Pensions Bill

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Clause 12

Review of qualifying earnings band
Andrew Selous: I beg to move amendment No. 20, in clause 12, page 6, line 15, leave out subsection (2).
The Chairman: With this it will be convenient to discuss the following amendments: No. 86, in clause 12, page 6, line 15, leave out from first ‘in’ to end of line 16 and insert ‘the value of the amounts in—
(a) section 11(1)(a) are to be assessed in a way that the Secretary of State finds appropriate and which has been approved by resolution of both Houses of Parliament; and
(b) section 11(1)(b) are to be in line with earnings’.
No. 21, in clause 12, page 6, line 17, leave out ‘may in particular’ and insert ‘shall’.
No. 73, in clause 12, page 6, line 17, leave out subsection (3).
No. 74, in clause 12, page 6, line 21, leave out subsection (4).
No. 75, in clause 12, page 6, line 24, at end add—
‘(4A) If the average earnings index (including bonuses) for the whole economy for September of a year is higher than the index for the previous September, the Secretary of State shall as soon as practicable make an order in relation to each amount mentioned in section 11(1)(a) and (b), increasing each amount, if the new index is higher, by the same percentage as the amount of the increase of the index.’.
Andrew Selous: We move on to another important clause, which covers the review of the qualifying earnings band, which we have just agreed should be in the Bill by agreeing to clause 11. Of course, the two figures—£5,035 for the lower limit and £33,540 for the upper limit—will not maintain their value due to the ravages of inflation, so it is quite right that they should be increased over time. Clause 12, however, gives the Secretary of State almost complete carte-blanche to decide how the two bands will be increased, so we seek greater clarity on how the uprating will be undertaken. There is a precedent because the Employment Relations Act 2004 sets down a formula through which statutory redundancy pay is uprated. I look forward to hearing the Minister’s intentions for reviewing the qualifying earnings band in the years to come.
Paul Rowen: I wish to speak about amendment No. 86 in particular. The purpose of amendments Nos. 20 and 86 is to probe the Government as to what methods they intend to use to ensure that the values of the earnings limits are maintained. I know that the EEF would like to see the qualifying band uprated in line with earnings, rather than leaving it to the Secretary of State, as the Bill proposes. That is not necessarily our view; we believe that the Secretary of State should have discretion.
Amendment No. 86 would, however, ensure that whatever discretion the Secretary of State used on uprating, the limits would be reported to the House. That would be an important safeguard to ensure that savings and the amounts paid keep their value. I am not saying that a future Secretary of State—whoever that might be—would not ensure that they would maintain their value, but we believe there should be a mechanism to ensure that Members are able to respond to the proposals put forward by the Secretary of State. I look forward to hearing how Ministers will ensure that Members are kept informed of the rates proposed each year.
Mr. Plaskitt: The reforms have been structured to enable a median earner with solid state entitlement to achieve a replacement rate in retirement of around 45 per cent., in line with the Pensions Commission’s recommendations.
The limits of the qualifying earnings band—the lower limit of £5,035 and the higher limit of £33,540, in terms of 2006-07 earnings—have been set in conjunction with the default minimum contribution rate for defined contribution pension saving: 8 per cent. Having established a relationship between working-life income and income in retirement, it is important to establish a mechanism to maintain that, as the hon. Gentlemen said. That is right, and it is the exact purpose of the clause.
We plan to review the limits of the qualifying earnings band once a year to determine whether they have maintained their value, as the Bill says. Our expectation is that future changes to the limits of the qualifying earnings band will follow changes in the general level of earnings. Tracking earnings is important for two reasons: first, to ensure that the value of contributions going into money purchase schemes remains stable in relation to earnings, which will help to maintain the balance between working-life income and income in retirement; and, secondly, to avoid enrolling even higher numbers of workers with low earnings for whom state provision will already offer high income replacement rates.
Pension reform involves making policy for the long term, however. Average earnings might not always be the only, or the most suitable, measure with which the Government should assess whether the limits of the qualifying earnings band have maintained their value. In the absence of complete foresight, which no Government can have, we have taken the prudent step of retaining some flexibility over the measures that the Government must consider when assessing whether the limits of the qualifying earnings band have maintained their value.
All the amendments would, in various ways, reduce that flexibility by removing elements of the Secretary of State’s discretion in uprating the lower and upper limits of the earnings band. Amendments Nos. 20 and 73 would remove the discretionary ability to uprate the earnings band limits using a more appropriate measure than earnings, should the need arise. Amendment No. 86 would require an assessment of the change in the value of the band limits to take place by two separate methods: an approach approved by Parliament for the lower limit, and using average earnings for the upper limit. Amendment No. 21 would make it mandatory to carry out a review of the qualifying earnings band in line with rises in average earnings only, and amendment No. 74 would remove the Secretary of State’s discretionary ability to change the limits of the qualifying earnings band, even when he judged that their value had not been maintained. Amendment No. 75 would make it mandatory to review and revise the qualifying earnings band limit in line with rises in average earnings.
In all of their various ways, the amendments would curb the discretion of the Secretary of State and reduce flexibility in the system. It is clear that the real test of whether the bands have retained their value, in terms of ultimate income in retirement, is value vis- -vis earnings. It would not be sensible to be over-prescriptive about which measure of earnings could be used, although it is perfectly clear which ones are used at present in respect of other benefits that are earnings uprated. Given that the provision will be in the Bill and that it is conceivable that, due to statistical developments or changes in future Government policy, the way of measuring earnings might change and new indices might evolve, it would not be wise at this time to prescribe with great specificity the index that should be used. We are establishing the principle that the value is maintained in relation to earnings, and the appropriate earnings index will be used.
It is also important to leave open the possibility—this is not inconceivable—that earnings in any given year might not be the right measure by which to assess value. There have been periods in which prices have risen faster than earnings. We want to leave the possibility open because the important thing, as the Bill says, is to maintain the value of those bands. The objective is to ensure decent levels of income in retirement and to maintain the balance of income obtained through work and income derived in retirement as a result of that work. That is the reason why the clause is drafted in such a way, and why we would not want to see it restricted in any way. Given that, I hope that the hon. Member for South-West Bedfordshire will withdraw the amendment.
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Andrew Selous: This was put down as a probing amendment, just something to get down on the record as to the Minister’s intentions. I listened carefully to what he said and I am reassured that he has made the commitment to maintain the value of both figures specified on the face of the Bill in relation to earnings. That is a useful reassurance that can be reviewed in years to come by Members of this House, should anything else be done by a Government at any future time. So, having heard the Minister’s comments, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 12 ordered to stand part of the Bill.

Clause 13

Pay reference period
Andrew Selous: I beg to move amendment No. 22, in clause 13, page 6, line 27, leave out from beginning to ‘twelve’ in line 28.
This amendment seeks to elucidate from the Minister the Government’s intentions relating to pay reference periods. The wording on the face of the Bill in clause 13 is quite open, and given the understandable concerns that employers have about how they are going to make the calculations relating to these payments, it would be useful to hear that the Government intended to make their pay reference periods as simple and straightforward as possible so as not to add to their administrative burdens in any way.
I hope for the vast majority of employers it will be quite clear and simple: either their financial year or the tax year. But I wish to be reassured by the Minister that the Government do not intend to impose on employers any strange or unusual periods that would cause them any difficulties.
Mr. Plaskitt: The hon. Member for South-West Bedfordshire seeks my reassurance on this in respect of simplicity and I hope I will be able to give that to him. Clause 13, an important clause in the Bill, enables Government to set the period, or range of periods, during which qualifying earnings are to be assessed for the purpose of calculating contributions to workplace pension saving. Many headline figures associated with these reforms are expressed in annual amounts: the limits to the qualifying earnings bands, for example. That is why the clause provides for a default pay reference period of 12 months, so that those annual limits make sense.
However, as set out in clause 11(2), the annual limits of the earnings bands are to be varied on a pro rata basis when qualifying earnings are being assessed for a pay reference period that is more or less than 12 months. Therefore, in line with the preference of employer lobby groups, especially the CBI and the Engineering Employers Federation, we have included the flexibility to establish an array of pay reference periods, so that the assessment of qualifying earnings and the calculation of contributions for the purposes of workplace pension saving may be aligned with the range of pay periods used by employers today, which in some instances are weekly or monthly. In essence, we are asking employers to do what they are already doing. That is the common-sense approach.
If an employer pays its workers monthly, that is the period it should use for the purposes of calculating pension contributions. The amendment, however, would remove that flexibility by locking employers into a pay reference period of 12 months—only 12 months—which would delay the point at which some jobholders qualified to be automatically enrolled. The flexibility to be able to prescribe pay reference periods as a week or a month is important for another crucial reason: it simplifies the administration for employers by making the calculation and collection of contributions to pension saving part of those companies’ normal pay cycles. Clearly, forcing companies into administering that out of line with their ordinary pay cycle would be an added burden. We will work with stakeholders to ensure that the linkage between pay reference periods is tailored to achieve the best fit for employers.
I hope that I have demonstrated the importance of retaining the flexibility. The measure fits with employers’ current practices and best serves the interests of the people that we anticipate will come into the schemes. With those reassurances, I hope that the hon. Gentleman will feel able to withdraw his amendment.
Andrew Selous: Yes, I am reassured by the Minister, particularly about the intention behind clause 13 to mirror the pay periods already being used by employers. If the clause has been worded in that way at the behest of the CBI and the Engineering Employers Federation and others, I am doubly reassured by what I have heard. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 13 ordered to stand part of the Bill.

Clause 14

Qualifying earnings
Andrew Selous: I beg to move amendment No. 2, in clause 14, page 7, line 9, leave out paragraph (c).
This is another probing amendment, to find out a little more about the current usage of average salary benefits. Many of us are familiar with final salary schemes. I am aware that there has been a significant demise in such schemes for various reasons in recent years, but I am not aware how widely average salary benefit schemes are being used. Therefore, I am seeking some elucidation from the Minister on that point and, in particular, on the likely impact—on the possible payments received on retirement—for personal account holders of average salary benefits being used.
Mr. O'Brien: In answer to the hon. Gentleman’s question, there are 9.6 million people active in occupational schemes, of whom 8.5 million are in defined-benefit schemes, and 1.1 million are in defined-contribution schemes. Around 200,000 people are in defined benefit schemes where pension benefits are based on a fraction of the individual’s average earnings across their career. These earnings are generally uprated in line with prices. This seems to be a probing amendment. Let me set out what we are seeking to do.
Clause 14 is the first of a series of clauses that set out the minimum standards for schemes to be used under the employer duties. This clause introduces the concept of qualification. Qualifying schemes must be occupational personal person schemes, tax registered under the Finance Act 2004, and must meet the relevant quality criteria in relation to a jobholder who joins the scheme. It is crucial to ensure that there is a statutory duty for schemes offered by employers to provide suitable contributions or benefits to those who join them. This amendment would remove a key element of the protection required to safeguard the quality of qualifying and automatic-enrolment schemes.
Clause 14(2) gives the Secretary of State the ability to disqualify, through regulations, certain schemes that would otherwise meet the quality requirement. That would allow regulations to disqualify schemes that require prohibitively high member contributions—ones where the employer will contribute so much, but the member must contribute a very large amount—and those which levy excessive administrative charges. It would also allow regulations to disqualify career-average schemes of a certain type, as set out in paragraph (c).
I can reassure the ACA, and others who have raised the issue, that we will allow career-average schemes to discharge employer duties. We are aware that career-average schemes are becoming increasingly popular, and provide a compromise for employers who want to retain defined-benefit provision, but do not want to do so through final salary schemes. Many career average schemes provide generous benefits to members and help employers control the cost of pension provision. We want to support and encourage such schemes.
It is our intention, however, to apply these regulations to career average schemes that do not appropriately revalue the earnings on which the pension is based. We have designed the quality requirements for defined benefit schemes to be as easy as possible for employers to apply. The intention is that this can be done by assessing the value of the benefits payable at a particular point in time. Some schemes may meet the quality requirement based on the value of benefits at that time, but those may not maintain their value over time to retirement without revaluation of earnings. I am sure Members will agree that, given the risk that such schemes would lose their value over time, they should not qualify to accept members under the statutory duty established by the Bill.
We are providing reassurance that we have the ability to prevent employers using schemes that are not of the sort that Parliament intends: poor schemes that will give poor value, or schemes that are intentionally created to discourage people from joining them. That is the aim of the powers we are taking in the Bill to bring forward regulations. I hope on that basis that the hon. Gentleman will feel able to withdraw his amendment.
Andrew Selous: Certainly. I am grateful to the Minister for setting out some of the figures that describe the different types of pension saving that are going on at present. I am also grateful to him for what he said about the capacity of this clause to deal with schemes with extortionate costs, and schemes which would require an overly high employee contribution. With that, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 14 ordered to stand part of the Bill .
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