Memorandum submitted by the Equality and Human Rights Commission
The Equality and Human Rights Commission submission to the public bill committee - Pensions Bill 2007
1. The Equality and Human Rights Commission (EHRC) welcomes the opportunity to submit written evidence to the public bill committee.
2. The new Commission, established on the 1st October 2007 is working to eliminate discrimination, reduce inequality, protect human rights and to build good relations, ensuring that everyone has a fair chance to participate in society.
3. The new Commission brings together the work of the three previous equality commissions The Equal Opportunities Commission (EOC), the Commission for Racial Equality (CRE) and the Disability Rights Commission (DRC) and also takes on responsibility for the other aspects of equality: age, sexual orientation and religion or belief, as well as human rights. The EHRC is continuing and building upon the work of the Equal Opportunities Commission in pensions policy, expanding it to cover the wider equality remit.
4. The EHRC is a non-departmental public body (NDPB) established under the Equality Act 2006 - accountable for its public funds, but independent of Government.
5. The EHRC would be happy to provide supplementary oral or written evidence to the Public Bill Committee, please contact Christina Barnes on firstname.lastname@example.org or 0161 8298559
6. The EHRC strongly supports the Government's proposed intention to introduce Personal Accounts (PAs) because this gives workers the opportunity to save in a low cost, flexible savings product with support from their employer, and tax relief.
7. This will be a significant advantage to many individuals including those currently unable to access decent employer supported pension saving due to labour market disadvantage. Be that low paid employment (in particular women and ethnic minorities), working in sectors of the labour market without high quality employer provision (women and ethnic minorities), or those with broken working patterns (for example, women, carers, and those with disabilities). Indeed as the DWP's own impact assessment points out:
· These reforms are likely to have a proportionately more positive impact on black and minority ethnic (BME) groups than on individuals from white ethnic backgrounds. This reflects the fact that these groups are over-represented in the target group for automatic enrolment
· White and BME women are both under-represented in the population of employees earning over £33,000 and over-represented in the population earning less than £5,000, highlighting that this is a gender issue as well as a race issue.
· Employees in BME groups are also less likely to be contributing to a private pension than white individuals: in 2005/06, 28 per cent of individuals aged 22 to State Pension age from BME groups contributed to a private pension, compared with 45 per cent of individuals from white ethnic backgrounds.
· Generally, employees who are disabled are equally represented in the target group of moderate to low earners (£5,000 to £33,000), although they are over-represented amongst those earning between £5,000 and £15,000
· Twenty three per cent of disabled people aged 22 to State Pension age are currently participating in a private pension, compared with 47 per cent of people in this age group who are not disabled
8. Auto enrolment will be vital to the success of PAs, as it will capitalise on inertia and automate the decision to save, hopefully greatly increasing participation rates.
9. However, we are concerned about the power in Clause 3(5) that would exempt employers from the requirement to auto enrol their employees if they offer a Workplace Personal Pension (WPP). Whilst we understand that current European law prohibits auto enrolment into WPPs this exemption to auto enrolment could undermine one of the central principles of these reforms.
Ø WPPs should not be exempt from auto enrolment, methods such as master trusts should be investigated.
10. The Bill sets out the new obligations on all employers to enrol eligible employees into a qualifying pension scheme. We believe that the vast majority of employers will fulfil this obligation. However, a fully effective compliance regime is vital to ensure that no individual suffers detriment due to their employer failing to enrol them, or attempting to coerce them into opting out.
11. Clause 49 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. However this does not prohibit such arrangements or non financial inducements, and it is difficult to see how this could be effectively implemented.
12. It would also place the onus on the individual to complain about non compliance.
Ø A major information campaign will be required to ensure all individuals are aware of their new rights.
13. We have no objection to The Pensions Regulator (TPR) carrying out the compliance function for PAs. However, we need to ensure that TPR has sufficient access to quality data to enable them to carry out this function. They must have the resources to monitor opt out rates, and be able to disaggregate data in order to monitor opt out rates by gender, race, disability, age, income group etc.
14. This role will also have significant operational issues to ensure that all employers comply, with particular emphasis on smaller employers. This will have resource implications for the TPR. Failure to gain sufficient compliance from smaller employers could have a disproportionately negative impact on women and ethnic minorities, who are more likely to work for smaller employers.
Ø TPR's compliance role will require significant equality focus to ensure high quality monitoring so that all individuals in the target group are able to benefit from PAs
Ensuring that it pays to save
15. Whilst the EHRC is a strong supporter of PAs, and the principle of auto enrolment, we along with others have raised concerns that there may be some individuals for whom saving will not pay, as saving in PAs (or other savings products) will serve to merely replace means tested benefits (such as Pension Credit, Housing Benefit, or Council Tax Benefit) which they would have been entitled to had they not saved. See Age Concern's paper for more detail on this issue.
16. Although generic advice and information will help guide people, it cannot identify those individuals who will be most at risk of it not paying to save. Many of the risk factors are unforeseeable, for example taking significant time out of paid employment due to ill health, being a carer, or being single in retirement.
17. We are concerned that there is a strong risk of too much media attention around the risk of it not paying to save. The impact of this could be a lack of confidence in PAs and encouragement of individuals to opt out.
18. Key stakeholders have suggested several proposals for reform that have been proposed by ourselves and others such as increasing the trivial commutation and capital disregards limits, income disregards, adjusting the means tested tapers etc.
19. We are pleased to see that the Government has not allowed compromises that would have weakened the strong principle of auto enrolment, such as excluding older workers in 2012 when PAs are introduced, or increasing the lower earnings threshold to exclude the lower paid.
Ø The Government should commit to a public report on the pays to save issue, including modelling the number of individuals likely to be at risk, an assessment of the tradeoffs between different proposals for reform and public consultation with key stakeholders.
Older female workers at specific risk of it not paying to save
20. One group we have particular concern about is older workers, in particular older female workers who may not have the safety net of even a full basic state pension to underpin their saving.
21. During the debate around the 2007 Pensions Act, in response to the amendment tabled by Baroness Hollis to enable individuals to buy back additional years contributions the Government made a commitment to exploring options to help these women.
" We want to find a way to overcome these problems. We are keen that any solution should deliver a fair outcome for individuals who have experienced complex and fragmented lives, but at the same time we need to be mindful of how any changes would impact on people living overseas.
With that in mind, the Government will commit themselves to looking at the range of options in the coming weeks, including the option to buy additional years as proposed in the amendment, and to provide an update in the pre-Budget report.
22. We are exceedingly disappointed that in the Lords on 17th December Lord McKenzie announced that the Government would be taking no action on this issue
"My Lords, the Government committed to look at a range of options to help individuals who have gaps in their national insurance contribution records to purchase additional voluntary contributions. This work is now complete. The options were analysed in terms of fairness, affordability and simplicity. The Government have concluded that none of the options considered passes these assessment criteria and none is particularly well targeted, and therefore have decided to make no changes to the current rules to allow individuals to buy additional national insurance contributions."
Ø The Government should urgently reconsider the issue of enabling older women to take action to increase their entitlement to the Basic State Pension
23. In order to help ensure that it pays to save, it is vital that the structure and design of PAs is focused on its target market of low to moderately paid individuals not currently saving for their retirement.
Flexibility to save over the lifetime
24. We are pleased to see a reserved power for lifetime limit in clause 53 (3). It is vital that this clause is used. The Government proposes an annual limit of £3600 which will not allow for flexibility to save over the lifetime for those who are unable to save in a consistent pattern. A moderate lifetime allowance running alongside this (perhaps 2 or 3 times the trivial commutation limit, or a small percentage (2-3%) of the lifetime savings limit for tax free pension saving would enable greater flexibility. For example someone who misses out on contributing whilst taking time out of paid employment to care for a sick relative, who then leaves them with a small legacy, or small bonuses or redundancy payments.
Ø The reserved power to introduce a lifetime limit for contributions into PAs should be used.
Ø The proposed 2017 review of PAs should investigate whether PAs have sufficient flexibility for individuals in the target group to save as they wish.
Merging of small pots
25. It is currently proposed that there will be no transfers in or out of PAs, and this shall be reviewed in 2017. We are pleased to see that there will be an exception for individuals who fail to reach the vesting period for their scheme who will be able to transfer the full value of their accrued find into PAs.
26. However, if an individual reaches their alternative schemes vesting period, they will not be able to transfer money into their Personal Account. This ban could have a disproportionate impact on those changing jobs frequently and on those with very small levels of saving. Whilst PAs themselves will be portable between jobs, the ban on transfers into PAs will mean there will be little portability for those working for employers with alternative schemes, who do not interact with PAs.
27. Consider an individual earning £10 000, who spends a year working for an employer with an alternative scheme. Using PAs default contributions her total contribution into her account would be around £400, leaving this in the employers scheme could see the value significantly erode due to charges. It is also costly for the schemes to administer small pots. Allowing small transfers in would also facilitate the decumulation process allowing individuals to merge their savings to achieve a better rate on their annuity purchase.
Ø Small transfers into PAs should be allowed
Individuals with multiple jobs
28. Individuals earnings for auto enrolment and for employer matching will only be calculated with reference to their band earnings from an individual employer. DWP estimates in the Gender Impact Assessment of this Bill suggest that under 40 000 individuals per year have more than one job, earning less than the lower limits in their separate jobs, but more than the lower limit when their earnings are combine.
29. However unlike the increasingly flat rate state pension system with a strong system of credits there may be a further group of individuals who could miss out due to holding multiple jobs. Consider an individual doing 2 jobs, each paying £6000 per year, therefore both over the lower limit.
30. Both jobs will trigger auto enrolment, but their contributions, and employer matching will only be triggered by the amount in excess of the £5035 lower limit for each job.
31. Therefore their total contributions will only be £160 per year. However if they were to have the same earnings but from only one employer her contributions to PA would be £560 per year, of which the individual will have only contributed £280, gaining an additional £150 from employer matching because they only have one job.
Ø The issue of individuals with multiple jobs needs to be addressed, one option would be to enable individuals to opt to pay contributions on their earnings below the £5035 lower limit, and for this to trigger employer matching.
32. This would also help those who earn a little over the lower limit to increase their contributions and gain employer matching.
Clause 62 - Principles for PADA
Ø There should be an overarching principle that the role of PADA should ensure the design of PAs is in the best interest of the target market.
33. This would ensure that PADA works to design a scheme that would meet the needs of its target market, low to median earners not currently saving in a pension.
the cost of membership of a scheme under section 50 should be minimised
Ø The structure of membership charges should not only be minimised, it should not penalise the savings patterns of the target market, for example not have a disproportionate impact on those with intermittent savings patterns, or on those with the very lowest levels of contributions.
62 (2) e)
the preferences of members and future members should. so far as practicable, be taken into account in making provision about investment choice in such a scheme
Ø The needs as well as the preferences of the members and future members should be taken into account, the design of the default fund will be critical to ensure that it meets the needs of the majority of the target market.
62 (2) (f)
diversity amongst members and future members of such a scheme should be respected
34. Would like to hear more about what this principle means in practice. We need to ensure that the diversity amongst members is not only respected but embedded into the work of PADA and the decisions that it makes about the structure and design of PAs. PAs cannot simply be a low cost replication of current private pension provision, the design has to take into account the needs of the target market, whose diversity gives different needs to those of the standard pensions market. For example PAs cannot be designed around a model of 40 years of consistent saving.
35. Information and advice needs would also differ significantly between different groups of individuals
Ø We would like to see commitment to a specific report by PADA on information and advice needs of the target market, and the different equality impacts of the information and advice strategy.
36. PADA's work will be subject to the race, gender and disability equality duties.
Ø The Personal Accounts board who will be running PAs will also be subject to duties because of its dual status as a trustee based pension scheme and an NDPB
Additional measures contained in the Bill
37. We are pleased to see the measures to allow Pensions Protection Fund compensation payments to be shared on divorce.
38. Measures to increase the automaticity of payment of means tested benefits (housing benefit and council tax benefit) and removal of reassessments of entitlement to Pension Credit for the over 75s are welcomed
Abolition of accrued protected rights - requirement to purchase a joint life annuity.
39. It is our understanding that during the passage of this Bill the Government intends to complete the process started in the 2007 Pensions Act to remove the requirement to purchase a joint life annuity with an accrued protected rights pensions pot.
40. We have been working as part of the Treasury/DWP open market option review to seek a solution to this, which would ensure that both the individual purchasing the annuity and their partner has sufficient information to make the correct decision for their circumstances about purchasing a single life annuity.
Ø We would like to seek further clarification about the process for developing the information strategy for annuity purchase and the end process, in particular the provision of advice for partners.
DWP, Pensions Bill Impact Assessment, 5th December 2007.
 Personal accounts and means-testing: making sure it pays to save, Age Concern England, 2007
 Mike O'Brien, 17th July 2007, Commons consideration of Lords amendments
 p84, Pensions Bill Impact Assessment 2007, http://www.dwp.gov.uk/pensionsreform/pdfs/PensionsBillImpactAssessmentDec07.pdf