Clause
2
Continuity
of scheme
membership
Mr.
O'Brien:
I beg to move Government amendment No. 116, in
clause 2, page 2, line 4, after
jobholder insert
, without ceasing to be employed
by the
employer,.
An
employer will need to be able not only automatically to enrol people,
but in certain circumstances to terminate participation in a pension
scheme. The circumstances might well be involve ceasing to employ
someone, so we thought that we should make it clear in the legislation
that if someone is no longer employed, the obligation to continue to
have them automatically enrolled in the pension scheme ceases. That was
not in the original Bill, but when we considered the point we thought
that we should make that explicit in case employers are in any doubt
whether they are obliged to continue making contributions after an
employment has ceased. The purpose of the amendment is to clarify the
duty not to terminate active membership of a qualifying scheme, which
does not apply when the action concerned involves the cessation of
employment.
I hope
that the Committee will support the amendment. It is a
business-friendly amendment to ensure that current employment law and
practices regarding the end of employment are not fettered by unrelated
pensions
obligations.
The
Chairman:
Before I call the hon. Member for South-West
Bedfordshire, I would like to point out that the experiment with
explanatory statements is continuing and that this is one of the Bills
involved. Therefore, you will see after the amendment the explanatory
statement. Personally, I hope that all members of the Committee find
the explanatory statements helpfulI certainly
do.
Andrew
Selous:
This is a brief Government amendment, with which
we agree. It is reassuring to find that the mighty Government machine
with its expert advisers occasionally gets things wrong. If my hon.
Friends and I were to table amendments that the Minister told us were
not technically correct, we would not take that as a stunning rebuttal,
given that even Ministers, with all the systems at their disposal,
occasionally get things
wrong.
The proposed
amendment is entirely sensible and provides important clarification, as
far as employers are
concerned.
Amendment
agreed to.
11
am
Andrew
Selous:
I beg to move amendment No. 11, in
clause 2, page 2, line 4, leave
out , or make any
omission,.
This
is a brief probing amendment to clarify exactly what sort of omission
the Government are talking about in clause 2(1). It is important to
provide such clarity here, given that once someone has enrolled, they
remain a scheme member. It is not clear in my mind what the employer
might omit that would be either a problem or an offence under
subsection
(1).
Danny
Alexander:
This is a useful probing amendment to press a
point about what sort of omissions the Government have in mind. Some
omissions occur by accident and, while they will be prohibited by the
phrase in the Bill, employers will want to make good their omissions
straightforwardly and quickly. Equally, removing the reference to
omissions, as the amendment proposes, would allow scope for
unscrupulous employers to act by stealth and fail to carry out their
obligations. By removing a reference to an omission, employers could
fail to carry out their obligations and make it seem like an accident,
which would get round some of the provisions in this Bill. That is my
concern about the amendment, but I am interested to hear the
Ministers response to the points raised by the hon.
Gentleman.
Mr.
O'Brien:
What are we seeking to ensure that the employer
does not omit? The sort of omission we are talking about is if an
employer fails to tell the pension scheme about the up-to-date details
of an employee, which might be accidental. This will be a fairly
light-touch regulatory regime, so the employer could be reminded and
then provide the details. If the employer wilfully defaults, however,
we cannot deal with it, unless we have this wording.
The phraseology means that
employers will be obliged to do what employers who enrol people in
pension schemes are normally obliged to dothey are obliged to
provide information not only to the employee but to the pension scheme.
The employee will get the basic information that they are enrolled and
with whom they are involved. They will know what their pension scheme
iswhether it is a personal account or some other
schemeand the pension scheme must also be given up-to-date
details on the employee, as and when the details change. That will not
be onerous, and we do not intend the provision to result in employers
being subject to intervention by the state. The objective is to ensure
that the employee reminds the employer that there is an omission and
that the employer deals with it. If not, the matter could be reported
to the appropriate authorities, and the employer could be reminded
again. The obligation is not meant to be unduly onerous, but it is
necessary for the purposes of the Bill. There need be no fear of
accidental omission, but there needs to be an obligation to ensure that
there is no deliberate
omission.
Andrew
Selous:
That is exactly what I hoped to provoke by way of
response and clarification by the Minister. I assure the hon. Member
for Inverness,
Nairn, Badenoch and Strathspey that this is a probing amendment, which I
do not want to press to a
Division.
I beg to ask
leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn
Question
proposed, That the clause, as amended, stand part of the
Bill.
Andrew
Selous:
I would be grateful if the Minister were to tell
the Committee what the Governments intention is in relation to
the prescribed period mentioned in subsection
(3).
Mr.
O'Brien:
The Governments view is that the
prescribed period should be immediate: an employer should enrol an
employee in a pension scheme when a period of employment starts. There
are, however, exceptions if there are exempt schemes to which
particular rules apply. We are anxious not to cause problems for
employers who make contributions well in excess of the minimum required
with automatic enrolment and who have an ongoing pension scheme that
operates very well. Such employers should be able to continue with
their schemes, and it may well be that in such situations it is
possible to continue with the rules that operate at the moment.
However, if the employer does not have a pension scheme, they will be
obliged automatically to enrol employees to the minimum standard from
the first day on which they are employed. That should be the way in
which we
proceed.
Question
put and agreed
to.
Clause
2, as amended,
ordered to stand part of the
Bill
Clause
3
Automatic
enrolment
Danny
Alexander:
I beg to move amendment No. 78, in
clause 3, page 2, line 18, leave
out from reached to end of line and insert the
age of 50.
I
want to use this probing amendment to discuss one of the central issues
of this Bill: the questions whether and for whom it does or does not
pay to save in a personal account. By adding the words the age
of 50, this amendment addresses the question, which has been
raised in both oral and written evidence, of the impact of those aged
over 50 at the time of automatic enrolment. I stress that the Liberal
Democrats strongly support the principle of automatic
enrolment.
The Bill is
clearly directed at a large target, including people who work in the
private sector who are currently not making any provision for their
retirement. In the oral evidence, particularly that given by Adair
Turner and the other members of the Pensions Commission, the size of
that grouppotentially some 12 million peoplewas made
clear. The potential benefits of the Bill for a large swathe of that
group are therefore abundantly clear, and I certainly do not seek to
question that. However, there are some people, though it is difficult
at this juncture to know how many, for whom the question whether it
will
pay for them to save in a personal account for their retirement is at
least an open one. That question relates in particular to how, when
they want to decumulate and take as a pension the pot
of money that they have accumulated in their personal account, that
pension interacts with whichever means-tested benefits they are in
receipt ofpension credit, for example. We know from previous
pensions legislation that by 2050 there will be somewhere in the region
of 30 per cent., by the Governments estimate, or 40 per cent.,
by the Pensions Policy Institutes estimate, of people in
receipt of pension credit, and the taper is even steeper for housing
benefit.
A particular
issue relates to people over 50. They will potentially enrol in a
personal account late in their working life, and they may therefore
have only 15 years, 10 years or even five years in which to accrue
savings in their personal account pot. The questions that I have
highlighted about how relatively small amounts interact with the
means-tested benefits system are particularly acute for that
group.
I draw the
Committees attention to the written evidence submitted by the
PPI regarding its assessment of the risks for various groups. The
institute broke down the risk into low, medium and high risk of
personal accounts being unsuitable. A medium-risk group are single
people in their 40s and 50s with low earnings and full working
histories. A high-risk group, although they would not be auto-enrolled,
which is an important caveat, is single people in their 40s and 50s in
2012 on low-to-medium incomes who are
self-employed.
There
are particular potential risks for those over 50 who enrol in personal
accounts in terms of whether or not they would receive enough money
back to make it worth their while. Later, we will discuss other groups
and how the advice and information regime that is put in place around
personal accounts can help people to make
decisions.
I also draw
the Committees attention to other evidence. Help the Aged, for
example, also made the point that it is important to ensure that it
pays to save for all those who are auto-enrolled. Help the Aged drew
our attention to those people whose state pension records are
incomplete, those whose private pension fund value is low and those who
are still renting their home in retirementwe will come to the
final point later. Help the Aged believes that more needs to be done to
protect people in those
scenarios.
By tabling
the amendment to lower the auto-enrolment age limit, I seek to probe
the Ministers intentions, particularly with regard to those
aged over 50, in relation to measures that he might have in mind to
ensure through advice, information or changes to the Bill that such
people are protected or advised not to get into a situation in which
they start saving in a personal account only to discover in retirement
that it has not been worth
while.
Andrew
Selous:
I am grateful to the hon. Member for Inverness,
Nairn, Badenoch and Strathspey for explaining his amendment. On the
face of it, it is a pretty blunt instrument with which to try to bring
about the effect that he has
discussed.
11.15
am
We are moving
the state retirement age up to the age of 68, so we would be talking
about knocking out 18 years, potentially, of earning contributions. For
many people at lower wage levels earlier on in their working life,
these are very important years of contributions into their personal
accounts potcontributions that would make a significant
difference to their lives in retirement. It is probably for that reason
that the Equality and Human Rights Commission was worried when they saw
this amendment and urged Committee members to vote against it, if it
were pushed to a vote. In fairness, the hon. Gentleman has said that
that is not his intention. He has raised the whole issue of when it
pays to save and I think we will have further debates on this later on.
I am happy to see that this is purely a probing
amendment.
Mr.
O'Brien:
The hon. Member for Inverness, Nairn, Badenoch
and Strathspey said this was a probing amendment and I am happy to
respond to it on that basis. It is true that there is concern about the
point at which it pays to save. One of the areas that some of the
stakeholder groups have raised is people over 50. Someone on median
income of about £24,000 would be making contributions into a
pension of about 8 per cent.: 4 per cent. from the employee, 3 per
cent. from the employer and around 1 per cent. from tax relief. It
would take someone on that income about 11 years to get a pension pot
of up to £16,000. A pension pot of less than £16,000
could be taken by way of trivial commutation. The result is that people
in their 50s who have been savingproviding they do not go above
the £16,000are likely to be significant beneficiaries of
this sort of pension scheme. Far from them being losers, they are
likely to benefit from being able to take a lump sum and will also
have, in terms of their pension credit, a disregard. Many of those who
are automatically enrolled would actually benefit even though they are
over 50 years of age.
However, what of those who are
auto-enrolled, do not realise that problems could arise and have
pension pots beyond £16,000? They would be able to take 25 per
cent. of the pension pot in a tax-free lump sum; they are making a 4
per cent. contribution, so about half the contribution was theirs. They
would then be able to receive the remaining three quarters of their
pension pot by way of income. So it is the case that even they would be
in a position where they would be able to benefit to some extent from
the contributions of both the employer and themselves.
Perhaps this is not the time to
have the wider debate on the extent to which it pays to save, because
this is a narrow amendment. But as far as people over 50 are concerned,
our view is that the majority of those are likely to benefit. There may
well be some who, in due course, might fail to benefit, but we are
looking at a period into the 2020s before that is likely to arise to
any significant extent, so the opportunities to deal with it over the
longer term are
evident.
I have some
wider points that I wish to make in relation to the debate on whether
it pays to save, but perhaps I will save those for another
amendment.
Danny
Alexander:
I think, as the Minister says, we will have
further opportunities during the course of
this bill to debate the broader issues more generally, and on that basis
I beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Andrew
Selous:
I beg to move amendment No. 13, in
clause 3, page 2, line 27, leave
out subsection (5) and
insert
( ) Subsection (2)
does not apply if there are prescribed arrangements under which the
jobholder is entitled to become an active member, with effect from the
automatic enrolment date, of a qualifying scheme which is a personal
pension scheme of a prescribed
description.
( ) An order will
be made under this section to prescribe the terms under which it is
applicable, and the basis on which its application may be withdrawn
with respect to specific scheme providers or
employers..
The
Chairman:
With this it will be convenient to discuss
amendment No. 12, in
clause 3, page 2, line 27, leave
out may and insert
shall within three months of this
Act receiving Royal
Assent..
Andrew
Selous:
Amendment No. 13 is a probing amendment which
seeks to press the Minister on how we are going to deal with the vexed
issue of what are referred to as either group personal pensions or
workplace personal pensionsGPPs or WPPs.
It is important to put on
record the extent of GPP provision at the moment. The excellent impact
assessment produced by the Department tells us that in 2005 there were
3.3 million employees who were members of workplace personal pensions,
of whom 2.1 million were receiving employer contributions of 3 per
cent. or more. The value of total contributions to workplace personal
pensions was around £6.7 billion in 2006-07. By any measure,
this is a substantial part of the current pensions saving
landscape.
I know
that the Minister will not want to do anything within the Bill to
undermine what is good provision and is for many peoplefor
those 2.1 million workers, in any caseabove the minimum
employer contribution limit laid down in the Bill. There is a real
danger, as far as new employees are concerned, of levelling
downof employees being offered less good pension provision and
less than a 3 per cent. employer contributionif we are not able
to find a means of dealing with the current European Union constraint
on the UK, which prohibits auto-enrolment of employees into
GPPs.
We had a
roundabout discussion in the evidence sessions on what we could do
about this. The Minister may have alluded to the fact that there are
three possible solutions. Most of us, I think, would like the EU to
amend current legislation to enable auto-enrolment into GPPs. It seems
perverse, given that it was not the original intention of the
Commission or of the European Union to forbid workers from being
enrolled into good workplace personal pensions, that we have this
extraordinary situation. This has nothing to do with being pro or
anti-European. I think that many of us on both sides of the Committee,
and from all parties, would like to think it possible, in a
well-functioning Europe, where there have been some unintended
consequences of legislation, that we have
good enough relations with our European partners to go there, explain
the situation and obtain for the UK some form of derogation.
I cannot believe that we do not
have enough friends or influence within Europe to achieve that sort of
result. I press the Minister on this point, and would like to hear what
the Government intend to do. Neither of the other solutions put
forwardinvolving master trusts or streamlined joining with a
focus on achieving good participation levelsis perfect. Both
have been attacked or criticised as potential solutions to this
particular problem by major players within the industry. If the
Minister gets up and wrings his hands and says that good as our
relations are with our European partners, it will not be possible to
amend the distance marketing directive and the unfair commercial
practices directive before 2012, we need to hear now, or certainly on
Report, his preferred means of ensuring that we do not undermine and
level down this very significant and much-appreciated part of the
current pensions
landscape.
There
are a diversity of views within the industry and among older
peoples groups and consumer groups as to whether the Minister
should go down the master trust route or the streamlined joining route.
Of all the briefs I have read, there seemed to be quite convincing
arguments about streamlined joining, provided the participation levels
are high. It is for the Minister, however, to tell the Committee how he
intends to sort out this particular problem and I look forward to
hearing what he has to say in response.
Danny
Alexander:
Before I address this amendment, I would like
to say to the Committee that if they wish to refer to my constituency
using the word Inverness, I shall not be offended. I realize it is a
tongue twister, much though I am grateful to the hon. Member for
South-West Bedfordshire for his repeated efforts.
This amendment raises an
important issue. It is carefully constructed to draw attention to a
genuine difficulty which the Minister has been working hard to try to
resolve. There are a number of conflicting pressures. One of the things
this amendment would dothough the second part of it, by
allowing the Department to withdraw the terms with which it is
applicable, seeks to limit thisis nonetheless to dilute the
principle of automatic enrolment. I accept that this is one way this
issue could be addressed but it would not be my preference because the
principle of automatic enrolment seems to be a central feature of this
Bill. Ideally one would wish for the principle of automatic enrolment
to be applied to the WPPs or the GPPsI am not sure which is the
best term to
use.
Andrew
Selous:
I do not know whether the hon. Gentleman will be
coming on to this later in his remarks, but I wonder if he could
address the specific issue of levelling down for the many people who
have good levels of contributions. The average level of contribution is
6 per cent. in GPP schemes. That is double what personal accounts are
proposing.
Danny
Alexander:
The hon. Gentleman makes an important point
that I was about to come to. The first point is to maintain the
principle of automatic
enrolment. The second is to not undermine the many millions of
peoplethe hon. Gentleman gave the correct statisticswho
benefit from high quality workplace personal pensions. If this Bill was
to undermine that provision or to make businesses think that this was
not an appropriate way for them to deliver pensions for their staff in
future that would be seriously damaging. The Minister is caught between
those two imperatives.
The way out of thisI am
grateful to hear this from the Conservative Bencheshas surely
to be the European solution. The Minister has said in other forms, and
he may say again today, that four years is not sufficient time to
negotiate appropriate changes in the European directives. A Government
clear in their commitment to the European Union and seeking to exercise
influence by turning up to the relevant meetings on time and making its
case, and who work closely with their European partners, surely should
be able to negotiate such a change on the basis that this is an
unintended consequence of European legislation which was designed for
other
purposes.
11.30 am
The two directives were not
designed to prevent the sort of sensible pensions reform that has been
proposed in this bill, but were introduced for good reasons relating to
a range of other areas in the consumer sector. I know the Minister
himself has raised this matter at European level, with the Commission
and elsewhere. I do not know to what extent he has encouraged it to be
raised at an even higher level, potentially even by the Prime Minister
at European Councils. But an appropriate degree of influence and effort
should be applied at the European level to get what is, technically, a
complicated change, but nonetheless one whichthough in the
gamut of European legislation is relatively insignificanthas
great importance for the people we are talking about in the context of
this amendment.
I
would like to hear more from the Minister about the steps being taken
at a European level to win on this issue. It is also the case that the
more streamlined processes that are being proposed in the reform treaty
would help this sort of thing.
Mr.
Nigel Waterson (Eastbourne) (Con): Given his own
partys enthusiasm for Europe, and in particular for denying the
British people a referendum on the Lisbon treaty, is he not a little
disappointed that our European partners seem so unwilling to move
quickly on what is, in any view, an unintended consequence of one or
two European
directives?
Danny
Alexander:
I am not clear yet whether discussions have got
that far, since I have not heard more from the Minister about the
details of the negotiations he has had. It does not seem at all that
this is something that has been blocked by our European partners: it
seems to me that the sense of the scale of the task within the UK
Government has led to an attitude of despair. They are saying that this
is something we simply cannot do in time, and therefore we are going to
have some discussions but not necessarily take it much
further.
What I am arguing for is that,
if necessary, it should be escalated up the diplomatic chain, so that
more pressure can be applied. The European Commissionand this
may surprise some hon. Memberscan move quickly when it is under
pressure to do so. I suspect that there are many other countries in the
European Union that are caught in very similar situations to us in
terms of the demographic change and the lack of pension provision and
so on. They are not necessarily proposing the same measures, but we
might actually see that the changes we are seeking to make would assist
them too.
I do not,
therefore, accept that this is something that has been blocked at a
European level. I do not know, for example, whether the Minister has
had conversations with people in the European Parliament, who deal with
these matters in their committees, to see if there is a route through
that body that could help us with this problem. As the hon. Gentleman
has made absolutely clear, there are potentially millions of people who
will be affected if we do not get this one right. I hope that the
Minister will not give up on the European solution, and I would be
grateful if, in answer to this debate, he elucidated in some detail the
various steps he has taken to try to reach agreement at that level.
That seems to be the best way to solve the problem which this amendment
has rightly highlighted.
Mr.
O'Brien:
Clause 3 is very importantone of the most
significant in the Billand deals with automatic enrolment and
the duty on employers. Subsection (5) creates an exemption for
employers using workplace personal pensions from the duty of automatic
enrolment. We are not currently satisfied that under the distance
marketing directive, and the unfair commercial practices directive,
automatic enrolment is possible into a personal pension which is
commercially based. It is possible in relation to a trust-based scheme
and it is possible in relation to the scheme we are setting up,
personal accounts, which is going to be trust-based.
However, in relation to
contract-based schemes, there is a serious question about whether or
not we can be satisfied that it is possible to enrol on that basis. I
am choosing my words with care. I am not saying that it is not possible
to do it. Let me again elucidate carefully what we have done in
relation to the European Union. I am conscious that others will read
what we say here and if hon. Members wish a fuller discussion it may be
better that it take place through the usual
channels.
The
advice we got was that we needed to approach this with great care. In
particular, we did not want insurance companies to take undue risks in
relation to the contracts that they entered into. We therefore put the
subsection into the clause to enable us to create an exemption. The
principle of automatic enrolment is enormously important. Our
preference is that employers should be able to automatically enrol into
both trust- and contract-based schemes, basically insurance company
pension schemes. Our concern about the two directives means that at
this point we cannot give the insurance industry the reassurance that
it would like, and which we would like to
give.
We
are looking at the directives with great care. One of the directives is
due for reconsideration inI think2011. However,
reconsideration involves consultation in
a number of European countries, agreement on any changes and then
implementation. That would probably take us beyond 2012. That is why we
want the provision here, to see if we wish to go down the route of an
exemption for the insurance-based
schemes.
WPPs are an
enormously important, and a growing, part of the pensions market. As
the hon. Member for South-West Bedfordshire indicated, they account for
around 47 per cent. of current private pension membership. That
represents around 3.3 million employees, involving total contributions
worth around £6.7 billion each year. There are 2.1 million
members of WPPs with an employer contribution in excess of 3 per cent.
While the hon. Member for South-West Bedfordshire is right in relation
to a 6 per cent. average, some employer contributions are actually less
than 3 per cent, and some of them are considerably more than that. WPPs
vary considerably in quality, but they will all be obliged to comply
with the 3 per cent. minimum employer
contribution.
The
discussions that we have had more recently with Europe are a little
more optimistic than our earlier indications. I am always cautious in
approaching institutions to ask a question because the answer may be
broader than the question asked. Therefore, we want to have some view
of the likely answer if we are to pursue, with any degree of pressure,
the question suggested by the hon. Member for South-West Bedfordshire.
In other words, are we able to go ahead with insurance company
contract-based signing up and automatic
enrolment?
We wish to
make further approaches and see if we can find a way through to the
conclusion that we all seek. In the meantime I am engaged in some
detailed and helpful discussions with the ABI to see if we can reach an
agreement with regard to an exemption. The discussions are going well
and I am hopeful that we will be able to reach an agreement, although
we may not be able to do so. However, I can give no undertaking in
relation to that. We need to talk not just to the ABI but to other
stakeholders. When we heard evidence last week, it was clear that a
number of witnesses had serious concerns about breaching the principle
of automatic enrolment. I am very conscious of the extent to which
those people have concerns. We need to take those concerns into account
in the negotiations that we are having with the
ABI.
We need the
exemption to enable us to have the opportunity to complete negotiations
with the ABIto see if it is possible to create an exemption.
The exemption would only be necessary if we could not automatically
enrol into contract-based schemes. We will continue to look at the
issue with the European Unionagain, I am being careful with my
words as far our discussions are concerned. In due course, we may take
a view that it is best to wait until 2011 and have the discussions
then, or it may be that we can move forward and have some discussions
in the coming weeks. I will attempt to keep the Opposition spokesmen
informed, through the usual channels, of the extent of those
discussions, as and when they take place. That is essentially where we
are.
Danny
Alexander:
Before the Minister leaves the European
pointI appreciate the care with which he is choosing his
wordsthe Liberal Democrats would be
happy to discuss the involvement of MEPs in the different groups to try
to advance a solution more quickly, should it prove helpful to go
through the European
Parliament.
Mr.
O'Brien:
I am grateful for his offer, but we are dealing
with a legal issue rather than a case of political negotiation or
pressure and we need to look at it in that context. That is not the
primary issue, which is what the directive obliges us to do, and
whether we are able to do certain things within those terms. It is,
essentially, a legal
issue.
Andrew
Selous:
Like the hon. Member for Inverness, Nairn,
Badenoch and Strathspey, I am grateful for the Ministers full
response on the matter, because the issue is important. The Minister
said a number of times that the directives are not due to be
reconsidered until 2011. That is a full three years away. Many of us in
the Committee are surprised that there does not seem to be a mechanism
for pushing something up the agenda if it is a significant issue to
many millions of people in this country. Is he able to say anything
further to the Committee about how we could perhaps bring forward the
reconsideration of such
matters?
Mr.
O'Brien:
We would only want to do that if our current
discussions led us to a conclusion that we did not want. Let us take
this step by step. Let us investigate the legal issue and whether or
not it is possible to get some comfort from our discussions with the
Commission. If we can, it may well be that we do not need to do what he
suggests.
In any
event, is it possible to raise things before 2011? Yes, it is. It is
obviously much more difficult, because we have to engage all the
members of the EU, to get their agreement and then to push it up the
agenda. That of itself takes significant amounts of time, and we would
probably run into 2011 in any event. My concern now is that we have
insurance companies out there that want to know where they stand. They
do not want to know where they stand in 2010, 2012 or 2015; they want
to know now. They want to know during the course of the next few months
and years. Are they able to expand their business significantly? I want
to give them as much reassurance as I reasonably can. Our aim is to
maintain good quality pension provision. Often that is likely to be
insurance-based as well as trust-based. We want to ensure that the
issue of levelling down is not presented to employers. It is an issue
here.
11.45
am
If an employer
were making a contribution in excess of 6 per cent. to a good-quality,
contract-based pension scheme and, as a result of the way in which
these particular clauses operate, was obliged to change significantly
the way in which his pensions were dealt with, he might well decide to
level down. My objective, therefore, is to see whether we can minimise,
in so far as we reasonably can, the prospect of levelling
down.
The aim is to
see whether we can keep things pretty much as they are for cases where
there is a good-quality
pension scheme with an employer contribution above about 6 per cent., an
issue which we will come to in a few minutes. That is my aim, although
I do not know whether we will be able to do it. We have some time
during the course of this year to explore these issues and to see what
the best approach is, and to discuss an exemption, if necessary, with
the ABI and other stakeholders. That is the approach the Government are
taking. I know it has broad support among stakeholders, although as we
have heard during the course of evidence-giving, many of them are
concerned that we should minimise any breach of automatic enrolment,
whereas the members of the ABI want to minimise any disruption to their
market. In both cases, the principle position of the stakeholders is
entirely understandable and justifiable.
The hon. Member for South-West
Bedfordshire also asked about master trusts and streamlined joining.
Some insurance companies already offer master trust-based pension
schemes, and would therefore be in a position to expand those schemes.
Those who offer those types of schemes also offer contract-based
joining, which they tend on balance to prefer. Some of the other
insurance companies currently only operate contract-based schemes. They
have concerns about the nature of a switch to master trusts. Some of
them take the view that this would produce disruption for employers.
Some of the other stakeholders, such as the National Association of
Pension Funds, have done some work on this and think it would not
produce that level of disruption. There is still some discussion going
on with the ABI and others to try to ascertain what the precise level
of disruption would be if some of the contract-based pension funds were
converted to trust-based pension
funds.
The general
idea of a master trust scheme is that the trust is created within the
insurance company, not with the employer. That enables automatic
enrolment into the schemes under that trust, creating minimal
disruption for the employer, and therefore there would not be the
circumstances in which the employer would be likely to level down. The
aim is to see whether some of the insurance companies would wish to
move to that type of master trust scheme. If they take the
viewwhich some havethat they do not wish or do not feel
able to move to master trusts, then they are presented with a
difficulty if there is no exemption, because they would either have to
convert to master trusts or some of them would lose some of their
market. That does concern me greatly and that is why we are in the
business of negotiating it very seriously with the ABI and
others.
Let us see
how those discussions go on. I think I have outlined the various ways
in which we are trying to clarify the issues, to pursue options if we
do not get the answers we want, and to see whether there are other ways
in which the insurance companies could proceed. We would need to be
provided with a reassurance that we would get sufficient numbers of
people engaging in pension provision to say that we could exempt them
from automatic enrolment. The insurance companies need to identify
employers with whom they have good relationships and be able to find
opportunities with those employers to sell good-quality pension schemes
to the employees. The employees would then need to sign up in numbers
in excess of those we would have got if there had been automatic
enrolment.
We do not want a situation in
which we do not apply automatic enrolmentin which we have, in
other words, an exemptionand as a result do not get sign-up to
pension schemes. We need to get that sign-up. The exemptions themselves
could create some difficulties for insurance companies, because they
will then want to engage only with employers from whom they know they
are likely to get a certain level of sign-up. If they cannot get that
sign-up, they may well decide they do not want to continue to engage
with particular employers. There would however be opportunities for
them to sell their product on a broader basis after 2012, because
automatic enrolment will mean for those insurance-based companies that
employers will be in the market looking for provision. If there were an
exemption, they may well find a much bigger market in which to sell
their products. In business terms, both insurance-based schemes and
trust-based schemes will probably benefit quite significantly from
providing pensions after 2012, because the market will be significantly
expanded.
Andrew
Selous:
I am very grateful to the Minister for his very
full response to this section of the debate. The ABI has provided a
briefing in which it estimates that going down a master trust route
would have administrative costs of about £350 million and might
lead to a churning of policies between the providers and a consequent
re-broking cost to the industry of around £1 billion, and that a
switching in workplace pension provision would actually damage the
policies themselves, causing a loss of embedded value
of around £4 billion to £5 billion. What is the
Ministers and the Departments estimate as to the
accuracy of those estimated
costs?
Mr.
O'Brien:
We would want the ABI to provide some detailed
justification of some of those estimates. It is the case that some of
the insurance companies which have master trust schemes do not envisage
these sorts of costs applying in relation to the master trust schemes,
because they simply would not. The question is what the alternative is
for the insurance companies. If they are ableas some of them
areto expand their master trust schemes, then obviously the
cost for those insurance companies will not be so significant. If they
have to do a lot of conversion, I would want to see the actual costs of
converting to master trusts, because there is quite a lot of
disagreement in the pensions industry as a whole. I include here
stakeholders such as the NAPF, who have very different views. I think
the ABIs response to the NAPF would be, they would say
that, wouldnt they? They are, in a sense, competitors. They are
providing trust-based schemes, we are providing contract-based
schemes. Before accepting any of those figures we would want to
see a greater degree of justification from the ABI.
I have heard the arguments
about the costs. I am not convinced about the size of these costs. I
have not seen all of the detailed figures with which the ABI justify
its global sums. The figures need a lot more justification than they
have at the moment if they are to be presented as reliable. That being
said, I do not doubt that there is a significant issue here. The ABI
has a serious point and it is one on which, if I am able to accommodate
it, I will. I am satisfied that the
discussions we have had with it so far have been serious and I hope it
will lead to an exemption, which we could use should that be
necessary.
I am not
as pessimistic about the approaches we might make to the Commission as
I was some months ago. Our advice now is that the issues may well be
manageable but, again, I am cautious about what I want to say. At this
point I am happy to have private discussions with the hon. Gentleman if
that would be
helpful.
Andrew
Selous:
We have had a full and useful debate in this
section of our deliberations. These are important issues because of the
numbers of employees involved in these group personal pension schemes.
There is nothing much more that I can add but I am grateful to the
Minister for the full way in which he has responded to the
debate.
I beg to ask
leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Danny
Alexander:
I beg to move amendment No. 79, in
clause 3, page 2, line 36, at
end add
(8) The Secretary
of State shall publish an annual report on the impact of means-tested
benefits on automatically enrolled members of the scheme established
under section
50.
The
Chairman:
With this it will be convenient to discuss the
following amendments:
No. 16, in
clause 8, page 5, line 7, at
end add
(3) The
information so given must include whether the jobholder is likely to
benefit by reason of being
auto-enrolled.
(4) For the
purposes of this section benefit shall be defined as
the jobholder recovering all contributions to the scheme as well as an
additional return the extent of which the Secretary of State shall by
regulation
define..
No.
87, in
clause 12, page 6, line 24, at
end add
(5) The Secretary
of State shall report annually on the effect of changes to the
qualifying earnings on the impact of means-tested benefits on members
of the scheme establised under section
50..
No.
104, in
clause 58, page 27, line 21, at
end insert
(c) to consider
the impact of means-tested benefits on members of the scheme
established under section 50, and report these findings on an annual
basis..
New
clause 2Projections of numbers of those on means-tested
benefits
New clause
6Trivial commutation
limit
Danny
Alexander:
I would like to say something about amendment
No. 79 and about new clause 6, for which I would be interested to hear
the Ministers specific responses.
As I said in relation to
amendment No. 78, the debate about the extent to which it pays people
to save in personal accounts is one of the critical issues that has
been drawn attention to by a wide number of stakeholders in the course
of the preparation of this Bill. Members on both sides of the House at
Second Reading were concerned that, while it is clearly the case that
the personal accounts will be beneficial to a large number of people
within the target group and that the wider benefits of the personal
accounts scheme and the
ideas behind it such as automatic enrolment were clear to see, there are
critical issues as to whether it will pay certain individuals to
save.
One of the
answers to that relates to the way information and/or advice is
provided. We will come back to the question of information and advice
at a later stage in the Bill so I do not wish to dwell on that point
now. We believe this matter is very important in answering the
question.
Amendment 79
is a modest proposal that I hope the Minister will be minded to accept,
given the concerns that have been expressed on all sides of the House.
At the very least the Secretary of State should annually provide to
Parliament a report on the impact of means-tested benefits on
automatically enrolled members of the personal accounts scheme. That
would enable Parliament to have on a regular basis the information that
it needs to understand whether the concerns raised, which I will go on
to, have had the impact that some expected or whether, as the Minister
said, the groups concerned were small or the rulessuch as with
his example of the trivial commutation limits for those aged over
50have had the effect that he was
expecting.
12
noon
The amendment
would enable Parliament to keep a close eye on the situation. As that
would be through a report provided by the Secretary of State, the
Secretary of State would be able to provide his interpretation and
guidance on what he thinks that the information contained therein
means. None the less, an issue raised on all sides of the House but
about which there is a great deal of uncertainty could be discussed
regularly. There is clearly some uncertainty about the issue. Everyone
in the House agrees that there are some people for whom it may in the
end not pay to save in personal accounts, because of the impact of
means-tested benefits on their income in
retirement.
In
addition to the group of people aged over 50 that we discussed, there
are other groups. In that context, I wish to refer to those people who
receive other means-tested benefits, in addition to pension credit. The
debate has focused on pension credit, because pension credit is the
means-tested benefit that pensioners receive, and will continue to
receive in large numbers until 2050. Independent estimates, by the
Pensions Policy Institute, for example, suggest that two in every five
pensioners will be in receipt of pension credit in some respects in
2050; the Government estimate would suggest more like one in three. In
either case, that is a significant proportion of
pensioners.
However,
many pensioners will receive other benefits. One group of concern is
those renting in retirement. The housing benefit taper is particularly
steep, especially when linked in with the council tax benefit
taperwho knows whether the council tax will still exist in
2050, although that is another debate? None the less, those taper rates
are particularly steep and would therefore have a dramatic effect on
the degree to which pension income would be generatedsmall for
someone who has saved a pot of just over the trivial commutation
limits, as described by the Minister. A lot of that
income would, in effect, be used to substitute for means-tested
benefits. Would those people even be getting back what they paid
in?
I noticed a
sensible amendment, proposed by the Conservatives, thatin
talking about having a more detailed assessment and a measure of what a
benefit meansputs forward the idea that a benefit means getting
back what you paid in and a bit more. I am sure that a Conservative
Front Bencher will go on to explain more what they meant. However,
having in the Bill some measure of what benefiting from personal
accounts means seems to be a sensible
idea.
While the scale
of the problem is hard to estimate, none the less the Pensions Policy
Institute has highlighted some groups for which it thinks there is a
high risk of personal accounts being unsuitable, such
as:
Single
people who are likely to rent in retirement and who have no additional
savings. These people are likely to qualify for less means-tested
Housing Benefit as a consequence of saving in a Personal
Account.
It
also refers to
single
people in their forties and fifties...who are
self-employed.
There
are also medium-risk groups that have been highlighted by that
organisation.
It
would be useful if the Ministers response could give us any
information that he has about the extent to which that might be a
problem, and the numbers of people involved in particular groups. I
accept what he no doubt will say, that it is often hard for any
individual to predict what their circumstances will be in retirement,
particularly at an early age. Of course that is the case. None the
less, we do not want the Bill to get us into a situation where some
people can fairly claim that they were strongly encouraged to enrol
automatically in a personal account, only to reach the time of
retirement to discover that the financial benefits that they receive
are not what they were given to expect. We certainly do not want to get
into a position where those people are able to make a claim against the
Government on that basis. That is why having a proper understanding of
the numbers of people and the range of groups that might be affected,
and how the Minister wishes to see those groups addressed, would be
beneficial. The problem does not affect the many millions of people for
whom the scheme is clearly beneficial but if it does affect hundreds of
thousands of people then it is very serious; the hon. Member for
Eastbourne said that there might be even more than hundreds of
thousands. Unless the issue is got right there will be a significant
gap in the Bill in its application to the target audience for which it
is hoped that the benefits will
accrue.
New
clause 6, which relates to the trivial commutation limit, is designed
to probe the Ministers reaction to a particular proposal
brought forward as a way of helping to solve the problem. That proposal
is to increase the trivial commutation limit. The Minister quite
rightly described how the limit can benefit people with small pots. It
has been suggested that an increase in the limit would substantially
increase the number of people, in the category under debate, who are
able to benefitthose who might otherwise be at risk of not
benefiting to a great or any extent from their personal account saving.
That would be done by enabling a larger pension pot to be accumulated
and then converted in full into a cash
lump sum. For example, research by the PPI showed that an increase in
the trivial commutation limit from £15,000 to £30,000,
with a corresponding increase in the capital limit, could increase the
proportion of retirees who would be able to trivially commute their
pension pots from 13 per cent. to 22 per cent. Potentially, that could
substantially improve the ability of some people at least to get
returns from their
savings.
I am sure
that the Minister in his response will stress the importance of
affordability and I am therefore interested to know what estimates he
has made of the costs of the proposal and of the number of people who
would benefit, particularly those who are at risk of losing out because
of the interaction with the means-tested system. For us, the problem
lies with the extent of the means-tested system. That is why we put
forward proposals in the previous Pensions Bill to move towards a
citizens pension which would ensure a basic state pension at a level
sufficient to ensure that everyone had a firm foundation on which their
private saving could be built. That is not something that we are
debatingwe are looking at whether there are any technical
solutions that can be brought forward to help to address the problem.
The increase in the trivial commutation limit is one such technical
solution, which may or may not be of
assistance.
I would be
grateful to hear that the Minister is not under any illusions as to the
seriousness of the problem and that it is something he is seeking to
address. Otherwise there will be doubts in some peoples minds
as to whether saving is worth their while, and that could undermine the
extent to which the sensible proposal in the Bill can be successful in
the long run. I look forward to the Ministers
response.
Mr.
Waterson:
I rise to make my first substantial contribution
to the debate. It is a pleasure, Sir Nicholas, to be serving under your
liberal chairmanship. It was interesting to have a re-run of the
citizens pension concept from the Liberal Democrat spokesman. That was
perhaps not unreasonable given that his constituency includes Loch
Nessthe citizens pension is about as likely to make an
appearance as the Loch Ness monster.
Danny
Alexander:
I think the hon. Gentleman is making the point
that he does not agree with a citizens pension policy, but that
is not to say that it would not have the outcome I seek in the context
of this amendment. As for the Loch Ness monster, I hope he is not
doubting the importance of that economic asset to my
constituents.
The
Chairman:
Order. I think that is as far as we should take
the Loch Ness
monster.
Mr.
Waterson:
Quite right, Sir Nicholas, though it is not
unrelated to the presence of several distilleries in the hon.
Gentlemans constituency.
We now enter the twilight zone,
as it were: the funnel of doubt, as it has been termed
by the Pensions Policy Institute. That is a rather sinister expression,
but it does underline the massive unpredictability of trying to look,
perhaps as far in the future as 2050certainly many years from
our current debatesat the interface between the means-tested
benefits system and personal accounts, not least because factored into
all that is the likely success or failure of personal accounts and the
effect that will have on taking people out of means-tested benefits. I
therefore make no apology for dealing at some length with these issues,
particularly concerning this group of amendments, because this is one
of the two major issues identified by the PPI as being at the heart of
this Bill.
This is a key
clause, which is, effectively, the other side of the coin of
auto-enrolment. We all agree with auto-enrolment; it was, indeed, in
our last election manifesto as a way of harnessing inertia to get
people saving for their retirement. The other side of that coin, as
discussed in the opening contribution by the hon. Member for Inverness,
Nairn, Badenoch and Strathspey, is this: what about people who might be
well advised not to auto-enrol, or to opt out? We will deal later in
some depth with the issue of what advice is going to be made available
to these people. I would however say that people are not exactly
queuing up to give specific advice: employers are not; the Government
are not; the Opposition are not, because they feel they might one day
be the Government. There is an unresolved issue of what generic advice
would be made available. That is a topic to get into in more detail
later in these discussions. It has long been recognised as an
issue.
Only
yesterday, I stumbled across an interview in the Financial Times
last June given by the previous Secretary of Statethe right
hon. Member for Barrow and Furness (Mr. Hutton). He made the
point that there needs to be a major communications effort
if the introduction of personal
pension saving accounts is not to lead to future Governments being
accused of mis-selling, John Hutton, Work and Pensions Secretary, has
conceded.
It goes on to
talk about the dangers of different outcomes. Quoting directly from the
then Secretary of State, it says:
That is a risk, he
says, and it has to be dealt with fairly and squarely. People have to
trust the concept and understand that there cannot be an absolute
guarantee about the outcome.
I agree with that.
Changing metaphors from the
Loch Ness monster, this problem has patently always been, as it were,
the elephant, or the monster, in the room. As we have some vague
ambitions to be a future Governmentpossibly the future
Government when all this takes effect in 2012it is important to
get this right. It is fair to say that everybody now accepts there is
an issue, and one which needs to be
addressed.
Looking
first in more detail at our new clause 2, these are all probing
amendments, and I support the basic thrust of the amendments put
forward by the Liberal Democrats. I think we are all coming at this
from different angles but trying to achieve the same broad result,
which is to raise the profile of this issue and look at ways it can be
dealt with.
12.15 pm
We as a party have not lighted
on some magic bullet solution. The hon. Member for Inverness, Nairn,
Badenoch and Strathspey is clearly taken by trivial commutation. I
think it is worth saying that some of these solutions will actually
increase means-testing and problems at the cliff-edges of the
proposals, so we are a
long way off. To be fair, I do not think the hon. Gentleman was pinning
his colours to that particular mast as such, but there are any number
of discussions and analyses still needed of some of the options that
have been put
forward.
Looking at
new clause 2, I have plucked out of the air a figure of 10 per cent. of
the pensioner population who might be in the at-risk groups. At the
moment, we are have a pensioner population of about 11.5 million, which
by April 2009 will rise to 12 million. Ten per cent. of that is at
least a hundred thousand pensioners. It seems to me that if we at this
so-called funnel of doubt, nobody has any idea how many
people are going to be in these at-risk groups. If it starts to be
north of 100,000, we have a serious potential problem on our hands. But
it may be several hundred thousand or it may be in the tens of
thousands; nobody actually knows the answer at the
moment.
It is salutary
to touch on some of the evidence given in the oral evidence sessions by
some of these organisationsparticularly by the PPI, which
deserves a lot of credit for the consistently thorough, independent and
thought-provoking way it has addressed these and other issues over a
long time. All our debates would be the poorer without its various
interventions. It raises the issue of suitability and its definition.
In its written evidence, its says that in its
analysis,
Personal
Accounts are defined as being suitable if individuals
do not lose out as a result of their savings. This is a less stringent
definition than ensuring that saving in Personal Accounts is the right
thing for all consumers, which would be more consistent with the
FSAs definition of
suitability.
I appreciate that the FSA is not going to
be supervising these personal accounts, but it seems odd that an
established definition of suitabilitypoliced by the
FSAis not thought relevant to personal
accounts.
The question
of suitability is right at the heart of my amendment No. 16 to clause
8, which is about information that has to be provided. We are seeking
to extend that obligation to include information about whether the
worker is likely to benefit from being auto-enrolled. We define
benefit as
the jobholder
recovering all contributions to the scheme as well as an additional
return the extent of which the Secretary of State shall by regulation
define.
It is a pretty
poor state of affairs if it is to be regarded as all right for those
who have scrimped and saved to put money into personal accounts from
their employee contributions, only to end up no better off than if they
had put the money under the mattress.
The hon. Member for Inverness,
Nairn, Badenoch and Strathspey has already touched on the at-risk
categories. Again, this is work that the PPI has refined over a
significant period, with a traffic light approach of red, orange and
green to depict people who are either at low risk, medium risk or high
risk. It is interesting that it makes this comment in its written
evidence:
The
Governments test is that individuals should get back at least
the value of their own contributions, (but not necessarily the value of
their employers contributions, real investment returns or the
tax relief) protected for
inflation.
It
continues:
This suggests that the
Government would only be concerned about individuals in the
PPIs high risk group.
This is
slightly to repeat what was said by the hon. Member for Inverness,
Nairn, Badenoch and Strathspey, but the high-risk group includes single
people renting in retirement with no additional savings and single
people who will be in their 40s and 50s in 2012 on low to medium
incomes who are self-employed. It also refers to those who have a high
level of personal debt. That is probably a typical instance. For
instance, a female worker on low income and with high credit card debts
would be extremely well advised not to opt in to personal accounts, but
there will no one advising her to opt out.
The hon. Member for Inverness,
Nairn, Badenoch and Strathspey touched on some of the options put
forward. Two or three have been proposed in recent months, all with the
fingerprints of the PPI on them. One, at the behest of the Equal
Opportunities Commission, as it then was, was a suggested increase to
trivial commutation and capital limits. The significant cost of that is
set out in some detail, and the Minister may want to comment on the
Governments attitude to those projected costs.
Another variation, sponsored by
the B and C scheme, is the pension income disregard. That, too, has a
certain superficial attraction. A figure of, say, £12 a week may
be disregarded as income for pensions, but it brings with it the
question of whether one is trying to extend means testing or to roll it
back; another question is what happens at the edges.
The fundamental point is this:
where do we go from here? Broadly, the attitude of the PPI and others
is that they have taken things as far as they can without access to the
Governments model. Indeed, at the oral evidence sitting last
Thursday I raised that issue with Niki Cleal and Chris Curry from the
PPI. At the moment, they cannot identify the number of people likely to
be in what they signalled as at-risk groups. In his evidence, Chris
Curry said:
In
the UK, there is only one model that works in that particular way: the
PenSim 2 model run by the Department for Work and Pensions.
[Official Report, Pensions Public Bill
Committee, 17 January 2008; c. 59,
Q84.]
That, it seems to me, is
where we are at the moment in developing some concept of public policy
on the question of means testing.
I return to the question of
whether it is important. We believe that it is. I am pleased to say
that so far there seems to be almost total unanimity among those who
have given written and oral evidence that the issue needs to be
addressed. It is fair to say that there are variations in how seriously
witnesses put in it the context of the personal account, but everyone
seems to agree that it needs to be addressedand in the
reasonably near future.
It is not gratuitously
provocative to say that the consensus process has been through a rocky
period recently. Our attempts to flag up the issue were met, at least
for a time, by Ministers being upset with us because we were rocking
the boat and undermining the possible appeal of and confidence in the
new personal account system. However, we have gone beyond that. It is
now clear that everybody, including Ministers, agree that the matter
has to be addressed.
I shall cite one or two
comments given in written evidence. The Equality Commission, talking
about pays to save, spoke of there being
a strong risk of too much media
attention around the risk of it not paying to save. The impact of this
could be a lack of confidence in Pas and encouragement of individuals
to opt out.
It then
stated:
The
Government should commit to a public report on the pays to save
issue,
as outlined by the hon.
Member for Inverness, Nairn, Badenoch and Strathspey. The commission
said that it should include information on the number of individuals at
risk, the trade-offs between reform and the general effect of the
relationship with the means-tested benefits
system.
Age Concern
also makes the point. It says that there are concerns that some people
may find they are little better off from saving because of the
interaction between means-tested benefits and private provision. It
believes that that is an important issue and it went on to talk,
unsurprisingly, about the need for a much higher state pension. One of
the issues that we are trying to draw out from Ministers in other
amendments is whether they have reached their conclusion about when
they intend to restore the link with average earnings for the state
pension. Finally, Age Concern said that the Government should set up a
review of the options to ensure that saving pays. We agree with that,
and Mr. Mervyn Kohler made some similar points in his
evidence for Help the
Aged.
We seem to be in a situation
where everyone now agrees that there is an issue. Let me quote the
final arbiter on many of the issues, Lord Turner, who in his
evidenceregarding the different approaches to tackling the
issuesaid:
I
still think that those issues are worth looking
at.
That is an important
influence, and certainly the approach that we have been
taking.
The good news
is that the Government have had a change of heart. I am delighted to
say that we have been having initial discussions about how we could
best approach the various proposals on a cross-party and entirely
constructive basis. I commend the Minister in particular for his
approach to that. Ministers have moved some distance on the issue in
recent days and weeks. I have never believed that we could resolve the
issue during this Committee. What we have been at pains to do is to
flag up our concerns, and those of many outside organisations and
bodies, and to be reasonably assured that somewhere in the bowels of
the Department for Work and Pensions the Pensim 2 model is whirring
way, trying to look at some of the potential
solutions.
I am not
naive enough to think that the Pensim 2 model has all the answers. We
know, for example, that it has one fatal flaw. It takes no account of
housing benefit, which, if you look at the PPI work, is crucial to some
of the projections about at-risk groups. I am sure it has other flaws
as well, but it is the only game in town for approaching the issues. I
am committing myself and the official Opposition to being as helpful
and constructive as possible and to work closely during the life of the
Bill and also beyond to try to find solutions to the problem. As we all
march bravely towards 2012if that indeed is the implementation
date for personal accountswe can put our hands on hearts and
say to people that, broadly speaking, they are going to be better off
by saving or at least be able to
identify more clearly those groups that would be best
advisedthrough the mechanisms of generic advice, which is
another debateto opt out, as set out in the
Bill.
Those issues are
very important; they transcend political divisions. We will do what we
can to help. We are not unaware of the limitations of the model, nor of
the massive uncertainties summarised by the PPIs expression
the funnel of doubt. We want to see a solution and we
are confident that Ministers do as well. Sooner or later we will hammer
something out but it will involve looking closely at some of the
ideastrivial commutation, capital disregard and pension income
disregard.
Even
in the last week or two there has been a further new suggestion from
Legal and General, I think, about flexing the
£16,000 cut-off between income and capital. I am not
sufficiently into the detail to see what difference it could make, but
it is a useful suggestion that ought to be run through the modelling to
see if it brings any benefits to all the people who I think are
determined to try to help. We are signed up to the post-Turner
consensus on pensions reform. We are determined to ensure, as far as is
practicable, that the reform will work and deliver a better retirement
for millions of people and that there will not be major problems with
people who should not have joined up in the first place. That clarity
should be available not after 2012 but in the run up to 2012 so that
misguided journalists do not write stories which will put off people
who should be enrolled and give support to unscrupulous employers who
may use such articles to discourage their eligible employees from
becoming
enrolled.
12.30
pm
I hope that
that is helpful in setting out our attitude to our new clause and our
amendment 16. I support the thrust of what the hon. Member for
Inverness, Nairn, Badenoch and Strathspey said. This is all an attempt
to tease out from Government what their attitude is. I see it as a
constructive attitude and one which we support.
Mr.
O'Brien:
I am grateful for the way in which the Opposition
spokesmen have set out their case. This is an issue which we need to
debate in a serious way. It is not a new issue. In each of our
constituencies there are people who have bought into second pensions
through private pension schemes and they find that the pot of money and
the returns they get from their pension mean that they are below the
pension credit level. Therefore they have to top up their second
private pension with pension
credit.
It is
therefore an issue currently. Nobody suggests that the pension
providers should compensate people but there are ways in which it is
possible for individuals to ensure that they minimize any disadvantage.
Trivial commutation has already been discussed at lengthup to
£16,000. There is also the opportunity to take a tax-free lump
sum of up to 25 per cent. of the pension pot. There are ways in which
people are able to deal with this issue and I will come on to some of
the others in a moment.
One in six people are
automatically enrolled in pension schemes todayprivate pension
schemes in some cases, public pension schemes in others.
Automatic enrolment of itself is not the new factor, although arguably
the scale on which it occurs will be different after 2012. Because the
Government are now legislating, we have to recognise the significance
of the issue and we do so. I am grateful in particular to the hon.
Member for Eastbourne who acknowledges that the Government have looked
seriously at this issue and we will continue to do so. I will set out
how we intend to go forward in due course.
As this is an important issue,
I will set out at length the Governments approach. Before that,
I will deal with new clause 6 because this suggests a significant
increase in the trivial commutation level. I will separate this from
the broader discussion. Issues around finance and trivial commutation
in particular are matters for Finance Bills. That matter will be dealt
with by the Chancellor in a Budget or another announcement. It is not
something we propose to deal with in the course of the Pensions
Bill.
The hon. Member
for Inverness, Nairn, Badenoch and Strathspey should be careful in
suggesting that trivial commutation is just a means of helping people
who may lose out in relation to pensions. It is also potentially a tax
loophole, which some might exploit in order to minimise their
contribution as taxpayers. We need to approach trivial commutation with
great care, because it has not only some beneficial effects but some
disadvantages, of which we should be aware. I therefore cannot
recommend any support for new clause
6.
Let me move to the
broader issues. We had strong evidence in relation to pays to save from
a wide range of witnesses, but there was consensus in that evidence
that in the course of considering the Bill, we should keep in
perspective what is a complex issue. Whether it pays to save for a
second, private pension is not just an issue for this Bill; it is a
wider issue. It is not just about personal accounts. That is an
extremely important point to make, because there has been some press
comment that suddenly a problem will arise as a result of personal
accounts. In fact, the problem is there now and will arise in relation
to many other types of private pension provision. It is not particular
to personal accounts, but those accounts are directed towards low and
moderate-income people, so we need to be aware of that issue when
discussing
them.
Governments
always need to strike a balance between alleviating poverty and
incentivising savings. The Government look for that balance in relation
to all their policies. We seek to alleviate poverty and protect people
against unpredictable eventsin other words, to provide a safety
net if people fall on difficult times or if they are merely poor
because of their inability in the past to earn a substantial income. We
seek not only to provide a safety net, but to encourage all individuals
to take some personal responsibility for their retirement income and
not just to leave it to the state. We have the element of the safety
net, we seek to have people look to their individual responsibility and
we seek to have regard to the overall need to operate according to
affordable and sustainable public finances. The Government need to
balance all three elements in relation to this
issue.
With
regard to alleviating poverty and providing a safety net, means-tested
benefits ensure that individuals can safeguard themselves against
severe poverty and
relative poverty. We have been able to lift more than 1 million
pensioners out of relative poverty in recent years. Means-tested
benefits are an important part of our welfare system and our safety
net.
Our reforms in
the Pensions Act 2007 start to address some of the issues about whether
it pays to save, because they make significant changes to the state
pension system, enabling about 90 per cent. of both men and women to
get a full basic state pension. The proportion of women who currently
get it is about one third. We need to increase the percentage
significantly. We will do so from 2010 and we will see those numbers
increase significantly after that. They will move up so that, by 2025,
90 per cent. of women will be receiving the full basic state pension.
That is an important change with regard to the points that have been
raised
today.
As
a result of being able to receive a full basic state pension, many
pensioners will not need pension credit. That is one of the significant
changes that we are making. The percentage that we anticipate will be
claiming pension credit will fall significantly to about 30 per
cent.less than the third to which the hon. Member for
Inverness, Nairn, Badenoch and Strathspey referred. The state pension
will be more generous and easier to achieve. The issue that we are
discussing now will be significantly assisted by improving the incomes
of pensioners as they get older and as the provisions come into
effect.
Incentivising
savings is the next issue that I want to discuss, because about half of
pensioners are currently on means-tested benefits and in receipt of
income from private pensions as well. Our reforms are aimed at
strengthening incentives to save and incentives to take individual
responsibility by enabling each pound saved to be matched by provision
from the employer and the tax system. We estimate that between 4
million and 8 million people will be saving for the first time, and
between 6 million and 9 million people will be saving more than they do
at the moment. That will be a significant incentive for people to
continue to save and to build up strong pension pots. At the moment
there is inertia in terms of saving. People do not save because they do
not get involved in the system. We want to reverse that so that they
will get involved in the system, and if they want to get out of the
system they have to take action to opt out. Inertia therefore will work
in favour of saving, and not against it.
We aim to target our reforms at
those most in need of help: the low and moderate income earners who at
the moment, in many cases, are not even able to get involved in an
occupational pension scheme. We want to do more to ensure that people
know it pays, in retirement, to save. We have made some important
changes in the benefits system, which I mentioned earlier in passing. I
want to return to those. It is not just things like trivial commutation
that will help people on low incomes: savings credit is an element of
pension credit which prevents a pound-for-pound clawback of benefits
such as we saw before 1997 and enables people to know that, if they are
saving for their private pension, some allowance will be made for that
saving when they are claiming pension credit. Together with the 25 per
cent. tax-free sum and trivial commutation, we need to factor in this
issue of savings credit in terms of pays to save.
For the majority of people who
are automatically enrolled, who do get involved in either personal
accounts or another pension scheme, we expect to see significant
improvements in later life. We know from our surveys that the vast
majority of people who are not now saving for a pension still want a
higher return than the state will provide for them when they retire.
They want a higher income. What we are saying is, essentially, that we
as a state will provide only so much, and they will have to lift
themselves above that level if they wish to go beyond it. That means
that they have to save for
themselves.
The hon.
Member for Inverness, Nairn, Badenoch and Strathspey asked for whom
will it not pay to save. We had some very significant evidence during
the course of the evidence sessions last week, particularly from
Professor John Hills, who is widely regarded as the foremost expert on
this issue in the UK today. As a member of the Pensions Commission, he
has done very valuable research in relation to this issue, and we all
must regard his views as having a great deal of weight. He made the
very important point, backed up by Lord Turner, that there are some
people who will have saved who end up on pension credit, just as there
are now. It is difficult to predict who these people are. If I remember
Professor Hillss evidence correctly, he said that the only way
to predict who would lose out in the long term would be to put together
a system that interrogated people at great length about their detailed
circumstances.
There are so
many imponderablesso many variations, so many life-events that
change peoples circumstancesthat being able to predict
at the point of auto-enrolment whether they would lose at retirement
would be so difficult that getting that information would not be
sensible given the amount of investment required. In any event, having
to answer those sorts of questions would probably deter
people.
12.45
pm
Lord Turner, in
his evidence on 17 January, said
that
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 peoples lives get into, we will pick
them up to a certain absolute level of income in
retirement.[Official Report, Pensions Public
Bill Committee, 17 January 2008; c.
98.]
I
agree with that. We provide a safety net, but we also encourage people
to save and to make their circumstances better. For example, with men
in particular, statistics show that nine out of 10 men will benefit
from saving for a pension, because they will get to retirement. One in
10 will not. Should they not have saved? No one would seriously say
that one in 10 men should not have saved in the expectation that they
would need to provide for their retirement because they would not reach
state pension retirement age. We need to ask ourselves some of the
fundamental questions about the level of predictability of people
considering whether to save. Also, what information and advice will
they need to be given when making a decision about whether to
save?
Let me deal with
the issue of information, communications and advice. As the hon. Member
for
Inverness, Nairn, Badenoch and Strathspey has indicated, that is one of
the core questions that we must ask ourselves. We will be discussing at
length those issues later in the Bill, but let me first make some brief
points. Automatic enrolment needs to be a relatively straightforward,
simple, user-friendly and inexpensive pension provision to succeed. We
all want it to succeed and, to increase levels of take-up, we need to
minimise cost. We cannot have detailed interrogations of people or vast
amounts of
advice-giving.
At this
point it is important to place on the record the difference between
information and advice. Information is giving people basic information
about what the pension scheme will be and some projections of possible
outcomes in provision. Advice is giving individuals advice about their
circumstances and whether saving is right for them. That advice to
individuals can come in one of two forms: as individual advice to a
particular person, based on information received from them; or as
generic advice, given to groups of people, about what their possible
circumstances might
be.
Providing large
amounts of detailed advice to every single person automatically
enrolled is clearly not something either that we need to do with a
basic, simple pension system or that is desirable. It would certainly
not be financially possible to keep costs low if we were to do that.
The decision to remain in a pension will generally be straightforward,
but individuals need to have good information. Good information is the
key factor in achieving our objective of enabling and increasing levels
of retirement savings. A lot of good information and some level of
advice are already provided by citizens advice bureaux, the Pensions
Advisory Service and the Financial Services Authority, for example. We
should not just add new sets of information to what is already there.
We will be working with all our stakeholders and expert organisations
to develop a coherent and consistent service for providing information
and for providing some opportunities to seek advice, where
necessary.
I envisage
the system operating with an individual being automatically enrolled
and getting the basic information about what they are enrolled into.
Their pension schemebe it personal accounts or a private
pension schemewill give them some information. Some may well
have particular concerns, but they will be given access to a website,
which they can interrogate to find out will happen in their particular
circumstances.
Otto
Thoresen is looking at the issue of the provision of broader, generic
financial advice. He is due to report later this yearwe
anticipate that it will be around March, before the conclusion of our
consideration of the Bill. We want to take account of his findings and
recommendations on the way forward on generic advice. That is
important. We will also need look at the question of how much further
we go beyond that on providing advice. PADA will look at personal
accounts, but other pension providers may wish to look at the
issue.
Most
employers should not be in the business of giving advice; that is not
what they are there for. Some employers might choose to do so and might
employ a independent financial adviser to advise their employees,
but we anticipate that most employers will not choose to do so. They
will be given basic information, probably from the pension provider, be
it the private scheme or personal accounts, and that is what the
employee will receive. The employer would be ill-advised to give
advice, because those who do so may well have a legal responsibility
for the advice that they give. However, if a person needs advice, they
can go to the Pensions Advisory Service or a citizens advice
bureauthat is the route that we would direct people to
take.
Having said all
that, and as the hon. Member for Inverness, Nairn, Badenoch and
Strathspey indicated, it is possible that some people, in the end,
unpredictably, will be on pension credit, even if they have saved in
personal accounts or through a second private pension. The Government
looked in detail at how we can prevent such a situation. We looked at
trivial commutation and the proposal, for instance, from the Pensions
Policy Institute, for an increase disregard on pension credit; and at
how to adjust the various tapers, contributions and penalties that
relate to various benefits.
All of those measures are
expensive and raise significant questions and, as the hon. Member for
Eastbourne indicated, they fail to provide a magic bullet. We should
continue to evaluate policy measures. It is important that we recognise
that there is an issue, but it should not prevent the passage of the
Bill, and it certainly should not prevent the introduction of personal
accounts. None the less, we need to look at the issue with a great deal
of care. I agree with the hon. Member for Eastbourne, who indicated
that we have an opportunity to look at the matter in greater
detail.
The Government
were approached by the Peoples Pension Coalition, particularly
by Sally West from Age Concern, who asked for a longer-term debate
beyond the length of our consideration of the Bill, so that we can look
at the pays to save issue. I reassure the Committee that I am working
to put in place a process to take things forward and to provide
reassurance for the longer term. I am not committing to any policy
outline. However, I would be happy to work together with Opposition
spokesmen and the various stakeholders for three key reasons. First, we
need to evaluate the evidence on who is likely to benefit and who is
likely not to benefit by saving. Secondly, we need to consider the
interaction between pension saving and income-related benefits in a
reformed system, and how that affects incentives. I would like to
examine the extent to which we are able to predict the numbers in
groups who might be affected. The evidence that the Committee has heard
so far suggests that such a level of prediction would be very
difficult. If so, let us look at the matter to see how much we can
undertake to predict.
Thirdly, we want to look at the
various constraints and methods for dealing with this issue through
policy changes. We need an evaluation of some of the issues around
trivial commutation and other things. I repeat that I make no
commitments in relation to outcomes. However, it would be extremely
useful, as part of the process of building on our consensus on pensions
policy, to have a serious job of work done to evaluate how far we can
predict who will be affected, the likely outcomes and how we could
change policy in order to
affect those outcomes. We need to share knowledge, establish an
understanding of the trade-offs, and engage with others over the coming
months in shaping how we could have a shared baseline of understanding
of the issues with which we have to grapple. I have agreed to Age
Concerns suggestion that we join this group and work with them
over the next ten months or so to carry this out and, in due course, to
publish a report.
This will not recommend a
particular way forward, but will, I hope, look at the various issues,
cost them, and put some of the basic information out there so that any
further debate on this issue would be much better informed. The various
proposals and amendments that have been put forward are variations on
the theme of getting information. The Conservatives have indicated that
theirs are probing amendments. I appreciate that, and therefore ask
that they be withdrawn. I am grateful for their indication that they
are happy to engage in the process of evaluation, and I hope we can
agree to proceed on that basis rather than by pursuing any of these
amendments. The Liberal Democrats have not yet indicated whether they
intend to press any of their amendments, but I hope their spokesman,
the hon. Member for Inverness, Nairn, Badenoch and Strathspey, feels
able to withdraw his
amendments.
Danny
Alexander:
I will endeavour to complete my remarks before
1 oclock, but if I need 30 seconds when we return then I hope I
may avail myself of that. I am grateful for the Ministers
response. On the trivial commutation point, I entirely accept what he
said about that issue. Certainly, if a new group is to be set up to
look at these issues in more detail, it is entirely appropriate the
issue of trivial commutation should be referred to that
group.
I am pleased
that we have moved on from the tone of debate on Second Reading, when,
frankly, there was some entrenchment on both sides. The way in which
the Minister has expressed his points, as well as the substantial
suggestion he has brought forward in response to the idea from Age
Concern, suggest that there is a new desire, in looking at this issue,
to evaluate it properly, to examine the interaction with means-tested
benefits, and to look at the level of predictability. The exercise he
is proposing guided, I hope, by Age Concern and some of the
independent people who can become involved in thisis one that
we on these Benches would welcome, and with which we wish to
co-operate.
The
Committee he is setting up will produce a report. Clearly, some of
these amendments relate to reports to Parliament which Parliament can
then debate. While I would be happy to withdraw these amendments, I
hope that this report will not be kicked into the long grass, and that
Parliament will be able to debate it so that Members in all parts of
the House have a chance to express their opinions of what is said. With
that, I beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
It
being One oclock,
The Chairman
adjourned the Committee without Question put, pursuant to the Standing
Order.
Adjourned till this day at
Four
oclock.
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