation to your direct question on the role of the employer, I think
that when employers make such a strong stance that it is not their job
they are largely saying “We are not competent to do it”.
Without repeating the points made, we are not talking about
sophisticated companies with their own HR resource. Therefore, in
direct answer to your question, I think that they are willing to be a
conduit for advice prepared by others but not to provide even outline
information that they have generated themselves. I think that they are
simply not competent to do
so.
David
Yeandle:
I hold very much the same position. There is
no doubt that the whole question of advice and information is a serious
issue. I think that employers would be comfortable, in most cases, to
be active as a conduit, but that they would be extremely nervous if
they had to generate any information. Indeed, I think that that would
be quite dangerous. There is a real danger that if you had 500
employers producing information it would all be slightly different;
much better to have one piece of information produced by an
authoritative organisation that is then disseminated to employees by
the employer. The whole message of Adair Turner and the Pensions
Commission was: we have to keep this simple. The more we keep it
simple, the better chance it has of working. Simple for employees,
simple for employers. That has to be the message. I have been reading
some of the reports of the evidence sessions from earlier this week,
and it is encouraging how much that message keeps coming across. We
must focus on that and not get carried away trying to do lots of other
things which, in an ideal world, might be ideal. Frankly, we will fail
if we do that. We must keep it
simple.
Q
116
Mr.
Greenway:
Should we consider having a prohibition on
employers giving advice? Looking the other way through the telescope,
that would prohibit
employers from giving advice to employees to opt out, thereby avoiding
the payroll cost to the employer of automatic enrolment. If you have
studied our evidence, you will have heard that some of our witnesses
have that
concern.
Mr.
O'Brien:
The EEF and the CBI have employers who currently
have pension schemes. Presumably, in most of those cases, information
will be given but not advice. I have a great deal of sympathy for the
points you have been making in terms of the role of the employer, but
that is the case now. You give information to an employee who is either
automatically enrolled or is able to join the scheme, but you will not
give advice because that would put you at some liability. It may be
that some of the larger employers have advice schemes: I do not
know.
John
Cridland:
Advice is not for employers. Information is
not for the target group of employers you are seeking to reach with
this legislation. However, the Minister is absolutely right: there are
many employers on a bigger scale, with more resources, and they would
feel comfortable giving information. Indeed, some of the best practice
that has led you to consider auto-enrolment as a sensible route has
come from the good practice of companies that have driven up enrolment
rates by working very closely with their employees on the provision of
information, but not on the provision of advice. Advice? No.
Information? That depends on the size and sophistication of the
business, but cannot be a
requirement.
David
Yeandle:
I agree entirely that we need to clearly
distinguish between information and advice, and I recognise that
sometimes there is a slightly hazy barrier between the two. We must be
absolutely clear: employers should not be involved in any way, shape or
form in giving advice. Some of them may wish to provide information
through a
conduit.
Q
117
Alan
Keen (Feltham and Heston) (Lab/Co-op): I
am delighted at the constructive attitude of the employers’
organisations. However, I got more pessimistic as I listened, though
not because you do not want to give information or advice. We are
concerned—though perhaps not all of us—about employees
within small businesses. There is a reluctance by the employers’
organisations even to give information, to get involved with small
businesses. Would you agree that the Government are going to have to
put some sort of mechanism in place to be proactive with small
businesses? I think Mr. Yeandle was optimistic when he said
that people look at information and say, “Who is this
from?” I think the first reaction would be to throw it in the
bin and not even wonder who it is from. If we are not proactive, we
will not get small employers involved. I have had experience in large
companies and in running my own business, and it was a dreadful shock
moving from a large company to my own small business. Have you put some
thought into how the Government could be proactive in this
field?
John
Cridland:
I agree with the point that David Yeandle
made earlier: this requires a major marketing campaign as we move to
2012. It requires a lateral approach to reaching the marketplace, which
Government Departments do not always find easy. It is not just about
publishing notices or sending out brochures. We do however have some
experience of getting this right with projects on a similar scale. I
was previously a low
pay commissioner as a representative of employers. We asked all the same
questions in the late 1990s about whether we could make a national
minimum wage work, because it was aimed at very low-paid employees, who
often did not have very much access to information and worked for very
small employers, few of whom would wilfully have avoided the minimum
wage, but many of whom would have been confused by it. By keeping the
minimum wage simple, by a bold approach from public advertising and
promotion, we have actually shown through third-party surveys that
there is a very high level of awareness by both individual employees
and small employers of their legal
responsibilities.
But
it is because we kept it simple. In principle—and I would not
claim there was 100 per cent. compliance—it ended up being
fairly close to self-policing. I think that is an analogous model to
what we want to achieve here. We need to keep personal accounts so
simple and straightforward, keep that 3 per cent. figure in
people’s minds—that this is a right unless they choose to
opt out—keep the procedures of automatic enrolment crystal clear
so that the vast majority of employers and employees find the system
user-friendly. There will always be the one bad apple in the barrel,
but we cannot produce a system for trying to tackle the one bad apple,
or we will mess the barrel up for everybody
else.
Alan
Keen:
Do you agree that no small business would want to
pay the 3 per cent., but much more difficult for them than paying the 3
per cent.—finding the money—is actually the
administration of the scheme and the willingness to get to grips with
it. Have you put any thought, as employers’ organisations, into
being able to help, or helping the Government set up a proactive
organisation that can give not just advice, but practical help and go
knock on the
doors?
Neil
Carbery:
We have. We have had a number of meetings
with some people who have been involved with PADA. We are looking at
payroll providers and so forth to see what might be deliverable to
small businesses in an online portal. One of the things we are looking
at, for instance, is delivering an opportunity to develop computerised
payroll free of charge as part of the delivery of personal accounts. So
the small business would benefit because they would pick up a
computerised payroll program, for instance, from the delivery authority
that is helping them comply but is also offering them some business
benefits as well. That is the kind of discussion we have been involved
in—certainly something that we would be keen to take forward as
we move toward
2012.
Alan
Keen:
Do you get the feeling that the
people who are responsible—both PADA and the
Government—understand that that is the major problem and that
they are listening to
you?
Neil
Carbery:
Our initial experience of PADA has been
positive. We have had a number of meetings with Tim Jones. He met with
CBI members just last month and our initial feeling there is that they
are listening. Of course, as with all things, the proof of the pudding
will be in the eating.
Alan
Keen:
I was pleased with the experience of the PADA chair
and chief executive, but obviously we are talking about a body of
companies that are way below
the level at which those people have worked. That is what concerns me;
we have got to get it right before we get too close to
it.
David
Yeandle:
Much like the CBI, we have also had some
valuable and constructive discussions with PADA senior officials, and
very much stressed the point, that I think they fully endorse, that the
whole process has got to be kept simple for employers to understand and
be able to administer. Frankly, we are all going to have to think about
innovative approaches to this. We are going to have to think broader
even than pensions in terms of how we do this: we need to think outside
the box a little bit about how we get the message across. We should not
assume that it is only people within the pensions community who have
the best way of doing this: we have to think more broadly.
We do need to
get the small business community at large on board, and if the
Government were prepared to give some indication that they recognise
this is a big challenge for them, and to do something—even if it
is relatively modest—at the start of 2012, that would be an
important message. It is about getting everybody on board and singing
off the same hymn sheet as much as we possibly
can.
Alan
Keen:
Would you agree that it should not come from
Westminster or central London: it should be done on a regional or even
a smaller basis to get onto the
doorsteps?
David
Yeandle:
You are going to have to find all sorts of
ways of getting the message across. Certainly it is not necessarily
always going to work if it comes directly from Westminster. We must try
innovative approaches to get the message across. How do we get the
message across to the small business community about other things,
other than pensions? We need to think about that. What works? What does
not work? We need to learn from that. We need to talk to all the
different engaged organisations and find out what works or does not
work for them and learn from
that.
Q
118
Andrew
Selous (South-West Bedfordshire) (Con): All of you talked
about simplicity, more than once. What about the issue of agency
workers, as far as the employer organisations are concerned? We have
briefings from the House of Commons Library that says that they can be
defined as employees of the organisation that they are working for, and
that the definition of “jobholder” in clause 1 of the
Bill includes “employee”. I wonder if that is an issue
that has come across either the CBI’s or the EEF’s radar
screen.
Neil
Carbery:
The issue of agency workers is a difficult
one with regard to this Bill. We have to acknowledge that people pass
in and out of agency work during their careers. They often choose to do
it because it suits their lifestyle at that time. We might expect
agency workers to have one of the highest opt-out rates from personal
accounts, because of the stage of career that they are at. It is clear
to us that the responsibility for administering personal accounts
should sit with the body administering payroll for the
individuals—that would usually be the
agency.
David
Yeandle:
The question of agency workers is very
problematic. We are pleased that agency workers are going to be
covered, because clearly they comprise an awful lot of the people who
are not saving for their
retirement. We have to recognise that agency workers are a very varied
group of employees. They are not all low paid and vulnerable. Many of
them are quite well paid. We have to recognise that there are lots of
different types of agency workers. I entirely share Neil’s point
that—in exactly the same way as the responsibility for ensuring
that workers get paid the national minimum wage and for adherence to
the working time regulations—the responsibility here should be
the agency’s, not that of the organisation that happens to be
making use of the agency on that particular
occasion.
Ian
Farr:
No.
Keith
Barton:
No.
Andrew
Selous:
The other phrase that we have
heard an awful lot throughout today is light-touch enforcement,
specifically in relation to inadvertent non-compliance. We know that
there are some pretty big sticks within the Bill. We all accept that
they are there for good reason, to deal with the rogue employer
element. How would you all like to see the enforcement regime operated,
from a light-touch point of view? That is going to be critical going
forward.
John
Cridland:
There is an analogy here with the
deliberations that you needed to have on the issue of employers and
illegal working. For illegal working there are some stiff penalties,
but the approach to regulation has to be light—if people
inadvertently, as an employer, find themselves employing someone who
does not have the appropriate employment status, and it happened
because of the complexity of the questions about their employment
status, then someone gets a slapped wrist and they are encouraged to do
better. One of the ways of encouraging them to do better is better
provision of advice and guidance, along the lines that we discussed
earlier, rather than the notion that someone has messed up and they are
immediately facing the sorts of penalties in the
Bill.
As
a responsible employer body, we support the compliance provisions in
the Bill. We think that there have to be provisions of this kind, but
“light touch” for us is a culture in the regulatory body
where, as we heard earlier, you only use these powers in extremis. The
big stick is there to be kept in the cupboard and brought out when
needed, not used on a regular
basis.
David
Yeandle:
I entirely agree with that point. It is very
important to all employers, in exactly the same way as with the
national minimum wage, that we want a level playing field. The good
employers—the vast majority of employers and of our members and
of the CBI’s members—will do their very level best to
adhere to this legislation. We want to ensure that there is a level
playing field out there. I think that the legislation is drafted in
such a way that it achieves that. But we also want to make sure that it
does not impose additional regulatory burdens on those employers who do
the right thing. The sort of step-by-step approach that John talks
about, where the big stick is there and is available but is only used
in extremis and on a very occasional basis, is the right approach. Most
of the problems hopefully will
be able to be resolved by a common sense phone call, a bit of advice, a
bit of education. Most of the problems will then hopefully
disappear.
2
pm
The
Chairman:
Two colleagues have caught my eye for a second
innings, but I am still to call Wayne David for his
first.
I want to
return to the issue that Mr. Farr raised of conditionally
indexed schemes. I notice that in his written submission, and also
orally today, the emphasis was placed on how lifting the ban on the
implementation of those schemes has worked effectively in the
Netherlands, for example. But, of course, the Netherlands is not the
United
Kingdom.
My
question is not so much to you, Mr. Farr, but to
Mr. Yeandle and Mr. Cridland. I get the
impression that both the EEF and the CBI are lukewarm towards the
suggestion and I wonder what would happen in practical terms. Do you
think that there would be a reasonably large take-up by your
members?
David
Yeandle:
As I have indicated already, it is not
something that lots of people are knocking on my door about. I do not
get the impression that there is an enormous demand, from our members
at least, for this type of scheme. I think that there is a limited
interest in risk-sharing, but not an enormous demand out there for
conditional indexation. We would not oppose it as a matter of
principle, particularly if it could be introduced in a relatively
simplistic way, by relatively modest changes to the legislation.
However, in terms of taking forward, the agenda we think that there may
be other issues of deregulation that it might be more advantageous for
the Government to
address.
I
come to the point that I wanted to make. We are very supportive of the
proposal in the Bill to reduce the 5 per cent. cap from 5 per cent. to
2.5 per cent. but we think that the Government need to go a little
further. There is real problem for many employers to be able to
implement that part of the legislation. Indeed, they have had trouble
implementing the provision in the 2004 Act to reduce the cap from 5 to
2.5 per cent. for pensions. It would be really helpful, in terms of
implementing the legislation and really getting it to work, if the
Government were to go that little further and provide the opportunity
for overriding legislation so that employers could genuinely implement
it. There is a problem in doing
so.
John
Cridland:
There is a lot of common ground between the
pensions industry and the broader business community concerning the
desirability of innovation in pensions provision, and in considering
that the halfway house, the risk-sharing approach, has considerable
merits. But the debate has still some way to go. It surprises me that
pensions industry bodies believe that this would make a major
difference. I have to say that CBI member companies have taken a very
similar approach to David Yeandle’s answer, which is,
“Yes, we can see the merits of this but actually we don’t
think it would make any major difference”. Therefore, there is
still some way to go to flush out why different constituents are taking
slightly different approaches.
I do not want
to suggest that we were not supportive of Ian’s aspirations,
because we most certainly are. But when my members say what they would
like to see Ministers or the House do in relation to the Bill, they
give much higher priority to other issues. It has not come up yet in
discussion, but the definition of pay, for the purposes of the Bill, is
a huge issue for my members, who believe that the Bill in that one
single area is overcomplicated by a very wide definition of pay. Most
employers with pension schemes use basic pay as the definition. Here is
a rare example of perhaps over-gilding the lily and bringing in
administrative complexity that would defeat some of the objectives of
the
Bill.
There
is widespread concern among pensions industry members, as well as
business members, about the fact that European law may interrupt our
ability to use automatic enrolment, certainly in relation to group
personal pension schemes. We are working with the DWP to find a
solution to that. The real solution we desperately need is to go to
Brussels and get them to understand that things like the directives,
which were there to provide consumer protection, were never intended to
interrupt auto-enrolment, but could do so.
I mention
those two issues as ones on which I have a mandate to say that
employers are very concerned to see them resolved. They share the
conditional indexation aspiration, but that is not something they have
asked me to say is their current No. 1
priority.
Ian
Farr:
I gave you the figure of £900,000
compared with £5 million 12 years ago. You still read every week
of the closure of final salary plans. You also see their replacement
with money purchase plans—there is very little risk-sharing
going on—and that will continue to go on. Some of the difference
in emphasis comes from the fact that we are talking not about small
employers, but about medium to large employers who employ several
million people.
We know from
advising medium to large employers that many of them have a heavy heart
about changing from taking all the risks of a final salary scheme to
passing all the risks to individuals under money-purchase. Such medium
to large employers want to, and can, afford to share the risks,
particularly when their employees are modestly
paid—£20,000 to £40,000 a year—and have
difficulty in withstanding the volatility of a pension from a
money-purchase arrangement.
Of course, if
you are self-employed or a smaller employer, all you can have is a
personal account type arrangement in which you have to accept that
volatility. The pension depends on the level of the stock market when
you retire and the cost of annuities. If you are lucky enough to work
for a medium to large employer that can share some of the risks and can
offer you a pension related to salary rather than directly to
investment returns or the cost of annuities, why ban that for those
employers that wish to offer that but are currently not able
to?
Q
120
Mr.
David:
This is a very interesting discussion, but we are
not taking part in an esoteric philosophical discussion here. We are
considering a Bill, and we will get into the nitty-gritty very shortly.
It is not my intention to try to put words into the mouths of
Mr. Cridland and Mr. Yeandle, but can I infer
from what you said earlier that you would not be in favour of an
amendment to the Bill as suggested by Mr. Farr?
John
Cridland:
We do not have a mandate from our members
to support such an amendment directly, but we would not be opposed to
it.
David
Yeandle:
I am in a very similar position. To be
absolutely frank, I have not gone through the detail of the particular
amendment, because it is not an issue that is high on our
members’ agenda. As and when you get to that stage in the
debate, I will ensure that you have our considered
view.
Q
121
Danny
Alexander:
May I ask a question to which I hope you will
have an answer? Mr. Cridland, you mentioned at the beginning
of this evidence session the question of the costs to employers of
implementing this scheme. We have estimates of the costs in the
regulatory impact assessment provided by the Government. Do you think
that those costs are accurate, or—as we heard from other
organisations this morning—that they might be
underestimates?
The
Chairman:
Before you answer, Nigel Waterson would also
like to put one more point. Perhaps you could deal with them together
in the 90 seconds we have
left.
Q
122
Mr.
Waterson:
John Cridland made a point about group personal
pensions. Everybody knows there is a problem. There are three possible
solutions being mooted: getting Brussels to change the law; streamlined
enrolment or master trusts. Can I have a yes or no answer from each
organisation as to which of those you favour as a
solution?
John
Cridland:
We favour getting this issue sorted in
Brussels, but if the fallback has to be a streamlined approach, there
are examples from employers such as Asda that it can be done.
In relation
to the cost, we have no reason to question the costs in the Bill.
Clearly, the biggest cost is the cost to the employer making the
contribution. Against that, the regulatory costs are much more
modest.
David
Yeandle:
We certainly urge the Government to address
the issue in Brussels, but I do not underestimate the difficulty and
time that that might take. Of course, going to Brussels always opens
Pandora’s box and we do not quite know where we will end up. In
the meantime—we will have to do something in the
meantime—I favour the streamlined joining approach rather than
master trusts. That is the better solution and it is the one that would
have the least adverse impact on employers and their recruitment
policy. That is important. The less change that they have to make, the
better.
The
Chairman:
Do you have a response? No, so perhaps it is an
appropriate time to bring this part of our deliberations to an end. I
thank our witnesses—David Yeandle, Neil Carbery, John Cridland,
Ian Farr and Keith Barton— for their full and frank responses to
the many questions that they have been
asked.
We
have now had a relatively smooth changeover of witnesses. I welcome
warmly Adair Turner—Lord Turner of Ecchinswell—Jeannie
Drake and Professor John Hills, who are all from the Pensions
Commission.
Q
123
Mr.
Waterson:
Welcome to the final act, as it were, of the
commission’s work. I have two questions. First, does anything in
the Bill not sit comfortably with the conclusions in your report?
Secondly, there has been a lot of debate recently about means-testing
and the effects on at-risk groups. A consensus has now emerged that
everyone agrees that issues need addressing. Solutions to those
problems have been punted around, such as income disregard and fiddling
with trivial commutations. Do you accept that there is a problem and
have any of the solutions taken your fancy in recent months?
Lord
Turner:
Let me start with the first question. I shall
then see whether John or Jeannie want to add anything. Is there
anything in the Bill that does not fit well with our proposals?
Overall, the answer is no. It is a fairly complete enactment of what we
proposed. The only areas where it has some potential
divergence—it is potential rather than actual—is when
problems have emerged that we did not anticipate. We did not get to the
level of detail. We can come back to it later, but clearly the proposal
that the Bill has an enabling power on the Secretary of State to exempt
personal pensions from the need to auto-enrol was not something that we
had anticipated. We had not realised at that stage that there
might—indeed, probably will be—a problem under European
law about auto-enrolling people into personal pensions. We can come
back to our attitude to that specific issue later.
One other
more minor point that was in our initial proposals but is not here
relates to the conditions that make a scheme one that is valid to apply
to rather than a personal accounts scheme. We envisaged that there
would be a requirement for the level of contributions to be in excess
of 8 per cent. and for the administrative costs to be below a certain
percentage to ensure that, post the administration costs, the scheme
would be at least as good as the national scheme.
Those are the
only two areas in which there is a difference from what we anticipated.
Are there any others that occur to
you?
Jeannie
Drake:
No, I agree with that. I would also add that
as the Bill progresses its way through Parliament and additions are
made that detract from the simplicity or add to the cost of running any
new pension arrangements, that would work against the principles of
keeping it simple and keeping the costs and charges
down.
Professor
Hills:
I have nothing to
add.
Lord
Turner:
If I turn to the issue of means-testing, we
always recognised that, in our proposals on the state pension and in
the variant that the Government took forward, significant progress had
been made in reducing the role of means-testing. However, we have
clearly not eliminated means-testing from the state pension system. The
problem is that it is quite expensive to eliminate means-testing from
the state system. It is for those who say, “You have not gone
far enough” to come up with what they would specifically do to
get rid of the remaining element of means-testing and to work out what
that would cost. The issue, however, clearly remains whether the
remaining element of means-testing is a problem
when it comes to pay to save and incentives to save. It is important to
narrow down the potential range of concerns. I am going to make some
general points, and then suggest that you ask Professor Hills, who has
looked at this issue in more detail, to comment on it as
well.
It is
important to narrow down the problem in two respects. First, under the
present proposals for the state pension system, there will be a
significant proportion of people who are subject to a 40 per cent.
withdrawal rate of their savings credit during retirement as their
private pension income increases. However, we do not consider that
those people have a problem with incentives to save because the
withdrawal rate that they are subject to in retirement is offset by the
fact that the combination of the 3 per cent. employer contribution and
the tax relief contribution on the way in more than overcomes that. The
focus should be on those people who are subject to not just a 40 per
cent. rate of withdrawal but to higher rates of withdrawal and, in
particular, to the 100 per cent. withdrawal rate.
Secondly, you
cannot treat the fact that some people post facto will not have done
well out of saving as proof that it is a bad idea to advise them to
save. An analogy would be that if at the end of the year your house has
not been burgled, it does not mean that it was bad advice to buy a
household insurance that year. None the less, we have a social
commitment to ensure that, whatever mess people’s lives get
into, we will pick them up to a certain absolute level of income in
retirement. There will be some people whose life course means that,
when they retire, they will not necessarily get the benefit of the
saving that they have individually accrued. That is only a problem for
incentives to save if it relates not just post facto to individuals,
who are to a degree random, but to whole categories that we could have
predicted in advance. Even if we could define categories of people in
advance, by their home tenure, or their age or income, would it be
right to say that it was poor advice to suggest to them that they
should save?
What we need
to know is how big that segment is. Indeed, are there segments or
categories of people who are defined by those parameters and where
there is a high probability that they will be subject to such high
withdrawal rates in retirement that it would be poor advice for them to
save? Once we have worked out what the figures are, we must zero in on
one of two things; there are two possible responses. One is to ask
whether there is an affordable package of measures that removes the
danger for those categories of people, and the other is about whether
it is possible to define reasonable generic advice regarding the people
who opt out. Those are the general points I wish to make, and I suggest
that Professor Hills provides some more details.
Professor
Hills:
Obviously I agree with everything that Lord
Turner has said. It is important to remember where we have come from,
and the transformation in the position on prospective returns to savers
that the Pensions Act 2007 created, and how much you have all achieved
by passing that.
There are two
issues here. We should not leap from the possibility that we can all
construct a hypothetical case and argue in advance that people, because
of their particular circumstances, could get a rather low return if
they were enrolled into a savings scheme. We need to compare that with
how many people are identifiably in that situation and are really
affected by it.
Looking at the
issues that Adair just raised, first, it is important to remember the
treatment of the money on its way in. We are not only looking at what
happens when people’s savings come out; we need to think about
how much it cost to contribute something to their pension pot in the
first place. As Adair said, an important part of that for many people
has been the impact of tax relief and the employer
contribution.
However,
another group of people are important in the cases that we might be
worried about. They are the people who are on relatively low earnings
and who possibly receive tax credits or housing benefit—that
seems to me to be the most important issue—during their working
lives. I am sure that you all studied in great detail the appendix of
chapter 7 of our first report. That described some of the things that
happen to your tax credit entitlement, for instance, or your employer
national insurance contributions and so on. As the money goes in, many
of those people who we are worried about and who may end up on
means-testing in retirement, will, at least for a significant
proportion of their working lives, have been in the situation in which,
unknown to them, if they had made a bigger pension contribution, their
tax credits would be higher. In effect, it costs them very little to
contribute a pound into their pension pot and in all the calculations
that I have seen so far, I have not really seen that effect taken into
account very much. We need to bear it in mind.
We also need
to look at the most worrying cases. Some people on very low incomes,
who do not accumulate very much, might be caught by automatic
enrolment, because in a particular pay period in a good year, they come
within the scope of automatic enrolment. They will come within the
rules of trivial commutation: their pension pot will not build up to
more than £16,000, and in fact they will be able to draw it
straight back out again. The point about means-testing that it raises
is less important for them.
The people
whom one really needs to concentrate on are those who end up on housing
benefit in retirement. The most recent estimates that I have seen from
the Pensions Policy Institute, which I think you have been speaking to,
give a range of between 10 and 15 per cent of future pensioners who
could be affected by housing benefit. Given how steep the taper
is—65 per cent.—and given that those people are likely to
be on council tax benefit as well, it is hard to construct a high
return from that. However, within that 10 to 15 per cent.—and
the Department for Work and Pensions may have its own view on whether
those are realistic figures, but they are not anything higher than
that—some of those people would not have been within the scope
of automatic enrolment anyway, as their incomes are rather low. Some of
them are precisely the cases that Adair was describing where it looks
as if their lives were going fine, but something went wrong. Perhaps
they were an owner-occupier in a couple, the marriage split up and they
ended up as tenants in their working lives and on housing benefit. In
that situation, the state comes along and helps them out.
It would be
perverse to argue in advance that people should not make preparations
for supporting themselves because something terrible might happen to
them, and therefore they might need help. Then again, another
percentage of them will be people who will have been on means-tested
benefits in their working lives—for
instance, if they were tenants or on housing benefit in their working
lives. For reasons that I do not quite understand, you are allowed to
set half of your pension contributions against your housing benefit
entitlement and so, effectively, they do not cost you nearly so
much.
That leaves a
residual group for whom, with very detailed financial advice, you might
be able to identify that, in their working lives, they were not on
housing benefit or tax credit withdrawal, but they were highly likely
because of their individual circumstances to end up on housing benefit
in retirement. That will be a fraction of that 10 to 15 per cent., but
the difficulty is that it is a fraction that is hard to identify
without incredibly detailed advice and knowledge of people’s
circumstances such as what their marital position is and what
inheritance they will get. It would be very hard, without spending
hundreds and thousands of pounds on financial advice, to identify
them.
If that is
the problem and those people are so hard to identify, even within these
identifiable categories of people of a particular age, gender and
housing situation, it would seem a mistake to set up rules that would
deny the overall advantages to the group as a
whole—prospectively, we are expecting the group as a whole to
get quicker returns—that the Bill and the new mechanism set out.
There is an issue here in which it would be better if we had a little
bit more precision on the numbers of people who fit into the different
categories, but we should not run away from saying that there are some
cases that you can construct hypothetically where there will be a
barrier for broad groups of people.
Q
124
Mr.
Waterson:
That was a full answer, and I am grateful. It
may be beyond your current brief anyway, but have you had chance to
think about any of the alternatives being floated about disregards? You
mentioned trivial commutation. There is a view that a disregard itself
extends means-testing, but you have other things to do these days, so
you might not have got into that subject.
Lord
Turner:
In general, we had been attracted to looking
at whether if one had a greater level of detail on the problems that
John mentioned, one could then address those and alleviate them by, for
instance, changing the wealth disregard levels or trivial commutation
levels. It should certainly be something that people continue to think
about to see whether there is an acceptable cost for a package of
measures that at least alleviates some of those problems.
The issue of
whether you just shift the problem further up the income schedule
depends crucially on whether your disregards have cliff edges or not. I
think that I am right in saying that on the trivial commutation, it is
not a right of everybody to take £16,000 out of their pot and
non-annuitise it—the rule is up to £16,000 but when you
are at £16,500 you have to annuitise it all. We have the classic
problem of cliff edges— where you shift these things around and
you have another point where there is a high effective withdrawal rate.
That said, I still think that those issues are worth looking
at.
Q
125
Mr.
O'Brien:
We have had evidence over two
days now. The degree of consensus has been remarkable among the TUC,
the CBI, the organisations that support older people, various small
businesses and engineers
and others. They have broadly supported the consensus that you created
as a result of your report on pensions. Therefore, it would be really
useful to have on the record your view as to why it is so important
that these changes need to be made. What is your view about why this is
so
important?
2.30
pm
Lord
Turner:
Let me say something about the background of
the situation that we were dealing with and why we believe that these
changes are so important. The changes that we have proposed were, of
course, a combination of changes to the state system and to the private
system.
We
discovered a situation where the state system was heading towards being
more and more means tested, was over complex and was also—this
is not going to change—not going to provide sufficient for what
most people want in retirement. It is a baseload of anti-poverty
prevention, but not as effective as it should be. That has been the
case for many years in Britain. We have relied on the story that we
told ourselves: it was okay to have one of the least generous state
pension systems in the rich developed world, because we had the most
extensive system of private pension provision. Indeed, under both
Conservative and Labour Governments, the proposition was that that
extensive private system would not only continue, but would actually
grow, and a larger number of people would be covered by it. Probably
the single most important fact in our reports was that that was simply
not
occurring.
The
percentage of the private sector work force who have no pension
provision other than that provided by the state is significant and has
gone up. It has gone up from about 44 per cent. to 56 per cent. over
the past 10 years. To me, that was probably the most telling fact of
all those that we brought forward: 56 per cent. of private sector
employees were heading towards being totally dependent upon the state
in their retirement, but did not really understand what the state was
going to provide for them—in some cases, that state provision
was inadequate—but felt that they faced disincentives for
private savings because of the means testing in the state system. That
is why the core of what we proposed was at least to take the state
pension system and make it less means tested and simpler and fairer
than it had been in the past—there will always be debates about
whether one has been able to afford to go far enough in that—but
on top of it, to do something to make sure that the people who have no
private pension provision on top of the state do so in
future.
We
became convinced that that would never occur provided you relied on an
entirely voluntary and private sector solution. There were no tweaks to
the regulatory regime for selling or to the level of the stakeholder
cap that were going to achieve what policy had failed to achieve in the
past, which was to manage to penetrate that under-penetrated sector.
The only way to get to that sector was to have a system that had two
elements to it. One was automatic enrolment—we had to shift the
balance of inertia around, so that people had to positively decide to
opt out, rather than decide to opt in. Secondly, there had to be at
least the option of a national system that was going to achieve
economies of scale and, therefore, low administration
costs.
In
relation to the Bill, what we see as absolutely essential is a belief
that we need automatic enrolment and the national scheme that PADA is
now charged
with making available. We need both of those in order to make progress
into that 56 per cent. of the private sector work force who at the
moment are totally reliant on the state. That is what we see as
fundamental: automatic enrolment; and making sure that there is a
low-cost savings option, which means that people get to keep as much as
possible of the savings that they
make.
Professor
Hills:
We believe and continue to believe that there
is a great prize here. The reforms in last year’s Act and,
potentially, in this Bill, offer the opportunity to open up low-cost
savings for retirement to a group of people who opportunity to open up
low-cost savings for retirement to a group of people who have never had
that before, including people on low to medium incomes and a large
proportion of the female work force of the country. The ability to
create a single lifetime account that can cope with people’s
varied working lives in a way that does not put huge costs on to the
system—which is what happens within the existing
system—would be a great move forward. I think the motivation for
the kinds of ideas that are now embodied in the Bill lies in opening up
that entirely new opportunity, which this country has never had
before.
Jeannie
Drake:
One of our conclusions was that employer
engagement with pension saving would potentially be in irreversible
decline if one did not go beyond the current voluntary system. That is
why the contingent employer contribution is so important, because
auto-enrolment and contingent employer contribution as an inseparable
whole is a core element of the policy. It is also important to remember
that auto-enrolment and contingent compulsion on employers needs to
work, because reforms to the state system are gradually removing the
earnings-related element in the state pension provision. For that
reason as well, it is very important that the auto-enrolment and
contingent arrangements work. A very important part of this is the
issue of carers in particular, and those who participate in the labour
market on a broken record of employment. There would have to be a
combination of the state reforms in order that they could benefit from
the auto-enrolment and the contingent employer compulsion
arrangement.
Q
126
Danny
Alexander:
May I pick up on the point that Jeannie Drake
just made about employer engagement being in inevitable decline unless
reforms of this nature were put forward? How does that apply to the
question raised by a number of organisations in relation to this Bill
about the possibility of the levelling down of existing
provision?
Jeannie
Drake:
Levelling down has to be seen in two
dimensions. A lot of the debate has been around the employer
contribution level of 3 per cent., but participation levels are also
important. You want the number of people, as well as the level at which
people participate in pension saving. There are elements in the reform
package—such as the cap and the current transfer policy that has
been proposed, with a review in 2017—which are intended as
measures to inhibit levelling down. It is also important to remember
that even under the current voluntary regime, the evidence coming out
of the Association of Consulting Actuaries is that, among those good
employers that intend to continue to be good employers, the
contribution rate in their DC schemes has actually risen. Without the
new regime, under the voluntary
system, there are some good employers that would continue to be good
employers. That is certainly consistent with the DWP’s evidence
on employer attitudes.
In terms of
participation rates, of the 18 million to 19 million employees in the
private sector, around two thirds, I think, are not currently in
occupational pension schemes. There is no levelling down risk there;
they are just not participating in any scheme. Of those that do
participate, about 2 million are participating with an employer
contribution level of below 3 per cent., so the issue of levelling down
in terms of the contribution rate is for those approximately 4.5
million cases where the employer contribution is above 3 per
cent.
Those
employers will be in, what I call, the upper quartile of good employers
anyway. They will have good employment-policy reasons to remain good
employers and to consider the provision of good occupational pension
provision as part of their employment package. Although it is
necessary, as set out in the Bill, that one of
principles is that the reforms should not undermine good occupational
pension provision, which was always the intention of the
Pension Commission’s recommendations, you cannot eliminate all
elements of potential levelling down in part. However, those are not
reasons in themselves for not going ahead with the
reforms.
Lord
Turner:
I shall add to that to reinforce what Jeannie
said. We must recognise that there is at least some danger in some
sectors of levelling down, but I think that it is relatively small. The
net effect of what is being proposed in the Bill will result in a
levelling up. One must reiterate the point that 56 per cent. of
private-sector employers have, as it were, been levelled down to zero?
For them, the availability of a contingent compulsion on their employer
to put in 3 per cent., as long they accept automatic enrolment, will
represent a significant increase. There is a large segment in which we
will definitely have levelling up, not levelling
down.
Secondly,
as Jeannie suggested, there is a segment of the private-sector work
force where I do not think that there will be a levelling down. Large,
well-known companies, that are household names, competing for higher
skilled people, will not suddenly say, “Well, the minimum
national standard is 3 per cent., so we will come down to that”.
They have positions in the labour market that are not compatible with
that. I am convinced that there will be a large number of large
companies that will continue to provide, in some form or another,
pensions that are much better than the minimum
standard.
There
might well be a danger of levelling down among the sort of people who
have a contribution of 4 or 5 per cent. in a medium-sized firm that
sees the new standard and says, “That is what we will go
for.” It is that intermediate slice—not those providing
zero, where it is clearly levelling up, or the large slice of
higher-prestige companies. However, there is probably an intermediate
slice where there is a danger of some levelling-down. Having said that,
those are the people who, left alone, might level down to zero in the
future anyway. We have seen a gradual drift among those small and
medium enterprises away from the idea that they should provide any
pension at all. One could well see that in the future.
Certainly,
when we did our focus groups of small and medium enterprises, a lot of
them said, “Look, we don’t think that we get bang for our
buck from the pension provision that we provide. We think that our
employees
might prefer straight cash. So although we are providing something at
the moment, we might well not do so in five years.” I do not
think that it would be right to deny that there is some danger of
levelling down, but it should not be overstated. The question is what
we do to minimise that risk. We must try to remind people of what a
very sensible thing it is to get paid in pension contributions. Looking
at the level of relief to the employee and employer combined, including
the relief from employer’s national insurance—an issue
not often focused on—it is clear that they are a very tax and
national insurance-efficient way in which to pay people. We need to try
and get that message across in order to minimise the danger of further
levelling down. Overall, however, the Bill will produce far more
levelling up from zero than levelling down to some new minimum
standard.
2.45pm
Professor
Hills:
I simply endorse the point made about the
reasons why paying people through pension contributions is a very
effective way of remunerating them, which the larger and
better-informed employers know, which are reasons why there would be no
reason for them to go downwards, given that they have already done
those calculations.
However, it
will depend on what happens over the next four years. The climate of
opinion, both for employees and employers, will determine a lot of
those initial reactions. The Committee will have seen the initial
research that the Department for Work and Pensions has done on
immediate employer reactions to this, which as a starting point is
relatively encouraging. The immediate reaction of the majority of
employers is not to say, “Oh, well, in that case I am going to
level down and get out of what I am doing at the moment.” If
anything, it is slightly the reverse.
That is just
the beginning of the process, but it does suggest that, as we know,
that this is an area where people’s knowledge is very low, and
that a potential effect of the debate that is going to occur over the
next four years, assuming that the Bill is passed, is that there will
be much more attention to employer responsibilities. Some of them may
begin to realise that these arrangements are very much in their
interests, and that could even lead to some levelling up among some of
the people who are sensing a movement up, among the people who are
already there. I would be cautiously optimistic, although I agree very
much with Adair that that is not to say that there is not a danger
there.
The
Chairman:
To help witnesses and members of the Committee,
we shall complete this part of our questioning and evidence-taking at
3.15 pm. At least five other Members have so far caught my eye. I call
Alan Keen, who will be followed by John
Greenway
Q
127
Alan
Keen:
Fifty-six per cent. will have no private provision
pension. Roughly how many millions of people is that?
Lord
Turner:
It must be something like 12 million or so.
The private sector work force is 23 million or so, so it is about 12
million.
Lord
Turner:
They will predominantly be employed by small
and medium businesses. I do not have the precise figures here, though
they are in the background in the report. It will be small businesses
in the sense of people who employ five, 10, 15 or 20 people, but it
will also be lots of people in companies employing 250, some of which
provide nothing. Of course, it will also be people in large companies
who have chosen not to be in schemes that are available to them. You
will find those people in companies of all sizes, but the percentage
gets very high once you get down to small enterprises, say below 50
employees.
Q
128
Alan
Keen:
I have to admit that my knowledge of pension policy
has all been gained during the past week. I shall
concentrate on the mechanics. What are your greatest concerns about
getting small business to understand? We know how important it is to
all of them that their employees have the chance, but what concerns you
most? You said that you have focus groups from small businesses. What
did they say to
you?
Lord
Turner:
We held a number of focus groups with
individuals as individuals and also with some SMEs. We were trying to
understand their attitude towards providing pensions. What transpired
is that there is a large slice of smaller enterprises who do not think
it is any part of their business, to be blunt. That is why previous
attempts to make progress in that sector—for instance, through
the stakeholder proposals—were not going to work. Essentially,
there is a segment, however easy you make it and however much you try
to encourage it, that does not think that it is part of their business.
They are companies where there is no HR department. The head of HR is
the finance director, is the chief executive, is the owner. He or she
has a lot of other things going on in life, and one of the things that
they do not want to have to deal with is pensions.
Of course, in
that sector you will also find a lot of people who say, “I will
find it difficult to afford the 3 per cent. employee
contribution.” But we ended up believing that it is affordable
provided it is brought in at an appropriate time, and that there is a
segment of small and medium enterprises that will say, “Yup,
this is the way to go. What we want is somebody to tell us what to do
because we do not have the professional expertise to make a highly
tailored decision about what is appropriate for our workforce.”
So we have concluded that there is a segment of companies where you
have to have contingent employer contribution, auto-enrolment and an
easy-to-use national scheme because if you do not have those three
things they will not provide
pensions.
Q
129
Alan
Keen:
Have you thought about the mechanics of it? We
talked before you started to give evidence about how this will have to
be done not from central London but on a regional or even an area
basis. Short of going in and sending people to jail—it does not
matter what the law is—what is needed is constructive help from
people who understand how the system has to work. I asked the
employers’ representatives and they were reluctant to be
involved in giving anything more than straightforward information, let
alone in helping practically with the smaller companies. Who is going
to do that?
Lord
Turner:
There are two points there. First, many small
and medium enterprises do not want to be and will not be involved in
the job of advising on pension provision. They quite rightly recognise
that they have no particular competence to do that; they do not want
the liability and they want someone else to organise them. Their
attitude to pensions is that with the Pensions Bill they will have to
make a 3 per cent. contribution—hopefully more—but that
is it, it is not for them to administer it. In a sense that is
sensible. What that means is that one of the key jobs of PADA is to
design a system which, in terms of the way in which the paperwork flows
and the money flows, is as simple as possible for small and medium
enterprises.
I
am sure that one of the key concerns is “Is this thing going to
be administratively simple enough to work?”. I would be
surprised if you had not heard that if you have listened to the
Federation of Small Businesses and others. We believe that it can be
made administratively simple, provided there is a clearly defined set
of processes. But the core will have to be that the flow of any generic
advice will be directly from the pension provider—in many cases
the national scheme pension provider—to the individual. It will
not typically flow through the employer because it is simply something
that they do not want to be involved in, and they know that they have
no particular competence to be involved in
it.
Alan
Keen:
I will not press you further. Obviously it is up to
other people. Thank you again for the work that you have done to get to
this
stage.
Q
130
Mr.
Greenway:
I would first like to say to Professor John
Hills that I am sure that I did study chapter 7 of his report but I
cannot entirely recall right now what it
said.
I
want to take you back to your initial conversation on the issue of
means-tested benefits and whether it is worth people saving or not. It
flows on in a sense from the answers that Lord Turner gave to Alan
Keen. One thing we are trying to grapple with is a scenario in which
the employer quite rightly will not want to give advice—I think
we are likely to conclude that that must be the case—but
individuals will nevertheless have to make judgments based on the
information provided. That can only be done in a generic information
sense.
Among
some of the earlier witnesses—the elderly charities in
particular, on Tuesday afternoon if I remember correctly—there
was concern that it has to be simple and straightforward, yet the
questions in people’s minds are complex. You both referred to
relatively low earnings, very low incomes. What do we mean by that? We
will have to produce some numbers. Everyone who has been before
us—the Minister is the only one left—has said that they
think the scheme can work. He must be very happy about
that.
Q
131
Mr.
Greenway:
It really would be a turn-up for the books if
the Minister suddenly said, “We think that
this is a lot of nonsense”. He will not say that. Everybody
supports it. I said on Second Reading that my understanding of the
industry is that people’s goodwill
towards it is admirable, but is it your view that we can devise a system
of generic information, which is not a too elaborate Christmas tree of
questions by which people can judge whether the scheme is for them or
not? There will be some for whom it clearly will not
be.
You
mentioned housing benefit. For a person aged 62, who is retiring in
three years’ time and is already on housing benefit and who does
not own his own house and is on a very low income, the answer is
clearly no. However, at the other end there will be people—I
appreciate that my question has been long, Sir Nicholas. This is my
final
comment—
The
Chairman:
I was about to suggest that you might apply for
an Adjournment debate on the matter. You could ask our witnesses a
question.
Q
132
Mr.
Greenway:
Should not we leave people with the question in
their minds that that it is why they should contribute to a pension,
not why they should
not?
Professor
Hills:
You have made an important distinction between
generic information and detailed advice. The secret of much of this is
that the moment we get into anything that suggests that individuals
should seek a detailed, financial health check that would be hard and
expensive to carry out, all of the advantages that we are trying to
achieve of opening up a low-cost system to people would be
lost.
You
are then into what you can achieve by way of a huge improvement in the
level of overall public understanding of financial matters in general,
and pensions in particular. The provisions of the Bill will bring to a
head something that was, in my view, a national issue anyway. When
asked regularly, “How would you describe your knowledge of
pensions?”, one of the things that struck me as we at the
commission did our work was that the number of people who said in
response each year, “little or none” had increased. It is
not an area in which many people think themselves expert. Moreover, it
is possible that some people who think themselves expert are not. The
effect of that has been to reinforce the inertia that has kept people
out of making pension provision. There are a lot of other things that
people would prefer to think about than the niceties of making pension
contributions.
In
order not only to set up the scheme, but make it one that is popular
and seen as a success, and something that, by and large, the word on
the street is that people would be silly not to be part of it, there
has to be a significant improvement in people’s understanding of
the basics of what happens when they contribute to a pension, such as
how they are likely to live and the different resources that are
available to
them.
I
would not underplay the difficulty of the overall task. Such matters
would have to be done by the time the scheme starts, but we should have
been doing them in any case. Within that, the guidelines of
circumstances in which people might want to think carefully about
opting out would have to be quite broad. By the time that we start
giving people detailed ready-reckoners and asking, “How much do
you expect to inherit from Aunt Madge? What are the precise chances of
your marriage breaking up?”, we will have lost it. There may be
some
groups to whom it could be said, “Think very carefully if you are
in such a situation” but, going back to my earlier answer, those
groups are probably rather
restricted.
Lord
Turner:
Let us consider helping
those who might want to stay out to know that they should stay out. It
will also be important to establish the fact that a huge swathe of
people should obviously stay in. For people on average, not low,
earnings and who own a house, the likelihood that the system is bad for
them is very low indeed. We have to create a realisation that many
people, not just on low incomes, but bang in the middle of the income
distribution, who are not saving for a pension. It is absolutely clear
that it makes sense to do
so.
3
pm
Jeannie
Drake:
One small point to add—it is important
that it is run on a generic information basis. We not only want the
personal accounts system to work, we want good occupational pension
provision to work as well. I think that 25 per cent. or so of current
occupational trust-based schemes operate on an auto-enrolment basis.
You have to have a generic information arrangement that employers are
happy with. They will not move into complicated advice systems.
Whatever the approach on generic information, it has to work across all
occupational pension schemes, not solely personal
accounts.
Q
133
Andrew
Selous:
You stress, as many of our witnesses have, a need
for simplicity in the administration for this to work. I understand
that. We heard from some witnesses yesterday that many of us have
“untidy lives”—people come in and out of work,
they may be self-employed for a while, or they may have some previous
pension provision, then perhaps that will stop and they will go into
personal accounts—for example, what will happen to that? It
struck me that there are five years before the measure comes in. I am
sure that the three of you would want people to make provision now, if
they are not making provision. Mindful of the need for simplicity,
which I understand, what do you say about dealing with those issues?
Following on from that, you were talking about the importance of people
understanding the importance of pension saving. I agree with you. Do
you think that part of achieving that might be some sort of annual
statement showing the value of your employers’ contributions
year-by-year?
Lord
Turner:
On the second question, the answer is yes. We
said in the report that within the personal accounts
system—within the national scheme—one should be aiming
for an annual statement. We were very struck when we visited Sweden
with what is called the “orange envelope”. The statements
all go out at the same time of year, which manages to create a national
discussion in the financial pages of the press about how well the
pensions are going. It is quite a model; you see both how much money
you have and a series of estimates of what that might buy you as an
annuity—on certain assumptions as to the rate of
return—at different ages. It is a very useful communication for
people to understand when they get to their late 50s and they think
about the retirement age how very different their pension will be if
they retire at 63, 65 or 67. The annuity rates move quite dramatically
as you make those different decisions. There are ways of making the
communication helpful in educating people. Of course, it will not be as
simple
as it is in Sweden, because there it is all going through one national
scheme, therefore that statement is the person’s consolidated
account. We will not have that in the UK. Frankly, it is a trade off
between the desire to keep flourishing private pension provision going,
so that employers and individuals can be in something other than the
national scheme and not interfering with the existing provision. That
is a good objective, but clearly has the downside that somebody who
goes through a set of employers throughout life may end up with several
different pots of money, rather than one. I think I am right in saying
that one of the crucial issues in the Bill is what exactly are the
rules about the transfer of existing pots of money from one scheme into
another to enable people to consolidate their pension pot. That issue
is still open, because the Bill establishes the power of the Secretary
of State to decide those things. That is an important remaining issue.
I have a preference for allowing as much consolidation of pension pots
as possible. I speak as someone who now has about six different pots of
pension provision, and I am still trying to persuade one or other of
those groups of people to accept the transfer from all the others so
that I do not have six bits of paper. It is an important issue, and on
whether we can make it easier for people to consolidate their pension
pots, the details are yet to be decided.
Professor
Hills:
To reinforce your first point about keeping it
simple, I have a feeling that as the Bill progresses, you and your
colleagues in Parliament will all have particular enthusiasms for
additions to the general provisions in order to help people in
particular circumstances or to meet some particular need. I urge you
all to be very careful about that, and to avoid, so far as you can,
building bells and whistles and extra provisions into what is intended
to be a simple, low-cost system of savings.
You will have
heard separately from the Personal Accounts Delivery Authority, and I
am sure that one of its concerns is to get the legislation set up so
that it can be launched with the most straightforward administration.
That will be a big task in itself, and what may seem like small,
incidental additions could rapidly create the need for individual
interaction such as telephone calls for people to check their position,
which would rapidly increase the cost base of the people contracted to
carry out the work. So, what you said at the beginning was absolutely
right.
Q
134
Nick
Ainger:
I shall try to be brief. We have heard from a
number of witnesses about the different levels of risk, as they see it,
in levelling down, and you gave a formidable presentation about why you
thought that the risk would be lower rather than higher, as some
witnesses said. The ACA, when it gave evidence, said that it had a real
fear about the issue. Other than what you have said about the Bill,
which should go some way to reducing the opportunities for employers to
level down, have you looked at the ACA’s proposal for
conditionally indexed schemes? Would that be another method of reducing
the risk of levelling down further? Should it be included in the
Bill?
Lord
Turner:
Let me comment, and then I suspect Jeannie
Drake may want to say something, too.
The issue
that the ACA is dealing with is not closely related to levelling down
per se, because we are primarily dealing with larger companies that
have DB schemes,
and there is a danger that when they think about reforming them to make
them affordable, and the risk acceptable to the company, they will move
entirely to a DC scheme without thinking about the intermediate. The
vast majority of companies that do so will not level down to 3 per
cent. They are the sort of companies that take an existing DB scheme, a
final salary scheme, which costs them 20 per cent. of salary, and put
in a DC scheme with perhaps 8, 10, 12 per cent.—but something
above the minimum.
The issue is
less about levelling down to the national minimum contribution, and
more to do with risk-sharing. Those companies feel that they have a
choice between two states of the world: one is to continue to provide
salary-related schemes, DB schemes, in which almost all risk, including
the longevity, investment and salary progression risk of the
individuals, resides with the sponsoring employer, and none resides
with the employee; the other is to close the scheme and open up a DC
scheme in which almost all risk resides with the employee. Even if the
contribution is reasonably generous, for example 10 per cent., the
risks have nevertheless been shifted.
The arena
that the ACA is talking about here is not small and medium-sized
enterprises. These are large household names. What is the nature of
their provision? Do they go from very generous and very risky to
reasonably generous but with all the risk on the employees’ DC.
Therefore, can we do things to create more intermediate options, such
as hybrid risk-sharing techniques? That is not an issue on which the
commission took a collective view. John and Jeannie may want to comment
on that.
From a
personal point of view, I am sympathetic to the ACA’s
suggestions in this respect. It strikes me that we have a fairly odd
form of regulation at the moment. There is no requirement on an
employer to provide a defined benefit scheme, but if they provide such
a scheme, it has to be one in which pretty much all the risk resides
with the employer. We have made it difficult for them to provide a DB
scheme that shares the risks but leaves it open for them to close the
existing DB scheme and open one in which all the risks are shifted to
an employee. There is something prima facie slightly illogical about
that form of regulation. If it was the case that we had a compulsory
requirement for DB schemes, you might significantly regulate how good
that DB scheme should be. If there is no requirement for an employer to
provide anything, it is slightly odd to put too much of a regulatory
burden on
that.
Lord
Turner:
I think that it is something that should be
looked at. I do not think that it will produce a revolution, but
without the creation of hybrid risk-sharing schemes, the trend of DB
provision in the private sector will be either a slow or a rapid
decline, and the legitimate debate is between these. There is at least
a chance that we could see the development of intelligent risk-sharing
approaches. I would certainly look at ways that might make that
easier.
Jeannie
Drake:
My immediate point on the conditional indexing
is that it should be looked at rather than put in the current Bill.
That is where my point of view differs. Where pension provision in the
private sector is increasingly DC—there are fewer than 1 million
active members of
open DB schemes in the private sector and therefore the risk is shifted
to the individual—there is merit in looking at, and
facilitating, ways by which employers can re-engage with risk sharing.
It is very important to be conscious of the action and the effect in
the sense that any measures that are introduced should have the effect
of increasing new forms of risk sharing and not simply accelerating the
decline in the current level or nature of defined benefit provision
because the existing legislation and regulation already allows various
means of risk-sharing. If you look at the railway pension scheme and
British Aerospace’s scheme, risk-sharing mechanisms are already
in place.
On the
railway pension scheme, it is sharing the total cost of the combined
benefit pension provision. In British Aerospace’s scheme, it is
in relation to increasing life expectancy. Therefore, it is not that
there is not a facility, and that it is not already being used by some
companies to do more innovative forms of risk-sharing. However, I would
not want to see a specific legislative provision on conditional
indexing at this stage. It would be better if there was a comprehensive
look at the issues of risk-sharing. For example, to look at the better
models and at what would better motivate behaviour. When you are
introducing risk-sharing into a defined benefit scheme, you have to be
careful. There is a DC world and a DB world. In risk-sharing in a DB
world, you have to be careful what risk you are putting on the active
members in relation to pensioners and deferred liabilities, which is an
issue I found when I looked at the railway pension scheme. It is not an
argument against the principle of looking at innovative ways, it is
about asking whether there is a need to rush on this one specific
measure at this point without taking a measured look. It is not that
there are not options open to employers who do want to
risk-share.
3.15
pm
There
are also other considerations that should be reflected upon. You have
to think about what it means for transfer values of conditional
indexing and at least reflect on what it means for the pension
protection regime. I would want to give those involved in that the
opportunity to ask about giving protections on defined benefit
provision. It is not an argument against the principle of risk-sharing
or considering whether it has merit, it is asking why you would to take
one particular provision and make allowance for it in the Bill, when
there are already some in place that employers are using. I would
counsel standing back and considering what are the most effective means
and what will have the greatest motivational effect on
employers.
The
Chairman:
If Julie Kirkbride has a very short question
soliciting a very short answer, I will allow
her—
The
Chairman:
It is, in fact, just after 3.15 pm. On behalf of
the Committee I thank our witnesses, Lord Turner, Jeannie Drake and
Professor John Hills, for the expert and very helpful evidence that
they have provided. Thank you very much
indeed.
3.16
pm
Sitting
suspended.
3.24
pm
On
resuming—
The
Chairman:
I have allowed slightly more than five
minutes—perhaps mostly for my benefit—which is using the
huge authority that rests in the person of the
Chairman.
We
now come to the last part of our evidence taking today. I say to our
witnesses that I understand that there is an agreement across the
Committee—all the Whips have agreed—that we might finish
a little earlier than is scheduled, but that is up to the Government
Whip, who may seek to catch—[Interruption.] He is here.
It is up to the Government Whip, who may seek to catch my eye to move a
motion. If he does, I shall give the matter proper consideration before
I put it to the
Committee.
We
are very pleased to have the Minister of State, Department for Work and
Pensions, Mr. Mike O’Brien, to give evidence,
together with Caroline Rookes, director of private pensions in the
Department for Work and Pensions. I welcome you. Nigel Waterson, the
shadow Secretary of State for these matters, will put the first
question.
Mr.
Waterson:
That is a bit Ruritanian, Sir Nicholas. I am a
shadow Minister of State—we must get these things
right.
Q
136
Mr.
Waterson:
Clearly, Government members of the Committee do
not want to ruin their career prospects by quizzing the Minister, so it
falls to us to start the ball rolling. Could I begin with a couple of
questions? I have four points in all, if that helps, Sir Nicholas.
First, how confident are you, Mike, that personal accounts will be up
and running in 2012? You have made it clear you have given very bullish
instructions to Tim and his colleagues at PADA, but how confident are
you really that it can all be done in time, on the basis of the advice
you are
getting?
Mr.
O’Brien:
We have four years to deliver this,
and the advice I am getting at the moment is that that is entirely
achievable. If something changes in the future, obviously we will look
at that advice, but the advice I have at the moment is that by 2012 we
will be in a position to deliver personal
accounts.
Q
137
Mr.
Waterson:
Thank you. Do you accept that when the dust has
settled and the smoke has cleared, if, as well as an increase in the
number of savers, there is not an overall increase in the amount of
savings in this country, personal accounts will have been a
failure?
Mr.
O’Brien:
The objective is to get more people
saving, so that they are making proper provision for their retirement.
We are talking about large numbers of people. There are various
figures, but we heard from the Pensions Commission that up to 12
million people are doing inadequate or no effective saving for their
retirement. We want more people to make that provision, so that
they have the opportunity of a better retirement. That is the whole
purpose of the core of the Bill. Our aim is that we should have not
only more people saving, but a very substantial increase in the amount
of saving. Our estimates are up to £10 million. Indeed, it is
not just our estimates. The PPI—the Pensions Policy
Institute—has suggested it could be up to £10 billion of
extra
saving.
Caroline
Rookes:
I do not think I have anything to add. Thank
you,
Chairman.
Q
138
Mr.
Waterson:
I have two related points. First, why is the
contribution cap figure of £3,600, adjusted for inflation, not
in the Bill? Secondly, do you accept the broad principle, in setting up
PADA and its successor body, of a level playing field and no public
subsidy?
Mr.
O’Brien:
First, £3,600 is a 2005
figure, which will be annually uprated as we deal with issues in terms
of the economy, inflation and other factors. Therefore, we want to
ensure that we do not enshrine in statute something that we then plan
to amend year on year. The figure that we in due course use, in 2012,
will be a figure that we will have to determine, given the
circumstances that arise during the next four years. For those reasons,
enshrining that figure in legislation would not be wise, but we would
intend to say that very clearly the policy is that that is the figure;
we do not intend to increase it other than by the increases in the
level of inflation. Your second question was about a level playing
field.
3.30
pm
Mr.
O'Brien:
In terms of public subsidy, our aim is that
personal accounts should operate in the same way as most other pension
schemes. They would not have a level of public subsidy which would be
unacceptable. Indeed, it is the role of the members to pay for the
operation of that pension scheme. We have been clear in saying that we
believe we can get the costs of running the scheme down to 0.3 per
cent., although I made it clear in my evidence to the Select Committee
that it may well be 0.5 per cent., at least initially. We think that we
can keep the costs low and that the costs of setting up the scheme
could be met primarily from the private sector. Obviously, there are
ways in which schemes are able to get money from the private sector to
set up those
schemes.
We
have made provision, particularly in terms of PADA, which is
essentially an advisory body and a preparation body. It will have a
termination date, and will not actually run personal accounts. Personal
accounts will be run by the personal accounts board, under an NDPB.
PADA will therefore have a limited life span to just beyond 2012. PADA
is receiving public subsidy and is responsible for the set-up costs of
working out what the investment strategy will be and identifying how
computer systems will be set up and how information will be dealt with.
I am very clear that it is publicly subsidised because this is a public
policy issue. PADA is responsible for advising Ministers on the set-up
of the organisation, and it is right that there should be a public
subsidy for PADA. Once we move into the new system, our aim is that it
should operate on a self-funding basis.
Q
139
Mr.
Waterson:
Just to clarify, am I right in saying that in
the last legislation, we specified a figure of £23 million for
PADA? I think that is right, from memory. Is there any suggestion that
that amount will be increased between now and PADA’s life coming
to its natural
end?
Mr.
O'Brien:
We are not planning to increase it at the
moment; it is about £21 million for 2007-08. We will look at
what costs PADA will need in the future, and it has an ability to raise
funds if it needs to do so. PADA will have important obligations in
terms of setting up a structure, and we want to ensure that it can
carry out that role effectively. I want to make sure that once we get
beyond that and into the personal accounts board and having an NDPB
running a pensions scheme, we will have an organisation that is
primarily
self-funding.
Q
140
Mr.
Waterson:
We can return to this issue, so I will leave it
there. I have one final question. If the ACA is right that it could
make a difference to a number of DB schemes to bring in the
flexibilities involved in risk sharing, such as conditional indexation,
and if all this is trying to do is provide a possible route for people
that is not obligatory and that they can choose for commercial reasons,
why do I get the feeling that you and the Government as a whole are so
unenthusiastic about
it?
Mr.
O'Brien:
I think you have the wrong feeling. We are
very interested in those ideas. The question is not whether we are
interested in them, but whether they are fully developed enough to form
part of the Bill. I share the views of the Pensions
Commission—of both Jeannie Drake and Adair Turner. Adair said
that he thought the ideas very promising. We need to explore the detail
of them, but Jeannie added the caveat, which was well worth making,
that although they are interesting, there are already shared risk
opportunities out there for various pensions schemes. Before we start
to legislate, let us look at some of the issues in relation to them,
identify the better schemes and identify some of the legal changes that
need to be made. The advice I have received is that the ACA are a bit
optimistic in saying that all this requires is a few amendments.
Actually, this may well be quite a significant venture into rewriting
some of the pension legislation. If we must do that, then it is best
that we do it properly, investigate these issues and see whether there
are particular things we need to do and the best way of doing
them.
I would want
not only to have some analysis done of this, but also to have a period
of consultation and discussion about exactly how it would be done. I do
not think you are right in saying that we are unenthusiastic. We think
this is a valuable idea which needs to be explored further. We would
want to explore it further with the various stakeholders in the
pensions industry, identify what needs to be done and see whether there
is an opportunity for legislation some time in the future. I cannot
give a definite view about when that would be, but I heard Ian
Farr’s suggestion that it ought to be relatively soon. I cannot
give a
guarantee.
Mr.
O'Brien:
I have been working on it. I am not sure
whether I would identify myself as “our finest minds”,
but I thank you for the compliment.
Mr.
Greenway:
Jeannie Drake from the Pensions Commission
mentioned at least two other schemes—the rail scheme and the
British Aerospace scheme—that have found other ways of doing
this. Is it feasible to ask your Department to try to publicise the
information as to how this can be done so that we can then have a suite
of ideas on which to consult, which the TUC and the elderly charities
asked for on Tuesday? I would add that I personally think the issue is
urgent, because the number of defined-benefit scheme members,
particularly new members, is fast
diminishing.
Mr.
O'Brien:
With respect, it will not be us—the
Committee—that consult. I would want to look at this in good
time. Officials are talking to the Pension Protection Fund and other
stakeholders to see what the implications of this would be, as it might
well have a significant impact in relation to the PPF and its levy
payers. We want to work through these ideas and see what their
significance is. It may well be that in a few months we and the various
stakeholders can come up with a structured examination of them. I do
not want to commit to a short time scale, because there are issues
here. Most importantly there are quite complex—potentially very
complex—legal issues that need to be explored properly. Some of
those issues are quite sensitive. Let me put it as delicately as I can.
Some people have suggested that some of the ways in which the current
shared-risk systems operate have not yet been tested in the courts, and
it may be that we have to look at how the courts might respond. Then
the question is how we need to legislate to ensure that they respond in
an encouraging
way.
Danny
Alexander:
In the evidence we have heard, there seems to
have been agreement that there are—at the very least—some
people for whom it may not pay to save in personal accounts. What
estimates has the Department made about how many people this might
apply to? Part of the Minister’s reply will be that that is very
unpredictable; has he identified particular groups that this
particularly applies to?
Mr.
O'Brien:
I associate myself very much with the
comments made by the Pensions Commission in early evidence and not just
with that body, but with Dick Saunders of the Investment Management
Association, who
said:
“the issue of means
testing is an important one, but one that needs to be
kept in perspective. When you hear some commentators on the Bill, you
would get the impression that anyone going into the scheme would be no
better off, and indeed possibly would be worse off, as a result. All
the analysis that has been done suggests that that is far from the
case.”——[Official Report, Pensions Public Bill
Committee, Tuesday 15 January; c.
27.]
I agree
with that. Mr. Saunders gave a particular example, which I
will not repeat, but it is worth refreshing your memory about it,
Danny, because we are looking at the vast majority of people
benefiting: that is the result of our work on this. Our figures, in
terms of our research, are slightly lower than the Pension Policy
Institute’s in respect of those who might
not.
I
associate myself very strongly with the evidence that we heard from
Professor John Hills, who has probably done more examination of the
issue in this country than almost anyone else. He said essentially, if
I can paraphrase it, that we may find in due course, at the
end of the process, that there are some on pension credit who do not
realise the return that they would have hoped for, but it is difficult
to predict who those people will be. It is possible that some who are
older and are automatically enrolled in a pension scheme might develop
a pension pot that is quite small and therefore would be better off on
pension credit, but they could, by and large, take the benefit of
trivial commutation, which would enable them to take a pension pot
out—not only their contribution but the taxpayer’s
contribution and the employer’s contribution—up to
£16,000 and, in relation to pension credit, there is a disregard
of £6,000 on that. That would probably be the way in which they
would deal with it if they were to lose
out.
The
difficulties of predicting in terms of much younger people were set out
expertly by John Hills. You could probably have some element of
prediction if you spent tens of thousands of pounds individually,
talking to each individual and trying to predict what would happen. But
this is not practical, because the Pension Commission has also said
that the key to making this a success is that it is simple and does not
have to have vast amounts of money spent on giving advice to
individuals.
I
shall mention how I envisage this operating in terms of advice, just to
move on so that you can look at how somebody would get advice. People
would be dealt with either through personal accounts or through one of
the current pension providers. The employer would say, “I want
to have a pension scheme.” Many employers will decide to go to a
private sector provider, as they do now, and others will decide to go
to personal accounts. They now provide information in relation to the
product that they have. Personal accounts would do the same thing. That
would be very basic information. Then there would be a referral to a
website or whatever facilities that they have to give advice. A person
who has a particular issue would then be able to get some basic
information, access to further information and, if needed, access to
some generic advice. But we are dealing with such a basic, simple
product that, providing we keep it simple, we can ensure that there is
no need for the sort of expensive detailed advice that would really
seriously damage personal accounts, as Professor John Hills was talking
about.
The
circumstances of many of those who we are talking about here are
difficult to predict. We are going to do research on what information
people will need. We will have advice from PADA in terms of what advice
it intends to provide on personal accounts and, obviously, the various
insurance companies and other pension providers will be providing
information on their own products. That is the basis upon which people
could make a decision about whether they want to remain in an
auto-enrolled system, whether personal accounts or another system, or
to opt
out.
3.45
pm
Q
141
Danny
Alexander:
The point that concerns me is about the advice,
on to which you rightly moved the conversation. Despite what has been
said, it remains unclear what range of advice will be available and of
what the generic advice will consist. I agree that the scheme needs to
be kept simple and that the involvement of PADA, and of the Personal
Accounts Board, in due course, has to be kept to a minimum, for cost
reasons.
Various
proposals are on the table, however, including those being considered
by the Thoresen review, for wider-ranging advice, not just on pensions,
but on wider financial matter as well. Do not forget that
someone’s decision about whether to enrol at a particular time
might be based on their wider financial circumstances, such as, for
instance, large credit card debts. I am looking for a sense from you
that broader thinking is going on, not about advice provided by
PADA—your point on that is correct—but on wider advice
that would involve more than a website providing some information.
People should have access to a system, whereby a conversation can take
place over the phone or, when necessary, face-to-face—it does
not necessarily have to involve hugely expensive personal financial
advisors. That could be done through voluntary organisations. It would
allow people to look into it in more depth and to make an informed
decision. Simply providing information, however detailed, via a
website, would not enable them to do
that.
Mr.
O'Brien:
I accept that. We need to return to the
important distinction between information and advice, although it is
not always easy to make it in practice. However, it is important that
we do so for the purposes of this discussion. We do not expect the
Personal Accounts Board to give advice; we expect it to give
information. There are sources from which people can get a degree of
person-to-person advice about whether to do something. The Pensions
Advisory Service can provide a degree of advice, and the citizens
advice bureau has financial advisors. Otto Thoresen is looking, on the
Government’s behalf, at how we can best provide generic
financial advice, and we expect his report later this year. It will
enable us to take this discussion much further forward and to look at
how we can provide the level of reassurance that you seek for people
who might be concerned about whether to opt in or
out.
Q
142
Miss
Julie Kirkbride (Bromsgrove) (Con): If almost everybody
will benefit from taking out a personal account or pension of some
description, why do we not make it
compulsory?
Mr.
O'Brien:
We considered that and
took the view that it would probably be burdensome, because some people
might choose to make alternative provision or to invest in property and
risk the property market. Others might have made other personal
provision and want to have a personal pension, rather than an
occupational pension. When the Pensions Commission looked at this, it
took the view that automatic enrolment would provide automatic entry
into an occupational pension scheme and the ability to opt out, which
would provide an element of choice. Nobody would be forced into it.
They would not have to remain, although inertia to some extent will
play a part; some will come in and just not bother to opt out. However,
that happens at the moment.
On my
conversation with Danny Alexander and the issue of forcing people in, I
should mention that currently many people are automatically enrolled
anyway. One in six people in occupational pensions schemes today are
automatically enrolled. Those are often some of the better schemes,
although they do not include just the well-provided ones. Some pension
schemes for people who are relatively low-paid, such as some people who
work at Tesco, are automatically enrolled into a pension scheme and
able to make contributions. It is possible
that some of those will end up in pension credit, but most of them do
not and believe that they will benefit from being involved in the
scheme.
It is not
right for the Government to give a guarantee. It is not right that the
Government should say that everyone, whenever they get involved in a
pension, is always going to be compensated by the Government. It is an
investment and it has some investment risks attached to it, and people
know that, but it is right that the Government provide some sort of
safety net for them.
In terms of
forcing people into such a scheme, I do not think that that is
desirable or the way forward. Certainly, that is not where the
consensus that we have developed over recent years lies, and it is a
remarkable consensus—you have seen it in the evidence that you
have heard over the last couple of days. We have everyone from CBI to
the TUC to organisations that represent the elderly to small businesses
all taking the view that we need to move forward with these sorts of
provisions. Part of that consensus is that we have automatic enrolment
and that we should not move into a position of forcing people into
pensions.
Q
143
Miss
Kirkbride:
In answering Nigel’s point earlier, you
quoted the Pensions Policy Institute on its more favourable projections
that there could be £10 billion extra going into pension funds.
At the same evidence-taking sitting, it also said that its worst-case
scenario is that £10 billion less is going into pension funds
because of levelling-down. Would you still consider it a success
because more people have some form of private saving, even if there was
less money going in, or do you think that that would be a
problem?
Mr.
O'Brien:
The core objective is to get more people
saving. What do you define as a success? Our success would be the best
possible outcome, but there are various variations in terms of success.
We want to see more people saving and increased amounts going into
saving that would benefit investment more broadly, but what we most
want to do is ensure that in years to come, people who retire, who are
often those today who are on low and moderate incomes who have not got
a pension provision, will in future have made a pension provision for
themselves. It is important that we get more people investing and that
we get towards the higher range of that figure, but our projections
have been from about 4 million to 10 million people.
The optimal
sums in terms of annual extra saving would be about £10 billion
extra. That would be a good level of savings. In terms of the lower
figures, we do not think that it is likely that there will be any
reduction in levels of saving. On the contrary, we are having large
numbers of extra people saving. The only circumstance in which the most
pessimistic and most unlikely scenarios you describe would happen is if
there was such a degree of levelling down, as has been discussed in the
previous evidence, that we would see more people saving but overall
saving less. The chances of that happening on the level that you
suggest are remote. We have to work on what is likely. Many things are
possible and there are things that are likely. It is more than likely,
it is probable, that we will see a significant success as a result of
this.
Q
144
Miss
Kirkbride:
We all hope so, but sometimes
we cannot always predict. We had a little bit of discussion in the
evidence-taking sitting about the deadweight of people who are
auto-enrolled but who are migrant
workers. Is it the view of your Department that this is something that
we are just going to have to put up with? There could be an awful lot
of people who were auto-enrolled who then go and live in another
country because we have a significant number of migrant workers in the
UK. It would clearly add to the administration cost, but is that
something that we have to put up with in order to have the advantages
of auto-enrolment, or is there a way forward in the future?
Mr.
O'Brien:
Remember that anyone who is saving is
contributing money into the scheme; money which in due course will be
invested. We are very happy to see that money invested here in the UK,
whether in private sector pension schemes and
remember—
Mr.
O'Brien:
It depends on whether they are small sums,
and how significant they are. Some of them may be quite considerable,
it depends what pension scheme they are in. The assumption that your
question makes is that those sums will be in personal accounts. That
may not necessarily be the case; it is not now. There are people saving
in private pension schemes now, whether in trust-based schemes or
insurance-based schemes, who are investing in those UK schemes. That
money in turn is invested by UK companies and, not always but very
often, our industries benefit. Investments tend to be made
internationally in the global economy and often our economy will
benefit from that and the money will come back.
There will be
administration costs but, in terms of personal accounts, those costs
will be very low—about 0.3 per cent. in the long term. In terms
of the evidence that you have already heard, particularly from business
organisations—John Cridland from the CBI gave evidence
earlier—the issue of how much the administration costs is not
the biggest problem. The issue is rather the 3 per cent. investment or,
in the case of many businesses, a much higher contribution than that.
Some employers make quite substantial contributions, well above 3 per
cent. Many current employers employ migrant workers, who may well be in
highly-skilled industries—computing and elsewhere—and
they may well be making much higher contributions than that to their
employees’ pension scheme. Those contributions are going into
UK-based pension schemes and being invested on. It is possible to
over-worry about that problem.
It might be
the case that in due course, the issue of no transfers in and no
transfers out of personal accounts could be looked at again. We believe
that the whole issue can be reviewed in 2017. At the moment a number of
stakeholders, particularly some of the insurance companies, take the
view that it would be better not to have transfers in and out. There is
some concern that transfers in and out personal accounts might be a
problem. Therefore, as part of the settlement, as a compromise, we have
said no transfers in, no transfers out. However, that starts up in 2012
and by 2017 it will have been operating for five years. People know
what is going to happen and there is some evidence from a number of the
people that we have heard recently, which suggests that, particularly
if there are small pension pots—Tim Jones made this
point—it may well be that
some people would wish to transfer that elsewhere. I am not
unsympathetic to that, but the time to review it is in 2017, not now.
We had a consultation, we talked to large areas of industry and more
broadly with the stakeholders, and we have a broad-based agreement
which, as you have seen, is enshrined in the Bill. That is part of the
way forward. In 2017 we may look at that again or we may not, but it
will not be a decision for us during the course of the
Bill.
Q
146
Miss
Kirkbride:
We are waiting with eager anticipation for your
financial assistance scheme amendments, and I wonder if you could give
us some more details and some reassurance for the many people who are
interested in this, that it will match the PPF criteria.
Mr.
O'Brien:
We have said that it will not be exactly the
same as PPF, but it will provide similar benefits to those 140,000
people who lost out. Just before Christmas we were delighted to
announce that we were able to deliver justice for them and we will try
to do that as quickly as possible. There are some issues that I want to
put into the Bill, but what I have sought to do, and I will look for
the co-operation of the Opposition in this, is to put in regulation
where I can. With the co-operation of Members of the House we should be
able to get regulations through more quickly. I want to bring forward
regulations to enable payments to commence at 90 per
cent.,—which is one of the key things—from the normal
retirement age rather than 65. Some of them have an earlier retirement
age. That should be brought through as quickly as possible, and I
propose to bring forward the draft regulations in March. Normally I
would need to have a 12-week consultation on that. I propose a two-week
consultation period, and I shall look for the views of the Opposition
Members and others. There is broad consensus that we should have the
change, and I hope to bring regulations to the House in early May with
a view to getting them through by the Whitsun recess, so that we can
then gear up our officials to start payments. That will be the first
important
instalment.
4
pm
I
shall have to bring forward more detailed regulations over a longer
time, because they will be much more complex and will require further
consultation. I want to put a number of amendments into primary
legislation. None will be substantial, but probably the most important
one concerns the definition of a qualifying member of the financial
assistance scheme. That will be important for identifying people in
underfunded schemes, and the assets that we will take over. Trustees
will have to agree that we take over their
assets.
Lest
anyone is of the view that no one loses, some accountants and lawyers
who advise various pension schemes who will not receive the funding
that they would otherwise have received may sometimes be tempted to
give advice to trustees and say, “Well, for technical reasons,
you don’t want to do it this way.” We need to reassure
trustees and to give confidence to those who make the transfers that
they can make them and that those in their schemes will
benefit.
A
number of schemes have a problem. One that springs to mind is Desmonds
in Northern Ireland, the difficulty being that it does not fall within
the PPF criteria or that of the financial assistance scheme. We
may need to table amendments to clarify that, but I shall meet Mark
Durkan and others to talk through some of the issues. They have asked
for a meeting, and I hope to be able to give them some clarity on how
we move forward. I may be able to bring forward legislation to deal
with that in terms of the financial assistance scheme
also.
Q
147
Miss
Kirkbride:
That is very clear. So we can tell the people
who know that they are in the financial assistance scheme that if they
are due to retire at their scheme retirement age by June, they will
have their
money.
Mr.
O'Brien:
Yes and no. As with all things associated
with FAS, the matter is more complicated. Last September, I said that
trustees could make payments from the point at which someone retired
from their scheme. Some trustees have taken advantage of that, but not
many. We must give them some encouragement to make payments straight
away, otherwise people will not get their money. I want them to have
their money, and we may have to provide some legislative
encouragement.
4.3
pm
Sitting
suspended for a Division in the
House.
4.18
pm
On
resuming—
Q
148
Mr.
Greenway:
From my point of view, I have a few tidying-up
points. Most of what I wanted to ask has been
covered.
You
made the point about the opt-in, opt-out review in 2017, and you and I
had a conversation about this the other day, so I entirely understand
the pressure you are under from both sides. I wondered whether you
might like to say a few words about your intentions on lump sum
investments. On Tuesday afternoon, we heard some quite polarised
comments. Understandably, the Association of British Insurers and
others feel that taking lump-sum investments without advice is not a
good thing. On the other hand, people might want to start saving and to
put in a lump sum in 2012. I would appreciate your views on
that.
Mr.
O'Brien:
The first thing to say is that people today
have lump sums, and they decide how to invest them. Some people take
advice, and some do not. That is their right. The problem is not one
that will present itself exclusively because we have created personal
accounts or because of auto-enrolment. The question for us is, in a
sense, the first point you raised. Do we have our lump sum payments in
during the course of the running of personal accounts? Also, what about
at the start? A question was raised during evidence about whether there
should be an initial ability to make a payment in of about
£10,000.
Mr.
O'Brien:
Indeed. There are two separate but important
issues here. We have asked PADA to consult and come back to
us.
I have some
sympathy with the point about the initial payment, but I am concerned
that it should not come from other pension schemes, because that is
part of the
arrangement that we have with the pension groups. If it were, say, the
case that someone wanted to save for a pension scheme now, in an ISA
perhaps, and then wanted to be able to put that money into a personal
account once they were set up, there is an argument for
that.
We
want to be careful about the concerns that some in the industry have
about levelling down—you have raised issue that several times.
What we are not looking for is people transferring out of perfectly
good and, in some cases, better schemes into personal
accounts—transferring lump sums. So, we need to look at this
with a bit more care. I have not ventured a conclusive opinion on it.
The right approach is to say that these are important issues, we want
to consult on them, we are not going to put them in the
Bill—other than as a power—and then, in due course,
Parliament and the various stakeholders will be able to express a view
on whether the £10,000 should be allowed as an initial payment
or legacies should be able to be put in late
on.
The
issue at the moment is that, as part of the consensus, we have
developed an agreement that £3,600—2005 figures—is
to be the amount that is paid in each year. If it is to go beyond that,
we need to have wide consultation and a full understanding of how it is
going to happen. Then Parliament should, in due course, be able to look
at that issue in the round, with the benefit of
consultation.
Q
149
Mr.
Greenway:
But judging by what you say, one possible
restriction might be for people who are not in a pension fund now or
for people who do not have access to a pension fund now, other than as
a stakeholder. I suspect that all of us would think that if people know
that they are going to be in a personal account scheme with lower costs
and so on, it might be better to wait. That might be one
restriction.
On that
basis, and again thinking about where the lump sums might be invested,
do you have a feel as to how many funds it is realistic for PADA to
have in the personal account regime without again introducing the
complexity of people perhaps needing advice as to which fund to go
into? This issue concerns me.
Mr.
O'Brien:
I share the concern, but let me come back to
that
point.
Let
us deal with your first question. An earlier question was whether we
should have £3,600 or the equivalent on the face of the Bill. I
gave an answer on that, but a second answer could have been that, if we
were to make a decision to have a lump sum payment in, or a
£10,000 figure, we would then come up against a statutory block,
because the £3,600 would be in the Bill. Therefore, it is better
not to have it there in quite that way. However, we have given a clear
commitment that, as a matter of policy, that is the sort of issue that
we intend to deliver
on.
In
terms of the number of funds, I share your concern that we must not
have undue complexity in the variety of funds available for people to
choose. There needs to be a level of discretion. When I asked Tim Jones
about this, he suggested, if I remember rightly, that there would be a
default fund that everyone agrees on, but that there then would be a
number of others. My personal view, although it will be a matter for
PADA to consult on and the Personal Accounts Board to make a
decision on, is that there should probably be a handful of funds with
perhaps one or two beyond that— perhaps sharia funds or
something to do with the environment. Some people want higher-risk
investment. There has been the suggestion that we should have various
named types of account linked to particular commercial pension schemes.
I am somewhat sceptical about that, but let us consult on it and let
PADA give advice. In due course, a decision can be
made.
Nearly
all the evidence that we have received is that the key thing is
simplicity. If we do not get that simplicity because we have such a
variety of choices, not only might we confuse some people, more
importantly we will add to the cost. That will mean that some people
might not invest when we want them
to.
Q
150
Mr.
Greenway:
Unscrupulous smaller employers
who might feel encouraged to persuade employees to opt out and thereby
save money are a matter that has come up during our evidence sessions.
I have not thought this through myself yet, but I wonder whether you
share my sense that, by making it absolutely clear that employers do
not give advice but only information, there might be a means of
ensuring that it is illegal under the Bill for them to advise people to
opt out. It is your clear intention that they should not be allowed to
advise people to opt out so might that not be one mechanism that we can
think and talk about in
Committee?
Mr.
O'Brien:
We have provision in the Bill that restricts
employers’ ability to do that, but not the provision that you
suggest. Your question is essentially whether we should ban employers
from giving advice. I am reluctant to do that, because it may well be
that some larger employers decide that they want to give advice from
independent sources to their employees. They may well, as I suspect
some do now, employ an independent financial adviser, or a number of
them, to give
advice.
Mr.
O'Brien:
Yes, they do, but in future employers will
often decide to just bring their employees into the pension funds that
they have now. The idea that, in 2012, everyone will suddenly sign up
to personal accounts is just wrong. No doubt millions will do that, but
many employers will say, “Look, we’ve got 30 per cent. of
our employees signed up into x company or x pension fund, and we are
just going to use that as the one to auto-enrol into. It is a good
scheme, we have a good, long-standing relationship with it. We make a
good contribution to it.” It may well be that some of those
employers, if they are particularly good employers, want to provide
proper independent advice and employ someone to do that. I do not want
to block that from being done, because on the face of it there is
nothing wrong with that provided that it is done
scrupulously.
I am
sceptical about the suggestion that we should have in the Bill some ban
on advice, not least—I say this as a lawyer—because the
difference between information and advice is easy for us to discuss in
the abstract but in practice might not be so straightforward for an
employer, or for personal accounts and commercial operations to
determine. If they did an advert saying, “This is a really good
scheme”, would they be giving advice? We need to be a bit
careful about being too prescriptive. Let us make it simple and
straightforward for employers, so
that they can sign up and let us not frighten away the better, more
capable employers who can provide high-quality advice. At the same
time, we can ensure that most employers know that they are not in the
business of giving advice; they are perhaps in the business of passing
on information that comes from either personal accounts or a commercial
operation, so they will not put themselves in a position of giving any
advice at
all.
Mr.
Greenway:
Sir Nicholas, the Minister has left open the
possibility that we can discuss this further in Committee.
Mr.
O'Brien:
We can discuss many things, and no doubt we
will.
I remind our
witnesses and Committee members that I am obliged to bring the
evidence-taking to an end at quarter to 5. Three other Members have
caught my eye. I call Nick Ainger.
4.30
pm
Q
151
Nick
Ainger:
I have two questions. First, on the discussion
that we had about levelling down and the introduction of greater
flexibility in risk-sharing, could you not introduce an enabling clause
that would give you the time to consider and consult on the range of
risk-sharing options, and then bring forward detailed legislation in
the form of regulation?
Secondly, and
completely unrelated, the Select Committee on Work and Pensions asked
the Government to consider the idea of auto-enrolment for the
self-employed, and you responded by saying, “No, they will have
to opt in.” Why was that decision taken?
Mr.
O'Brien:
In answer to the first question, we do not
know the impact that primary legislation may have on
the various structures of shared risk which Ian Farr has identified.
Others have different schemes from those which the ACA has proposed,
and we have already heard some evidence about the various schemes.
Therefore, we would not, by means of a power in the Bill coupled with
regulations, be able to deal with all the problems that we probably
would have to deal with if we were to move towards shared risk—a
new, middle way of shared risk.
The issue is
not just about statute, but about case law, which can be complex. There
can be specific and detailed issues about the way in which a pension
scheme operates, and although regulation might well provide for some
ability to overrule it, regulation would not necessarily be firm
enough. On pension funds, and particularly on trust law, we are talking
about complex and detailed case law that requires a lot of examination.
The lawyers who advise me, and myself as a lawyer, are very cautious
about saying that we can undertake such work.
On the second
question, about whether there should be auto-enrolment for the
self-employed, who would auto-enrol them? They would only have to
auto-enrol themselves, in which case they would be opting in. Would you
say that everyone who is self-employed was obliged suddenly to join a
pension scheme and then opt
out? It would be somewhat burdensome for every window cleaner and small,
self-employed business if they had to do that, particularly if they
were setting up their business for a short period.
We would
provide the opportunity and probably the encouragement for the
self-employed to get involved, not particularly in personal accounts,
although they are there if they wish, but in saving for their future
and for a pension. Not enough self-employed do so. It would not be
advisable to auto-enrol them and create an administrative hoop for them
if they were running a small, temporary
business.
Q
152
Nick
Ainger:
But they are paying their class 2 national
insurance stamp. Is there not a way of using that system? Most are
paying that through direct debit, I guess. Is there not a way of
encouraging them to, in effect, auto-enrol when they pay their class 2
stamp?
Mr.
O'Brien:
Auto-enrolment is an obligation, not just an
encouragement.
Mr.
O'Brien:
We have looked carefully at that and the
issue of the self-employed. I am happy to encourage as much as we
reasonably can people to make future provision for themselves. However,
the variety of people who run small self-employed businesses is so
great that we should leave it up to them, and not try to impose a
straitjacket in the form of a provision that they have to have and to
create another barrier to them setting up a small business for a short
period. I would rather say, “We encourage you to make provision
for your future pension. We will make it as easy as we can. You can get
involved in personal accounts and we will encourage you to do that if
that is the right thing for you.”
There is an
added problem, particularly for the self-employed. Personal accounts
are something that they would have to consider very carefully, because
they will not benefit from the employer putting in the additional 3 per
cent. They will have to put in the funding themselves. Therefore, there
is no incentive to open personal accounts, and there is a £3,600
cap on the annual contribution. They would want to think about whether
they should go into a private or commercial scheme. We want to say to
them, “A personal account is there for you. We encourage you to
make provision, but there are other commercial opportunities for you to
make provision not only in the future, but
now.”
Q
153
Andrew
Selous:
May I take you back to an earlier point? You
mentioned the possibility of a sharia fund and an ethical fund. Some
people, for example, do not like to invest in tobacco companies. Others
might not want to invest in companies that trade extensively in Burma
at the moment. Will there be provision for such
people?
Mr.
O'Brien:
That is a matter for PADA to advise upon. As
regards to how personal accounts develop over the longer term, it will
be up to the Personal Accounts Board to determine what further options
it wishes to introduce. Opportunities already exist in the commercial
market for people to have particular kinds of investments. If people
have a view about where they want to put their money, I do not think
that we should create a system of personal accounts that will have a
multiplicity of choices. As I have already indicated to John Greenway,
the costs of doing that would be substantial. We need to keep the costs
low, the product simple, and the level of choice limited. People will
have choice and whatever else they want in the private sector. We are
creating a default system and a limited number of further options if
there is a particular market that we know to be significant. If people
want to go for a very narrow type of investment product, they will have
to go to the commercial
sector.
Andrew
Selous:
I am slightly surprised at that answer given that
you have already mentioned sharia and environmental funds within the
personal accounts scheme. Perhaps we should leave it
there.
Mr.
O'Brien:
What you were talking about went much
further than that. I can see that those are both areas in which there
is an obvious significant market. When you start talking about much
narrower markets, we should be very careful about creating
multiplicities of
choice.
Q
154
Andrew
Selous:
Moving on to another area. As regards to
employers, particularly small employers and the mechanism by which they
are going to make the payments, I understand that the PAYE system is
not an option; the computer cannot cope. You are obviously the expert
on that as your officials can advise you. In order to help small
employers, is there any possibility that these payments could be made
along with PAYE? I do not think that it could all be on the same form
but it could be two parts of the same form to streamline this process
and make it as administratively easy as possible, particularly for the
smaller employers.
Mr.
O'Brien:
I suppose that the straight answer to that
is that we may be able to create such an option. What I am a little
cautious about doing is saying that we should create a level of
preference for personal accounts that is not shared by commercial
operations that are also in that market. There are a number of
insurance companies, pension funds and other organisations that are
already operating in the low income and moderate income area, and they
are dealing primarily with medium-sized employers. If you create the
type of opportunity that you described, where personal accounts could
be treated in a particular way that did not apply to commercial
operations, it would give personal accounts a level of preference. I
would want to think about that issue with a great deal of care.
Therefore, the straight answer to your question is that that might be
possible, but it is not just the issue of administrative practicality
that must be considered but that of commercial advantage. I would want
to consult very carefully about whether we wanted to move into that
area.
Let me just
say that one of the things that I did, particularly regarding
compliance procedures, was to get reassurance from Her Majesty’s
Revenue and Customs that we would be able to access some of its
information to ensure that compliance procedures were carried out by
the pensions regulator. That is quite an important achievement, which
will enable us to get some of the benefits of having access to the
information that HMRC has in relation to who is an employer. At the
same time, however, we would not necessarily need to use that
information to carry out that work.
Mr.
O'Brien:
Before you ask another question, let me just
say in addition that Caroline has just told me that I ought to make it
clear, in answer to your earlier question, that we need to reassure
employers that we would want to see these contributions dealt with as
part of a payroll activity. Whether that is done in the way that you
have identified is another matter, but it should be done as part of
payroll activity, so that it is easy and straightforward and the costs
are
low.
Q
155
Andrew
Selous:
Can you tell the Committee what the Government are
doing at the moment to deal with the issue in Europe about the
auto-enrolment of personal pensions not being possible? It strikes me
that that should be a battle that it is possible to win, given that the
European regulation was really intended to stop auto-enrolment of group
personal pensions. Will you put some effort into trying to change that
regulation?
Mr.
O'Brien:
I think that there is a possibility of
winning that battle in the long term, but the long term does not
necessarily mean by 2012. The difficulty is that changing EU
regulations requires a high level of agreement. There is a review of
some of these regulations in 2011 and that may well be an opportunity
to say that we have a particular issue here, that this situation is not
an intended consequence and that we need this regulation changed. We
would have to get agreement on that change, but again it could well
take us a year or two to get all the procedures in place. As you will
know, things do not necessarily happen overnight in the EU. Therefore,
the chances of getting a change in the regulations quickly are
limited.
We
are assessing the extent to which the advice that we have been given,
which is that there is a serious problem here, is as certain as we have
so far been advised. We are looking at this issue again.
The easy way
to deal with this problem would be to auto-enrol everyone; I think that
everyone would say that that is fair. The difficulty is that consumer
protection measures from the EU, which everyone, on the face of it,
thought were a good idea—it was thought that you should not have
inertia selling into commercial organisations—did not anticipate
that we would be setting up this method of pension collection.
Therefore, we have considered whether there is a way of dealing with
the fact that these rules are in place in our current law, without
contravening European law, so that in due course we can perhaps make
changes that we need to make in European law. In the meantime, we are
considering whether it is possible to create an exemption that enables
us to get, effectively, the benefits of auto-enrolment without using
that particular scheme.
You have
heard from the coalition that gave evidence, and also from the Pensions
Commission, that there is serious concern about an exemption, and I am
very conscious of that concern. They say that auto-enrolment is the
absolute key here. The better approach would be to get an exemption
that provides us with the benefits of auto-enrolment but enables
insurance companies, who are particularly affected by this, to continue
to sell to companies with whom they have a long-term relationship. I do
not yet know—we are discussing it with them—whether we
are able to create such an exemption and whether it would fit
effectively within the legal constraints we are operating in. It would
be good if we were able to create that exemption.
[Interruption
.]
Further
consideration adjourned.—[Mr.
David]
Adjourned
accordingly at fifteen minutes to Five o’clock till Tuesday 22
January at half-past Ten
o’clock.
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