Memorandum submitted by Engineering Employers' Federation (PE 10)
EEF's Submission to the Parliamentary Scrutiny Unit on the Pensions Bill
1. EEF is the representative voice of manufacturing, engineering and technology-based businesses with a growing membership of 6,000 companies employing around 900,000 people. Comprising 11 regional associations, the Engineering Construction Industries Association (ECIA) and UK Steel, EEF is one of the UK's leading providers of business services in employment relations and employment law, health, safety and environment, manufacturing performance and education, training and skills.
2. EEF believes that the new low-cost personal accounts scheme, with auto-enrolment and compulsory minimum employer contributions, which the Government is now introducing through the Pensions Bill is a key element of its comprehensive and inter-related package of reforms to the UK's pensions system. Providing personal accounts are simple for employers to administer and individuals to understand, we believe that they will help to achieve the Government's objective of encouraging more people to save for their retirement.
3. However, EEF has a number of concerns about some detailed aspects of personal accounts that we consider still have to be addressed and resolved by the Government. In some cases, this needs to be done during the Pensions Bill's passage through Parliament. In other cases, they are not issues to be addressed through the Pensions Bill itself but they will need to be resolved by the Government prior to the introduction of personal accounts in 2012. An example of the latter is the need for the Government to provide some initial financial assistance for smaller employers when personal accounts are introduced.
4. EEF regards the deregulation of occupational and private pensions as an equally important part of the Government's package of measures to reform the UK's pensions system. The deregulatory proposals in the Pensions Bill provide a welcome supportive message to those employers who are voluntarily providing occupational pension schemes for their employees.
5. We therefore feel that the proposed reduction in the annual "cap" on revaluing deferred pensions from 5% to 2.5% is an encouraging first step in the deregulation of occupational and personal pensions. However, the Government must now build on this by, for example, introducing statutory override to help employers to introduce this proposed change.
6. The issues covered in this Submission are-:
· The Annual Contribution Limit
· The Enforcement/Compliance Regime for New Worker/Employee Rights
· Workplace Private Pensions
· The Role of the Pensions Regulator
· Government Support for Smaller Employers
· Repeat Auto-Enrolment
· The Deregulation of Private Pensions
· The Interaction with Means-Tested Benefits
7. In addition to these issues, EEF has some specific concerns about a number of the Pensions Bill's provisions and we are therefore planning to put forward amendments to various Clauses in the Bill that we believe would address these concerns.
The Annual Contribution Limit
8. In its response to the consultation on the Personal Accounts White Paper that was published in June 2007, the Government stated that, having reviewed the wide variety of views that had been expressed on the annual contribution limit into personal accounts, it had decided to have an annual contribution limit of £3,600. This figure would be based on 2005 earnings levels, with this annual limit "being uprated from that point to implementation from 2012". Whilst this was not in line with EEF's view that there should be no annual limit on employer/employee contributions other than the current annual limit on pension contributions that is set by HMRC, we considered that, on balance, the Government's decision was a sensible compromise between many different views that we felt had satisfactorily resolved this controversial issue.
9. We are therefore very surprised and disappointed to see that, whilst Clause 53 of the Pensions Bill refers to the introduction of an annual contribution limit, there is no reference to the level of this limit in either the Pensions Bill itself or the Bill's Explanatory Notes. We consider that both the £3,600 annual contribution limit and its uprating in line with earnings between 2005 and 2012 need to be set out clearly in the Pensions Bill as we feel that the absence of this detail will inevitably reopen the debate on this important issue which we felt had been resolved.
10. However, we are pleased to see that, according to the Pensions Bill's Explanatory Notes, Clause 53 will allow the Secretary of State to set "a lump sum contribution limit over the member's lifetime". EEF considers that individuals should be able to make the occasional lump sum contribution into personal accounts over and above the annual contribution limit providing this does not add unnecessarily to the cost of administering personal accounts which we believe must be kept as low as possible.
11. The facility to make the occasional lump sum contribution would provide the opportunity for some of those in the Government's target group for personal accounts to enhance their retirement income. We believe this would be particularly beneficial for women who often have periods out of the labour market to care for children and elderly relatives or periods when they are working part-time. It would also help those women who, after being divorced, realise that they need to boost their income in retirement and may want to use some of the funds from their divorce settlement to achieve this objective.
The Enforcement/Compliance Regime for New Employee/Worker Rights
12. The Pensions Bill will introduce some new employee/worker rights associated with the right for eligible employees/workers to be auto-enrolled into a qualifying workplace pension scheme (including personal accounts) and, if they decide not to opt out, the right to have the minimum employer contribution. EEF was pleased that the Government stated in its Personal Accounts White Paper that the enforcement/compliance regime for these new rights would be "light-touch, risk-based and proportionate" and we believe that this better regulatory approach must be followed. In addition, it must not impose additional regulatory burdens on the vast majority of employers who will endeavour to comply with this new legislation.
13. We consider that the provisions on these new rights in the Pensions Bill follow this better regulatory approach and that they are broadly in line with current employment legislation. However, we understand from information in the Bill's Impact Assessment and recent discussions with DWP/BERR Officials that the Government may be tabling an amendment during the Bill's Committee stage discussions that would be designed to prevent employers from screening individuals out of the recruitment process because of their wish to save in a qualifying pension scheme.
14. EEF recognises that such an amendment to the Pensions Bill needs to be made. However, we feel that it will be very important for this measure to be limited to introducing a sanctionable prohibition on employers doing certain things before offering employment, such as attempting to make a job conditional on non-membership of a qualifying workplace pension scheme or asking questions about an individual's intentions about membership in either a job application form or at a job interview. We are firmly of the view that this proposed amendment should not introduce the right for individuals to be able to seek, at an Employment Tribunal, compensation or any other form of redress where there has been a breach of this prohibition and/or they have been unsuccessful in applying for a job. We understand that it will be proposed that the Pensions Regulator should be the enforcement body for this new provision and we would support this approach.
Workplace Private Pensions
15. EEF recognises that Workplace Private Pensions (WPPs) are an important part of the range of pension arrangements that are currently provided by employers for their employees. We also understand that there are some difficulties with current EU legislation (particularly the EU Distance Marketing Directive) about allowing auto-enrolment into WPPs. However, we consider that, on an urgent basis and ideally by 2012, the Government should take the necessary steps to have changes made to the relevant EU legislation so that auto-enrolment into WPPs is then allowed. We also feel that, in order to reassure all those concerned, it would be very helpful if the Government made a clear statement about its intention to do this during the Pensions Bill's Second Reading on 7 January 2008.
16. Since it is likely to take some time to change EU legislation to allow auto-enrolment into WPPs, we understand that the Government will be tabling an amendment during the Pensions Bill's Committee stage discussions that will, in the meantime, exempt employers with WPPs that meet certain specified criteria from having to auto-enrol their employees into a qualifying workplace pension scheme (including personal accounts).
17. EEF would, in principle, support such an amendment providing it does not impose disproportionate administrative burdens on employers and/or require them to change their current recruitment procedures by, for example, changing their contracts of employment or offer letters. Our preferred approach would be for employers to have to give new employees a standard application form to join their WPP (probably drawn up and pre-populated with the employee's details by the WPP provider) at the same time as their offer of employment is made. In order to meet in full their legal requirements, we appreciate that employers would also have to give this proposed standard application form to all eligible current employees who are not members of their WPP. However, we are firmly of the view that any new requirements that are introduced by this proposed amendment should only apply to employers who provide WPPs for their employees.
The Role of the Pensions Regulator
18. EEF has no objections to the Government's recent decision that the Pensions Regulator will be responsible for monitoring personal accounts and ensuring employer compliance with the requirements set out in the Pensions Bill to automatically enrol employees into a qualifying workplace pension scheme, including personal accounts. However, we consider that it will be very important for the Pensions Regulator to be given the necessary expertise and resources to undertake this new and very different role as well as to work closely with other bodies, particularly HMRC.
19. In addition, these new responsibilities must not impact adversely on the Pensions Regulator's current responsibilities for monitoring work-based pension schemes and protecting the benefits of the members of these schemes, a difficult and increasingly complex role that we feel the Pensions Regulator is handling very well.
Government Support for Smaller Employers
20. EEF is pleased that, to reassure and assist all employers, the Pensions Bill confirms in primary legislation that the minimum compulsory employer contribution into a qualifying workplace pension scheme will be 3% of banded earnings and that this minimum employer contribution will be phased in gradually. However, we are firmly of the view that, although this is not a matter to be addressed in the Pensions Bill itself, the Government also needs to provide some initial financial assistance for smaller employers when the requirement for employers to auto-enrol into a qualifying workplace pension scheme (including personal accounts) comes into force in 2012.
21. In our view, the provision of this initial financial assistance would not only recognise the additional costs and administrative burdens that many smaller employers will face for the first time in contributing to their employer's pension arrangements but it would also help to make the small business community more supportive of these new pension arrangements. This latter point is very important because many of those who the Government is trying to encourage to save for their retirement work for smaller employers and the attitude of these employers will therefore be very important for the successful implementation of this part of the Government's pension reform programme.
22. Following discussions with our members, we have developed a possible way in which the Government could provide this initial financial assistance for smaller employers without disadvantaging employees who work for them, an important prerequisite for our members. We have now costed our proposal, based on the assumptions about employee take-up for personal accounts that were set out in the Pensions Commission's Report, and discussed it with DWP/Treasury Ministers and Officials. A copy of a paper detailing our costed proposal, as well as addressing some specific issues that have been raised with us by Treasury Officials, is attached as an Appendix to this Submission.
23. EEF is pleased that the Pensions Bill's Explanatory Notes confirm that repeat auto-enrolment for eligible employees "will not be more than once in a three year period for either each employer or each jobholder". We have also noted that Clause 5 of this Bill gives the Secretary of State the power to set the dates for repeat auto-enrolment and we hope that this will include allowing employers to undertake this on a fixed date (such as the start of the tax year) for all their eligible employees rather than on the anniversary of the date that each individual chose not to be auto-enrolled. We consider that this approach would not only be easier for employers, particularly smaller employers, to administer but it would also reduce the chances of inadvertent non-compliance with this new legislative requirement.
24. Another issue about repeat auto-enrolment that we consider the Government also needs to address is repeat auto-enrolment into defined benefit, and some defined contribution, occupational pension schemes as they provide non-pension benefits such as death in service and ill-health retirement benefits. In our experience, companies generally require employees to pass a medical examination before they are allowed to join such schemes after they have initially turned down the opportunity to join them. This approach prevents employees from waiting until they have a medical problem before they try to join the scheme and therefore gain access to these valuable non-pension benefits. When employees have not passed this medical examination, employers either do not allow them to join their pension scheme or restrict their access to non-pension benefits relating to death in service or ill-health retirement.
The Deregulation of Private Pensions
25. EEF regards the deregulation of occupational and private pensions as a very important part of the Government's package of measures to reform the UK's pensions system. It complements the other key elements of this package, namely improvements in state pension arrangements together with a gradual increase in the state pension age and the introduction of the new low-cost personal accounts scheme with auto-enrolment and a minimum employer contribution for those who do not opt out.
26. We have therefore welcomed the provisions in the Pensions Bill that will reduce the annual "cap" on revaluing deferred pensions from 5% to 2.5% for rights that accrue from some future date that has yet to be determined. Whilst some EEF members have indicated that they would have preferred this proposed reduction to have applied in the case of all revaluations after the appointed date rather than just to rights that accrue after this date, we still consider that this reduction will help to reduce the costs for employers of providing defined occupational pension schemes. As a result, its introduction will probably make it more likely that those schemes that are already closed to new members will decide to remain open for future accrual to current members.
27. This proposed change would also bring the revaluation "cap" for deferred benefits into line with the change in the revaluation "cap" for pensions in payment that was introduced by the Pensions Act 2004. It would also discourage the practice that we understand is now sometimes occurring of individuals voluntarily deciding to leave their occupational pension scheme, but without leaving their employer, because they feel that their deferred pension benefits will be better protected against inflation compared to their continuing in active membership of the scheme.
28. Whilst the introduction of the proposed reduction in the revaluation "cap" on deferred benefits is very welcome, it should only be the first step in the Government's deregulation of private pensions. In particular, the Government needs to introduce statutory override to enable schemes to make changes to their rules about the indexation of benefits in respect of both the proposal in the Pensions Bill and the reduction in the revaluation "cap" for pensions in payment that was introduced by the Pensions Act 2004.
29. This statutory override is needed because a number of EEF members have told us that they have had, or are having, difficulties implementing the provision in the Pensions Act 2004, primarily due to the wording of their trust deed and rules. They anticipate that they would therefore face similar difficulties implementing the reduction in the revaluation "cap" on deferred benefits that the Pensions Bill will introduce. We would therefore urge the Government to enable statutory override on these issues to be able to be exercised by employers without having to obtain trustee consent
The Interaction with Means-Tested Benefits
30. EEF supports the new low-cost personal accounts scheme that is being introduced through the Pensions Bill and believes that it will help many people, who currently do not have the opportunity to join an occupational pension scheme, to save for their retirement. However, we recognise that there are concerns that, as detailed analyses by the Pensions Policy Institute (PPI) in some recent PPI Reports have shown, personal accounts may not be suitable for all employees due to their interaction with means-tested benefits. This therefore means that individuals will need to be provided with very clear information about personal accounts and generic advice to help them make informed decisions about whether or not they should opt out of personal accounts.
31. In the Report that the PPI was recently commissioned to produce by the B&CE Benefit Scheme ("Increasing the Value of Saving in Personal Accounts: Rewarding Modest Amounts of Pension Saving"), the PPI identified a number of policy options for reducing the risk that employees are auto-enrolled into saving when it is not suitable for them. These were:-
· Not auto-enrolling some groups who are more likely to be at risk of low returns, such as low earners and today's older people
· Increasing the trivial commutation limit to allow more individuals to take small amounts of pension saving as a lump sum
· Allowing individuals to have a limited amount of pension income without it affecting their entitlement to means-tested benefits.
32. EEF would not support the first of these policy options as we believe that all eligible employees should be auto-enrolled into a qualifying workplace pensions and, moreover, exempting some groups of employees could also create administrative burdens for employers. However, we consider that both of the other policy options that are set out above (increasing the trivial commutation limit and allowing individuals to have a limited amount of pension income without it affecting their entitlement to means-tested benefits) warrant more detailed examination by the Government although we acknowledge that, in both cases, they would increase Government expenditure.
33. Whilst we do not regard this issue as something that needs to be resolved in the Pensions Bill itself, we consider that the Government should now examine this issue in more detail and try to resolve the concerns about the interaction between personal accounts and means-tested benefits that have been raised by a number of organisations and commentators before these new pension arrangements are introduced in 2012.
Small firms and personal accounts
The case for supporting small firms
This note looks at the need for some form of modest and temporary financial support for small firms in the period immediately following the introduction of personal accounts, sets out one possible model for providing this initial financial assistance and addresses some of the potential objections to it.
In our submissions to the Pensions Commission on reforming the UK's pensions system and more recently to the government, EEF has consistently opposed any form of exemption from personal accounts or lower employer contributions for smaller firms. We believe that such an approach would create perverse incentives and potentially a two tier economy.
However, we see the role of smaller employers as being critical for the successful implementation of personal accounts given that many of those who are not currently saving for their retirement work in small businesses. We therefore feel that the government should take all the necessary steps to try to ensure that the small business community is supportive of the introduction of personal accounts.
Many smaller firms will face a great challenge in absorbing the extra costs of administering and contributing to personal accounts on behalf of their employees and we consider that there is therefore a strong case for providing them with some form of initial financial assistance. While small firms will benefit from the government's welcome decision to phase in contributions to personal accounts, we consider that the government should also provide them with some targeted financial assistance when personal accounts are introduced. We believe that this will help them to absorb these increased costs as well as help to create an environment in which the smaller employer community is likely to be less resistant to the introduction of compulsory employer contributions into personal accounts.
A possible model for supporting small firms
EEF has examined a number of different models for this initial government financial support. Our preferred model involves the government reimbursing smaller employers for a proportion of the contributions that they have made into personal accounts for their employees during the initial years of its operation. We have developed this model as one possible way to approach supporting smaller firms and have calculated the costs associated with it.
This paper updates previous costings developed by EEF before the publication of the government's personal accounts White Paper. Our new figures are based on the White Paper's announcement of the phasing in of employer contributions from 1% to 3% of a band of earnings over a three year period and the assumptions in the Pension Commission's report about participation in their proposed National Pensions Savings Scheme. We have also based the figures around the staged changes up to 2009/10 in National Insurance Contribution thresholds announced in the 2007 Budget. For consistency with these thresholds, we have assumed that average earnings (based on the 2006 Annual Survey of Hours and Employment) grow by 4% per year up to 2009.
In the table below we look at the costs of compensating small firms in the three years over which the contributions are phased in, i.e., the Year 1 figures are based on 1% contribution rates, Year 2 on 2% and Year 3 on 3%. We also look at how the costs to the Exchequer would vary according to the rate at which compensation was paid - with compensation rates of 25%, 33% and 50% - and the size of firm covered, looking at covering companies with up to 49 employees and with up to 19 employees.
The table shows that compensating firms with up to 49 employees for half of their contributions would cost £221m in the first year, but that restricting it to smaller firms - those with less than 20 employees- saves just over a quarter of the costs, taking them down to £161m. These savings could be quite significant in the second and third years as the cost of compensation builds up in line with the increasing employer contribution rate.
Costs to the Exchequer of compensating smaller firms for employer contributions into personal accounts, £m
Source: EEF calculations, Pensions Commission's Report, Budget 2007, Annual Survey of Hours and Earnings
Addressing concerns over supporting smaller firms
We believe that the costs associated with our proposed model for temporarily supporting smaller firms in their contributions to personal accounts are modest in comparisons to the savings to the Exchequer from the proposal to end contracted out rebates for defined contribution occupational pension schemes. However, if cost was a major concern, there would clearly be scope to address this by applying a lower size threshold for firms receiving assistance with their contributions into personal accounts than has been used in the above table. One way to smooth costs to the Exchequer over the three years would be to compensate firms for 50% of contributions in year 1, 33% in year 2 and 25% in year 3.
Our recent conversations with HM Treasury officials have revealed that they have some more fundamental concerns about the practicalities associated with targeting financial assistance at firms of a certain size and are worried that it would lead to firms fragmenting themselves into smaller groups in order to qualify for it.
We believe that these concerns about the practicalities of providing some initial financial assistance are overplayed given that European and UK company law definitions for smaller companies are already in place in relation to transfer pricing, capital allowances, R&D tax credits and other tax incentives, audit requirements and accounts disclosure. These are based around thresholds for staff headcount, turnover and balance sheets. For EU purposes, these include micro firms with less than 10 employees and annual turnover below €2m.
The issue of fragmentation is more complex and we have discussed these concerns in some detail with senior tax experts from RSM Robson Rhodes. They have advised us that, since there is already "anti-fragmentation" legislation in the tax legislation, it would be relatively easy for the government to introduce similar counteractive legislation that would make such reorganisations ineffective. An example of how current tax legislation aims to stop companies from enjoying tax benefits as a result of fragmentation relates to the different rates of corporation tax. The top rate of corporation tax is 28%, although a reduced rate (22%) is available for companies that make limited profits. To pay the full rate of tax a company needs to make profits in excess of £1.5m, the lower rate is available for companies making profits of up to £300,000.
An obvious response to this would be for a company making £1.5m in profits to create five separate companies each having profits of £300,000 and thus pay the lower rate of tax on all the profits. Not surprisingly the legislation indicates that the limits are divided by the number of companies that are 'associated' with one another in the period. The definition of associated is quite complex, but essentially boils down to 'under common control'. Thus, in the above example the upper limit (£1.5m) is divided by 5, the number of associated companies, giving a revised upper threshold of £300,000, meaning that each company pays tax at the full rate of 28%. A similar approach of aggregating the results of companies under common control could be employed when looking at the proposed financial support for smaller employer' contributions to personal accounts.
Businesses would therefore need to bear in mind that this might make any fragmentation exercise a waste of effort and that there could be significant further costs were they subsequently to decide to recombine the business. Given that the exercise may appeal more to comparatively smaller businesses, the relative costs of undertaking fragmentation can be seen as significant.
RSM Robson Rhodes's analysis also suggests that the costs associated with a company fragmenting in order to qualify for this financial assistance would outweigh any benefits that would, in any case, be time-limited to three years. In particular, they have identified the following issues that companies would need to consider before undertaking fragmentation. We have marked with an asterisk the issues that would be particularly time-consuming for smaller companies.
1. Where companies or limited liability partnerships are involved there will be the cost of multiple formations and annual filings with Companies House. *
2. For companies which are required to have an audit, or wish to have one, there will be additional audit costs.
3. For companies and other businesses, there will be multiple corporation tax/income tax filings by means of a separation of business.*
4. Depending upon the business structure used, there could be appreciable tax de-grouping costs on the de-merger of the business including capital gains costs and stamp duty/stamp duty land tax costs. While reconstruction reliefs can often eliminate these tax costs, the process and costs involved to be eligible for such reliefs may not be very attractive to businesses. Tax exemptions may also require HMRC clearances demonstrating the business purpose involved which may cause difficulties in view of the main intent of the planning. While it would be possible to envisage a separation into several companies in a group in a manner which would not constitute a demerger, it is hard to consider that this will be likely to represent an effective fragmentation when the new rules are introduced.*
5. Companies/businesses would need to consider whether multiple VAT registrations are appropriate.
6. Companies/businesses would need to consider whether multiple PAYE references were appropriate. It would appear inconsistent to operate a single PAYE number while claiming there were separate employment units for pensions purposes although in theory this may be conceivable.
7. Separation of the businesses will, from an employment law perspective, need careful review including the potential impact of the TUPE Regulations. Employment advice will be required on this but we envisage that, in most cases, TUPE provisions will be seen as having application but this would appear inconsistent with the potential benefits of fragmentation. *
8. Legal issues may arise in terms of the joint ownership or usage of assets e.g. property, usage of intellectual property, etc.*
9. Businesses may need to look at shared cost arrangements on the use of assets and also the shared costs in terms of head office facilities. The process of defining the approach to apportioning common costs and posting them in the relevant accounts is likely to represent an additional administrative exercise. In the case of any businesses which are not small or medium sized enterprises, UK transfer price regulations would apply as between companies even where all the companies are within the UK. In applying these UK transfer pricing rules, limits will be defined taking into account associated enterprises. It is hard to envisage, given the level of fragmentation that may be involved in comparatively large businesses to achieve sufficient fragmentation, that the exercise in defining costs on a sharing basis together with documenting these costs will be seen as an acceptable or cost efficient strategy.
10. Similar issues could relate to the sharing of employees especially where the units were defined in such a way that they would need to share or transfer operational employees over time or on a seasonal or needs basis. In certain cases, this may challenge the validity of claiming that a certain individual was properly an employee of a particular unit.
RSM Robson Rhodes have also stated that there may well be a range of additional issues that would need to be considered by companies considering fragmentation in terms of branding, customer perception and issues such as the situs of contract, novation of contract, operation as undisclosed agent etc.
They conclude that "even in the event that counteracting measures were not introduced either from inception or from a very early stage to counteract the policy of fragmentation, the number of issues involved would be likely to make a fragmentation strategy unattractive to the majority of businesses with a view to saving the associated administrative cost and payroll cost inflation associated with the new pensions saving scheme. "