Angela
Eagle: Is the hon. Gentleman saying that he thinks this
reform should be proceeding much faster than the 2012
date?
Mr.
Waterson: That remains to be seen, because a new
Government of any persuasion would be well advised to review why the
scheme will apparently take so long. In the real world, there are large
numbers of people on lower-middle incomes who perhaps heard vaguely
after that nice Lord Turner made his report that something will happen
in 2012. However, those people will actually have years of planning
blight in relation to their pension savings and there will be a period
of non-full contributions that they will never be able to make up in
their working lives.
Steve
Webb: Does the hon. Gentleman think that an incoming
Government conducting a review will add or reduce the planning
blight?
Mr.
Waterson: The hon. Gentleman’s confidence in either
of the likely outcomes of the general election is touching. There are
things we can do. I do not want to be called to order, but we have said
that we would bring forward auto-enrolment, rather than having it
umbilically linked to NEST. Auto-enrolling people into existing,
inevitably more generous schemes could be a great prize worth
having. It
comes down to issues such as the regulatory framework. One of the
penetrating questions any new Minister of any persuasion will want to
ask after the general election—it might even be the hon. Lady
for all I know—is why the scheme will take so long. Is it a
matter of resources or is it inevitable? What are the problems? Why
will the most difficult cases in terms of employers and employees and
those likely to be on the lowest incomes be waiting until the end of
the queue?
Angela
Eagle: I was just wondering whether the hon. Gentleman is
absolutely certain it is appropriate automatically to enrol people who
have quite low earnings into schemes that may have very high charging
levels. Essentially, that would be automatically forcing them to go
into something that is not in their best interests. Is he confident
that a Conservative Government—if the awful happens and there is
one—should be taking such an
approach?
Mr.
Waterson: The Minister is obviously privy to some
information that the rest of us are not. She obviously has some clear
indications about what the final charging regime will be for NEST. I am
happy to give way if she has some hot-off-the-press information on
that. I was making the glass half full argument; not the half empty one
she was making. Almost by definition, auto-enrolling people into
existing company schemes will mean they get higher contribution levels
from their employer than they would ever get under
NEST.
Angela
Eagle: I am anxious to try to get some answers on that.
Part of the reason for the Turner commission was the identification of
the market failure among medium to low earners in the private sector.
In a commercial world entirely, it is not profitable for those people
to be served by DC pension schemes because of the cost of providing
them. The money they can save gets eaten up in the higher levels of
charges. If it is Conservative party policy automatically to enrol
people into such schemes, that is surely the beginning of another huge
mis-selling scandal.
Mr.
Waterson: At the risk of getting too far down the wrong
path, we are talking about auto-enrolling people into existing DB
schemes on a voluntary basis for the companies that want to volunteer.
It seems that every cloud has a silver lining, because if there is
going to be such a long delay in setting up a personal account or NEST,
that may be the way forward. We will certainly consider that as a
serious
possibility.
Angela
Eagle: I am not sure I heard the hon. Gentleman correctly.
Did he say that under the Conservatives the plan is to enrol people
automatically into DB schemes rather than DC
schemes?
Mr.
Waterson: Yes. While the Minister is on the
subject—
The
Chairman: I am hesitant about calling hon. Members to
order, but we are straying a little
bit.
Mr.
Waterson: I am talking about market failure. The Minister
set us part of the scene for the regulations, and I will definitely
return to the
detail. It
is easy for this Government to talk about market failure, but the fact
is that since 1997, the number of active members in the schemes has
just about halved. Therefore, the Minister cannot blame the market
entirely. A lot of Government action has been involved in downgrading
many pension provisions. The needs identified by the Turner commission
are even greater now than they were then.
What
we all got used to calling personal accounts, we are now getting used
to calling the National Employment Savings Trust, or NEST. We have no
particular problem with that name—it is a nice, cosy, safe and
reassuring sort of name. I do not know what the second and third
options
were.
Angela
Eagle: My lips are
sealed.
Mr.
Waterson: I do not suppose we will ever know. But it seems
slightly eccentric, even for this Government, that when the
implementation of NEST, or whatever it will be called, recedes further
into the distance, they have spent some £350,000 on the whole
re-branding exercise. It would have been better if more priority and
resources had been devoted to getting the thing up and running sooner
rather than
later. I
wanted to touch on some of the specific issues raised in the
consultation on the draft orders. A large number of points of interest
were raised by the pensions industry. The orders cover only a
relatively small number, but there are other issues that we will have
the pleasure of dealing with in due course. I guess that many of the
issues will be dealt with in a final version of the rules, which I
assume would be a matter for the NEST Corporation to produce in due
course.
The National
Association of Pension Funds’ central concern was to ensure that
NEST remains focused on employees without access to a workplace
pension. No doubt it will be relieved by what the Minister and the
orders say about the restrictions on transfers in and the annual limit
of £3,600, up-rated for inflation, as indeed am I. The
association also rightly takes the view that NEST should be as free as
possible from political interference. There has clearly been some
movement in the right direction on the power to remove trustees and on
workers without qualifying earnings.
I want to
make a point on the target for NEST and its awareness raising. The
original proposals would have charged the
trustees—NEST—with raising awareness of the scheme in
general. The NAPF was concerned that that wide-ranging duty could
distract NEST from its central purpose, which is to extend workplace
pensions savings to low-income groups that currently do not have access
to them. There is now, as one would have no doubt spotted, a subtle
change. Under article 14, trustees may now engage in awareness raising
so
that “employers
and individuals who may be admitted as members of the scheme may assess
whether they wish to use the
scheme”. That
appears to tighten up the wording, although the precise implications
are unclear. Will the Minister clarify that
issue? The
original proposals would have given the Secretary of State the power to
remove trustees. The NAPF thinks that she should be able to use the
power only in certain specified circumstances. I am pleased to see that
the power has been removed from the final version of the
order.
Again, the
original proposal said that the employers’ and members’
panels should be established within one year of the start of the
scheme. The NAPF argues that they should be in place from the start.
There is no change in the final version, and it remains a concern.
Perhaps the Minister would like to explain why strong governance
arrangements should not be in place from the minute the scheme is
launched.
Article 29(7)
of the final version of the order gives NEST extra powers to limit the
number of occasions on which a member may choose where his assets are
to be invested and the number of investment funds to which the
scheme’s assets may be directed. Why was that not included at
all in the original consultation
draft? On
article 27, the Association of British Insurers said that
it “provides
that the trustee must make deductions from members’ pension
accounts to contribute to the general costs of the setting up,
administration and management of the scheme. In the draft scheme
order...the word ‘general’ did not
appear.” Is
there any significance in
that? There
is also the public subsidy issue. As the Minister knows, because it was
aired at some length during the passage of the original legislation,
the Opposition are not wholly convinced by the public service
obligation argument. It obviously applies to the post office, or the
Royal Mail, for example, but we do not accept that it applies to
personal accounts or NEST. There are serious issues about the level of
public subsidy in the first instance, about the state-aid rules under
the European Union, over what period the NEST structure is meant to
become self-funding, and how long a payback period is projected. Can
the Minister help us on that?
Steve
Webb: Again, just to be clear in my mind what the hon.
Gentleman has just said, he seems to be saying that NEST, the subject
of the orders, in his world would not necessarily be obliged to take
all-comers, so would be free to turn down potential scheme members and
employers—for example, if it thought the cost of servicing them
was too high. Does he have particular categories or types of people in
his world whom he envisages NEST would want, or would be able to say no
to?
Mr.
Waterson: I do not know about my world—that is a
slightly grandiose concept. The answer is no, we are not suggesting
that. I am saying that I do not think it is directly comparable, for
example, to the Royal Mail obligation of being able to post a letter in
the Outer Hebrides and have it delivered in London the next day, or the
next week, or whatever it may be now. We are certainly not suggesting
any discrimination against individual potential
members.
Angela
Eagle: Without the public service obligation—if
NEST has to accept any employer that comes to it and subsequently any
employee of that company—how will the hon. Gentleman achieve the
aim of no discrimination?
Mr.
Waterson: I am not suggesting that at all. I am saying
that I do not think that that justifies a significant public subsidy in
the early years—assuming it is the early years—of the
operation of NEST.
That brings
me to my next question for the Minister, which is when will the
Government be publishing decisions on the charging level and structure
for the scheme, and why have they not done so to date? There is a lack
of transparency about the funding arrangements for NEST. The Government
have now to their credit virtually completed all the legislative
architecture for NEST, yet there has been no disclosure to date on
scheme charging and funding. We know PADA, or NEST, is already running
up huge set-up costs, and other costs are being
incurred by the DWP, the pensions regulator and so on. We need to have
an idea of the sums involved and what subsidy and payback period is
envisaged. On
charging, it could take up to 20 years on some projections to recoup
the set-up costs, which have been estimated at anything between
£1.7 billion and £4.5 billion, requiring some
Government funding over that period. Is that a period that the Minister
recognises and agrees with? There is also the issue of economies of
scale. The Government have said in various debates that there will be
economies of scale in NEST, but the Association of British
Insurers’ Oxera research shows economies under fund management
reduce significantly once funds reach a value of £500 million,
and are virtually non-existent for funds in the region of £1
billion. Serious issues still need to be addressed on the funding of
NEST in its early stages, where that funding is to come from and over
what period it becomes effectively self-financing. Will the Minister
please give us an idea of when the charging structure will be put to
bed? I
want to raise one final, separate issue, which is the rather weighty
impact assessment that accompanies the order. We are still looking at
the projected annual cost of all the new regulation and new structure
on micro and small companies of a mere £100. I cannot remember
off the top of my head the figure that was projected when the Bill was
being enacted, and I have not had time to research it today, but I have
an uncanny feeling that it was exactly the same amount. On any view
£100 is a risible amount to suggest that a small or
micro-employer would end up having to spend additionally to comply with
the new NEST system. Could the Minister tell us how that figure is
arrived at? Even for a medium-sized company it is only £400 and
for a large company such as Marks & Spencer, for example, it is
only £1,900.
These seem
absurdly low figures. If we are going to be straight with possibly up
to 1 million employers who will be involved in auto-enrolment,
particularly the very small ones, we need to be clear exactly what it
will cost. Perhaps the Minister could tell us how much the numbers are
based on consultation with bodies such as the Federation of Small
Businesses.
We do not
intend to vote against these orders. They are necessary as part of the
transition from one body to another. There are some altogether meatier
measures to come. I do not know whether you will have the pleasure of
chairing those, Mr. Cummings. There are still some issues of
detail that we would like to have some answers on, but broadly we
support the
orders. 5.1
pm
Steve
Webb: Good afternoon, Mr. Cummings. It is a
pleasure to serve under your chairmanship. The role of these new
things—they used to be personal accounts and they are now NEST
eggs—is to fill a gap in the pensions market. It is to provide
workplace-based pensions for people who would not otherwise have had
them. The Minister did not wholly reassure when I intervened on her so
I shall try to clarify the point.
Paragraph 7.5
of the explanatory memorandum on the regulations
states: “There
will be a ban on the transfer of accrued benefits into and out of the
scheme”.
The argument seems to be
that if this NEST product is to undercut the existing financial
services market, people should not be able to move money from a
Scottish Widows pension or whatever into a NEST pension. So there is a
ban on that in the orders. Is there not a danger that these orders will
be thwarted in their intent if instead of NEST being predominantly
filled by people who never had a pension before, it is filled with
people who had other pension provision but are facing higher charges
than those envisaged in the NEST
pensions? Let
us hypothesise a parliamentary researcher, indeed all our collective
parliamentary researchers. Let us suppose they are in an existing
scheme where there is an employer contribution of 10 per cent. and the
charge is 1 per cent. I do not know whether that is accurate for the
Portcullis scheme, but let us suppose it is that for the sake of
argument. These regulations come in and NEST eggs become available and
the charge is 0.5 per cent. My employee comes to me and says,
“Hang on minute. 0.5 per cent. of my money going into
my pension every month is going in charges that are not necessary
because there is a 0.5 per cent. pension out there. You are an employer
and this is a workplace-based pension scheme. I insist that you
approach NEST and tell it that you want to offer me a NEST pension
rather than a Portcullis pension.”
We have just
heard that NEST cannot turn me down because it will not say no to
anybody. It cannot turn my employee down even though they already have
a pension because although they cannot transfer money in, they can
start from scratch. Who are the people most motivated to go into NEST
pensions? Presumably it is the people who are pensions literate and who
are already in pensions. If the Minister allows voluntary employers to
go into the scheme in 2011, which I think she said was the case, what
will happen if I am the first one in the queue? I turn up at the doors
of NEST on the day it opens and I say, “I’ve got an
employee who is fed up with paying 1 per cent. She wants to
go in at 0.5 per cent.” NEST will then spend perhaps the first
years dealing with large numbers of people for whom the scheme was
never
intended. Is
the prohibition on transfers in a fig leaf to keep the financial
services industry happy and it will not achieve that goal because it
may not get transfers in, but it will get potentially millions of
people who are in higher cost pensions who will see the NEST pension as
a better value for money pension? All the financial pages of all the
papers will advise them, if they are paying more than 0.5 per cent., to
go to their employer on the first day the scheme is open for business
and get them to enrol them in NEST. I wonder how far PADA and NEST are
prepared for that. To what extent do the Government think that that
will happen? If, as we have discussed, there is a public expenditure
subsidy for the process at some point, to what extent will that divert
subsidy to those who are already pensioned and away from the target
market for NEST? I had not really thought about that until I read the
consultation responses in the explanatory memorandum but, unless I am
missing something, it strikes me as entirely plausible that the early
days of the scheme could be swamped by the wrong people. I hope that
the Minister will address
that.
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