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
13Transitional period for defined benefits and hybrid
schemes
.
Mr.
O'Brien:
Clause 10(2) has been drafted to give effect to
the Governments 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
BusinessesI note that its member is in his place in Committee
Roomresponded 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
stepsthey 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 schemedefined benefit and hybrid schemesto 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 jobholdersnew workers
and those who were previously ineligible to join the defined benefit or
hybrid schememust 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 individuals 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
employersunscrupulous or otherwisewho 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 servantsnot 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 makingthe
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.
employers contribution. If they can switch some of what someone
earns into bonuses or not count overtime as actual
earningspredominantly affecting those on low paythat
will enable them to get below the £5,035 threshold, resulting in
less of an employers
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.
The
clause defines qualifying earnings by establishing an earnings band,
and by setting the range of pay components for the purposes of
calculating those qualifying earnings. Qualifying earnings, in
conjunction with the minimum 8 per cent. overall level of contributions
for
money-purchase saving, as set out in clause 18which we will come
toestablish the new minimum level for pension saving and
underpin the whole package of reform. Together, they should enable a
median earner with solid state entitlementa good number of
yearsto achieve a retirement income at a replacement rate of
around 45 per cent. Those arrangements, including the minimum employer
contribution of 3 per cent., only work if the calculation is based on
the full value of gross earnings, as was pointed out by the Pensions
Commission in its report of
2005.
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. Gentlemans 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.
The
core pay components set out in the Bill already cover the majority of
workers earnings, so any additions
to the list are unlikely to have much impact for most employers.
Nevertheless, we want to be able to consider additions such as
allowances that relate to the skills that workers have, or to the
working patterns that they adopt, such as data processing and shift
allowances.
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 componentshere 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 acceptedI 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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