Clause
4
Postponement
of automatic
enrolment
Mr.
O'Brien:
I beg to move Government amendment No. 117, in
clause 4, page 3, line 1, leave
out subsections (2) and
(3).
The
Chairman:
With this it will be convenient to discuss the
following amendment: Government amendment No.
118.
Mr.
O'Brien:
I was referring to automatic enrolment from day
one. However, there is an exception, which we come to now. What we have
at the moment is a number of employers who provide perfectly good
pension schemes for their employees. They make a contribution that may
be above the 3 per cent. minimum that we are requiring. We want to
cause the minimum possible disruption to current good-quality pension
provision. Therefore, the objective of the clause is about where an
employer is making a fairly good-quality contribution—we reckon
at least 6 per cent., or double the minimum—and there is a
deferral of entry.
For
example, Tesco defer for a year at the moment before someone is
automatically enrolled into their pension scheme. One has to be
employed for a year and then one is automatically enrolled, as I
understand it—I can be corrected if I am wrong. The result is
that we would say that we do not want to change it unless we need to.
However, one year is rather a long time and we would rather have a
period of about three months. We do not want to put that in the Bill
now and we have time to discuss it with employers and to consider the
sort of period that will be best for ensuring that we keep a good
quality provision. Some employers have very strong views; if they make
a contribution of, say,
12, 13 or 14 per cent., as some good employers do, there may be an
argument for giving them a longer deferral period. We need to have a sensitive
discussion with employers. We want to give ourselves flexibility in the
coming months or possibly even a year or so. To have such a discussion
would ensure that we get the detail of regulations right. Three months
is the sort of period we are considering as a reasonable maximum but I
am not being dogmatic about that as we are prepared to discuss it
further as part of a consensus-building approach when we may consider
some sliding scales or say that three months is right.
The amendments clarify what we
are doing. We want employers using a deferral period to follow the
arrangements set out in clause 3. We want automatic enrolment and we
want it to be done properly; amendment No. 117 puts that clearly in the
Bill so that employers know that there is another procedure.
Amendment No. 118 is
uncontroversial. It clarifies the fact that employers can get a
deferral period for a reasonably good scheme, but they cannot then
switch the employees to another scheme that is not so good; in other
words, they cannot manipulate the system. Employers can keep the
deferral period provided that they keep their employees in the scheme
for which they are seeking the deferral. They cannot use it to move in
and move out of a scheme.
I doubt that many employers
would be tempted to use that trick but we want it to be clear in the
Bill that they cannot do so. If they seek a deferral it must be to
enrol someone in a better quality scheme than the minimum. In those
circumstances we accept that an element of deferral may be possible if
current arrangements are in
existence.
The
provision would particularly benefit employers who have a high
turnover, but it will mean that in order to take advantage of the
clause and the amendments they would need to have a better quality
pension scheme than the absolute minimum. There is a reasonable
trade-off, which has been discussed with various stakeholders. It is
fair to say that stakeholders have different views but what is proposed
is a sensible compromise that enables us to make a reasonable
provision.
I have
looked with care at the percentage level at which we enable the
deferral period to come in, given the employer contribution. It has
been suggested that the level should be 9 per cent., 10 per cent. or 6
per cent. I chose 6 per cent. primarily because I want a minimum of
churning, of decision making and of opportunity for people to decide to
level down. The proposal is part of that process; the less we require
employers who have reasonable provision to do, the better in terms of
levelling down.
I
hope that the Committee will accept the amendments and the
clause.
Andrew
Selous:
I am grateful to the Minister for his explanation
of the amendments and clause 4. The amendments are entirely sensible.
Amendment No. 117 is a way of tidying up and ensuring that clause 4 is
in line with what is stated in clause 3, and the strengthening
provision of amendment No. 118 is sensible also, so
I understand where the Minister is coming from. However, I have a
couple of questions about the Minister’s introduction to clause
4. I am grateful for his comments on clause 4 generally because he has
provided a lot more information than I have been able to obtain, either
from the explanatory notes or from the House of Commons Library brief.
I would be grateful if he provided a little further clarification on a
number of points. He mentioned, by way of example, the Tesco scheme. If
I understood him correctly, he said that employees are not enrolled in
the scheme at all for the first year, but that after that year they are
and it would pass his test of what counts as a good scheme. I am
unclear whether Tesco would retrospectively make contributions for
their employee for that first year. Perhaps he can respond later,
unless he wants to intervene
now?
Mr.
O'Brien:
I will not pre-judge whether the Tesco scheme
will fit our criteria or not, I want to look at it in more detail. I
have had discussions with Tesco, it runs a defined contribution scheme
on which employees are auto-enrolled after a year. In those
circumstances Tesco would not make back-dated contributions to the
start, but from the point of enrolment. In terms of the people who
would be automatically enrolled if we moved to three months, they would
receive their employer’s contributions as from three months, not
as from day one. There would be the option of a deferred period for
automatic enrolment and
contributions.
Andrew
Selous:
I am grateful to the Minister for that
clarification. I must admit that when I first looked at clause 4, I
assumed that schemes that paid an employer contribution of 3 per cent.
or more would fit the Minister’s criteria for an acceptable
scheme. I now realise that that is not the case and we shall have to
wait for specific regulations from the Minister on the exact balance of
employer contribution, when the scheme kicks in and various other
factors to determine whether a scheme will pass a reasonableness test.
He mentioned a 6 per cent. contribution figure; I do not think that he
totally committed himself to that, but that is perhaps a helpful
general clarification for employers in this
area.
Mr.
O'Brien:
I am fairly clear that 6 per cent. is the level
at which I want this to kick in. The pressure on me, in terms of the
views of stakeholders, has been that we should set the figure higher
rather than lower. I have tended to take the view that in order to
minimise disruption for employers and levelling down, we should set it
at the lower level of about 6 per cent.
Andrew
Selous:
We are going to have to take on trust what the
Minister is doing. I have no reason not to extend trust to him in this
particular area. In terms of not wanting to disrupt existing good
provision as the Minister suggests, we are in agreement with him. We
shall have to wait to see the specific regulations that he brings
forward, having had further discussions with those in the
industry—employers and specialist interest
groups.
Danny
Alexander:
Like the hon. Member for South-West
Bedfordshire, I think that the amendments are sensible. They are
intended to strike the right
balance between not giving employers undue
incentives to level down and preserving the right of pension holders,
employees, to get a decent
pension.
4.45
pm
I have one
question to ask the Minister. What process does he have in mind by
which employers will register to take advantage of the deferral period?
In the light of the conversation that we had on the previous clause,
there will clearly be some benefit to doing so. The Minister hinted
that it would be a quasi-automatic process based simply on employer
contribution. Will there need to be a one-off registration process
administered by PADA, for example, or will a record of the level of
employer contributions mean that a deferral applies? Businesses will
have to be notified if they are eligible for the deferral period, so
that they can make use of it if they need to. I should like a little
more detail on the practicalities and reassurance that they will not be
unduly burdensome in delivering a potential benefit to
employers.
Mr.
O'Brien:
The whole idea is that the employer can
self-certify his scheme. There will not be a registration process. We
want to make the rules explicit so that he can make a judgment that his
scheme enables him to self-certify, and he will then be responsible for
it. He will be able to get advice if he wishes, but that is essentially
the approach.
PADA
would not give him a certificate, because in a sense it is just another
provider, although it has wider obligations. If a certificate were to
be issued, it would have to be by the Pensions Regulator, but we do not
intend that to happen. The employer will examine his scheme and see
whether he is making contributions above a certain level. We want to
make the rules as clear as possible so that he can say, “Right,
I don’t have to be concerned about having to enrol everyone and
set up a pension scheme on day one. I have got my three-month deferral
period”—for example—“before I have to enrol
everyone, because I go over the
level.”
Miss
Julie Kirkbride (Bromsgrove) (Con): The Minister has put
some good arguments for his plan. From the opposite perspective, why is
he excluding schemes that make contributions of between 3 per cent. and
6 per cent.? After all, those are companies that have been doing the
right things and providing something for their employees by making a
contribution that, if an employee stays there for a considerable
period, will make a considerable difference to their pension pot
because it is above the 3 per cent. state minimum. If there is to be a
three-month waiting period, why cannot all schemes that already exist
qualify?
Mr.
O'Brien:
That is a good point. Part of the process of
deciding on the level was to consider all the circumstances of pension
schemes, because they have administration costs and running costs. It
would be very easy to set up a pension scheme with a high running cost.
For example, personal accounts could have 0.5 per cent. or 0.3 per
cent. running costs in the long term. Employers’ contributions
can be used up in that running cost, so the employee does not get the
benefit of them. In order to create therefore a cushion, we need a
certain amount of flexibility, and some trade unions, for example, are
concerned that the level at
which the exemption—the provision—kicks in should be
higher than 6 per cent., because the cost of running the system could
be quite high. Some systems, if they allow a lot of choice or are
complex, will have high administration costs.
Essentially, the answer to the
hon. Lady’s question is that I do not want to create a set of
complex rules that say things like, “You can self-certify if
your contribution is at 4 per cent. and your administrative
costs—your pension scheme—remain at 0.3 per
cent.,” among other conditions. I would rather have a clear and
straightforward set of rules, so that a small employer who has enrolled
his employees in a scheme that operates before 2012 and is fairly
straightforward can just say, “They’re all signed up,
I’m paying over 6 per cent., I can self-certify,
it’s fairly simple and straightforward. That gives me a deferral
period of this long, and I know what the situation is.” He does
not have to get advice from an independent financial advisor. The issue
is about getting the balance right between that level of protection
against administrative costs, and making self-certification as simple
and straightforward for a small employer as I possibly can.
Amendment agreed
to.
Amendment
made: No. 118, in clause 4, page 3, line 8, leave out from
beginning to ‘within’ in line 10 and insert
‘Where a person becomes an active
member of a scheme in accordance with regulations under this section,
the employer must not take any action, or make any omission, by which
the person ceases to be an active member of the
scheme’.—[Mr.
O'Brien.]
Andrew
Selous:
I beg to move amendment No. 14, in
clause 4, page 3, line 15, at
end add—
‘(7) The length of
any such postponement shall not exceed 6
months.’.
The
amendment would add new subsection (7) to the clause and stipulate the
maximum time for which automatic enrolment could be deferred. The
Minister has mentioned three months on several occasions during earlier
debates, which is half the time that the amendment stipulates, at six
months. The amendment would ensure a level playing field for all
employers, because there is a competitive advantage for employers who
do not make any automatic enrolment contributions to a scheme. An
employer, in a business in which margins are tight, may compete against
another who does not make such contributions, and 1 or 2 per cent. can
make a difference to winning business and getting orders.
Paragraphs 2.38 and 2.39 of the
regulatory impact assessment mention a possible three-month limit for
the postponement of automatic enrolment, but it became clear from our
earlier debate that we will have to wait for regulations. We would feel
more comfortable if there was a time limit in the Bill, so it would be
helpful if the Minister said when he expects to bring forward
regulations on clause 4, because it raises significant issues,
particularly about competitive advantage for
employers.
Mr.
O'Brien:
I have been asked when the regulations were
likely to be brought forward. We would want to have a proper discussion
with stakeholders, and it will be some time before we are in a position
to do that. I
cannot give a clear view on a time scale, but I would guess that we
would be able to have that consultation during the course of this year.
We need to have discussions with employers, and to have the regulations
drafted. I would like, then, to consult on the regulations; so it will
be the early part of next year before anything is brought before the
House. Bear in mind that we have a time scale of 2012, providing that
people have sufficient warning and the ability to contribute to the
discussion.
I am
afraid that I would reject setting a six-month period, although I
assume that the amendment is a probing one in any event, so I will not
spend any more time trying to rebut the arguments. I understand the
position that the hon. Member for South-West Bedfordshire has
taken.
Andrew
Selous:
What the Minister said when he introduced the
debate on clause 4 was helpful. In light of what he said then and what
he has said now, particularly about the time scale for bringing out the
regulations, I beg to ask leave to withdraw the
amendment.
Amendment,
by leave, withdrawn.
Clause 4, as amended,
ordered to stand part of the
Bill.
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