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The Committee consisted of the following Members:

Chairman: John Cummings
Bacon, Mr. Richard (South Norfolk) (Con)
Baron, Mr. John (Billericay) (Con)
Brown, Mr. Russell (Dumfries and Galloway) (Lab)
Clelland, Mr. David (Tyne Bridge) (Lab)
Dhanda, Mr. Parmjit (Gloucester) (Lab)
Dorrell, Mr. Stephen (Charnwood) (Con)
Dorries, Nadine (Mid-Bedfordshire) (Con)
Eagle, Angela (Minister for Pensions and the Ageing Society)
Hodgson, Mrs. Sharon (Gateshead, East and Washington, West) (Lab)
James, Mrs. Siân C. (Swansea, East) (Lab)
Naysmith, Dr. Doug (Bristol, North-West) (Lab/Co-op)
Owen, Albert (Ynys Môn) (Lab)
Rowen, Paul (Rochdale) (LD)
Waterson, Mr. Nigel (Eastbourne) (Con)
Watson, Mr. Tom (West Bromwich, East) (Lab)
Webb, Steve (Northavon) (LD)
Glen McKee, Committee Clerk
† attended the Committee

Seventh Delegated Legislation Committee

Tuesday 9 February 2010

[John Cummings in the Chair]

Draft Personal Accounts Delivery Authority Winding Up Order 2010
4.30 pm
The Minister for Pensions and the Ageing Society (Angela Eagle): I beg to move,
That the Committee has considered the draft Personal Accounts Delivery Authority Winding Up Order 2010.
The Chairman: With this it will be convenient to consider the draft National Employment Savings Trust Order 2010.
Angela Eagle: It is a pleasure to serve with you in the Chair, Mr. Cummings. The two orders were laid on 12 January.
We know that millions of working-age people are not saving enough to generate an income in retirement that they would either want or expect. In fact, nearly half of working-age employees are not making any private pension savings at all. That is why the Government embarked on their workplace pension reform programme. By building on the work of the Turner commission, which helped create the consensus for change, we have worked closely with the pensions industry, employers, and business and consumer representatives, and across the political spectrum, as we move to deliver such landmark reforms. Today is another step of progress on that march to reform.
Increased access to workplace pension saving is critical if we are to tackle under-saving. That is why we are extending access to workers in every employment sector, by introducing a new duty on employers to enrol their workers automatically into a workplace pension scheme, and to pay a minimum contribution towards their pension saving. We are also due shortly to debate the automatic enrolment regulations that frame the employer duty as part of this overall package of secondary legislation.
Many employers, particularly those with a smaller work force, are not able to provide a workplace pension for their workers at a reasonable cost. Such a situation arises from a market failure that the reforms aim to correct. When the time comes for employers to start automatically enrolling their workers, they will need a scheme in which to do that. That is why the Government is creating NEST—the national employment savings trust—a new low-cost and simple-to-use pension scheme, formerly known as personal accounts. That will be one of the options available to employers to enable them to meet their new duty.
The order covers a number of areas that you would expect to see in the trust deed of any pension scheme, including powers to allow the trustee to make rules for the scheme, to make investments on members’ behalf and to charge members to meet the costs of running the scheme. It also includes provisions relating to the liabilities of the trustee, the payment of benefits to members and pension sharing on divorce.
However, the scope, scale and role of NEST mean it also has a number of features that set it apart from other occupational pension schemes. It might be helpful if I take a little time to set out what the differences are. First, NEST will have to accept all employers that wish to use it and, once an employer is participating in NEST, it must also accept any worker enrolled by that employer. In short, the NEST Corporation will have a public service obligation. It will not be able to turn away any employer or any worker, nor will it be able to set different charge levels for providing the same service to different members.
Steve Webb (Northavon) (LD): Workers who currently have workplace provision might be paying higher charges than in the NEST scheme. They might be in a stakeholder scheme and paying, say, 1 per cent., and NEST is offering 0.5 per cent., or whatever. NEST is obliged to take the employer, as the Minister just said. Will workers paying 1 per cent. be lobbying employers to give up their current provision to go into NEST, so that they can get 0.5 per cent. rather than 1 per cent. charges. The idea of the scheme is that it does not replace or undercut existing provision, but does the duty she has just described not mean that that will tend to happen?
Angela Eagle: I do not want to anticipate, in anything other than in the broadest terms, the behavioural impact of a reform of this size. That will become clear over time. We have done as much research work as we can to model behavioural changes. I like to think that, certainly over time, the presence and existence of NEST will put welcome pressure on cost bases for existing pension schemes. Likewise, the public service obligation, which I have just been talking about, will mean that NEST—the corporation—has to take all the business that comes to it, regardless of whether it can make a profit from charges. Making a profit on its business is not what it is there to do; it is there to enrol automatically all employers and employees who come to it. Once NEST is up and running and exists, the behavioural changes will be complex, but we can tie ourselves in all kinds of knots anticipating far in advance precisely what those changes would be.
I was pointing out that the public service obligation means that employers and individual employees cannot be turned away from membership of NEST, nor will NEST be able to set different charge levels for providing the same service to different sorts of members. That is vital in tackling the market failure in pension provision, particularly among the medium and low earners, which we see in the private sector. It is one of the driving ideas behind the proposals that have been making their way through Parliament since the Turner commission reported.
Mr. Nigel Waterson (Eastbourne) (Con): The only reason that anyone might ever mention the public service obligation in such a context is to justify large public subsidies for the early years of what we now have to call NEST. Does the Minister yet have any idea of what scale of subsidy the Personal Accounts Delivery Authority is planning on applying for? If so, has she thought through the possibility of getting all that through the European rules?
Angela Eagle: We are aware of the tensions with state aid rules and the accompanying issues. It is slightly too early to anticipate exact amounts, since the Personal Accounts Delivery Authority has not finished its procurement process and, at this juncture, the costs are not clear. As the procurement process proceeds, it will become clearer to all what kinds of charges and charging structure are likely. I am sorry that now, as things are going on in parallel, I cannot be as clear as I would like to be. The answer to the question cannot be formulated until the procurement process is finished.
Workers who move jobs frequently can find it hard to keep up their pension savings. With NEST, they will be able to save in the scheme even when they move jobs or move out of the labour market altogether. In effect, membership of NEST is a membership for someone’s working life, which means all members can continue to contribute to NEST until they access their savings at retirement. NEST is not tied to any one employer or group of employers, unlike other occupational schemes. All employers, therefore, will be able to use NEST, and will need information, as indeed will the self-employed.
The NEST Corporation will therefore be able to take steps to increase awareness and understanding among employers and individuals who may wish to use the scheme. Both employers and workers need to have a voice in how NEST is run. Occupational pension schemes normally have member-nominated trustees and trustees nominated by the employer. However, such an approach would be unwieldy and unworkable for NEST, as it will have millions of members and hundreds of thousands of participating employers. To suit its unique circumstances, we have decided that NEST will have two panels: one to represent NEST members and the other to represent participating employers. The job of the panels will be to ensure that the views of members and their employers are taken into account in the operation of the scheme. The members’ panel will ensure that members have a say in selecting trustee members who will operate the scheme on their behalf, once the scheme is up and running.
We want NEST to focus on those employers and workers that the current market does not serve effectively. To achieve that, NEST will operate with an annual limit on contributions and a ban on transfers into the scheme. Such restrictions will ensure that NEST complements existing pension provision—a point that the hon. Member for Northavon emphasised in his earlier question—and the whole arrangement, with the contribution cap and the ban on transfers, will be subject to review in 2017.
To ensure that NEST meets the right balance between the competing policy ambitions of being self-financing over the longer term and delivering low charges for members, the order gives the Secretary of State the power to set upper and lower limits on charges. The order also specifies that the NEST Corporation must provide information to the Secretary of State. Such information will enable the Government to assess whether the reform programme is meeting our objectives, for example, by assessing the contribution NEST has made to increasing pension savings among its target membership.
The features set out in the order are fundamental to our policy intentions for NEST. Therefore, the NEST Corporation will not be able to change those features—the order can be changed only by Parliament. We estimate that NEST will have between 3 million and 6 million members, and hundreds of thousands of participating employers. Introducing a new pension scheme on that scale will be an enormous challenge, and we need to make sure that its systems deliver successfully from 2012 onwards.
To meet that challenge, NEST will be launched with a limited number of volunteer employers in the spring of 2011, providing an opportunity to test the scheme before automatic enrolment starts and so that any initial teething problems can be resolved in a controlled environment. The NEST Corporation will be established on 5 July. That is necessary as the trustees will need to finalise some specific details of the design and operation of the scheme before it comes into being, such as the statement of investment principles. We recently appointed Lawrence Churchill as chair designate, and are running an exercise to recruit other trustee members. We expect them to be recruited by Easter, enabling them to take up their appointments formally in July.
Once the NEST Corporation is in place, the right course of action is to hand over the remaining implementation and operation of the scheme to the new corporation, and to wind up PADA. The draft Personal Accounts Delivery Authority Winding Up Order therefore makes provision to dissolve PADA on 5 July 2010 and to transfer its property, rights and liabilities to the NEST Corporation. That will enable a smooth handover between the two organisations and provide continuity to minimise delivery risks.
In due course, automatic enrolment will create a presumption to save, so that planning for retirement becomes the norm. NEST will ensure that those who are not well served by current market options have an opportunity to save towards a decent income in retirement. These are ambitious landmark reforms that will help deal with the demographic challenge of an ageing society. I commend the orders to the Committee.
4.42 pm
Mr. Waterson: It is a great pleasure to be serving under your chairmanship again, Mr. Cummings.
As the Minister helpfully set out in her introduction, the two orders are about transition, between the Personal Accounts Delivery Authority and NEST—as we have to get used to calling it—the body that will operate what were known as personal accounts in the real world. The Minister referred to “the march to reform”—a march that is turning out to be very long indeed—and to the Turner report, which is of course the beginning of all wisdom.
Before Turner there was no life in pensions, and Turner is the fount of all such measures, but the Turner report envisaged that the system would be up and running in 2010. Although the impact assessment, in answering the question about when the policy will be implemented, rather plaintively says 2012, at the current rate of progress it is difficult to see what exactly will happen in 2012. For many people, particularly those at the heart of Turner’s target audience, nothing final will happen until something like 2017—perhaps even later than that.
We have to see the orders against that background and that of two announcements in recent months: the time scale for auto-enrolment is to be doubled from 18 months to three years, with the phasing in of full employer contributions taking until 2016; followed by—I said announcement, but that would be overegging the pudding—the small print in the pre-Budget report saying that full employer contributions would not come in until October 2017. That might be dressed up as happening for all sorts of other reasons—controlled environment and all that—but it saves the Treasury £2.4 billion. To put it another way, that is £2.4 billion taken out of the pension pots of people who can ill afford to lose that money.
 
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Prepared 10 February 2010