Pensions Bill

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Clause 10

Introduction of employers’ duties
Amendment made: No. 125, in clause 10, page 5, line 24, leave out from ‘that’ to ‘until’ in line 26 and insert
‘sections 2 to 7 and [Workers without qualifying earnings] do not apply in the case an employer of any description’.—[Mr. Mike O'Brien.]
Mr. O'Brien: I beg to move Government amendment No. 138, in clause 10, page 5, line 28, leave out subsection (2).
The Chairman: With this it will be convenient to discuss the following: Government new clause 12—Transitional periods for money purchase and personal pension schemes .
Government new clause 13—Transitional period for defined benefits and hybrid schemes .
Mr. O'Brien: Clause 10(2) has been drafted to give effect to the Government’s policy of enabling employers to phase in the requirements of employers’ duties so that they can better manage the additional costs that the reforms will bring. Consultation with small employers demonstrated that there was keen support for the phasing of the requirements. In particular, the Federation of Small Businesses—I note that its member is in his place in Committee Room—responded positively by saying that it welcomed the phasing in of the contribution.
However, the clause as drafted did not give employers certainty about the phasing arrangements that they would need so that they could start planning how they would discharge their duties. We have thus tabled one amendment and two new clauses to give employers a greater degree of certainty about the phasing arrangements for their qualifying schemes.
Amendment No. 138 proposes removing the broad power that would allow the Secretary of State to set out regulations on how employers’ duties would be phased in over a transitional period. The amendment will facilitate the introduction of the two new clauses, which set out the phasing arrangements for employers operating qualifying schemes.
New clause 12 will improve on clause 10(2) by giving employers that operate qualifying money purchase schemes the certainty that they need to plan how to manage any additional costs associated with their new duties. The phasing arrangements, which have been welcomed by employers’ representatives, involve a three-stage increase in the minimum contributions required of money purchase schemes. Essentially, with a direct contribution or money purchase scheme, the system is phased in over three years, with a percentage increase in each year. New clause 12 establishes that contributions in the first phase must be at least 2 per cent. of qualifying earnings, with at least 1 per cent. coming from employers. That will rise to 5 per cent. in the second phase, of which the employer must pay at least 2 per cent. Finally, the contributions will reach their permanent level of 8 per cent., including a 3 per cent. contribution by the employer. This will mean that employers will be able to meet the additional contribution costs in a series of steps—they will be given time to phase in the change.
New clause 13 sets out our intention to allow employers using the other main kinds of pension scheme—defined benefit and hybrid schemes—to be able to adjust gradually to the costs of the reforms. Existing legislation requires that defined benefit and hybrid schemes maintain appropriate funding for their liabilities. So, in effect, the scheme in new clause 12 of phasing in the amounts that employers would have to pay would not be able to work because the obligation on employers would be to maintain the appropriate funding level for their liabilities. However, employers must not reduce the contributions that they are committed to pay. Any provision that allowed employers to phase in contributions would interfere with the existing rules of the schemes and open up risks of under-funding. As such, it is not possible for employers with defined benefit or hybrid schemes to pay reduced contributions in the same way as new clause 12 will allow employers using money purchase schemes to do.
For those reasons, new clause 13 sets out an alternative approach. Employers offering final salary or hybrid schemes will be permitted to delay automatic enrolment into such a scheme for those jobholders who are eligible to join, but have not yet chosen to do so. They must automatically enrol those jobholders by the end of the transitional phasing scheme. Those who are currently in employment and have chosen, despite this being available to them, not to join a defined benefit or hybrid scheme would thus not have to be enrolled until the end of the transitional period. They would have already made their judgment: they could have joined, but decided not to. However, all other jobholders—new workers and those who were previously ineligible to join the defined benefit or hybrid scheme—must be automatically enrolled in the usual way at the start of the phasing period. There will therefore be a three-year phasing period before which an employer would have to sign up existing employees who had decided not to join the pension scheme.
I hope the Committee will feel that, particularly with regard to defined benefit and hybrid schemes, we have sought to give some flexibility. It is not possible to do the same for the employers in relation to DB schemes as it is in relation to DC schemes, but we have tried to provide some degree of flexibility to allow a certain degree of phasing in. We are also conscious that, as part of the process of automatically enrolling employees, we want all new workers enrolled and to ensure that those who were previously ineligible to join a pension scheme were able to join one. I hope that hon. Members will be able to agree to both amendment No. 138 and new clauses 12 and 13.
Andrew Selous: The Government amendment and new clauses are certainly sensible. We all agree about where we want to get to, but the Minister is right that getting there in one go might be too difficult for some employers.
In business, one cannot just lift prices significantly in one go. Sometimes these things must be done over time. We all expect employers to put in the money and to cope with this, but we must be sensitive to the competitive business environment in which they are operating, both in the UK and internationally. I am happy that the pleas of the Federation of Small Businesses have been listened to in that regard. These objectives are sensible, and we are happy to have them in the Bill.
Amendment agreed to.
Clause 10, as amended, ordered to stand part of the Bill.
1.30 pm

Clause 11

Qualifying earnings
Andrew Selous: I beg to move amendment No. 17, in clause 11, page 6, line 4, leave out ‘wages, commission, bonuses and overtime’ and insert ‘and wages’.
The Chairman: With this it will be convenient to discuss the following: Amendment No. 18, in clause 11, page 6, line 11, leave out paragraph (f).
Amendment No. 19, in clause 11, page 6, line 11, at end add—
‘(4) For the purposes of scheme contributions by and on behalf of members of a qualifying scheme other than that established by Chapter 4 of this Act, subsections 11(1) to (3) may be disregarded if contributions are calculated and made in relation to the individual’s basic earnings.’.
Andrew Selous: Clause 11 is very important, and sets out the band in which wages will be subject to the personal account scheme. At the moment, the vast majority of pension schemes use total basic earnings when they calculate contributions. This is not true in all cases, but certainly in the vast majority of cases. In my former life, my pension was calculated on my basic salary, rather than on any additional payments that I was fortunate enough to be paid from time to time.
I understand the concern, raised by the TUC and others, that there may be some employers—unscrupulous or otherwise—who will seek to avoid paying the correct amount into personal accounts by transferring what would ordinarily be paid as salary into commission, bonuses and overtime. I am aware of that, and I would be sympathetic to anything the Government could do to stop employers doing so, in a way tantamount to deliberate manipulation of normal commercial practice, with the aim of not paying the appropriate contributions into personal accounts. Does the Minister know of any evidence of that sort of avoidance happening now? Are employers paying remunerations that would ordinarily be part of salary or wages as commission bonuses or overtime?
How does the Government currently treat bonuses paid to civil servants and other public sector workers? The whole area of bonuses in the public sector is somewhat new to me, but one reads from time to time of significant bonuses paid to civil servants—not always civil servants who have done an amazing job. There are one or two examples of people being given bonuses when that, perhaps, was not justified, but I am sure that in the vast majority of cases it is richly justified. What happens in relation to public sector pension schemes where this is current practice?
There is a worry that clause 11, as drafted, may lead to some form of levelling down, for the following reason. The administrators of current pension schemes generally supply the information on the schemes’ members in relation to the basic salary that those individual employees receive. As I read clause 11, it looks like there is going to be an onus on the administrators of current pension schemes to get in touch with employers and find out the exact amount of commission, bonuses and overtime paid to each employee. Administrators of current pension schemes will not ordinarily have that information.
The requirements of clause 11 will place significant additional burdens on employers who have to provide the information, information that is likely to change from month to month because employees and employers cannot say in advance exactly how much overtime will be worked. Pension scheme providers do not hold that level of detail on earnings and so the employer will need to perform the check. If that results in employers getting bogged down in the monthly bureaucracy of having to provide a pension administrator with that level of detail on the overtime of every employee, which they currently do not have to do, some employers might decide that it causes too much difficulty and will perhaps level down from their current scheme.
A further complication is that administrators of current pension schemes need to know whether their scheme meets the quality requirements in clauses 18 to 24, which we will debate shortly. How will they be able to tell whether their scheme meets those quality requirements if they do not have to hand that level of detail on overtime, bonuses and commission that individual employees might be receiving month by month? It will be complicated, and it will be difficult for them to know whether existing schemes meet the quality requirements that the Government have quite properly put in the Bill. I understand exactly why commission, bonuses and overtime are included here, and I am mindful of the need to prevent employers deliberately manipulating the way in which they pay their workers to avoid contributions that they should be making—the Government would be right to ensure that those contributions were made. However, there are a number of technical and practical difficulties on which we need some assurances from the Minister. If he is not able to give full reassurance now I would be grateful if he would take the issue away to consider at greater length.
Paul Rowen: The Government, in drafting clause 11, have been mindful of some of the concerns. We have all talked about wanting to ensure that we develop a quality scheme that is simple and easy to administer. As the hon. Member for South-West Bedfordshire said, that has the potential to be a bit of a minefield, which could present some difficulties. Nevertheless, the safeguard is important for employees, so that the less scrupulous employer will not see if there is a way of saving money. Those companies that do not have schemes at the moment will be introducing a scheme and will have to pay the 3 per cent. employer’s contribution. If they can switch some of what someone earns into bonuses or not count overtime as actual earnings—predominantly affecting those on low pay—that will enable them to get below the £5,035 threshold, resulting in less of an employer’s contribution.
The Government have got it right by making sure that the clause is in the Bill. Nevertheless, I would be interested, as the hon. Gentleman said, in how they would intend to operate it. Clearly we want an easy-to-use system, which does not impose too great a regulatory burden on employers, but the safeguard is important. I support the clause as currently written.
Mr. Plaskitt: I am grateful to the hon. Member for South-West Bedfordshire for his amendments, allowing us to look at the clause in more detail.
Pension contributions need to reflect the full value of underlying earnings if workers are to stand a real chance of saving for an adequate income in retirement. However, both amendments Nos. 17 and 19 would reduce the range of pay components that need to be taken into account when calculating the minimum level pension contributions due to a worker. On average, commission, overtime and bonus payments make up around 8 per cent. of the earnings of those jobholders who will be eligible for automatic enrolment. If pensionable earnings became limited to basic pay, as would be the affect of applying the amendments, the overall value of pension saving would fall. We estimate that the reduction in savings could be around £900 million a year at a steady state, once the impact of the phased introduction of the employer duty has passed through the system. That would mean that people who save throughout their working lives will fall below the replacement rate that they are otherwise expecting to achieve.
That is a core problem with the hon. Gentleman’s amendment. Although he said that he supported the obvious intention to deal with any potential unscrupulous practice by which employers might seek to prevent payment from qualifying for their contributions to the scheme. In a sense the hon. Gentleman is trying to have it both ways, by watering down the protection, which would potentially open up the opportunity for unscrupulous employers. I think that we have the balance right and that the affect of the amendment would be to unbalance it in ways that I am sure he would not wish.
Some workers rely on commission and overtime payments. To exclude such pay components would reduce the benefit of the reforms for such workers. For example, commission payments often form a significant proportion of the overall income of those people who work in retail, telesales and parts of the motor industry.
1.45 pm
Amendment No. 18 would prevent the Government from being able to react to any pay practices that developed simply as an attempt to avoid pension contributions. The hon. Gentleman asked if I thought that that practice was widespread at the moment, but there is no evidence to suggest that it is. It is important, when legislating in this way, to anticipate possible developments and to choke off those that would be undesirable. The amendment would open up a loophole that could be used for unscrupulous avoidance by enabling employers to reclassify their workers’ earnings, thereby reducing the contributions that the employer was required to pay.
I want to reassure the hon. Gentleman and other hon. Members that we appreciate that many employers with existing schemes tend to define pensionable pay using fewer pay components—here I come to his point about the possible burden. We shall, therefore, provide guidance to help employers to work out whether their arrangements meet the minimum requirements. We could perhaps base that on look-up tables and other simple tests, which should address the point that he rightly raised about the potential for difficulties in computation. However, I should add an important point: no employer will be required to change their definition of pensionable pay because qualification relies on the value of contributions paid, not the basis on which they are calculated.
At present, the median employer contribution for workers in defined contribution schemes is 7 per cent. That provides those employers with considerable head room in the test. We therefore fully expect many existing arrangements to qualify, even if, for example, they do not take account of overtime as part of the pension calculation, because that could easily be offset by a higher employer contribution than the minimum 3 per cent. We plan to provide, I am pleased to say, a plain English guide for employers and schemes to assist them when applying the tests. That might involve simple illustrations of how the earnings band or higher contributions could be offset against a different definition of pensionable pay. There will be plenty of scope for further discussion as part of the normal regulation-making process.
In addition, qualifying earnings form part of the definition of jobholder. Tinkering with the definition of qualifying earnings would have an impact on the eligibility for automatic enrolment, and might mean that some people would miss out on workplace pension saving.
I think that I have addressed all the points made by the hon. Gentleman and I hope that he will now feel free to withdraw the amendment.
Andrew Selous: I am definitely reassured by what the Minister says. Perhaps I should have said earlier that the amendment was probing.
We have had a useful debate because there are concerns among current scheme providers about some of the computation difficulties that the Minister spoke about. I am glad that he is seized of the salience of these issues for those providers. He said that there could be £900 million less in contributions if the amendment were accepted—I would certainly not want that, and that was not my intention. I would, however, say that if the Minister was not on to the computation difficulties and was not able to do something about them, there would be a real possibility of levelling down from existing good provision above the level of personal accounts. There could have been a reduction had those computation difficulties not been taken into account.
I am reassured by what the Minister said about the guidance and leaflets, and especially reassured that they will be in plain English, which is something of which we are all in favour. I therefore beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 11 ordered to stand part of the Bill.
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