 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Pensions Bill |
Pensions Bill |
The Committee consisted of the following Members:Mark Hutton, Committee
Clerk
† attended the
Committee
Public Bill CommitteeTuesday 29 January 2008(Morning)[Janet Anderson in the Chair]Pensions Bill10.30
am
Mr.
Nigel Waterson (Eastbourne) (Con): On a point of order,
Mrs. Anderson. I would like to take this opportunity to ask
the Minister if he could update the Committee on where we are with the
drafting of amendments relating to the financial assistance scheme that
would extend the basis of compensation for pensions
victims.
The
Minister for Pensions Reform (Mr. Mike
O'Brien):
We intend to bring forward amendments in the
coming weeks to ensure that the Committee and the House as a whole have
an opportunity to debate them. The amendments will relate to
compensation levels—getting them up to 90 per cent.—and
some other issues that can be dealt with by regulation. I very much
hope that, before this Bill is through, we will have the regulations,
or at least some of the key ones. As for the amendments to be included
in this Bill, it will probably be two or three weeks before we are in a
position to share them with the Committee, as parliamentary counsel are
still working on them. I hope that that is
helpful.
Mr.
Waterson:
I am grateful for what the Minister has to say
and appreciate that parliamentary draftsmen do not always work at the
fastest rate. Clearly, it would be helpful to have a good amount of sea
room before the scheduled end of the Committee so that we will know how
much time we will have to devote to these very important matters and do
not run out of time for either those amendments or other new clauses at
the end of this stage.
I would also like to confirm,
and this is true of both Opposition parties, our happiness with a very
short consultation period on the regulations—a period of a
fortnight, rather than the normal requirement—so that we can get
on with getting money to the people who need
it.
Mr.
O'Brien:
I am grateful for that. We will get these
amendments drafted as quickly as we can. We will obviously want to
consult, and we will make sure that Committee members get the
opportunity to see the drafts as soon as we are able to provide them so
that they are able to contribute to the consultation. I hear what the
Opposition parties are saying and I will endeavour to be as helpful as
I reasonably can.
Clause 18Quality
requirement: UK money purchase
schemes
Paul
Rowen (Rochdale) (LD): I beg to move amendment No. 92, in
clause 18, page 8, line 8, leave
out from ‘least’ to end of line 9 and insert
‘5% of basic earnings in the pay reference
period’.
The
Chairman:
With this it will be convenient to discuss
amendment No. 90, in clause 18, page 8, line 17,
at end add—
‘(3) (a) the
Secretary of State may by order approved by resolution of both House of
Parliament amend the lower limit of the employers’ contribution
set out in paragraph (1)(b) of this
section.
(b) the Secretary of
State may by order approved by resolution of both Houses of Parliament
amend the lower limit of the total contribution paid by the jobholder
as the employer set out in paragraph (1)(c) of this
section.’.
Paul
Rowen:
It is a pleasure to serve under your chairmanship,
Mrs Anderson. These two amendments get very much into the nitty-gritty
of the Bill. As we all know, basic pay is a standard for pensionable
elements of pay in the UK labour market and the basis on which
contributions are calculated for many employees who are offered good
schemes. In the earlier clauses that we agreed last week relating to
all personal pension schemes, we broadened the definition of eligible
pay to include all earnings. Clearly there is an issue there, in terms
of employers, about how much effort will be required to work out
whether a particular scheme would be exempt. On the information that we
have been given, for example, an employer would have to make sure that
they were going to pay at least 6.8 per cent. of all earnings to ensure
that that overall 3 per cent. threshold was met. That is
overcomplicated. It would produce an awful lot of additional work and
not necessarily deliver what we all
want.
There is a much
simpler way of doing it. We acknowledge that the CBI accepts the
principle that working on basic pay rather than gross earnings is a
much simpler way of working out the equation. The CBI would like the
figure to be 3 per cent. of basic pay, but that is far too low. Five
per cent. is much nearer the percentage paid by employers in existing
schemes. We are extending the remit, so there will be an additional
cost, but that would be a much fairer way of working out whether a
scheme should be exempt. We hope that the Minister accepts the
principle—it is first of all a principle—that working out
exemption and the higher threshold needs to be
simple.
The problem
with using gross pay rather than basic pay is that gross pay fluctuates
for many people at both ends of the employment scale: low-paid people
who might do varying amounts of overtime; and people at the other end
of the scale for whom a large element of what they earn might be paid
as a bonus. That would produce an awful lot of additional work for an
employer. A 5 per cent. basic pay threshold seems a much easier way of
working. I appreciate that there are costs involved and I am interested
in what the Minister has to say about what thought has been given to
the
issue. I cannot support what the CBI says about levelling down to 3 per
cent. of basic pay. That would not deliver the benefits that we want to
see.
Mr.
Waterson:
I am following what the hon. Gentleman says
closely. He will obviously come on to the question of extra costs.
Before he leaves the point that he is making, will he tell the
Committee whether he has any concerns about moving away from the
overall Turner settlement, which, as part of the package, settled on a
3 per cent. contribution from employers? This is not a
pick-n’-mix exercise, as Lord Turner would have said if he had
been asked during the evidence session. I think that he would have put
it as, “A package that hangs
together.”
Paul
Rowen:
I accept what the hon. Gentleman says. The argument
is finely balanced between accepting a 3 per cent. figure on
gross earnings—using gross earnings is fairer when assessing
what the exemption rules should be—and accepting that that 3 per
cent. will produce a burden for employers and a lot of additional work.
If the scheme will be exempt anyway, why should they have to go through
the calculations in the first place? That is why, although Turner did
not recommend it, it is worth exploring whether a 5 per cent. threshold
on basic salary is a fairer way of delivering the benefits that we all
want to see. I am interested in what the Minister has to say about the
additional work and costs involved in working on—although the
CBI wants to move to 3 per cent. of basic earnings—3 per cent.
of gross
earnings.
Amendment
No. 90 is important. It would enable the lower limit of the
employers’ and employees’ contributions to be amended by
order. We are making calculations for the long term and certain
assumptions about take-up and how these schemes are going to operate.
The market might change, as might people’s perceptions of what
is acceptable. The amendment would give the Secretary of
State—with the approval of the House by resolution, because we
believe that these are important matters that should be
debated—the power to amend the set level of contributions. That
is important.
Many
employers’ schemes pay more than the 3 per cent. that we are
talking about. If there is evidence of levelling down, we believe that
we should have the ability to amend the contributions that are made.
There is certainly evidence that that could happen and it would be very
regrettable. We are not saying that it is going to happen—we are
not saying that it is inevitable—but, given that research has
raised concerns about whether there will be levelling down, we would
like to be able to have a debate in the House to set those figures. The
decision may well be taken a long way down the line when evidence
becomes clearer. However, we believe that such a provision in the Bill
would allow for a proper debate in
Parliament.
Mr.
Waterson:
I am sorry to start
today’s proceedings on a slightly churlish note, but I am afraid
that we are not able to support either of the Liberal Democrat
amendments. I am not for a moment saying that it is not right to have
this debate and I hope the Minister will have some fairly detailed
figures to share with us about the extra costs involved under amendment
No. 92. It
might seem churlish of me, because I have not entirely embraced the new
concept of explanatory notes, but I could not help noticing that the
explanatory statement attached to amendment No. 92 says:
“The purpose of this
amendment is to ensure compliance with the new system is not too
demanding for
employers.”
That reminds
me of the story that after the atomic bombs were dropped on Japan, the
very first time the Japanese people heard the voice of their emperor on
the radio—or at all, for that matter—he gave a speech
with a remarkable wording that must have been an early example of spin.
He said there had been a development in the war that was not
necessarily to Japan’s
advantage.
Although
on a much more modest scale, this explanatory note comes into the same
category. Needless to say, reference has been made elliptically to the
CBI, which, as far as one can tell from the written page, seemed to
have steam coming out of its ears about this subject. During last
week’s debates, I dealt with the CBI’s concerns
about the standard pensionable element of pay in the UK labour market
and the basis on which many employers with existing schemes do their
calculations. It
says:
“The
wide definition of pay used by the Bill at present will cause those who
run exempt schemes to have to reassess each employee's pay packet to
calculate a contribution rate each month and work out whether their
scheme qualifies.”
It
says that it would like the Bill in its final
form
“to allow firms to
measure their schemes against the percentage of basic pay they
offer.”
That is a debate
that we have had and will no doubt have again. The
CBI welcomes the fact that amendment No. 92 “acknowledges these
concerns”, but it
does not
“support
it, as it significantly escalates the employer contribution as a
percentage of basic
pay.”
It goes on to
say:
“Lifting
the level to 5 per cent., as the amendment does, is a significant
escalation of employer cost. The sentiment of this amendment is
correct, but the figure should be 3 per
cent.”
We broadly agree
with that
judgment.
10.45
am
We have two
objections to the amendments: the question of extra cost on employers;
and the broader issue of the Turner settlement. Although it is very
easy to fall into the habit of regarding the second and final report of
the Pensions Commission as holy writ, poring over it as if it had some
sanctified existence, on a more basic level, it is important to
remember that the package put together was about what happens not only
to the state pension, but also to private pension provision in this
country. Within that package are other packages, and the commission
weighed the ingredients carefully. One was the package for
contributions—the commission alighted on a figure of 8 per cent.
for the overall level of
contributions.
We can
argue, and no doubt will, about what sort of standard of living in
retirement an overall package of 8 per cent. will deliver, but the
broad Turner argument is that that is much better than nothing, which
is what a lot of people are staring in the face at the moment. However,
within the overall 8 per cent., the 3 per cent. employer contribution
is the result, again, not only of
careful of calibration, but also of a fair bit of give and take between
the various bodies involved, particularly those representing employers,
such as the CBI. We have to be careful about starting to unpick the
very basics of the Turner package and, if Lord Turner were here, I am
sure he would argue fiercely against that—I feel his ethereal
presence hovering over all our debates on this and other Pensions
Bills.
I turn,
finally, to the second report of the commission, which falls open at
page 277—I must read it fairly often—and makes it
clear:
“We
recommend that employers’ minimum contributions should be 3% of
earnings above the Primary
Threshold”—
going
on to explain why. That explanation includes,
because,
“contributions
are not subject to employers’ National Insurance, it will add
only about 2% to the cost of employing a median earner, and less for
lower paid earners, for those companies not presently making
contributions in excess of that
level.”
Then there is an
interesting discussion further on, in chapter 10, on pages 356-357,
about the effect of that level of contributions on
companies.
The
balance is difficult to strike. I will be the first to admit that. We
have had discussions—more later this morning—about
so-called levelling down. There is a balance to be struck between the
extra burdens to be heaped on employers and the knock-on effect of
employers being incentivised to close their existing, more generous
pension schemes. That is a difficult balance, but I think that if we
start unpicking the basic Turner proposals, then that way madness lies.
Therefore, with all due deference to the hon. Member for Rochdale and
the measured way in which he put his argument, the official Opposition
are unable to support his two
amendments.
Mr.
O'Brien:
I, too, wish to rescue the hon. Member for
Rochdale from madness. The amendments cannot be supported by the
Government
either.
Clause 18
sets out the quality criteria for UK occupational money purchase
pension schemes, which include personal accounts. To meet the quality
requirements, a scheme must have a rule requiring a contribution of at
least 8 per cent. of a member’s qualifying earnings, of which at
least 3 per cent. must come from the employer. The clause is important
because it establishes the minimum levels required, as recommended by
the Pensions Commission. The Pensions Commission, as has been said, was
clear that the 8 per cent. was on all earnings and is the basis of the
calculation that delivers the 45 per cent. replacement rate to a median
earner with solid state entitlement. It is part of the consensus around
which we have been able to get broad support. There are all sorts of
arguments from some, particularly in the trade union movement, who
might wish to see this increase; some who lobby for pensioners might
wish to see this increase; but everyone broadly accepts that, as this
policy stands, we have the key group of people needed to implement it
on board. That is the business community.
The Federation of Small
Businesses and the CBI are prepared to support the policy as set out in
the Bill. If we were to make the sort of changes that the hon.
Gentleman proposes, there is a real risk of that
consensus being undermined. I hear the way he puts his motion, and I am
grateful to him for putting it as an inquiry, rather than pushing it
hard. It is important that we have these debates, but also that we
recognise there is a consensus which needs, to some extent, to be
protected. Let me deal with the two amendments in more
detail.
Amendment
No. 92 alters the parameters of the quality requirement for money
purchase schemes, and could increase the contributions paid by
employers. If, under this amendment, employers were required to make a
contribution of 5 per cent. of all basic pay, then all
individuals would receive more employer contribution, provided that
their basic pay made up at least around 50 per cent. of their gross
pay. A median earner whose gross pay equalled their basic pay would see
their employer’s contribution more than double. They would
receive around £650 extra from their employer each year. The
amendment would therefore increase cost to employers in that sort of
situation. It would increase it most in cases where basic pay makes up
the highest proportion of employees’ gross pay, and would
therefore create an incentive for employers to make greater use of
bonuses and overtime rather than basic pay, which I do not think the
hon. Member for Rochdale wishes to
do.
The real problem
here, and the reason we are using the overall level of pay, is that
employment situations vary considerably. Some employers pay much of
their employees’ salary or wage in overtime and bonuses. For
example, ministerial drivers working a lot of overtime do rather well
out of it. Their basic pay, sadly, is not high. It is the case that
many employers, for all sorts of reasons, believe that paying overtime
is the best way of dealing with these issues.
Of course, if we move to basic
pay, the hon. Gentleman is quite right, because he is increasing the
percentage payment from 3 per cent. to 5 per cent. If we were to
calculate our figures based on basic pay, it would affect the lower
parameter and the higher parameter in terms of those who were
automatically enrolled. That would have all sorts of implications for
the Bill, but it would also mean that there would be incentives for
employers to look—in ways we would not necessarily regard as
desirable—at the way in which they pay their employees. We want
to see employees paid pretty much the way they are now, as a result of
the Bill. There may be all sorts of reasons we would want to change
things in other Bills. As far as this Bill is concerned, we do not want
employers to start changing their practices merely because it is
passed.
Paul
Rowen:
I am grateful for the Minister’s
explanation. I was listening very carefully to what he said. He
concentrated very much on median earners, and, yes, additional cost is
a disadvantage of the amendment I am proposing. When I moved the
amendment, I was concentrating—and it is a particular concern
for us—on the effects on low earners and people whose income
varies wildly. I was going to say that it also affects high earners,
but the cut-off limit has an effect on
them.
Does the
Minister not accept that for those people who, unlike his drivers, may
not be able to earn lots of overtime, that is a better deal? It is a
slightly increased cost, but in terms of the overall cost of a pension
scheme across the company, it is not going to be a huge
percentage. I accept we may not have got the amendment right, but in
that sense it was looking more at low earners rather than medium
earners, who would benefit under these
proposals.
Mr.
O'Brien:
I am not entirely with him on this. For a start,
some workers—particularly those on lower incomes—have
more of their wage paid as commission or overtime payments, and if we
start excluding those components, it will have an effect. It depends on
what percentage of their final pay is calculated on the basis of such
components, because he is excluding, by his criteria, those payments
from the calculation.
Yes, I see it is increasing
from three to five per cent., but if the amount paid to workers in
retail, telesales or parts of the motor industry by way of commission
payments, overtime or bonuses, is a substantial part of their wage,
perhaps over 50 per cent., then the end result would be that these
people could be worse off . Furthermore, there would be an incentive
for employers to move more and more of the wage into this area, so that
he would be able to pay less money. So I think there is a perverse
incentive here, which actually works against the lower paid, not in
favour of them.
I can
see how some of the lower paid might benefit, but it seems that, given
that the lower paid are by and large people who are sometimes in quite
vulnerable employment situations, and often not trade-unionised, they
are the ones who would be most at risk of employers shifting into
precisely the sort of payment methods that would result in a smaller
overall contribution to their pension than the hon. Gentleman
hopes.
I
think there is a balance here: the Pensions
Commission took the view that it was better to calculate these things
based upon all earnings. One of the reasons they did that was that it
better protected the lower paid. I do not disagree with the altruistic
view that he is putting forward: we would like to see lower paid people
have a bigger contribution to their pension. That would clearly be
desirable, but we also need to keep on board the employers who make
these payments, and to ensure that we do not make changes to the
overall consensus on this unless it is necessary to do so. I entirely
agree with the hon. Member for Eastbourne, who said that it is not a
holy writ just because it was in the Pensions Commission report. We
need to look at that report with a critical eye, but at the same time
we have been able to fashion a consensus with employers and others, and
this particular clause is a key part of this consensus.
Moving on to
amendment No. 90, this falls short of our public commitment, by
allowing contribution levels to be amended through an affirmative order
without full public debate. Under this amendment, any change would be
subject to parliamentary debate and scrutiny, but it falls short of the
full public debate on primary legislation that we believe would be
appropriate. I have given the cost to business of the employer
contribution and the importance of the overall contribution rate on
income replacement rates—the benefits that will go to the
pensioner in due course. It is right that any pressure for amendment in
the future should be subject to the fullest public debate through the
legislative process. Any change along the lines of the amendment would
undermine the consensus that we all worked so hard to
build.
That consensus relies on the
assurances that we have been able to give to employer organisations
about the level of employer contributions. Moreover, it is important
that contribution levels are confirmed on the face of the Bill because
this provides the employer community with the certainty they need to
prepare for the commencement of these reforms. I have received all
sorts of lobbying, from the trade unions in particular, saying we need
to be able to increase these
levels.
11
am
The
Government’s view is that we have established that broad
agreement with the employer community and we want to stick to that
agreement. Perhaps the figures will be looked at again in 2017, when
there is a review, or at some other time in the future when there is
another Parliament and perhaps other Members of Parliament. That is a
debate for another time. On this occasion, we have a view about how we
will proceed. It is a view that is broadly supported and I hope that
hon. Members will be able to be part of that
support.
Mr.
Waterson:
Does the Minister agree not only that employers
want the certainty of having that in the legislation,
but that, whichever Government were in power in the future, if there
were to be an overwhelming argument for change upwards or downwards
from the 3 per cent. figure, there would be at least as much
discussion, consultation, lobbying and everything else to reach the
right figure as on this occasion? That could never be achieved, with
all due respect to our procedures, in an hour-and-a-half debate on a
regulation in a deserted Committee
room.
Mr.
O'Brien:
There is an argument for what the hon. Gentleman
says. This has been a key area of discussion over the past couple of
years and one of the issues that has produced angst among our various
organisations in reaching the agreement. There has been a lot of
compromise and I am anxious that the efforts that people have made in
reaching that level of compromise and broad support for the Bill should
not be undermined by the amendment. I hope that the hon. Member for
Rochdale will feel able to withdraw the
amendment.
Paul
Rowen:
I have listened carefully to the Minister and the
hon. Member for Eastbourne, and I beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
‘(3) The Secretary
of State may by regulations make provision for a scheme to continue to
satisfy the quality requirement notwithstanding a shortfall in the
contributions over a pay reference period if the shortfall is paid
within a prescribed period after the end of the reference
period.’.
Clause
18 deals with quality requirements for UK money purchase schemes, and
the amendment would add a subsection that would enable any scheme, when
there was a shortfall in contributions for whatever reason, not to fall
out of the threshold, provided that any shortfall was made up in the
short prescribed period. The amendment is small and helpful.
We all want certainty and to be
able to ensure that the schemes that are set up continue and develop.
We accept that there are fluctuations and that they can affect the
workings of a scheme. The amendment would mean that if the threshold
was not met, the scheme would remain in the quality threshold, provided
that any shortfall was made up. We have not yet prescribed the time
period, but the amendment is
sensible.
Mr.
Waterson:
So far, so good. This sounds
like a sensible amendment that has been designed to be helpful, but
that was what the hon. Gentleman said about the last one. I appreciate
that he has not put in a prescribed period and that that would be a
matter for regulations, should the amendment be passed. Does he have a
feel for the length of time that would be appropriate? It would be
helpful to know what we might be talking about if the Minister was to
accept the
amendment.
Paul
Rowen:
One reason why we have not put in the time is
because, taking on board what the Minister has said, it should be the
subject of further debate and discussion. Looking at changes over a
cycle might be a better way of considering how a scheme was operating,
rather than looking at a snapshot of a very tight period. Things change
and move up and down. I would want to have a proper, broad discussion
about that area—the quality threshold—because it has not
necessarily had the scrutiny that other aspects have had. By having a
debate on what would be an acceptable prescribed period—and
introducing it—we might have a better consensus on how to
proceed.
Mr.
O'Brien:
I will not accept the amendment, mainly because
the mischief that the hon. Gentleman seeks to correct does not exist.
Any shortfall in contributions paid in a period will not result in a
scheme losing its qualifying status because that money will be owed,
even if it has not been paid. Therefore, the qualifying status will not
be lost.
I am with
the hon. Gentleman in theory, but there is no mischief to correct
because the loss of contributions does not mean that the qualifying
status is lost. The regulator will just have to go after the employer
to get the
contributions.
Paul
Rowen:
It will be interesting to see what happens when we
get to that discussion. This part of the Bill talks about quality. We
are saying that people can carry on owing sums of money and that the
viability of the scheme does not matter, but I am thinking about the
Robert Maxwells of this world. I can imagine what such people might do
with that flexibility. The whole point about a prescribed period is
that while we accept that there can be difficulties and that companies
can go through bad periods whatever, we ultimately want things sorted
out within a defined period. Leaving things open, which is what the
Minister is saying, means that that can go on for ever. As I say,
people will exploit
that.
I will be
interested to see how the pensions regulator will regulate the
situation without a definition in the Bill. That is the point of saying
what the prescribed period should be. We are not saying, “Here,
now”, but
that there needs to be some agreement. Earlier, I said that that period
should be a cycle—I accept that there is an economic cycle to
things. That cycle should be defined and acceptable. I do not know
whether it would be a three, five or 10-year period—the
actuaries would have to work that out—but we ought to be saying
that that is the period in which any shortfall should be made up. To do
otherwise would leave the door open for certain people to go out and
take
advantage.
Mr.
O'Brien:
Clause 18 sets out the quality criteria for UK
occupational money purchase pension schemes. Requiring minimum
contributions to be encoded in the scheme rules enables any shortfall
in contributions to become a debt on the employer that is owed to the
trustees, who are then responsible for pursuing it in the normal way.
That is what happens now. It is not, however, that responsibility for
the pursuit of unpaid contributions is a matter solely for the
trustees, particularly with personal
accounts.
The Bill
enables the regulator to issue an unpaid contribution notice under
powers in clause 30. Unpaid contribution notices are statutory notices
requiring the employer to pay any unpaid contributions to the scheme.
Fixed penalties can then be applied for non-compliance—the
matter becomes one of compliance. The hon. Member for Rochdale assumes
that the lack of contributions will result in the scheme no longer
qualifying, but that is not so, because it will still qualify. The
employer will be pursued for the money—perhaps as Maxwell ought
to have been—and will, if necessary, be the subject of
appropriate legal
proceedings.
The
amendment would allow a scheme to continue to meet the quality
requirement for a certain length of time in the absence of the minimum
contribution, but the rules of the scheme already give effect to the
quality requirements. A shortfall in contributions paid to a scheme
would not disqualify the scheme. However, the intention behind the
amendment appears to be to allow a period of grace when, for whatever
reason, the employer has failed to pay the minimum level of
contribution. The amendment also stipulates that that period of grace
would be finite, thus ensuring that the scheme member would be
protected against unscrupulous employers. The balance of allowing the
employer some flexibility and employees sufficient protection is a
position with which I have some sympathy, but I believe that it has
already been captured in the Bill. We are already dealing with the
mischief that the hon. Member for Rochdale thinks is there, but it does
not exist in relation to this part of the Bill.
We recognise that making the
right amount of contributions to a money purchase scheme on time, and
making sure that those contributions get in there, is absolutely vital
for the growth of an individual’s pension fund. Any shortfall
could result in a reduction of the member’s pension and a
subsequent return on investment. We want to build confidence in the
security of individuals’ retirement savings. However, we are not
convinced of the need to make further changes to the arrangements that
are already in place. Therefore, as now, scheme trustees will be
primarily responsible for monitoring payments into the scheme and for
initial follow-up action on any shortfall in due contributions.
When that is not successful, they will be able to ask the pensions
regulator to help. Our current practice is that trustees report a late
payment that is likely to be of material significance within 90
days.
The powers in
the Bill give the regulator flexibility in how it applies the regime.
They build on and strengthen the regulator’s current approach to
following up late contributions, enabling it to deal
with the higher volumes expected after 2012. One of the
regulator’s new powers will be the ability to issue unpaid
contribution notices, which will start the process of obliging the
employer to
contribute.
I
see where the hon. Gentleman is coming from with the amendment. I have
sympathy with the principle, but there is not a problem in this part of
the Bill that needs addressing because the effect that he thought was
happening will not happen. We want to ensure,
however, that employers who fail to pay the appropriate contributions
are dealt with appropriately—they will be, by another part of
the
Bill.
Paul
Rowen:
I have listened to the Minister and I agree that we
will return to this particular issue later. I beg to ask leave to
withdraw the
amendment.
Amendment,
by leave,
withdrawn.
‘(3) The Secretary
of State must report annually on the extent to which employers
operating schemes defined under subsection (1) have reduced their
contributions.’.
The
Chairman:
With this it will be convenient to discuss the
following amendments: No. 93, in
clause 19, page 8, line 35, at
end add—
‘(5) The Secretary
of State must report annually on the extent to which employers
operating schemes defined under subsection (1) have reduced their
contribution.’.
No.
94, in
clause 22, page 9, line 41, at
end add—
‘(5) The Secretary
of State must report annually on the extent to which employers
operating schemes defined under subsection (1) have reduced their
contribution.’.
Paul
Rowen:
These amendments are significantly more important.
With the previous amendments, I was probing the Government on their
intentions to see what parts of this quality clause were
doing.
The Turner
report sets out a minimum entitlement, and that is enshrined in the
Bill. As the Minister said, for people who do not have access to a
pension scheme at the moment, there will be one with an 8 per cent.
defined contribution, which will be made up of contributions from the
employer and the employee and tax relief from the Government. That will
capture the 6 million to 9 million people who are not enrolled in a
pension scheme. We have raised questions about how
those people will be captured under certain circumstances relating to
their work and how much they earn. We are now talking about a smaller
group of employees, but none the less a significant group: employees
who have a pension scheme that delivers much more than the scheme
proposed here. While we might have a broader consensus that deals with
the majority, the big concern with setting a minimum is that we will
see levelling down. Employers will be able to opt out, or to wind up
their schemes and opt into the proposals in the
Bill.
11.15
am
If that is the
case, rather than seeing an improvement in the basic position, we will
see pensions getting worse for a significant minority of people. I
think that the Government are deluding themselves if they believe that
that is not likely to happen. Some research carried out
a couple of years ago by David Blake is still
relevant. It suggests that if a scheme such as the one that we are
putting forward in the Bill is on the cards, there will be a
levelling-down process, and employers will opt to use the basic scheme
in the Bill, rather than their own schemes that might cost them
significantly more. The end result might be that more people are in
pension schemes across the whole range of employment and have the
right to a contributory pension, but the net result for a
significant minority would be that their pension no longer delivered
what they would have been getting before the Bill was
enacted.
For a
number of reasons—not least to preserve the consensus that the
Government have done a very good job of building—we believe that
it is important that there is a defined minimum. We hope and expect
that those employers who pay beyond that see the benefits of doing so
for the motivation and retention of employees. Nevertheless, we want to
have something in the Bill that acts as a clear warning shot that if
there is a movement away from the current situation, the Government and
Parliament will act.
I believe that employees are
looking to us to ensure that such safeguards are introduced. This
should be about not levelling down, but ensuring that people are
levelled up. That means ensuring that those 6 million to 9
million people who currently do not get an occupational pension scheme
can benefit from the Bill. However, if the 3 million to 4 million
people who already have pension schemes are levelled down, that would
be the worst of all
worlds.
Amendment No.
114 would only require the Secretary of State to report annually on the
operation of schemes. It might be that the pensions regulator, in the
course of its normal duties, produces the figures in its annual report
and looks at what is happening across the market. We believe that that
sort of report is important for monitoring what is going on and
ensuring that levelling down is not taking place.
Amendments Nos. 93 and 94
would amend clauses 19 and 22 along the same lines. This is an
important safeguard. We are not saying that employers cannot vary their
schemes, which would clearly be a nonsense, but we do not want the
whole process to result in worse payments and pensions for those who
currently enjoy a good scheme. The amendments do not set a percentage
or say, “Beyond this line you must not go.” They say that
we should monitor the situation so that if there is the possibility of
levelling down—as suggested by the evidence from David
Blake—Parliament will be able to address that.
The consensus that we have
achieved on 8 per cent. sends a powerful message. The other message
that is needed—the unions are right to request it—is that
we are going to monitor what happens and that if there is a
deterioration for that significant minority, Parliament will have to
look at the consensus and whether we are achieving what we originally
set out to do.
I hope that the Minister will
accept the amendment. Of all those that we have considered today, this
is the most important. It is vital that we address these concerns now,
rather than when things start to move in the wrong
way.
Mr.
Waterson:
I agree with the hon. Member for Rochdale that
this is an important group of amendments. The Conservative party
supports the amendments in principle. Indeed, to an extent, they mirror
some of ours relating to clauses on the duties and responsibilities of
the Personal Accounts Delivery Authority. They are important because
they raise the issue of levelling down, which outside bodies such as
the Pensions Policy Institute identify as one of the two really major
issues relating to the Bill.
That being the case, I make no
apology for trying to deal with this issue in some detail. As the hon.
Gentleman said, various surveys have examined the prospects of
levelling down when personal accounts start in 2012. The problem is
that every single survey rightly identifies a large degree of doubt
because they are trying to determine the likely behaviour of employers
in 2012. However, we do not know what the general economic background
will be in 2012, or the extent to which existing schemes will continue
to close, to either new or current members.
It is worth considering to
whom we are asking these questions. It is fair to say that some of the
Government’s research was based on asking human resources
directors what was likely to happen with levelling down. It seems to me
that the key people in all this are finance directors. They are the
ones who will be faced, almost overnight, with a possible doubling of
participation in their existing schemes. I forget the exact figure, but
I think the National Association of Pension Funds has reached a figure
of 30 to 35 per cent. as the average participation in an average
defined benefits company scheme. With auto-enrolment, that is likely to
shoot up to 70 to 80 per cent.—or an even higher figure if
auto-enrolment works as we all hope it will. That is a very big
increase in costs for any employer, regardless of the financial or
economic position that they might be in. Any finance director worth his
salt will already be focusing on this issue and making recommendations
to the main board of their
company.
In May 2006,
the Government estimated:
“only around £600 million
of the £2.6 billion cost to employers of a three per cent.
contribution would fall on firms currently contributing three per cent.
or more.”
The trouble
with that is it assumes that everyone joining these firms’
schemes only as the result of auto-enrolment would receive the minimum
3 per cent. contribution. In reality, many employers might
want to use the same pension contribution for
all their employees. Therefore, the Government have
subsequently estimated that automatically enrolling people into
existing schemes on existing terms would add £1.8 billion to
these employers’ pension
costs.
The surveys
actually come up with an alarmingly large range of conclusions, which
is hardly surprising for the reasons that I have mentioned. The
Department published a fact sheet alongside the Bill—I can make
no complaint about the amount of paperwork with which we are being
supplied by the Department and
Ministers—containing what were called “emerging
findings” from a new Department for Work and Pensions and BMRB
survey. Although the Minister might want to deal with the survey in
more detail, in a nutshell it concluded that 51 per cent. of employers
contributing 3 per cent. or more said that they would be likely to
maintain or improve the contribution rates offered to new employees
following the reforms. Thirty per cent. said that they might reduce
contributions for new employees, although smaller employers tended to
say that. Some 86 per cent.—a startling figure—said that
existing members of the pension scheme would continue to benefit from
contributions at today’s levels as long as they remained with
the company.
A little
while ago there was a study by Deloitte that asked 488 employers
contributing 3 per cent. or more whether they would reduce their
contributions. It was published with an introduction by
Mr. Stephen Haddrill of the Association of British Insurers,
who gave evidence to the Committee. He summarised the situation by
saying:
“one in four
employers who currently contribute over 3 per cent. of earnings to
employees’ pensions said they would introduce a new, lower rate
of contribution. This represents reduced employer pension provision for
2.4 million
employees.”
Another
detailed finding in the comprehensive report
was:
“At
present the average employer contribution rate for existing members of
pension schemes is 6.2 per cent. The average employee contribution rate
stands at 3.8 per
cent.”
A further finding
was that 23 per cent. of employees said that they were likely to close
the existing scheme to all or some employees. Some said that they would
reduce contributions for new or existing schemes, and 30 per cent. were
unsure of their response. That is perhaps an indication that many
employers are not yet even focused on the knotty
issue.
The report
goes on to say:
“24 per
cent. of employers who are currently making contributions over 3 per
cent. say they will offer a lower contribution rate ‘than the
one they offer their staff generally in their open pension
schemes’. This represents reduced provision for 2.4 million
employees”.
That is
particularly marked in different parts of the country—I will not
weary hon. Members with the details. The report
continues:
“the average
employer contribution rate post reform might rise by almost 100 per
cent. (2.1 to 4 per cent.), as more employees gain access to at least 3
per cent. employer contributions. However, this welcome overall rise
masks a likely fall in contribution levels for existing schemes of up
to 8 per cent. (6.2 per cent. to 5.7 per
cent.).”
I am
not sure how helpful it is to talk in averages. The concern, which is
also dealt with by other surveys that I will touch on, is whether
significant numbers of employees who benefit from generous employer
contributions in their existing schemes will find that those are no
longer available and that they will be reverting to a 3 per cent.
employer
contribution.
The
Deloitte report touches on another important issue. I have never been
one of those who believe that the problem of levelling down will be a
big-bang problem that will happen almost overnight, although no doubt
it will with some employers. My concern is that there will be a gradual
process of attrition. I will cite one final quote from page 5 of the
report:
“over time, job turnover is likely
to increase the amount of levelling down. Employees who leave schemes
with high contribution are unlikely to be eligible to participate in
schemes with such high contribution rates at their new
employer.”
That is the
real concern. The worry is that as people move around the jobs market,
they will find their employer contributions gradually
reducing.
11.30
am
Another
interesting survey is from the consulting actuaries, not least because
it drives their whole impetus for simplification and risk-sharing. The
Association of Consulting Actuaries surveyed employers—those for
whom its members worked professionally, I guess—54 per cent. of
whom said they would auto-enrol all those eligible into an existing
company scheme, rather than into personal accounts; of those, 23 per
cent. said that they expected to revise the benefits on offer to reduce
the costs associated with higher participation. So, only 42 per cent.
said that they would auto-enrol staff into existing scheme on existing
terms. Overall, 68 per cent. of employers thought that the
Government’s proposals would lead to a general levelling down of
employee pension contributions by organisations presently
offering better pension schemes. Given that those advised by consulting
actuaries must be a reasonable cross-section of British employers, that
figure of 68 per cent. is extremely
worrying.
Miss
Julie Kirkbride (Bromsgrove) (Con): I am listening with
interest to the hon. Gentleman’s figures. If I have been paying
proper attention, the 68 per cent. who think that things will level
down is higher than the around 50 per cent. of individuals who were
asked if they might level down. That rather suggests that, when people
are asked what they will do, they might not be giving as honest answers
as when asked what they think the industry will do. Therefore, the
problem is more worrying than we would like it to
be.
Mr.
Waterson:
That is a valid point. I am grateful to my hon.
Friend. It is like the bad old days, when Conservative support in
opinion polls was consistently understated, because people did not want
to admit to the intention of voting Conservative. Those days, of
course, are long gone. There is an issue there, and a related issue,
which I have already touched on and so do not want to labour the point.
A lot of people have not focused yet. It is 2012, and that seems a long
way a way—unless one is Mr. Tim Jones, of course. To
most people 2012 is a long way a way, but as companies begin to focus,
then we might get more definitive
figures.
The Minister
and I were both honoured to be at the launch of the PPI’s report
for the Nuffield Foundation. As one would expect of the PPI, the survey
is painstakingly detailed and well thought out, basically looking at
three scenarios. One is that all employers, after auto-enrolment comes
into force, would maintain contribution levels at the same level as
they are at the moment, which in the vast majority of cases would be
significantly more than 3 per cent. of employer contributions. The
second scenario—the “central scenario”—was
based on the Deloitte report, which was a kind of measured model as to
how employers
might react to the changes over time and produces a different figure.
The “pessimistic scenario” is extremely
worrying—as the name might suggest—and is based on the
projection of 50 to 60 per cent. of employees opting out of work-based
saving, in line with estimates made by the New Zealand Government for
KiwiSaver. It is important to bear in mind that, potentially, even the
pessimistic scenario could result in 4 million to 5 million new savers
in work-based pension schemes—but much fewer than the 7 million
to 10 million target market for the
reforms.
The PPI
stresses over and over
again:
“There
is a lot of uncertainty about how employers will respond to the
reforms, and the projections illustrated in this paper should not be
taken as forecasts. The analysis seeks to illustrate the potential
impact of a range of possible
scenarios.”
Their
scenarios are, indeed, rather sobering, particularly the pessimistic
scenario. As it
says:
“This
poses the question of whether the reforms would be considered
successful if they did not increase annual total pension contributions
but did increase the number of people saving and made the distribution
of saving more equal.”
I
can understand that there might still be some old-fashioned,
red-blooded socialists in the Labour party for whom a redistributive
effect would be a plus, taking the current amount of pension savings
and redistributing it around a larger number of people. However, when I
put this to the Minister, during his oral evidence to the Committee, he
was good enough to accept that that would not be a satisfactory outcome
for these reforms. I do not have his exact words in front of me, but no
doubt he recalls what they were. The PPI makes the point that, in any
such survey, some five years in advance of the reforms, it is difficult
to predict with certainty how employers will act five years on. That is
a very fair point.
It is important to look at the
scenarios. There is the scenario of enormous success, with many
billions of pounds of extra savings going into personal accounts, and
into pensions overall. There is what the PPI calls the “modelled
employer response scenario”, partly based on Deloitte’s
work, which shows that the size of pension funds in personal accounts
could reach £300 billion by 2050. Then there is the pessimistic
scenario, which actually shows a fall of around £450 billion in
the aggregate size of the pension funds in existing provision. These
are worrying projections, not least because they are so difficult to be
clear-cut about.
May
I just touch on one or two of the issues around levelling down raised
by some of the witnesses who gave oral evidence? The ABI, in
particular, had some useful comments on levelling down and their own
concerns about it. In its written evidence, the PPI
said:
“Overall,
the jury is still out as to whether the Government’s pension
policy will deliver both more people saving and more saving and better
retirement incomes.”
In
her evidence, Niki Cleal talked about the pessimistic scenario, which
is what would happen if all employers levelled down to 3 per cent.
contribution. She
said:
“Unsurprisingly,
you see a £10 billion decrease in pensions contributions in the
UK—a very negative outcome.”——[Official
Report, Pensions Public Bill Committee, 17
January 2008; c. 64,
Q87.]
I do not think
anyone would disagree with that. She also said:
“At this stage, it is
very difficult to see how employers will respond.”
——[Official Report, Pensions Public Bill
Committee, 17 January 2008; c. 64,
Q87.]
Again, something
we can all agree with.
The
concern about levelling down was, indeed, picked up by other witnesses
who came before us to give their views. Mr. Stephen
Haddrill, director general of the ABI, in answer to a question from me,
said that
“there is
going to be a risk of levelling down the more an employer has to decide
and the more complex that decision is. If employers face a situation
where, for instance, they are potentially going to end up with an
existing pension scheme and having to set up a personal account, they
are going to think quite hard about whether they want to carry on with
an existing pension scheme that has a higher level of pension
contribution from the employer than the personal account will
do.”——[Official Report, Pensions Public Bill
Committee, 15 January 2008; c. 24,
Q31.]
That mirrors the
concerns raised by bodies such as the ABI and the NAPF about what is
likely to happen in terms of levelling down.
One reason we might not in the
end support these amendments in a division is that it might be the case
that the Government accept this position anyway. It is in the impact
assessment of this Bill that they make the point that these issues are
difficult to estimate in advance. They use the phrase:
“is itself subject to a
considerable degree of uncertainty.”
They go on to say in paragraph
2.83:
“In
taking forward this work, the Government and the Personal Accounts
Delivery Authority will continue to work with employers and gather
evidence on the economic context within which these reforms will be
introduced to ensure they can achieve their aims whilst minimising
burdens on
employers.”
We
think that is very important. On the specific issue of levelling down,
I do not think I have ever heard this Minister suggest for a moment
that this is not a distinct possibility. Certainly, all the evidence we
have had suggests that this is potentially a major problem and, if we
take the pessimistic scenario, could fundamentally and fatally
undermine the whole success of personal accounts. As the Pensions
Policy Institute has said, we could actually end up with a situation
where total pension savings in the entire country are less than they
would otherwise have been. This would not be a satisfactory
outcome.
The
Government are not trying to avoid this issue, and whether they accept
the solution suggested in these amendments is neither here nor there.
But I would like to hear from the Minister—even if does not
accept the pessimistic scenario—whether he agrees that there are
these concerns. Secondly, I would like him to confirm that he
acknowledges the need to continue to monitor the situation because
these surveys from 2006 and 2007 are all very well, but it is the
run-up to 2012 that really matters. That is when employers will begin
to focus on these hard decisions within the economic and pensions
climate of that
time.
Thirdly, will
the Government in some way be sharing with the rest of us the
projections as they are updated and refined? The latest figures talk
about emerging trends and figures and that is absolutely right, but I
would like to be sure that that process will continue in the
Department, and continue in a public sense. If it
seems we are headed for a major problem on this, then
clearly action will be need to be taken by the Government of the day,
whoever they are. But I commend the hon. Member for Rochdale for
introducing these amendments. They have resulted in an important debate
which is fundamental to the likely success or failure of this
legislation. I look forward to hear what the Minister has to
say.
Mr.
O'Brien:
The hon. Member for Eastbourne has put the most
pessimistic gloss upon the evidence that he possibly could,
particularly in terms of the PPI evidence. I would not be surprised if
the PPI was more than a little surprised, because its evidence and the
launch of its report suggested that up to 9 million people would be
enrolled in pension saving as a result of these changes. Indeed, what
we are likely to see—far from a levelling down—is a
levelling up. We will see millions of people saving for pension schemes
who did not previously do
so.
The millions of
people who will be better off as a result of this Bill are the reasons
why Help the Aged, Age Concern, and a vast array of
organisations supporting the elderly, are behind it. The same is true
for various business groups, the trade unions and others who want to
see effective
savings.
One person
who was not quoted by the hon. Gentleman was Lord Turner. The noble
Lord said in his
evidence:
“We
must recognise that there is at least some danger in some sectors of
levelling down, but I think it is relatively small. The net effect of
what is being proposed in the Bill will result in a levelling
up...I am convinced that there will be a large number of large
companies that will continue to provide, in some form or another,
pensions that are much better than the minimum
standard.”
——[Official
Report, Pensions Public Bill Committee, 17 January 2008; c. 103,
Q126.]
11.45
am
Lord
Turner has looked at that issue with considerable care, as have his
colleagues on the Pensions Commission who are broadly in support of the
proposals and want to see the
changes.
Let me refer
to the Department for Work and Pensions survey that was quoted by the
hon. Member for Eastbourne. He finished by derisively, I thought,
suggesting that it was done by a bunch of HR directors. It was not;
that is not the case. Two thirds of the respondents
were managing directors, chief executives, owners or partners, or at
director level. They were not just, as he claimed, HR people. Our
evidence is that only one in 10 of them was a HR person. The rather
disparaging way in which he put it was somewhat
unfair.
Mr.
Waterson:
I do not think that I used the phrase
“just HR people”; I said HR directors. As the Minister
clearly has the figures at his fingertips, perhaps he can say how many
of the respondents were finance
directors?
Mr.
O'Brien:
I do not have the figures for
finance directors, but two thirds of them were managing directors,
chief executives, owners or partners, or at director level; so no doubt
some of those were finance directors.
Finance directors will have a say, but so will the other members of the
board. Certainly I would have thought that chief executives and
managing directors would have a say and getting their view as well is
therefore important. Regarding his suggestion that our survey was
perhaps unreliable, I would not say that the responses to the survey
are likely to be totally reliable but I am saying that the survey
produced some evidence that the way in which employers are likely to
look at the situation will not be as pessimistic as he
suggests.
The hon.
Member for Bromsgrove intervened to suggest that perhaps an even worse
scenario could be constructed out of employers saying that they
expected other employers to level down but that they themselves did not
propose to do so. It could be the opposite; they could be wrong being
so cynical about other employers and more employers than they think
could be likely to react like them and not level down. That is an
issue.
Miss
Kirkbride:
Cleary the Minister is a very nice man who
always sees the best in people and we all hope that his expectation is
right. However, even if it were, 49 per cent. would still level down,
which is a worrying
figure.
Mr.
O'Brien:
I do not accept that; I think that the hon. Lady
is looking at Deloitte’s statistics rather than the
DWP’s.
Levelling
down is an issue that we need to have cognisance of. It is an important
part of the debate and that is why we have taken steps to see if we can
minimise levelling
down.
Let me outline
what we seek to do. Our research shows that most employers with good
schemes support our reforms and the majority, particularly the larger
employers, would maintain their schemes at current levels, or in some
cases improve them. Among employers who already make contributions of 3
per cent. or more, the overwhelming majority—86 per
cent.—plan to maintain or even increase contributions for
current employees, and half plan to extend, maintain or increase
contributions for new employees. Nevertheless, we are not complacent;
it is an important issue and we will continue to track
employers’ responses to the reforms and trends in the existing
pensions landscape as we move towards 2012 and
beyond.
The DWP has
an extensive, ongoing research and data collection programme, which
will inform the evidence base for monitoring and evaluation of the
reforms. That includes: Government support for the new wealth and
assets survey, which will provide a rich source of data on a range of
pensions and savings issues; a regular survey of employers to examine
trends in and the extent and nature of pension provision, scheme types,
contribution rates, joining mechanisms used, etc.; regular surveys of
public attitudes to pensions and financial planning for retirement; and
surveys of individuals’ and employers’ attitudes and
likely reactions to the private pension reforms. Such surveys are
extensive, are going on and will continue to go on between now and
2012, and beyond that. They are not secret, but public.
Parliamentarians will be able to see the data.
Also, we plan to continue to
actively engage with external stakeholders—members of
companies—in helping to improve the evidence base for pensions
and retirement provision, to ensure that appropriate evidence is
gathered and that the whole pensions landscape is properly monitored
and evaluated for the purpose of the Government’s pension
reforms. External stakeholders will have a key role to play in helping
to build the evidence base, as well as in identifying gaps. A full
evaluation is planned once the reforms have bedded in, and that will
continue on an ongoing
basis.
The proposed
amendments would sit on top of a vast array of existing safeguards. The
sorts of things that the hon. Member for Rochdale is suggesting are not
necessary, mainly because they are being done in another form and with
other reports. He can see them whenever he wants. No doubt he can raise
in Parliament, when appropriate, concerns about whether levelling down
is taking place and the extent to which it is. Those are real issues,
but we have also taken steps to try to reduce the propensity for
levelling down: the rules about transfers in and out of personal
accounts; the amounts of contributions; and how the whole process of
dealing with automatic enrolment will operate. None of those is likely
to facilitate levelling down and, indeed, is likely to reduce the
propensity.
Mr.
Waterson:
Taking that point, why can we not, for example,
put into the legislation the £3,600 figure for annual
contribution limits—uprated from 2005 to the present, of
course?
Mr.
O'Brien:
We know that the figure of £3,600 is not
the figure that we are going to be using in 2012. We know that that
£3,600 figure relates to 2005—it is out of date now. We
do not yet know the precise figure that we will be using in 2012, but
we wanted to give some reassurance to employers about the level at
which we plan to set the figure. Therefore, we have regularly quoted
that figure. Employers understand that we will not set it in the
primary legislation now, because it is otiose before it begins. We will
set a figure in regulations as we move towards 2012, so that employers
will have the certainty. They already know the level at which we plan
to set the figure, so they are able to estimate where the figure is
likely to be in 2012. We want to be able to set the appropriate figure
in 2012, so that we can be as precise as possible. That is why we will
not set the figure
now.
There are lots
of other reassurances on levelling down in the text of the Bill and in
Government commitments to employers. We will be monitoring closely any
steps taken to level down. We will then be able to discuss what steps
can be taken to deal with that. However, we must set the issue in
perspective: for millions of people out there, the Bill will level them
up. Millions would not be in pension schemes at all but, as a result of
the Bill, they will be—they will be levelling up. A significant
number of others, about a million, are in schemes where the employer
contribution is less than 3 per cent.—they will be levelling
up.
Mr.
Waterson:
Will the Minister tell us what proportion of
existing employer-sponsored schemes have contribution levels from the
employer of less than 3 per cent?
Mr.
O'Brien:
The numbers affected are just under 1 million.
The hon. Gentleman has asked me the proportion of employer schemes, so
I would have to know the total number of employer schemes and do the
calculation. Will he allow me to come back to him with that figure? I
do not have it in my head. The number of employers who make that very
low level of contribution is quite small, but the number of people who
will benefit—either because their contribution is quite low or
because their employer’s contribution is quite low—is
well worth while. The biggest group that will benefit is the up to 9
million people who will be saving for the first time, or saving more.
Those figures are the more optimistic level which the PPI refers to in
its report.
We have
therefore taken steps to reduce the propensity for levelling down. we
have acknowledged that it is an issue, but our research among employers
suggests that it is not a substantial issue, and that most employers
will not be involved, and that in many cases they will go in the
opposite direction. I do not deny for a moment that this is a
legitimate debate, but I reassure the hon. Gentleman that the pensions
industry is being monitored. I have set out how that is taking place.
That monitoring will provide opportunities for us to keep a careful
watch, not just in the next four years but in the years after
that.
If issues
arise, and if there are ways in which we can affect them, assuming
that—as I think all Members of this Committee want—a
clear message goes out that we do not want to see employers levelling
down as a result of the Bill, that is the best way of approaching the
whole issue. Where employers provide good quality provision, we want to
see them all continue to do so. The best approach is to take the steps
we have taken, ensure that we continue to monitor, and ensure that, if
problems arise in the future, we are able to evaluate the best way of
dealing with them. I say to the hon. Member for Rochdale that the
amendments are not necessary. In a sense, this sort of thing is being
done, albeit in a different way from that he proposes. There is nothing
secretive about the various researches that are going on, and he will
therefore be able to do the monitoring that he hopes to
do.
Paul
Rowen:
We have had a very good and important debate on
this. I understand the assurances the Minister has given and the steps
that have been taken in the run-up to this Bill to try and reduce the
possibility of levelling down. I accept his point about the vast
majority of people being better off, and I also accept that the DWP
commissions a range of research. The problem is—and the hon.
Member for Eastbourne went through this very eloquently—when you
compare the DWP’s research with what others say, there is
clearly a discrepancy.
12
noon
I accept
that we will never know the genuine position until we get to the
starting gate. Nevertheless, I think the amendment ensures a proper
reporting mechanism: not just research, not just something that may or
may not be done, but something that has statutorily to be carried out.
I believe that is the best safeguard for ensuring that, in this
situation whereby, as the hon. Member for Bromsgrove said, what people
say and
what people do are not necessarily always the same thing, we get an
actual report of what they are doing. It is neither optimistic nor
pessimistic; it is saying, “there are so many schemes, x per
cent. of those opted to level down; x per cent. stayed the
same”. That is the sort of report that I believe and that gives
a concrete certainty, so I shall have to disagree with the Minister on
this particular occasion and press the
amendment.
Question
put, That the amendment be
made:—
The
Committee divided: Ayes 4, Noes
9.
Division
No.
1
]
AYESNOES
Question
accordingly negatived.
‘(3) A scheme does
not fail to satisfy the quality requirement under this section merely
because the trustees or managers of the scheme may on any occasion
refuse to accept a contribution below an amount prescribed for the
purposes of this section on the grounds that it is below that
amount.’.
Mr.
O'Brien:
Clause 18 establishes the
quality requirements for UK occupational money purchase pension
schemes, including personal accounts. Clause 24 provides the
same for qualifying personal pension arrangements. Under those
provisions, the quality criteria for occupational and personal pension
schemes include a requirement for a minimum contribution. The minimum
overall contribution will be an amount equal to 8 per cent. of the
jobholder’s qualifying earnings. Of that sum, at least 3 per
cent. must be provided by the
employer.
Amendments
Nos. 139 and 140, which are to clauses 18 and 24 respectively,
introduce a power to enable the Government to establish a ceiling for
minimum contributions to money purchase schemes. In other words, the
same scheme trustees and managers could refuse to collect contributions
below that minimum on the grounds that they were too small to be
economic to administer. In effect, that would mean that employers would
not be obliged to pass over contributions below the ceiling and would
not be considered to be in breach of the employer duty. However, if
such flexibility were not legislated for, schemes would be required to
accept contributions calculated on any level of qualifying earnings.
For example, in an extreme case, a jobholder would be automatically
enrolled with qualifying earnings of just £1 a week, on which
the contributions would be 8p. In that case, the cost of collection
would be considerable.
The collection and
administration of trivial amounts would be unlikely to benefit the
scheme or members because the administrative costs would be likely to
be greater than the value of the underlying contribution. Providing
schemes with an opportunity to alleviate some of the administrative
costs might have a beneficial effect on charges. Obviously, if
substantial charges result from having to accept
small contributions, that will affect the overall amount that some
schemes have to charge for administration. That particularly applies to
schemes that want low charges, such as personal
accounts.
Paul
Rowen:
I am interested in what the Minister says. Has the
Department carried out any research on the numbers of people who may
want to contribute below the minimum threshold? What would be the
additional administrative costs for administering such a
scheme?
Mr.
O'Brien:
The effect of these changes could be that people
who are above the £5,035 level, at which point contributions
start, will perhaps make quite a small contribution in the first year
because the first year rate will be at 1 per cent. of the employer
contribution. The costs of collection would be considerable. We have
considered that issue and the numbers of people who are likely to be
affected. In due course, we will consult on and set out the costs and
the process of setting the minimum contribution levels. We will consult
on what those levels should be. I cannot give the hon. Gentleman the
figure that he is seeking because until we set the minimum contribution
levels, it will be impossible to do
so.
We know that the
usual approach of pension schemes is to set such contribution levels.
They are often set at around £20 a month. That is quite a small
contribution overall because the cost of collecting less than that
might be more than the contribution. My view is that the figure will be
far lower than that. My aim is for people to start saving, especially
in the early years. I do not want to load any substantial extra costs
on to personal accounts or any other scheme, so I am fairly cautious
about setting a figure just by giving a Government view. I would rather
have proper consultation with the industry as a whole and get PADA to
express its view about what the minimum contribution should be. I will
then take a view on setting out the figures in regulations. If we do
not do it in that way, we are likely either to end up with quite a high
minimum contribution level, or to set the level so low that the
administrative cost is a significant
burden.
I am also
concerned about the phasing-in process because we will have three years
in which contributions are quite low, which presents some quite
difficult issues. Contributions are quite low in the first three years,
but will, in many cases, go above a level that would be of significant
benefit to the pensioner after three
years.
Should we
therefore say that we would be prepared to tolerate a certain level of
administrative burden on personal accounts for a year or two on the
basis that people will be encouraged to save in the longer term? Let us
say that we took that view and that the Government
intervened and said to PADA, and in due course to the personal accounts
board, “You will have to adopt a far greater public service role
than other pension schemes
apply.” We might want to do that, but before we get into doing
it, we need to talk to the rest of the industry and to PADA about
whether we want to take that route. It would be quite a significant
step for us.
The
position at this point is that we want minimum contribution levels so
that we can ensure that a judgment can be made in due course about the
point at which the administrative cost of collecting a small amount
outweighs the benefit from encouraging people to save that tiny amount,
given that in most cases they will not significantly benefit themselves
by saving much of a pension pot with that minimum contribution. I hope
that that answers the hon. Gentleman’s question and deals with
the issue more
broadly.
Government
amendments Nos. 141 and 142 are technical and consequential on the
amendments that I have mentioned. They insert a definition of
“trustee or manager” into the general interpretations in
clause 77. I hope that, with those suggestions, we can agree the
amendments and ensure that the changes that the Government seek are put
in
place.
Amendment
agreed
to.
Clause 18,
as amended, ordered to stand part of the
Bill.
Clause
19 ordered to stand part of the
Bill.
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