Memorandum submitted by CBI (PE17)
Public Bill Committee - 17th January 2008
CBI written submission
1. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. We speak for all sizes of business from multi-national organisations to start-up firms - all of whom will be affected in some way by the reforms in this Pensions Bill.
2. The CBI supports the broad package of measures in the Pensions Bill, which were developed as a result of the work of the Turner Commission. CBI members support the establishment of a low cost savings vehicle for lower to moderate earners who are not currently members of an occupational scheme. This approach represents a credible solution to the problem of how to increase individual saving for retirement in response to demographic aging. Employers are willing to play their part and will contribute 3% of pay where workers also contribute.
3. CBI members remain concerned about the impact of the reforms on employers who already provide good quality schemes and about the burden on smaller employers. They believe there are a number of important issues the government must address to ensure the success of the reforms. In particular, the government must tackle the barriers to auto-enrolment into group personal pensions at the European level as a priority and changes are needed to the definition of pay used for qualifying earnings. These issues can be resolved through amendment of the Bill or in the detail of the regulations.
4. Continuing progress on the deregulation of occupational defined benefit schemes is also important, as it enables employers to continue with their occupational schemes. We therefore welcome the deregulatory steps in this Bill.
Employers will play a vital role in the new system, contributing 3% for all eligible workers - but cost must be contained
5. From 2012, eligible workers will be automatically enrolled into either their employer's pension scheme or into the new personal accounts scheme. CBI members support the establishment of a new system of low cost personal accounts, targeted at lower to moderate earners who are not currently members of an occupational scheme. The Bill places a duty on employers to enrol eligible workers automatically into a pension scheme - either a workplace scheme or the new personal accounts scheme (clause 3). Employers must also maintain savers in a qualifying scheme (clause 2) and contribute at least 3% of earnings between £5,035 and £33,540 (clause 18).
6. The employer duties which this Bill creates will cost UK employers £3bn per annum. This is a sizable burden and the CBI welcomes the inclusion of the 3% in primary legislation. These significant costs are a burden that firms are willing to pay where other stakeholders also play their part.
7. We welcome the provision in the Bill that the Personal Accounts Delivery Authority (PADA) will minimise employer burdens (clause 62). The Bill requires employers to exchange information with a number of bodies, including PADA, HMRC and the Pensions Regulator (clauses 9, 40 and 41). It is vital that these burdens are recognised and it is essential that employers are consulted at every stage to ensure that unnecessary red tape is avoided.
Smaller employers need additional support - a time-limited financial support package is necessary
8. CBI members, particularly smaller member companies, remain concerned about the impact of compulsory employer pension contributions and the administrative burden. Whilst CBI members acknowledge that some of the increase in costs may be absorbed in wage settlements and prices, this will not be possible for all firms and all sectors.
9. CBI members therefore believe that - in addition to phasing-in compulsory employer contributions - government must introduce a time-limited financial support to help smaller employers absorb these increased costs. At the very least, the Low Pay Commission must take the additional costs that employers are facing into consideration when setting the national minimum wage during the introduction period.
The definition of qualifying earnings should be based on basic pay - notably for exempt schemes who already calculate on this basis
10. Employers have accepted that they will pay 3% of employees' pay into personal accounts. However the definition of qualifying earnings in the Bill goes beyond the definition of pensionable pay used by most employers, i.e. basic pay. In practice, this will create formidable obstacles, especially for those firms who are currently running schemes that they will expect to be exempt under the new regulations. Firms would have to investigate each employee's bonuses, commission etc to check contribution levels meeting the qualifying scheme test - requiring significant expenditure. CBI members report that running DC pension schemes that include commission as pensionable, for instance, is a significant cost.
11. Currently the Bill requires employers and employees to pay contributions based on a band of qualifying earnings between £5,035 and £33,540 and defines earnings very widely (clause 11) :
· salary, wages, commission, bonuses and overtime
· statutory sick pay
· statutory maternity pay
· ordinary statutory paternity pay or additional statutory paternity pay
· statutory adoption pay
· sums prescribed by the regulations for the purposes of the section.
This definition is used for earnings that are eligible for personal accounts but also in the qualifying scheme test that employers with occupational schemes will have to pass in order to continue with these schemes.
12. The CBI believes that the definition of pensionable pay used, especially for exempt schemes, should reflect current industry practice. Of course, some employers currently using a more generous definition will continue to do so. The Bill should set a minimum and employers will retain the option to do more.
13. The full details of the qualifying scheme test will be set out in the regulations. Employers need to know at the earliest possible opportunity whether their pension scheme will pass the qualifying scheme test so that they can plan for any necessary action to amend their schemes. Therefore the government should publish the draft regulations as soon as possible or provide full details of the key provisions of the test.
Enforcement should be proportionate and effective - allowing employers to address inadvertent non-compliance easily
14. The CBI believes that the range of powers that have been provided relating to abuses (clauses 37 and 38) are proportionate. Powers to issue fixed penalty notices up to a maximum of £50,000 (clause 32) and escalating penalty notices up to £10,000 (clause 33) will provide a powerful disincentive to prevent evasion by unscrupulous employers. Enforcement by the regulator should be proportionate, targeted and risk-based, so the CBI welcomes the fact that these measures will be used on a sliding scale, following an initial approach based on compliance notices to protect those whose non-compliance is inadvertent.
15. CBI members believe the government's emphasis must be on educating employers and employees about their responsibilities and rights. This is because many of the smallest employers will simply be unaware of their responsibilities and may end up not complying through lack of awareness rather than through a wilful intention to break the law.
16. Smaller employers will therefore require support to ensure they do not inadvertently fall foul of the new requirements. The government must, prior to the introduction of personal accounts, provide information to employers to ensure they are aware of their new responsibilities. This should include providing employers with an information pack, an easy to navigate website and a telephone helpline.
17. The Pensions Regulator will be responsible for monitoring employer compliance with their duties as created by this Pensions Bill. Whilst we accept the rationale for the appointment of the Pensions Regulator as the enforcement body, these additional responsibilities must not undermine the quality of service provided by the Regulator in other key areas. In addition, many employers will be unfamiliar with the work of the Pensions Regulator as this has so far been focused on defined benefit provision. It is important that employers are made aware of the expanded role of the Regulator and its enforcement powers.
The CBI supports the establishment of a new system of low cost personal accounts - but recognises concerns over disincentives to save
18. This Pensions Bill has developed on the basis of an extensive national debate on the future of pensions in the UK. The CBI has been closely involved in the debate and published its own recommendations for reform based on the report of the CBI's Pensions Strategy Group. The Turner Commission's recommendations were very much in line with CBI thinking and the CBI was pleased that all political parties were prepared to support the package of reforms. We accept that there are issues remaining about individual decisions to save, particularly with regard to qualification for means tested benefits.
19. One potential solution to this issue was recommended by the CBI Pensions Strategy Group when it called on the government to allow 'cash conversion' to provide a guarantee for individuals that saving in a pension scheme would not act against their best interests. This involves the payment of smaller pension pots as a lump sum rather than an income stream to ensure that saving does not work against the best interests of the saver. Proposals to increase the trivial commutation limit to £16,000 should be helpful in this regard; it is also essential that personal accounts provide returns on saving that ensure most individuals are better off by deciding to save.
20. We will continue to work with all parties to resolve remaining issues regarding the decision to save. But employers are clear that there is a vital role for government to play in ensuring the information that individuals need to decide how to save is accessible and easy to understand. Employers do not have the pension expertise or capacity to offer guidance to workers about individual decisions to save. They therefore do not believe it is appropriate for them to provide advice.
Reform must not undermine group personal pensions - government should tackle the barriers to auto-enrolment in Europe as a priority
21. The CBI supports auto-enrolment and is therefore concerned that lawyers have advised that, under EU law, employers cannot auto-enrol workers into group personal pensions or group stakeholder pensions (GPPs). GPPs are an important part of the current savings market - there are currently 2.5m members of GPPs, making up around 40% of pensions saving. The best solution to this problem is ensuring that auto-enrolment can take place in 2012 into these schemes, and the CBI encourages government to take this issue forward in Brussels urgently.
22. If there is a period after 2012 during which EU regulations have not been changed, Clause 3(5) gives the Secretary of State powers to allow GPPs to follow different procedures until EU law is changed. This is an important power because it ensures that these schemes can continue until the issues raised by EU law are addressed. Officials are working in partnership with employers on an efficient way of allowing GPP schemes to remain open to new members until the EU problems are resolved. Employers with GPPs have already signalled their commitment to providing access to a pension scheme for their employees. Under the employer duty to contribute (clause 18), workers in these GPPs will access at least 3% employer contributions - if they take full advantage of the additional contribution matching which is available in many schemes, they will benefit even further.
Employers with occupational schemes must be able to phase-in contributions and operate a waiting period for new employees
23. CBI members supported the government's proposal to allow employers with occupational schemes to phase-in the new provisions. The Bill provides powers to phase-in employer contributions (Clause 10 - Introduction of employers' duties) but the CBI believes that the Bill should include a specific provision on this point. This important measure will help employers adjust to the additional costs arising from the reforms. This is particularly important to smaller employers who may be less able to absorb additional costs.
24. CBI members also welcomed the government's commitment to enable employers with good occupational schemes to operate a waiting period of at least 3 months before new employees must be automatically enrolled into either the employer scheme or the personal accounts scheme. This is an important measure to reduce admin burdens and contain costs for employers who are already committed to good occupational provision. It would also help reduce the risks of levelling down. We therefore welcome the powers provided by Clause 4 - "Postponement of automatic enrolment" but would welcome the inclusion of the minimum waiting period of 3 months in the Bill to ensure that the principle is established in primary legislation.
Measures to focus Personal Accounts at the target group of workers without access to occupational provision are welcome
25. The CBI has supported the government's intention not to allow transfers in or out of personal accounts. This measure is designed to ensure the focus of the personal accounts scheme remains on the target market (those not currently saving) and does not damage current provision. In addition, keeping management charges as low as possible is essential and unnecessary complexity will drive up costs. Prohibiting inward transfers is an important measure to contain costs, enabling PADA to achieve an annual management charge for personal accounts scheme members that is close to the Turner Commission target of 30 basis points (0.3% AMC). The CBI supports the restriction on transfers in or out of personal accounts but with a provision to review the restriction after five years from the inception of the personal accounts scheme.
26. CBI members generally accept the introduction of an annual contribution limit for personal accounts as a way of targeting the scheme at moderate to low earners without access to an occupational scheme. A contribution limit will both help ensure individuals seek appropriate advice about the best ways to save before committing significant sums to a pension and protect the existing long-term savings market.
Progress on the deregulation of occupational defined benefit pensions is important to protect current provision
27. The CBI fully supports the deregulatory steps being taken in this Bill. These are part of a package including secondary legislation designed to free employers and trustees from restrictive scheme rules, a review of employer debt regulations and a move to clarify the legal requirements placed on trustees.
28. The CBI supports bringing revaluation for deferred members from 5% to 2.5% into line with revaluation for pensions in payment (clause 79). Price inflation in the UK has averaged well below 5% for many years, meaning that the regulations have provided full price protection. A move to 2.5% re-establishes the basic principles of the regulation. The changes will only affect benefits accrued in the future - scheme members affected by this lower revaluation cap will be aware of the treatment of their accrued rights and be able to adjust their pensions saving arrangements accordingly.
29. The CBI believes that the savings generated by this change will be a valuable benefit to businesses. They will help off-set some of the rising costs of defined benefit provision, ensuring that future accrual by active members can be continued on a more widespread basis - a valuable benefit for scheme members.