Memorandum submitted by TUC (PE 01)
TUC Pensions Bill 2007: Submission to the Public Bill Committee
1.1 The TUC warmly welcomes the Pensions Bill 2007. We are delighted that the Government has adopted the Pensions Commission's proposed National Pension Savings Scheme model as a new way for low- and middle-income workers to save for retirement.
1.2 The requirement for compulsory employer contributions and auto-enrolment into either a personal account or an existing good-quality employer provided pension are vital to both broadening and deepening pensions saving.
1.3 The TUC welcomes the appointment of Paul Myners as chair of the Personal Accounts Delivery Authority (PADA), Tim Jones as chief executive and Jeannie Drake as PADA's first non-executive director.
1.4 We are very pleased the PADA Consumer Committee has been quickly established with Jeannie Drake as the chair and that the TUC has been invited to be a member. The Committee will be key to representing members' interests in the establishment and subsequent running of personal accounts.
1.5 We welcome the wide consensus that has been built around the new settlement. We pay tribute to ministers and officials who have gone out of their way to consult with, and respond to, the TUC and other interest groups. There will inevitably be different views about some of the detail from various groups and political parties and new proposals to make the new system better, but it is significant that almost everyone seriously involved in the debate about the future of pensions now takes the basic framework to be established by this bill and its predecessor as the starting point of the debate.
1.6 We hope therefore that the passage of the bill through Parliament will provide an opportunity to extend and deepen that consensus by giving the bill proper scrutiny and by providing an opportunity for ministers to explain in more detail their plans for personal accounts, and the likely content of the regulations that will be needed to establish a practical system. We therefore concentrate here on those issues where we think there are outstanding points of detail to be resolved or where we think it will be useful to seek more detail from ministers, rather than providing a detailed commentary on each clause.
1.7 The TUC has worked closely with Age Concern, Help the Aged and Which? as part of the People's Pension Coalition, and also with the Equal Opportunities Commission, now the Equality and Human Rights Commission, during the pensions debate.
2. Employers' duties
Auto-enrolment and Workplace Personal Pensions (WPPs)
2.1 We understand the difficulties presented by the Distance Marketing Directive and the Unfair Commercial Practices Directive which prohibit auto-enrolment into contract-based WPPs. But it is crucial that these are overcome if there is not be a fatal breach of the auto-enrolment principle central to the new pensions settlement.
2.2 Our preferred option is that contract-based schemes should be converted to trust-based schemes under a master trust as we believe this delivers further benefits to members. If this is not possible then at the very least there must be auto-enrolment into a personal account for those who do not opt in to their employer's WPP.
2.3 WPPs that employers wish to be a qualifying pension scheme (and thus a suitable alternative to a personal account) should be judged on more than simply their contribution levels. We regard employer contribution, governance, investment options and low charges as all being of importance when setting the criteria for assessing the quality of WPPs.
2.4 The TUC supports the provision for all employers to re-enrol on the same terms.
Job holder's right to opt out
2.5 As part of an effective compliance and enforcement regime, the TUC believes any opt-out from a qualifying pension scheme must be given in writing by the worker and registered by them personally with the enforcement body. There should be no employer involvement. This will help to ensure this is genuinely a decision taken by the worker.
2.6 The requirement for every employer to register qualifying pension scheme arrangements with the enforcement agency is vital. Without this requirement it will not be possible to build an effective enforcement regime. While we are sure the vast majority of employers will comply with the new system, it should not be forgotten that there is a straightforward financial incentive for employers not to comply. The modest burden of registering pension arrangements is therefore crucial, and will stop responsible employers being undercut by the bad.
3.1 Most employers will co-operate fully with the new system, but it is likely that a minority will fail to fulfil their responsibilities. The compliance regime will need to take firm action against the irresponsible minority without imposing unnecessary burdens on responsible employers. It is essential that non-compliance with the auto-enrolment system is regarded as a very serious breach of employment regulations.
3.2 The compliance and enforcement regime will need to ensure that:
· employers pay their contributions in full and workers participate as widely as possible;
· employers do not attempt to influence their staff to opt-out of personal accounts (or their own schemes where they provide an alternative qualifying pension scheme).
3.3 The compliance and enforcement regime will need to be accompanied by information and publicity so that workers and employers are aware of their rights and responsibilities.
The enforcement body
3.4 We recognise that there was a debate in Government about which agency should be the compliance and enforcement body for personal accounts and other existing good-quality employer provided pensions. While the TUC could see merit in making the HMRC responsible, we accept that the argument was finely balanced and that the government has now decided that The Pensions Regulator (TPR) will fulfil this role.
3.5 But we would look for reassurance that TPR understands that this is a major change in its role. Up to now it has largely been dealing with stable large and medium sized employers responsible enough to establish a pension scheme, with the occasional issue caused by a relatively small number of employers. Its new role will mean that it has to deal with a hugely increased number of employers, many of them small and perhaps disorganised, and some seeking to evade their responsibilities. It is important that TPR is adequately resourced, is able to access all the data they need from other government agencies such as HMRC (and share its data in return), and has effective enforcement powers.
Unpaid contributions notices
3.6 The Bill does not currently include a requirement to pay interest on unpaid contributions. We think there is a strong case for interest payments for any delay beyond a reasonable administrative period.
3.7 The TUC believes penalties for non-compliance should be severe enough to provide a deterrent effect.
Payment of arrears
3.8 While the issue of arrears is not included in the Bill as published, we are seeking reassurance that workers do not experience any detriment or financial disadvantage from an employer's failure to enrol workers into a personal account or qualifying pension scheme. The TUC believes workers should not be expected to pay arrears in the event of employer non-compliance. Workers should be entitled to retrospective payments from employers (with interest) to make up both the missed employer and employee contributions.
3.9 In addition, we believe employers' deliberate underpayment to pension provision should be treated in the same way as non-compliance, and we welcome the proposal for employers to make good underpayments with no obligations on workers.
4. Protection of employment rights
4.1 Measures to ensure the opt-out is not abused by employers are vital. We therefore welcome the inclusion of the right not to suffer detriment and the right not to be unfairly dismissed on grounds relating to membership of a qualifying pension scheme
4.2 We understand a measure to prohibit employers asking in job adverts, interviews, job offers and so on about pension scheme membership will be included in the bill shortly. We would like this measure to include a prohibition on the prospective employer enquiring with the prospective worker's referees about their pension scheme membership.
4.3 We are disappointed that a pre-employment right not to be refused employment on grounds relating to pension scheme membership has not been included as a right. We feel this measure would be absolutely consistent with existing employment rights, and together with the other rights, would provide a fully comprehensive package of employment rights. We believe this measure is necessary to prevent employers from refusing to recruit somebody who is already a member of a pension scheme. The pre-employment right would complement the measure prohibiting employers asking prospective workers directly asking about pension scheme membership (see paragraph 4.2). The pre-employment right is necessary because an employer may find out or suspect that a prospective worker is a member of, or intending to join the qualifying pension scheme, without directly asking them.
Restrictions on agreements to limit operation of this part
4.4 We welcome the 'restriction on contracting out clause' so that any agreement to opt out of pension arrangements entered into before or after starting employment, in return for an inducement or otherwise, would be void.
4.5 While we recognise the legal difficulties, we are concerned that a minority of employers will seek to 'persuade' staff to opt-out through a range of subtle and not-so-subtle measures including bribes, misinformation and veiled threats. Employers at present are not meant to persuade staff to opt-out of the Working Time Directive, but in practice many do. In addition to individual employment rights, we would therefore press for TPR to establish a risk-based regime that gives careful attention to employers where there are atypically high numbers of opt-outs.
4.6 It is also important that there is a serious information campaign when personal accounts are launched to make people aware of their rights, and what their employer can and cannot do. We would like to see an obligation on employers to make good missed pensions contributions from both the employer and worker from day one of employment in the event of an inducement being discovered.
Enforcement of employment rights
4.7 Alongside the work of the enforcement body, individuals or groups of individuals should be able to take cases to an Employment Tribunal (ET), supported by the enforcement agency and/or trade unions. The employment tribunal route would act as a backstop to the work of the TPR.
4.8 Our work on the National Minimum Wage has demonstrated that there are serious limitations to the effectiveness of individual litigation on employment rights that would need to be overcome if we are to establish an effective compliance regime. The TUC believes that the government should investigate the feasibility and potential benefits that might arise from the introduction of a system of representative actions so that representative organisations such as trade unions can submit claims on behalf of a group of individuals, or trigger enforcement proceedings via the enforcement agency. This may help to allay the fears of workers about going to court on their own and facing intimidation from employers. It could also deal much more effectively with systemic failures by employers where deliberate attempts have been made to exclude large sections of the workforce from employer provided pension scheme membership. Representative actions could also save time and resources spent on ET hearings, and make employers more likely to obey the decision of the Tribunal.
5. Power to establish a pension scheme
5.1 The effective governance of the personal accounts scheme is essential for long-term sustainability and credibility. Central to this will be a governance system that ensures the interests of all stakeholders are known and represented.
5.2 The TUC welcomes the establishment of the Members' Panel. We would like reassurance that the Panel will be sufficiently resourced. We are also seeking reassurance that provisions to appoint member nominated trustees to the trustee corporation will be in accordance with statutory provisions, from 2012 and beyond.
5.3 The TUC believes there should be a modest 'lifetime lump sum contribution limit' on top of the annual limit of £3,600 for personal accounts. This would give individuals flexibility to put extra money into their personal account when they are able to do so, for example when someone has received a small inheritance, money from a divorce settlement, from a matured investment to which they may have been contributing or other savings, such as an ISA.
5.4 The argument for allowing such additional contributions is that personal accounts will only build up a significant pension if employees contribute throughout their working lives. Not everybody can, or will, do this. In particular this assumption does not fit the following.
· Older workers who will start to save for a pension for the first time when personal accounts commence in 2012.
· The working lives of many women. They are much more likely to have breaks in pensionable employment, not just through time out of the labour market when they are caring for children or other dependents but also through periods when they are working part-time or in low paid employment that does not give them the opportunity to build up significant savings for retirement.
5.5 Anyone who has missed out on the opportunity to contribute may well want to catch up later in their working life, and it would be sensible to encourage this.
5.6 Increasing personal responsibility has always been a key government objective for the new pensions settlement. It seems odd that the new system should forbid extra contributions of a size that would probably not make much sense invested elsewhere in a separate private pension. People in the target market with no experience of private pension arrangements would probably be put off anyway from seeking a further pension product.
5.7 We are also disappointed that personal accounts will not be allowed to deal with even small transfers in and out. Many people can build up a small pension pot in a job or though a personal pension, which makes no sense for either the individual or the company holding the saving to maintain for many years. There is a strong case for allowing personal accounts to sweep up such small funds. Similarly the ban on even small transfers out makes little sense. For example a migrant worker from Eastern Europe may build up six month's worth of contributions, but then return home to be faced with a lifetime of dealing with a relatively small UK trapped pension pot, which imposes a disproportionate cost on the scheme. We recognise that the government wishes to protect existing pensions companies from competition offered by the low cost and simple default fund structure offered by personal accounts. But even savings too small to interest pensions companies are caught by these blanket prohibitions. The TUC would therefore like to see provision for transfers in and out of personal accounts to be included in the bill, even if this facility cannot be established initially.
6.1 Personal accounts will quickly build into a major source of investment funds, most of which will be held in the default fund. Consideration should therefore be given to fund strategy and policies. We believe PADA should take an engaged investment approach to the management of the scheme. We think this presents an excellent opportunity for the Government to demonstrate a best practice approach. We recognise the need to keep charges low and would be happy to work with PADA to investigate ways to meet both of these aims.
6.2 We would like a central policy on engagement and voting, and instructing fund managers to properly engage with investee companies in line with the policy. The UN Principles of Responsible Investment could provide a starting point for such an approach.
6.3 We support the general principle of offering a limited number of non-branded fund options, including a Shari'ah compliant fund for Muslim members.
7. Other issues of interest to the TUC regarding personal accounts
7.1 The TUC recognises that there is a concern that some people may not benefit from saving because of the interaction with means-tested benefits. The majority of people will undoubtedly be better off from saving in a personal account or another type of employer provided pension but there are some groups of people for whom saving would not be appropriate, or others where there is a risk that they will not benefit from saving. This is not however a new issue and is not specific to the introduction of personal accounts. In particular we reject the language of mis-selling that has been used by some opponents of the whole system. Union members know about the genuine mis-selling conducted by companies who were fined for selling inferior products to members of good defined benefit schemes.
7.2 While access to good information and guidance is essential to help people plan for their retirement and make decisions about saving, it is not possible to eliminate risk from the system unless either all means tested benefits are replaced by universal benefits, or all pension payments are disregarded in means testing. This could only happen if public spending on benefits was massively increased or big cuts were made in benefits.
7.3 In addition all calculations that try to assess winners and losers are based on the current means-testing regime not only maintaining its current structure, but also its current level of benefits for many years ahead. This is not something that history suggests is very likely. Critics also undervalue the benefit that savers may see in building up their own pot rather than relying on the uncertainty of future benefits.
7.4 But we do believe that there are relatively inexpensive measures that government can take both to reduce the impact of means testing and reduce some of the uncertainty in determining whether an individual is likely to be a winner or loser. These include increasing the trivial commutation limit and making changes to means-tested benefit rules so that modest pension income and lump sums are disregarded.
The Pensions Bill also includes measures that do not flow from the introduction of personal accounts but other areas of pensions policy.
Deregulatory Review - Revaluation of accrued benefits
8.1 The TUC welcomes the retention of Limited Price Indexation at 2.5% for pensions in payment, and retaining the current rules for the return of surplus. However, while we recognise that the government is seeking to discourage employers from closing good defined benefit schemes, we are disappointed that the bill proposes to lower the statutory revaluation cap for future deferred pensions to 2.5% against the advice of the Deregulatory Review. Lowering the cap could have significant implications for members.
8.2 Indexation of deferred pensions provides vital protection for deferred members by adjusting their pension savings for inflation. A rise in inflation above the proposed 2.5% cap would result in members' benefits being significantly eroded.
8.3 The statutory revaluation cap also provides protection for current employees in defined benefit pensions, not least when employers make changes to schemes. If for example a scheme was closed to future accruals, all the existing members would be treated as deferred members with their benefits adjusted for inflation up to statutory cap.
8.4 As the reviewers Chris Lewin and Ed Sweeney noted, a reduction in the cap could impact disproportionately on women with broken career records on account of them leaving the workforce for periods of time to undertake caring responsibilities.