Pensions Bill [Lords ]
The Committee consisted of the following Members:
Annette Toft, Committee Clerk
† attended the Committee
‘(5A) An employer may only give an employee one notice under this section.’.
‘, except in the case of notices given under subsections (1) and (3), it cannot be longer than three months from the day on which the worker begins to be employed by E.’.
The amendments would undo the watering down of automatic enrolment contained in the Bill, and we question the decision to include a three-month waiting period. Amendment 29 would specifically reduce the proposed automatic waiting period before an employee is automatically enrolled from three months to one month. The Opposition have also tabled an amendment to eliminate the waiting period altogether, which will no doubt not have escaped the Minister’s attention, and that remains our preference. However, as a considered compromise, it is surely more appropriate for the delay to be limited to one month, first to limit the amount of people affected at any one time, and the extent to which they are affected over the course of their career, and, secondly, to reduce the risk of increasing opt-out rates. The Turner report is clear:
“The aim…is to use the power of inertia…to encourage individuals, and their employers through the matching contribution, to make at least minimum pension provision, while leaving individuals ultimately free to opt-out if they wish.”
Of the report’s options for the mechanics of automatic enrolment, the preferred one is for employees to have the first four weeks of a new job in which to opt out and, if they do wish to join, payments would commence only in the second month. Amendment 29 is therefore a compromise, which is in keeping with the all-important consensus that Lord Turner and his colleagues on the Pensions Commission came to.
In our earlier debate, I flagged the success of the KiwiSaver scheme in New Zealand; under it, pension contributions are deducted from a new employee’s very first pay cheque. As the Johnson review states, there have been strong and consistent calls from employers to introduce waiting periods. Employer groups have supported the introduction of waiting periods principally to reduce the administrative cost of enrolling people who are with the employer only for a short period, and to allow probationary periods to pass. Such groups believe that waiting periods would help employers to adjust the additional cost of the employer duties, minimising the need for refunds. However, the Johnson review also estimated that, compared with the status quo of no waiting period, at any one time an estimated 0.5 million fewer individuals would be automatically enrolled into pension saving and
“those that are automatically enrolled will not have contributed to a pension for the initial three months…they spend with any employer during their working life which will reduce their overall savings pot, unless they have opted in.”
My estimate is that, by having a three-month rather than a one-month waiting period, around 330,000 people would miss out on pension saving. That estimate is based on extrapolating from the 0.5 million who miss out if they wait for three months rather than paying from day one. I hope that the Minister can confirm whether that is roughly the number of people who will miss out.
The same argument applies to a one-month waiting period but, of course, the actual amount lost would be far less. Take people on average earnings of £25,000 a year. A three-month waiting period rather than a one-month waiting period would cost them around £260 in lost pension savings every time they changed jobs. If we estimate that people have 11 jobs during their lifetime, we are looking at a loss in pension income of some £3,000.
I want to further highlight the effects of this policy in two ways—first, its effects at the time of enrolment and, secondly, its effects over the course of an average career. On the first point, there is a concern from the Government that this amendment would counter the intention of the overall policy. Automatic enrolment exploits the inertia that people experience on pension savings. While we may be fully engaged in the subject, many people who could benefit from pension savings are sadly not. The default position of being automatically enrolled is intended to make savings the norm on an individual and collective level. Introducing a possible cliff edge after three months threatens to undermine that aim. Someone who works for three months before being automatically enrolled, unless they have opted in, will see their income drop in the first month that they are enrolled in the pension scheme. That is an incentive to opt out, compared with someone whose take-home pay remains constant throughout their employment period.
Habits do form and spending patterns are established. A person on an average income of £25,000 a year would see a drop of £70 in their monthly income once automatic enrolment kicks in. The drop would be much more noticeable after a three-month waiting period compared with a one-month waiting period. The impact assessment states:
“It is possible that waiting periods will increase opt-out rates. Individuals subject to a waiting period will receive a ‘full’ wage for some period, and will therefore be more acutely aware of the cost of contributing to a pension when they are eventually enrolled.”
It is also, in the worst case, an incentive for those employers with a three-month waiting period to get rid of their staff just before pension contributions kick in. That is why the legislation for temporary and agency workers is so important. Can the Minister clarify what regulation or enforcement he will put in place to deal with those concerns?
The second important issue that relates to these amendments is the effect on an average employee over the course of their career. The Johnson review shows that on average an individual has 11 different labour market interactions during their lifetime. If every employer were to opt for a waiting period, individuals would accumulate something approaching two years less savings over their career than would be the case under our amendment.
Lilian Greenwood (Nottingham South) (Lab): I wonder whether, in looking at the number of employments that someone has over their working life, we are in danger of looking backwards, which the Minister advised us against last week, and finding that people on average had 11 employments. If we look forwards, people might be expected to have more than 11 employments. That number may rise in the future and we should think about that in our consideration of the amendment.
Rachel Reeves: My hon. Friend makes a very good point. I know we have spent a lot of time last week talking about our mums, dads, husbands, wives and sisters—although we should not remind my hon. Friend the Member for Erith and Thamesmead that she talked about her sister—but if I think about the working patterns of our parents and our grandparents, compared with mine, I have already had more jobs than my mother had during the course of her working life. Although I was not going to mention the point, it is true that looking forward we can probably expect people to have more labour market interactions during their working lives than people have had in the past.
Coming back to the issue of part-time jobs, which I phrase carefully, if people are more likely to mix and match between caring, part-time work, full-time work and part-time study to ensure that they have the skills needed for a modern workplace, they will have more interactions with the labour market over time.
On the different labour market interactions that I mentioned, 11 is the historical number, but we should be looking to the future. There is a risk of losing three months every time somebody changes their job. At the moment, 11 times three means missing out on 33 months of contributions. If the number of interactions goes up to 14 times, there will potentially be 42 months of missing pension contributions. That is a point worth making, and I urge the Minister and his Department to keep such trends in mind when considering the waiting period and the impact on the pension pots that people could expect to build up. Perhaps the Minister will come back to those points later.
Under the Government’s proposal, a person on average earnings with an average number of labour market interactions—11—would lose out to the tune of £3,200. Someone whose work pattern is a perpetual cycle of short-term seasonal work could miss out to a much greater extent. The review tells us that about 25% of individuals already have 14 or more employments during
The review found that young people are likely to move jobs relatively frequently, while those starting a job at age 30 to 34 are likely to stay with the employer for longer. Some 24% of 22-year-olds have been in work for less than six months. For a programme that should be about recognising and encouraging persistency in savings and the formation of habit, it is worrying. If young people move jobs frequently and are never automatically enrolled in the first few years of their working lives, they will not build up the habit, which is such a crucial part of automatic enrolment and nudge theory.
There are clearly some groups on whom the Government’s proposal has a detrimental impact. When this part of the Bill was debated in the other place, the noble Baroness Hollis talked about her research, which is worth repeating. She said:
“My previous research shows that the pattern of job turnover is different for men and women: men have more turnover in their earlier years and settle in their 40s or 50s, while women have a higher job turnover than most men by virtue of being much more frequently in and out of the labour market and more likely to re-enter into a different job… Interestingly, 26 per cent of the population on this model have between 12 and 15 jobs in their working lifetime, which would mean, on average for them…a loss of five years’ pension contributions. Furthermore, 15% have 16 jobs or more—up to 23—
Age UK has highlighted the impact on particular groups. It emphasised that among employers that traditionally use short-term staff—for example, call centres —there is a real risk that those who move from job to job will remain under-pensioned if the optional waiting period is taken by their employers. Reducing the waiting period from three months to one month would make a huge difference for people who have staying power, but none the less a rapid job turnover for whatever reason, and for people who move from job to job more frequently than others, either because of choice or necessity.
There may be a cycle between self-employment and employment. Take, for example, hairdressers, as mentioned by my hon. Friend the Member for Nottingham South earlier. Their conditions of employment are often rather obscure, whether they are self-employed or even if they work in a salon. None the less, the waiting period of three months can represent, over a lifetime, a significant loss of working contributions, matched by the employer, into a pension.
The Minister of State, Department for Work and Pensions (Steve Webb): The hon. Lady is again raising the issue, which we discussed this morning, about people becoming self-employed or being required to become
Rachel Reeves: The aim should be to ensure that employers stick with both the letter and the spirit of automatic enrolment. Returning to the Turner report, on considering the evidence, it recommends that in the first four weeks, an employee should say whether they want to opt out, and automatic enrolment should go ahead in the second month. That would get the compromise right. The first month, in which people are making decisions, is the time for an employee to say whether they want to opt out. We would get the balance right by allowing the employer that month to do the paperwork. After working somewhere for a month, I think people deserve a pension contribution, which is in many ways deferred income.
The recommendation would also ensure that people who move jobs frequently, or just the average number of times—11 times—are building up a pension pot throughout their working life, rather than having three years in which they are not making pension contributions and so are missing out on £3,000 or so on of pension income that they would have got if they were automatically enrolled from day one or after one month.
I understand the concerns of businesses, which feel that the administrative burden would be great in sectors where there is a high staff turnover. For all the reasons that I have raised, I believe that the benefits to individuals and society outweigh the cost. The National Employment Savings Trust was designed to provide a simple and low-cost pension vehicle for all businesses, in particular to fill a gap in the market for pension provision for small and medium-sized enterprises. A company that offers a decent pension scheme, however small, should be more attractive to employees, create better engagement and reduce staff turnover. From what I have seen of NEST, I know that it is doing huge work to make its compliance processes—it is not even paperwork, because almost all of it is done on the internet—as simple as possible for employers to reduce the administrative burden that some businesses have complained about. It is for those reasons that I ask the Minister to reflect on whether he can make any movement back towards the original consensus to automatically enrol people earlier and enable them to build up their pension earlier on in their employment.
My hon. Friend the Member for Erith and Thamesmead tabled amendment 36, which has rightly been grouped with the other amendments, and I shall speak to it briefly. Amendment 36 would provide that the employer may give only one notice period to employees. My hon. Friend was responding to the concern that the operation of a three-month waiting period might have an impact on employees who stay with an employer, but whose earnings fluctuate. Let us take the case of someone whose hours are not fixed, such as the hairdresser whom we considered earlier. In the first two months of employment, they might earn enough to pass the threshold to be automatically enrolled, but in the third month,
The removal of the waiting period remains our preference, but the amendment seeks to find a compromise that would reduce the proposed waiting period from three months to one month. That would limit the number of people affected at any one time, limit the extent to which they are affected over their working lives by lost pension provision and reduce the risk of increasing opt-out rates.
I should be grateful if the Minister set out in more detail the research that lies behind the view that opt-out rates will not fall, because I am yet to be convinced. Can he elaborate on whether his Department undertook any assessment of alternative waiting periods of less than three months, such as one month as we recommend, or two months?
The Bill makes another amendment to the changes in the Pensions Act 2008, which were forged through the consensus of the Turner commission. The measure threatens to limit the scope of automatic enrolment and to undermine the purpose of the Act, which was to get people saving—persistently saving—throughout their careers. The settlement reached in the 2008 Act was appropriate, and subsequent changes to longevity mean that we need those provisions more than ever. We must not unravel the consensus.
Amendment 29 therefore aims to reduce the proposed waiting period to one month. The change would reduce the number of people being left out of automatic enrolment who are therefore also missing out on employer contributions and tax relief towards their retirement income. I hope that the Minister will consider the amendment and respond to my specific questions.
Teresa Pearce (Erith and Thamesmead) (Lab): In discussing the amendments, it is important to keep in mind what we are trying to achieve, which is a total change of attitude to pensions, not only among employees, but among employers. It is as well to remember that employers and their organisations have supported a three-month waiting period, mainly, I believe, because of concerns about administration and red tape.
In addition, we must keep in mind that over the years employers resisted many changes that we now think were for the better: they resisted changes to the national minimum wage, to equal pay and to health and safety. It is natural for anyone in business to resist particular changes that they believe will stop them carrying out their work, will reduce their profits or will take up a lot of their time. It is therefore difficult to walk the line between changing people’s attitudes and creating a total sea change in how people view pensions, and trying to implement a measure with minimum disruption.
The amendment aims to ensure that the three-month waiting period is not abused by unscrupulous employers. Many employers are concerned about their staff and want the best practices in their businesses. They want a level playing field, so they want to ensure that employers who do not play by the rules are brought to book. For the
My concerns are about seasonal workers and people in high-churn jobs, for whom the three-month cliff edge will be ever present. In addition, there might be a disincentive to employ older people. We had much debate last week about older women working for longer. The measures may well provide an incentive for employers to take on people who are under 22 so that they do not have to comply with the provisions in the Bill, which creates another worry for older women.
We must balance what is workable for employers and what is right for society. Most employers will comply, and as the measures are rolled out, the larger, more compliant employers will face the system first. That is the fair and right way to go, because it will show small and medium-sized employers that the system can work. We hope that any wrinkles or problems will be ironed out with the larger employers so that when the measure gets down to the small baker shop or hairdressers, lessons will have been learned and things will be easier.
I have a few questions for the Minister, because I seek reassurance that employers will not be able to manipulate the system easily. As I have said, I am concerned about people being employed only if they are under 22, which would disadvantage older women, who are expected to work for longer now. Will the Pensions Regulator be doing spot checks on employers? When employers open a pension scheme, is it at that point they become known to the regulator? If employers do not open a pension scheme, will they not be known and therefore not be able to be reviewed or policed? From reading the Bill, I am not sure how such matters will work.
As with the national minimum wage, there is the ability for employees to own up and complain if they are not receiving it. Will employees have the same ability to complain about an employer who is bullying them or not allowing them to access the pension scheme? Although there is a three-month waiting period, people are allowed to enrol from day one if they so wish. When an offer of employment is made, will it include information about the pension scheme and the fact that people can access it from day one? Can that be covered by legislation or guidelines? I am not sure how it would work, but if people do not know the facts, obviously they cannot access the scheme. It is up to the employer to inform people proactively.
My hon. Friend the Member for Leeds West, the shadow Minister, mentioned bogus self-employment. I hear what the Minister said about that, but bogus self-employment has been quite rife in several professions, such as the construction industry and IT. It results not only in people being unable to access their pensions, but in a loss to national insurance contributions and other employment rights. With a change in legislation, whether or not the onus is put on to employers, other drivers might push them to recommend that people become consultants not employees. I am interested to know whether there will be links with HMRC to investigate matters if an employer’s workforce decreases unexpectedly or if, all of a sudden, 80 of the 100 employees become freelance consultants. Will HMRC assist the regulator to make sure that sort of thing does not happen?
To return to what I said earlier, we have to think what we are trying to achieve. It is huge. It is a complete change in the thinking towards pensions. Given that
Before I entered the House, I worked for PricewaterhouseCoopers on tax investigations. My area of expertise was in employment, remuneration and pay-as-you-earn. Given what some employers would do to make sure that they pay the least tax in respect of their employees, nothing would ever surprise me. The measure will be regarded by many employers as a tax that they have to pay for employees. I therefore hope that the Minister has listened to my questions in the spirit in which they were intended. I hope that my worries are unfounded, but they are sincere concerns and have also been expressed by many trade unionists who are worried that the measure will be an extra reason why employers will put pressure on them. I look forward to the Minister’s response.
Sheila Gilmore (Edinburgh East) (Lab): It is a pleasure to be in Committee under your chairmanship, Ms Clark. I do not want to add a lot to what has been said, but I have thought about the points made this morning about the burden on employers, and that should not be entirely ignored. It then occurred to me that even the smallest of employers—for example, someone who needs a carer—will have to take on direct payments and deal with tax, national insurance and many other matters from day one, and rightly so, because that employee needs protection. I am a little sceptical about direct payments, because of particular difficulties and issues that my constituents have had, but even the smallest of employers, for example the employer of one person, will have to operate PAYE.
Rachel Reeves: My hon. Friend makes the important point that on day one of employment, the employer starts to pay the person’s salary and national insurance. Many people view a pension as deferred pay, so does she think that it is right that an employer should also start paying into the employee’s pension—the deferred pay for retirement—at the earliest opportunity?
Sheila Gilmore: I agree with my hon. Friend. Theoretically, those two matters are clearly linked. I was considering the practicalities, and the point that has been made is that such enrolment would create too great a burden and that, in needing to balance such burdens, we should not do it.
In the course of all the debate on welfare reform and universal credit, the Department has been confident that it will be possible to receive real-time information about people’s earnings, and also possibly about their hours of work, although that will depend on how the regulations are finally drawn up. We have been assured that one big advantage of universal credit over how tax credits have worked in the past is that problems—there have been issues of people being overpaid, and finding it very difficult to make repayments—will be avoided, because real-time information will be available from employers of apparently any size.
When we have asked about how easily that will work in practice, we have been assured that there should be no problems and that the Department was not concerned about its feasibility, so that the plans are operable. That means that employers will not only be operating current systems for deducting and remitting national insurance and tax, but also be supplying real-time information to Her Majesty’s Revenue and Customs, which will pass it on to the Department for Work and Pensions so that people’s benefits can be calculated and regularly recalculated. Some employers will regard that as a burden. If that really is feasible and practical, I wonder why it would be such a burden for people to be included in the scheme immediately.
In relation to time limits, the burden is less applicable than it is in relation to the threshold. Unless employees move on very quickly, which probably only a minority of them would, they will—provided that they meet the earnings threshold—be covered in due course. All the mechanisms to operate the system will therefore have to be put into place, whether that is from month one, two, three or four. On that basis, I hope that we will hear less of the argument about such enrolment being a burden on employers, in relation to its administration and practicalities, because there will be the same amount of work whether the employee is covered from the first month or from the fourth.
Unless an employer has very few employees, the chances are that they will be operating the scheme for some employees and not for others. If they have three or four employees, some might be covered by it because they will have been employed for the relevant length of time. I hope that those arguments about the practicality and the burden on employers will not now be repeated.
On a completely different matter, I have some information for the Committee. I referred to various adverts for chocolates and pensions this morning—I have not completely lost my marbles—and I have tracked down the chocolate advert, which was for Fry’s Five Boys chocolate. I am convinced that there was a similar advert about pensions, although which advert inspired which I do not know. I have not tracked the pensions advert down on the internet, but I would be interested if anyone can remember it. It was about the way that the poor man’s facial expression changed as he went from being a carefree youth who did not care about pensions, to a very worried man on the point of retirement. I would be interested in tracking that advert down; I know I remember it and it is not in my imagination.
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): It is a pleasure to serve again under your chairpersonship—if that is a word—Ms Clark. I admit to feel slightly nervous about standing up after my hon. Friend’s discussion of Five Boy’s chocolate. I have not heard of that since my childhood, and I am sure that today, such a description—or such a chocolate bar—would be deemed completely politically incorrect. It would have to be “five child chocolate” or something similar. I should probably move on.
This morning the Minister took Labour Members to task for not looking at some of the impacts of burdens on businesses and so on. As I reflected during the break since this morning’s sitting, there was a lack of Government
I am one of the few members of my family who does not run a small business—my family also includes the ubiquitous hairdresser who has been mentioned at various stages of our discussions. We have heard representations from business organisations that are concerned about the delay before people are auto-enrolled. I understand some of the concerns felt by businesses—particularly very small businesses—about the regulations, and that they may want time to get people on to the payroll. As my hon. Friends have suggested, the minute a business puts an employee on the payroll it has to start paying wages and national insurance. Would it be such a disproportionate burden also to have to deal with pensions? I accept, however, some of the points made by businesses. They feel that the last thing they need in the first few weeks of employing a new member of staff is more red tape.
Rachel Reeves: One of the concerns expressed by larger businesses when the Government commissioned their “Making automatic enrolment work” review was that if smaller businesses are not included in the automatic enrolment, there will not be a level playing field. Those smaller businesses would have a smaller cost base as they would not have to pay into a pension. A similar argument could be made about the waiting period. An employer that changes its work force regularly will never have to pay into pensions, while an employer with a stable work force that pays into pensions would have a higher cost base. That might be another reason why automatic enrolment from day one or month two would be better.
Cathy Jamieson: I thank my hon. Friend for that intervention and I will come on to the issue of businesses that change their work force regularly. Her point is important, and as I know from my constituency, small businesses play a huge role in providing employment in local areas and we should not put unnecessary burdens in their way. On the other hand, however, it is important to recognise that people who work in those businesses keep them going and contribute to the local economy.
Andrew Bingham: I am listening to the hon. Lady talk about small businesses. She must concede that small business men today are under great pressure, work extremely hard, and value their staff. Giving them three months will allow them to evaluate staff and to decide whether they can work together. To throw an extra burden on them immediately would discourage them from employing people. Having run a small business for 20-odd years, I speak with a reasonable amount of authority. The hon. Lady is being disingenuous about small business men, although I agree that they are the country’s engine room, and drive the country forward. We should bear their present troubles and strife in mind.
Cathy Jamieson: With respect to the hon. Gentleman, I was trying to be fair, and to put on the record some of the issues that small businesses have raised. I have not heard much about that from Government Members, but I will come to that. The Forum of Private Business has raised with Members on both sides of the House its worry about liability, and how to comply with the regulations that it believes the Government will introduce. It is aware that pensions are complex financial products, and that many small businesses will find it difficult to distinguish between what it describes as the good and the bad offerings. It is worried about the effect on small employers of auto-enrolment into pension schemes, and would like more support from payroll experts, and to have access to accountants and others who are familiar with the products. It wants help as the scheme is introduced because of its impact on businesses.
The forum believes that employees are unlikely to be happy at what they may see as lower take-home pay because money is paid into a pension scheme. It wants the Government to introduce an incentive package for employers to recompense them for their time and increased liability. It will be interesting to hear the Minister’s response to those points, which I have made simply to show the range of issues. Many small businesses are the life blood of local communities, and most of them understand their responsibilities to their employees.
It is important to scrutinise whether the three-month period is right, or whether one month would allow people the opportunity to deal with the issues that have been outlined, and to get people enrolled as quickly as possible. My hon. Friend the shadow Minister described situations that could become unintended incentives for opting out, and that would not be helpful. We heard some of that debate this morning on the thresholds.
I want to put on the record the fact that there is concern that some people would risk taking a short-term gain instead of planning for the future. We heard this morning about various situations, and if one has a family, current pressures may outweigh planning for the future. We do not want the cliff edge that my hon. Friend described. I hope that the Minister will reassure us on that. I may be accused of being cynical, but I live and work in the real world and regularly have to help people on fixed-term contracts and agency staff with employment-related issues. There may be a perverse incentive for employers who may see fit to get rid of staff within the three-month waiting period just before pension contributions kick in.
Lilian Greenwood: There may be employers who would lay staff off during the three-month period, but is there not also a danger that employers of staff whose hours and earnings fluctuate could deliberately ensure that an employee’s earnings fell below the trigger level in the third month, so that the waiting period would have to start again? Even if they continued to employ such staff, they could act in that disingenuous way.
Cathy Jamieson: I understand my hon. Friend’s point, and it is one concern that has been raised particularly by those involved in the trade unions, as well as others. I hesitate to use the word unscrupulous, but there might well be employers who seek to do that, because they would feel that it somehow absolved them from responsibility.
Andrew Bingham: I find it unbelievable that the hon. Lady actually said that a small business man would get rid of an employee just before the three months only to avoid the auto-enrolment. I find it interesting what people call small businesses because my experience is perhaps on the smaller scale of micro-businesses, but if I had a member of staff who, after two months and 29 days, was good and could do everything that the business required, I would certainly not consider getting rid of such a person to avoid auto-enrolment. To be frank, I know small business men who would be quite offended by that remark.
Cathy Jamieson: I hear what the hon. Gentleman says but, if he had listened carefully, I was not specifically referring to small businesses in that context. I also made it very clear that I have had to deal with situations in which there are employers who, under existing employment legislation, have used the lengths of people’s contracts to get rid of employees at a point before which they would become liable for further employment rights or further burdens. I am sorry if he is upset, but there are situations in which employees suffer as a result. I simply want to ensure that the issues are raised and debated, and that we have some assurances from the Minister.
Hywel Williams (Arfon) (PC): Perhaps I should declare an interest. Before I was elected, I ran a small business—a one-person business, but I was employing people on short-term contracts to do various teaching jobs. Everyone on the Committee would agree that small businesses try their best to adhere to the highest standards and, to retain staff, I was certainly adhering to those standards when I was involved. However, the problem is that the bad practices might drive out good, and we need to ensure that the systems that we set up do not allow that to happen, in as foolproof a way as can be managed.
Cathy Jamieson: I thank the hon. Gentleman for his intervention, and he perhaps put the case more eloquently than I did in outlining exactly what my concerns would be. If there are loopholes or any opportunities for bad practice to thrive, we should deal with them in discussion of the Bill.
Mr Marcus Jones (Nuneaton) (Con): The hon. Lady is being extremely generous in taking interventions. Is she advocating that we bind our businesses with even more red tape and regulation, stifling them instead of persuading them that now is the right time to take on additional employees? She seems to be forming her argument in a way that says to businesses: “We will burden you with more regulation and red tape, and you might want to think twice before you take on additional staff.”
Cathy Jamieson: I thank the hon. Gentleman for his intervention. I hope that he understands that I am pointing out what businesses themselves have said. Irrespective of the period of time for auto-enrolment that we are discussing, which they are concerned about, some businesses see it as a burden whether the period is three months or one month. We must dispel some of the myths and explain why auto-enrolment is the right thing to do. We clearly still have a job of work to do there, which the Minister I am sure will deal with in his summing up.
Cathy Jamieson: I would like to finish my point, if I may. Surely the purpose of our debate is to tease out and discuss the difference between three months and one month, and the best option to ensure that we meet the principles of the Bill, which is to ensure that as many people as possible are collected in to plan for the future via auto-enrolment.
Surely the point is to get the balance right—the balance between not regulating businesses to stop them taking on more employees, coupled with the importance of getting more people automatically enrolled. The figures that I quoted earlier suggest that about 330,000 people at any one time will miss out on automatic enrolment if we have a three-month rather than a one-month waiting period. When Lord Turner did his report—I do not think that his objective was to stifle businesses with regulations—he recommended that an employee could opt out in the first four weeks, but then in the second month when they receive the salary, they would be automatically enrolled. He thought that that was the right balance for regulating business and for ensuring that as many people as possible started contributing to a pension.
I am sure we all have examples of small businesses that we have worked for, or run, or that we know in our constituencies. I agree with Government Members that the vast majority of businesses, large and small, want to do the right thing by their employees, including paying into a pension for them. We can all agree on that point, but we must find the right balance between making sure as many people as possible benefit from automatic enrolment and making it as simple as possible, as I think the creation of NEST does, for employers to automatically enrol people into an appropriate scheme.
Cathy Jamieson: I thank my hon. Friend for that intervention. Once again, she has outlined her view very clearly. It is important that we get the balance right. The purpose of this debate is to tease out the issues the better to understand them from the perspectives of businesses and potential employees. It is important that we have the opportunity to do that. I favour a situation in which people are auto-enrolled as quickly as possible. That is important. I have concerns, which I raised on Second Reading, in relation to call centres, for example. I did not produce such concerns from nowhere. Age UK raised concerns about employers such as call centres that have traditionally used short-term staff because of turnover. People may be employed for a few months at a time, and then perhaps find that they have a number of short-term contracts throughout the year, none of which would be enough in this scenario to allow them to be auto-enrolled. People in certain professions or jobs could spend years without being able to benefit from having pension contributions paid. I have real concerns about that.
I listened with interest to the figures for the number of jobs that people are likely to have in their working lifetime—between 12 and 15. We have already discussed people who work in multiple part-time jobs. Many of them would have undertaken those 12 to 15 jobs very early on in their working life. Given the current situation, it is not too much to ask that we try to get them enrolled into the pension scheme as quickly as possible.
I want to reassure those who perhaps think that I have been criticising small businesses. As I outlined at the beginning, I come from a family that runs small businesses, so nothing could be further from the truth. I know exactly the contribution that they make. I know that people feel it is very important to have a system that is workable and straightforward. However, on balance, I believe that if auto-enrolment can be done after three months, it can be done after one month. That gives employees greater protection and also fulfils the principles of the Bill, which we all—hopefully—support.
I come to the amendment from both sides of the fence. I was a former trade union official and my father was a bookmaker who employed a small number of people. The major tension in the amendment and in auto-enrolment is that we have to temper the rights of the employee with the rights of the small business man. I do not think that anyone here today has talked about larger businesses that already have pension schemes in place and will therefore not have to worry about the whys and wherefores of auto-enrolment. They will, more or less, be there.
We have not, however, looked at the issue of stakeholder pensions in our discussion of the amendment. I remember, when I was a financial adviser, many companies had stakeholder pensions, where the only members of those stakeholder pensions were the managing director and the executive. It was not set up properly. When a customer came to see me, they would say, “There is a pension scheme in the company’s name, but I don’t know how to join it.” I would say, “Who do you talk to?” and they would say, “I don’t know.” That issue needs to be looked at when we discuss auto-enrolment.
This is a massive project, on which I support the Government. I take the point that we should not burden small business men with more regulation and red tape, because I know that from when my father worked in the betting industry. There is no industry with more regulation than the betting industry, where operators have to buy licences and so on. I admire any small business man or entrepreneur who wants to go out there and set up their own business, because of the amount of hurdles that they have to overcome in accountancy and the regulatory burden they have to meet. I want to hear from the Minister what help we are giving them to ensure that the auto-enrolment system works properly for them.
Andrew Bingham: I can recommend that the hon. Gentleman visits NEST, because the Work and Pensions Committee has been to NEST. I agree with a lot of what he is saying and I am not sure who that concerns more: him or me. NEST looks like a nice, simple package that will not burden small businesses. I was as concerned as he was on that point.
Chris Evans: I thank the hon. Gentleman for that useful intervention. It reflects my major concern on this and the whole Bill. As I have said before, I sold pensions for a long time. They are complicated to explain and to understand. If there is a simple solution, that is a good thing.
Chris Evans: Yes. I will probably end up like the man in the chocolate advert, full of ideas then a couple of years later bitter and twisted. Let us hope not. Where was I? I have lost my train of thought.
Chris Evans: Yes. My dad’s life story. I gave my mother’s life story last time, didn’t I? I am working my way through the family. Tell you what, I was born in—I am sorry Miss Clark, I am being very frivolous. Please accept my apologies.
We have to temper the rights of the employer with the rights of the employee. Three months is a little bit too long, and I would argue that one month is right. The world of work is changing. People will not stay in the same job that they had when they were 16. I will indulge the Committee with more examples from my family. My grandfather started in the pits at 14 and was carried off at 72, because he did not want to stop working. That is probably the type of person the Government do not like. He was in the same job all his life.
We now have a more prosaic employment record, which we see a lot in the IT industry. My brother-in-law is an IT consultant and he was moved on from a company to become a self-employed consultant, so he is not eligible for auto-enrolment, as the Minister said. How do we ensure that companies do not encourage employees to become self-employed to avoid auto-enrolment? That is an important point and I see that problem in many industries. We have tabled an amendment that proposes no waiting period from day one, but we need some sort of compromise. I hope that the Minister will consider reducing the period from three months when he sums up or that he will discuss the matter beyond Committee stage.
Lilian Greenwood: I am not sure that my hon. Friends have touched on the small matter of the impact of waiting periods on opt-out rates. If someone comes into a job and is auto-enrolled after three months, they will have had three pay packets and will therefore know the size of their take-home pay. If they are auto-enrolled in month three, when their pension contribution comes out in month four, it will be far more obvious.
I note that the Johnson review said that it had limited evidence to help us understand the effect of waiting periods on opt-out rates. It says that the example from the US does not raise a concern, but such a view is obviously based on scant evidence. What might the Minister do to review opt-out rates? Will there be a review of the waiting period when auto-enrolment is in place?
Rachel Reeves: In New Zealand, people are opted in to schemes after one month. After automatic enrolment is rolled out, and if the Government go with the three-month period, it might be useful if they compare opt-out rates in New Zealand with those in the UK. I share my hon. Friend’s concern that spending patterns become established after three months, and people will notice the drop in their income when 4% of it is diverted into a pension. People might not notice that drop so much after one month, because their spending patterns might be less entrenched.
Lilian Greenwood: My hon. Friend is absolutely right that we must find something to measure opt-out rates against so that we know what they might be and how they might differ if there were a shorter waiting period.
My hon. Friend the Member for Erith and Thamesmead touched on another issue. I am sure that the Minister will say that employees have the option to opt in even before the waiting period of three months is over. However, my concern is whether employees will be given sufficient information to enable them to exercise the right to opt in. Will the Minister explain what the Government intend to do to ensure that employers give employees such information, so that they can exercise their right and understand what it means?
Steve Webb: A number of important points have been raised about the waiting period and there are some serious concerns about the trade-offs. Should we have a waiting period at all? If so, how long should it be? The Johnson review, as I indicated, tried to achieve a series of trade-offs and strike a balance between reducing the burdens on business while protecting the interests of consumers. The Government came under huge pressure to exclude micro-employers. We came very close to taking a million people out of auto-enrolment, but it was precisely because we could say, “We recognise the pressure on micro-employers, so we’ve provided a waiting period. We’ve provided an increase in the threshold and we’ve made various other easements,” that we were able to keep those million people in scope. That was the nature of the trade-off, and each time we try and unpick a bit of it, we risk undermining it.
The hon. Member for Leeds West is fond of talking about consensus, but we have managed to keep people together for the project, including employers, at a time when the economy is not in a good state, by recognising some of the burdens. The hon. Member for Islwyn asked what we are going to do for small firms, yet this morning he voted against a measure designed to help such firms by raising the threshold. I assume that he is about to support another amendment that helps small firms, but the difficulty is that he cannot on the one hand say, “Let’s help small firms,” and on the other, oppose all our measures that do so.
It is important to paint a picture of the auto-enrolment world, which will be very different from the current one, and that will slightly change how we think about these
People who work for a series of small firms will often have a NEST pension, and I was delighted about the positive response that members of the Select Committee received when they visited NEST. I have visited it myself and was impressed by its work, specifically to assist small businesses. If NEST is the scheme that many small firms choose, people who move from one small firm to another will go with a NEST pension. The NEST corporation will have been in contact with them and people will have been thinking about it. It will not be a situation when they say, “Pensions. Oh, what is that?” Such people will have a relationship with the pension provider, potentially a continuous one despite changing jobs, which means that there is not likely to be 11 lots of three months.
Chris Evans: I hope that the Minister is right, but he is being optimistic. As I said earlier, when I was selling pensions, people accepted that they were a member of the company pension scheme. When the hon. Gentleman refers to people having a relationship with the pension provider, he is talking about a sophisticated relationship that does not exist at the moment. How do we get from a to b; from the point at which people are just looking at a job advert that refers to being part of the company pension scheme to asking the employer what the pension scheme is about?
Steve Webb: The hon. Gentleman is right. We are not at that point yet, and nearly 10 million people do not have pensions. That is where NEST, in particular, and other providers come in. I am slightly darting about, but the hon. Member for Kilmarnock and Loudoun said that small firms were anxious about choice. The regulator will inform them of the scheme called NEST. Firms will be told that the Government have made sure that there is a provider that provides decent value for money, satisfies the requirements of the regulator in respect of the quality of the scheme and has been designed with them in mind.
We believe that, as a result of the majority of small firms not finding the market viable and the big commercial providers not finding it profitable, large numbers of
Language and trying to get rid of jargon is being looked at hard, as is the interface between the individual and the scheme. I keep promising everyone that there will be a NEST iPhone app and an Android app, whatever that is. We are talking about young people, in particular. Nearly one quarter of those who should be enrolled are in the twenties, so we must think of new ways in which to introduce such things. I absolutely agree with the hon. Gentleman. NEST has not opened its doors for business yet but, by the time the scheme is in operation on a serious scale, it will have done. The cultural shift will not happen on day one, but over a lifetime of, say, 11 job moves, we will be moving into a period when people will be more engaged and the providers will be working much harder to communicate.
Mr Jones: In relation to pension provision, apart from those in the public sector and the people in the larger blue-chip companies, the level of take-up of either a personal pension or a company pension is absolutely shocking. I am sure that the Minister will agree. However, he is saying that these provisions will change the whole culture and create a society where people look to provide for their future and their retirement.
Steve Webb: My hon. Friend is quite right. Clearly, the public sector and big firms that run high-quality defined-benefit pensions on the whole have pretty good membership rates. However, unless you have auto-enrolment, take-up rates can be poor. I assume that hon. Members who are new to the House know that their parliamentary staff are entitled to 10% free—in the sense that the staff do not have to pay—contributions to the Portcullis pension scheme, but many staff do not take it up, even when it does not cost MPs anything to do it. That is free money. Whether it is because of awareness or barriers, or because the staff do not think that they will be here for long, there are huge barriers to getting people into that pension scheme. As he rightly says, the evidence from around the world, as cited earlier, shows that auto-enrolment completely transforms engagement and take-up rates. We get people in and then we have to work hard to engage them, but we get them in, as he rightly says.
What we have heard about amendment 29, regarding one month or three months, hardly addresses the issue of seasonal, casual and short-term workers. A season on average lasts three months. If we have a one-month cut-off, lots of seasonal workers will be auto-enrolled. The administrative cost of auto-enrolment is principally the one-off cost in choosing a scheme, getting people in and building up the relationship with the provider. The month-by-month process is relatively straightforward. If a company has to do that repeatedly for large numbers of short-term, casual and seasonal workers, there will be a considerable cost for particular employers, such as retailers. Sainsbury’s has said that it thinks that the
Rachel Reeves: I would dispute the idea that such staff are not employees in a meaningful sense. If someone works somewhere for six weeks and they put in their effort and hours and are contributing, they are an employee, and they deserve some contribution to their future pension. Are they not the sort of people whom we need to capture through automatic enrolment? Let us say that someone works in a café on a beach front for three months in the summer, picks fruits and vegetables in the autumn and then does another job in the post office over the Christmas period when it is busy. People who move from job to job and do not stay anywhere longer than three months will not be able to build up a pension. Does the Minister think that that is the right way forward? Will that not mean that people who work hard, but do not work anywhere longer than three months, do not have the pension that they need in retirement?
Steve Webb: The working patterns described by the hon. Lady happen, but they are often associated with particular periods in someone’s life, the classic one being a student who does a vacation job. Under-22s are not covered by auto-enrolment. The idea that people do a whole series of three-month jobs through their working life is not what happens. There will be odd cases and odd periods when that is the case. People can opt in—I will return to the point about how they will know about that—so no one will be deprived of anything if they want it, although they will have to be aware of it.
The crucial point of the regulations on the implementation of the waiting period is that to benefit from the three-month waiting period, a firm has to notify an employee immediately that they are about to go into a waiting period, and that during that period, the employee has the right to opt in. An employer cannot create a waiting period unless they tell their employee at the start of it about the right to opt in. That is how people will know.
Lilian Greenwood: Will the waiting period also apply when someone hits the age of 22 and becomes eligible for auto-enrolment? They may have worked for the employer for a long period, and are not a seasonal or casual worker. Would it make sense in that instance to enforce a waiting period?
Steve Webb: The hon. Lady is the first person to refer to amendment 30, which refers to whether someone is already working for a firm. I do not think that the hon. Member for Leeds West mentioned that in her remarks. Let us say that there is a staging date for an employer who decides to apply a waiting period for the whole work force. Some people might not be eligible for auto-enrolment, for example a 21-year-old or someone under the wage threshold. If, as under one of the amendments in the group, we cannot have a second waiting period,
The point of the provision is that it is an easement. The waiting period does not have to be three months; it can be up to three months but could be a lot less if the employer wants it to be. The reason for it, however, is to fit in with payroll cycles and to give employers flexibility, rather than pre-empting every possible combination of circumstance and devising complicated rules to foresee what might happen. We want a broad easement and the flexibility to get that balance right.
Rachel Reeves: The Minister talks about the cost of automatically enrolling people. Obviously, there is the cost of paying into the pension but, given what has been said about the simplicity of NEST, does he have an estimate of the administrative cost of automatically enrolling someone in a pension scheme?
Also, the Minister says that people are likely to be more engaged with pensions in the future, with the roll-out of automatic enrolment and NEST. Does he have any estimate of what proportion of that 500,000 who would not be automatically enrolled would enrol voluntarily?
Steve Webb: The figure that the hon. Lady has for less than three months is 500,000. To answer one of her other questions, she asked what the equivalent figure would be for one month. Not surprisingly, it is just under a third, so we estimate that about 150,000 would be covered under her amendment 36.
On the numbers of those who would opt in, no, we do not have an estimate, as it will change over time for the reasons I gave. At the start, all this would be new and people would not really be thinking about NEST when starting a new job. However, on their second and third job moves, that would start to change. Many people would take their pension with them, they would start to think about it and they would get the letter saying that they could opt in if they wanted. Initially, it might take a while for it to be taken up, but it will start to happen.
Harriett Baldwin (West Worcestershire) (Con): On amendment 36, can the Minister clarify whether employees who had opted in for a period but took maternity leave would then be subject to the waiting period on returning to work, if statutory maternity pay took them below the threshold ?
I am backing up my questions, so I will return to the cost of auto-enrolment. I do not have the exact figure to hand but we have produced an impact assessment which includes the cost to business, which I am sure that the hon. Member for Leeds West has seen. We estimate the cost of auto-enrolment for individual firms, varying it according to size. As one might expect, we found that
Going back to the big picture, under amendment 36 we are being invited to give employers a maximum waiting period of one month. What has not emerged in the discussion is that the existing legislation—the 2008 Act passed under the previous Government—includes a three-month period called a postponement period, but it only applies to what are called quality schemes. The previous Government therefore thought, “Actually, we will let people wait for three months, if we think that they have a really good scheme.” The Bill’s waiting period replaces the postponement period so, if we do nothing, there will be three-month waiting periods called postponement periods, but they will be much less flexible than what we are proposing, because the three-month postponement period does not allow people to opt in. Whereas we propose a waiting period during which people have the chance to opt in, the legislation we inherited deprives people of the chance to contribute at all during that period. What we propose is more beneficial and flexible. It would enable the employer to stagger auto-enrolment over a three-month period—which cannot be done with a postponement period—or make it coincide with pay periods. That is not a new idea; three months of waiting is already in the legislation, but we are making it more flexible and available across the board.
The answer to the question asked by my hon. Friend the Member for West Worcestershire about maternity pay is obvious to her, I imagine, if not to me. Statutory maternity pay is included in earnings as part of a total amount. If occupational maternity pay were to stop and a person ended up on statutory maternity pay, they could drop out of the system if they went below a certain threshold, but when their earnings went back up they would go straight back in. That is key to my hon. Friend’s question, and I thank her for raising the issue.
The key point is that each year there will be 2 million enrolments. Of those, 190,000 will be for workers who will leave within three months. If we do not make this change, nearly one in 10 enrolments will be for people who will be gone before three months have passed. The Labour party perhaps slightly understates the importance of buy-in by employers. At the end of this morning’s sitting, the hon. Member for Erith and Thamesmead said that employers have duties to pay tax and national insurance, and that it is part of their civic corporate responsibility to do stuff. That is true up to a point, but I would emphasise the issue of proportionality. It is fair to ask employers to do things, and in answer to the hon. Member for Kilmarnock and Loudoun, we are not planning to reimburse small firms for the cost of implementing the scheme. We think that auto-enrolment is part of employing someone, just like national insurance and tax, but we will try to minimise the cost. NEST has been specifically designed for small firms, and the Pensions Regulator has been working with software companies and will publish guidance to make it easier to set up schemes.
The Department has engaged with a range of stakeholders that represent small businesses, including the Institute of Chartered Accountants, and I have had meetings with small business groups. Rather than incur a heavy cost for the taxpayer, we are trying to minimise the cost. As the hon. Lady said, we recognise that it is part of an employer’s responsibility to participate in auto-enrolment, but we want to make it easy and flexible, which is where the three-month period comes in.
Hywel Williams: I have had a niggling concern throughout this debate about particular industries, one of which—the tourism industry—is over-represented in my constituency. Short-term, sequential employment of less than three months is fairly common and indeed might constitute the majority of some of my constituents’ records. That has implications for both employers and employees. Will the Minister address that issue, and tell the Committee what notice the Government have taken of the difficulties faced by that particular industry?
Steve Webb: I guess that in Wales the summer may last for less than three months—I have spent many holidays in Wales over recent years. I would ask what the hon. Gentleman’s constituents do over a 12-month period. Provided that they have some sort of employment that lasts more than three months, they will be auto-enrolled. If it is true that some people spend their entire lives doing jobs that last only three months, they will not get auto-enrolled unless they opt in. That is the point. If I know that my life is a whole series of three-month jobs, the point will come at which I will start opting in as pensions become more important. That is the trade-off.
Rachel Reeves: Does the Department have any information about the average pension savings for people who have permanent jobs compared with those who do part-time work? That might give us a better idea about whether there is an issue about part-time workers opting into pension schemes at the moment.
Steve Webb: The hon. Lady asks about part-time work. Obviously, we are not talking about part-time work, but about temporary work. [ Interruption. ] She meant temporary work. One dilemma is that we do not have much longitudinal data. It is fairly clear that, at a point in time, pension scheme membership and contribution rates are very poor for temporary workers, but the question is whether people spend their lives as temporary workers or only have a period of doing so. We do not have a tremendous amount of data about what someone who is a temporary worker at 25 does at 35 or 45.
The hon. Member for Erith and Thamesmead asked me whether, because of auto-enrolment, firms will employ 21-year-olds rather than older women. Those aged 21 have the annoying habit of becoming 22-year-olds, so that would be quite a short-term strategy. In addition, not many 21-year-olds are perfect substitutes for her sister or others of a certain age. People often ask, “Why do you want people to work longer—aren’t you depriving all the teenagers of jobs?” However, there is very clear evidence that the contrary is true: making the most of the experience and skills of older workers benefits young people as well, and such crude substitution does not usually occur. If one thinks about why one takes someone on, the attractions of employing someone who would
On how the regulator will know about an employer who is not complying, the staging process for auto-enrolment is based on PAYE records, so the regulator will know who is running a PAYE system and, based on that, if the employee does not report back with a matching scheme satisfying the duties, the regulator will see that the employer is non-compliant. It is not the case that if the employer does nothing, nobody will know about it; they will have to comply with the duty.
On spot checks, the regulator is currently working through the compliance regime, which will be risk-based. The regulator will not turn up on spec at a one-person firm in the middle of nowhere; the regime will be proportionate. However, individuals will be able to report grievances, as they can about the minimum wage and other matters. If someone is deprived of their rights or is unhappy, they can report that, but the regulator cannot be in 1 million places at once.
The hon. Member for Kilmarnock and Loudoun raised the issue about the choice of schemes. We have tried to strike a balance. We recognise that if we had put in an auto-enrolment duty and had not created NEST, we would have been asking the impossible. We would have told small firms to enrol their workers into a scheme, but the small firms might not have been able to find a scheme to take them. NEST will do that, as it has a public service duty and cannot turn any firm away, for which it receives a state subsidy. We have guaranteed that there will be a source, but firms are free to go elsewhere. The smallest businesses will often just not be attractive to commercial providers, in that it would not be worth the hassle of taking pension contributions from one or two lower-paid workers. On the whole, firms will find that NEST is easy, accessible and attractive, and although firms are free to go elsewhere, in practice they may not have much choice.
The hon. Member for Islwyn raised the issue of firms encouraging people to become self-employed. That is an important issue not only for auto-enrolment, but for national insurance and tax, and we are in conversation about it with our colleagues at HMRC. If 80% of a firm’s work force suddenly become self-employed, HMRC has a strong interest in that because it would lose shedloads of employer national insurance, so there is already a communality of interest between HMRC and us. At the margin, the existing incentives to make someone self-employed are the 12%-odd of employer national insurance and other factors, which are already substantial incentives compared with the 3% cost of auto-enrolment.
We will be doing ongoing research through the roll-out of auto-enrolment. We will monitor and research who opts in and who stays out, and compliance. A huge amount of monitoring, reporting and researching will be done because we want to get auto-enrolment right. If we identify any abuse of waiting periods, we have powers to take further action. The key is that we will be keeping a close eye on these things.
The crucial factor, which balances the new duty on firms, is the optional three-month period, during which people will have the chance to opt in. Although that period does not have to be used, it will give employers extra flexibility right at the start of an employment, when they perhaps need it the most. On balance, we
Teresa Pearce: I would like to thank the Minister for some of the reassurance that he has given me, particularly when he referred to easement, and I am setting great store by 2017, when I hope some things may have improved along the lines that I want. Perhaps when we come to new clause 7, some of my other worries will be allayed, but in the light of the reassurance that we have had, I would not want to press the amendment to a vote.
Rachel Reeves: We have had an extremely interesting debate this afternoon. First, the hon. Member for Edinburgh East told us that she had remembered that it was Fry’s five boys in the chocolate advert. She is still trying to remember what the similar pension advert was, but we have an hour and a half left this afternoon, and if she cannot remember by then, we will be enlightened on Thursday. We had our first consensus in the Committee on what a great job NEST is doing, and for that reason alone our sitting this afternoon will be memorable.
This afternoon’s debate has been about whether the balance of the waiting period is right. The Government propose three months, and we propose one month. We have had an intelligent and interesting debate about which period is right. Lord Turner suggested that employees should be enrolled automatically after four weeks, and Age UK suggest that they should be enrolled automatically on day one. The Government want three months, but the argument in the Johnson report, which has been heavily referred to this afternoon, seems to be finely balanced. This debate is important because the arguments are not clear-cut.
We have heard various arguments this afternoon. The first was that people have an average of 11 labour market interactions, but my hon. Friend the Member for Nottingham South said that that figure comes from the past, and that the number of such interactions is likely to increase in future rather than decrease. My hon. Friend the Member for Islwyn mentioned similar issues, and how he expects them to increase. My hon. Friend the Member for Erith and Thamesmead talked about part-time and seasonal workers, and the hon. Member for Arfon also touched on that. Those issues came up many times, including in the Minister’s response.
Although they are different from part-time and seasonal workers, the hon. Member for West Worcestershire mentioned women who take maternity leave, and how they will be treated under automatic enrolment. When responding to the issue of seasonal and temporary workers, the Minister said that he was not aware of comprehensive evidence, but he thought that what there was showed that temporary workers are less likely to be in a pension scheme. My argument is that such workers in particular will miss out if there is a three-month waiting period, but they are employees and making a meaningful contribution in their jobs.
My hon. Friend the Member for Edinburgh East said that employers pay national insurance and wages from day one of employment, and suggested that they should also contribute to a pension from day one. Many people see that as deferred income. My hon. Friend the Member for Nottingham South talked about opt-out rates, and said that if someone experiences a certain salary for
Lilian Greenwood: While the minimum reduction in take-home pay would be 4% once one is auto-enrolled, can my hon. Friend confirm that that is always the case, or could it be more than that, because in some employer schemes the employee contribution is higher than 4%?
Rachel Reeves: Yes, my hon. Friend is right. The minimum amount is 4%, but it could in reality be higher. The Minister is right to say that people can opt in in the three-month period, but the question that people have posed is, would they? Automatic enrolment has many values, one of which is to build on people’s inertia and nudge them into doing what is right for their long-term interests. Without that nudge, it is unlikely that many of them would voluntarily enrol before their enrolment was automatic, although I hope that they would.
I have put the case for the workers and why I believe that it is right for them to be automatically enrolled earlier. My hon. Friends the Member for Kilmarnock and Loudoun and for Islwyn, and the hon. Members for Nuneaton and for High Peak have also made important points about not burdening employers with regulations and red tape. Many members of the Committee have said that during these difficult economic times when we need small businesses to be the engine of growth, this might not be the time to burden them with additional regulation. However, we also know—the Minister has confirmed it—that smaller businesses will not be automatically enrolling employees until much further down the roll-out process during 2016 and 2017. We all hope that the economy is in much better shape by then. The staging approach, with big businesses automatically enrolling their employees first, is the right one.
I asked the Minister specific questions about the costs for businesses. He suggested that the up-front costs for administration purposes were in the region of hundreds of pounds, but he was not sure of the exact numbers. It would be useful if the Committee could see those numbers at a later stage, so that we are aware of the additional cost. All members of the Committee have emphasised that auto-enrolment is much less of a burden on small businesses because of the creation of NEST. The hon. Member for High Peak talked about his visit to NEST in south London and how he had been reassured that small businesses will not be burdened with the regulation and red tape that he had initially feared. That is good news for all of us, particularly for small businesses that will be automatically enrolling employees into their schemes.
We have had some heated debates, but the consensus is that small, medium and large businesses value their staff and want to do the right thing. Of course, we all
Today’s debate has been about balance. It has not been about whether automatic enrolment is the right thing. It has not been about whether the automatic enrolment period should be extended to six months, nine months or a year. It has been looking at whether it should be one month or three months and where the balance is to be found. It is a narrow window, but it affects some 350,000 people at any one time, according to the Minister.
When New Zealand looked at this and introduced the KiwiSaver, they decided to have automatic enrolment after a month. Lord Turner and his colleagues on the Pensions Commission also determined that people should be automatically enrolled after a month. My hon. Friend the Member for Islwyn said that the world of work is changing. We all know that people are likely to have more, rather than fewer, jobs in the future. That is why a compromise of its being one month before people are automatically enrolled is more appropriate to the changing world of work, to ensure that more people are brought into pension saving, particularly those who most stand to benefit from it—those who change jobs more frequently and those who work for smaller businesses. One month is a compromise that strikes the balance between employers and employees in a fairer and right way. I beg to ask leave to withdraw the amendment.
‘( ) In section 5 of the 2008 Act (automatic re-enrolment) omit subsection (5).’.—(Steve Webb.)
Steve Webb: This clause need not detain us too long. It is about the timing of automatic re-enrolment, which the Committee will know was originally proposed to be after three years, with the facility for a firm to delay by three months beyond that. The clause simply allows the firm to allow re-enrolment three months before that, at 2 years and 9 months. That is a straightforward easement. Given the conversations we have had, that will increase pension saving. The essential point of this is flexibility. That is a small but welcome change.
Steve Webb: Clause 8 relates to the way in which the earnings trigger and the qualifying earnings band are reviewed each year. The Committee will recall that we have now made a distinction between the threshold at which someone is auto-enrolled and the band of earnings on which the auto-enrolment duties form. In our conception, they are now two different numbers and the clause relates to the basis on which the two are set.
The 2008 Act introduced earnings-related uprating of what was then a single threshold. We have obviously deviated those two numbers from each other so we now have two numbers to set. However, the previous Bill locked in rises in that threshold to average earnings—in fact, the average earnings basis used to update the additional state pension. One of the issues that our
It is important to have flexibility. We need to keep the thresholds up to date and relevant. The employer duty starts next year. We could not reliably calculate all the figures we need now, and clearly the financial landscape changes. The basis on which tax allowances are set, national insurance thresholds are set and pensions are set are constantly moving feasts and if we tie the auto-enrolment thresholds to a single feature of the system that is doing something else, there is a danger that we will have the wrong number—the number that does not best serve our purposes.
The Johnson review suggested that the trigger should be in line with the PAYE tax threshold. We argued that there was a good reason for that, but that the lower limit of qualifying earnings should link to the primary threshold for national insurance and that the upper limit should rise in line with average earnings. Although we welcome those recommendations and recognise that there is a lot of sense in them, we do not want to be bound by them rigidly from one year to the next. The clause therefore provides that we review the thresholds annually to ensure that the right group is auto-enrolled. The Committee will see, however, that the clause also provides a power for an annual debate on the measures, which will be subject to affirmative procedure. The Secretary of State will review the threshold rates, having regard to the factors in the clause and other relevant factors, and he will bring to the House recommendations, which must then be debated.
Lilian Greenwood: Is the Minister concerned that the possibility for allowing a rate other than either the PAYE limit or the national earnings lower limit introduces an element of complexity? How do employers feel about that? How will the Minister ensure that employers are aware of the level if it is different from the other two that I referred to?
Steve Webb: The figures that the hon. Lady mentions are on the list of factors that the Secretary of State must have regard to. He must also have regard to other relevant factors, one of which is risk of confusion by having different thresholds. The irony is that we are putting right in the Bill precisely what she refers to. The £5,035 uprated figure is not the same as anything in the system, so we are taking out a number that does not match anything. The figures in the Bill match—certainly, the £7,475 matches the PAYE threshold—and the Secretary of State will be mindful of that.
The Secretary of State’s decision will be taken well ahead of the start of the relevant financial year and there will be a communication strategy, because firms will have a duty to follow the measure, just as they have a duty to apply national insurance and tax above particular thresholds. There will be a process for notifying employers of thresholds of this sort. We have indicated the general
Rachel Reeves: I have a couple of questions that build on what my hon. Friend the Member for Nottingham South said. The Minister has discussed the different ways in which the trigger can be changed in line with prices, earnings, tax and national insurance thresholds, and state pensions. What notice period will people receive? How far ahead of time will they know what the thresholds are? Perhaps I should know this, but will the Minister confirm whether the provisions relate both to the threshold at which people are automatically enrolled and the earnings on which it falls?
Most importantly, we discussed today how the threshold for automatic enrolment will be linked—certainly in the next time period—to the PAYE threshold. I have reservations about that, which were expressed in my earlier amendment, especially if the PAYE threshold increases, as relates to the amendment on which we have just voted. The advantage of the link is that at least it is not complicated—although neither was our proposal to link both to the national insurance threshold. Will the Minister elaborate on how he and the Secretary of State will decide how to increase the trigger and qualifying earnings band? Can he give some certainty about administrative ease and fairness so that we know that the level at which people are automatically enrolled will not rocket?
Steve Webb: I shall take the hon. Lady’s questions in order. On the notice period, the uprating will be done in January for April, which is the usual process of uprating for the following year. Most payrolls use payroll software, which all the figures will go into. The Pensions Regulator will issue guidance to those employers who must comply with the duty, and he will ensure that they know what the figure is. I stress that employers are used to getting new numbers at the start of a new financial year for all sorts of reasons; this will be another number—or not, as the case may be.
The clause covers both the review of the earnings trigger and the qualifying earnings band. The hon. Lady asked whether we could go mad and jack up the figures by huge amounts and exclude many people. All we know at present about the tax allowance is the rate that the Chancellor announced for 2012; we do not know anything beyond that and I cannot pre-empt what he will announce. However, there is a coalition agreement commitment to head towards a tax threshold of £10,000. The Johnson review specifically states that he does not think that a nominal tax allowance of £10,000 by the end of the Parliament—not today, it is important to stress that—is out of the spirit of the sorts of thresholds that he considered to strike the right balance between not excluding too many people and keeping down the burden on firms.
Steve Webb: I make no apology for a significant increase in the tax-free threshold—that is the basis on which I stood for election. The hon. Lady is right; it will have a significant impact, but we should bear in mind that we are talking about nominal, not real earnings. The lower earnings limit, or the primary threshold which I think she wanted to use, would be linked to nominal average earnings over three or four years, and who knows by how much they will increase—it could easily be by 4% or 5% a year for three or four years. [ Interruption. ] Well, if inflation is about 4% at the moment, and real earnings growth returns and headline inflation comes down, I would have thought that nominal average earnings growth in that territory is not implausible. We can argue 3.5% or 4% or whatever, but my point is that it is wrong to compare £10,000 with current figures. The nominal increase is of about 20% over another three years or so. Yes, it will go up the income scale—that is the point of the income tax policy, to take people out of income tax.
We are not proposing to stick rigidly to that in clause 8 but we are instead giving ourselves the power to do an annual review. To answer the hon. Lady’s question, therefore, each year we will look at the relevant premises of the system and at what would be a threshold that strikes the right balance between burdens on business and excluding people who we might want to keep enrolled. If for tax, national insurance or pensions policy reasons, the thresholds do something, we would not be bound, as we were previously, only to index the number we first thought of—that is the flexibility we have in the clause and which I think the House wants. However, an impact assessment will be done to inform the affirmative resolution debate, so there is plenty of scope for scrutiny and assessment, which is only right and proper, because the decision is important.
Harriett Baldwin: The Minister is renowned for coughing loudly about the practice that employers have of offering cash buy-outs from small pension pots in the run-up to Christmas and such things. Does he anticipate that the annual review could include transfers into NEST of small pension pots?
Steve Webb: We do not envisage an annual review of that specific issue—clause 8 concerns an annual review of thresholds—but we have a statutory duty, once NEST is rolled out and everyone has been auto-enrolled, to get going by 2017 on a review of issues such as transfers.
To encourage my hon. Friend, we have already, earlier this year, called for evidence about the regulatory difference between defined-contribution, contract-based and trust-based pensions, and one of the issues arising is that of transfers and small pots. In response, we have decided that in the autumn we will produce a document setting out some vision thinking on options for transfers. The issue she raised is important, and we are very much seized of its urgency and are not kicking it into the long grass.
Clearly, although I am straying on to a probable later debate, we do not want to unsettle the architecture of auto-enrolment just as we are about to implement it. We could tweak 1,001 things, but one of the pleas we have
Steve Webb: I hope that the clause is not the most contentious in the Bill. It is about rounding—the legal provisions for rounding the figures for the earnings trigger and the qualifying earnings band. Although the figures that we have been quoting are annual figures and sound nice and round, when they are divided by 12 or by 52 they stop being round, and the clause contains interesting but relatively uncontentious powers about whether such figures should be rounded up or down, or to the nearest 10p. Essentially, section 13 of the Pensions Act 2008 established the principle that pro rata weekly or monthly figures may be applied instead of the annual rate, and clause 5 introduces the same principle for the auto-enrolment earnings trigger. As I am sure is apparent to the Committee, clause 9 will insert a new section into the 2008 Act to allow those pro rata figures to be rounded up or down. That means that when new rates are set to match PAYE or national insurance contributions thresholds, we can match them exactly if we so wish. The clause is uncontentious and I commend it to the Committee.
‘(2) For the heading substitute “Certification that quality requirement or alternative requirement is satisfied”.
Steve Webb: The issue of certification is important and substantive, so I will explain what it is, why the provisions in the clause make certification easier and why we have gone a step further in amendment 9 and new clause 2 in response to the debates in the House of Lords.
This is the first time I have been a Minister in a Committee, and I am amused because I did not realise that Ministers are given a paper stating that the amendment will be “Moved by: Steve Webb”, that my “Party” is “Liberal Democrat” and that at the top is the word,
What is certification all about? The idea is that firms have to auto-enrol a set of workers, but what do they auto-enrol them into? They have to auto-enrol them into a scheme that is good enough. It does not have to be perfect; it has to be good enough. The 2008 Act envisaged certain quality thresholds for schemes that satisfy auto-enrolment quality standards. The problem with the 2008 Act is that it is quite rigid, which is a recurrent theme. A firm might have a pretty decent scheme, but if it did not exactly fit with what the Government thought it should look like, the firm would fail the pretty decent scheme test—as it is known in the trade. The employer would then have to amend the scheme to fit the Government’s framework or think, “Blow this for a game of soldiers—I will shut my scheme and do the bare minimum.” We want to avoid the situation of firms that are running schemes that are good enough feeling moved to close them or to level down.
The idea of certification and the reforms in the clause is that we will allow different sorts of schemes to pass the good enough test. We are proposing a range of thresholds to allow schemes to be certified as good enough, and there are three variants. First, if a firm provides 9% of basic pay, its scheme is good enough. Auto-enrolment is based on one definition of pay—on earnings in the band above the £5,000-odd threshold—but many pensions are based on another definition of pay, such as basic pay, which can create problems in that basic pay might be very different from total pay, because of overtime and bonuses. We do not want an employer who is running a basically decent scheme to have to shut it or amend it because of those differences in definition. Therefore, in response to a lot of consultation, tier 1 of the certification test, which we will be introduced in regulations, states that if at least 9% of basic pay is put in, including at least 4% from the employer, the firm will have a tick as being good enough.
Secondly, if the firm contributes at least 8% of basic pay, including a 3% employer contribution, that will also be good enough. Thirdly, if the firm contributes at least 7% of total earnings—basic pay plus bonuses, overtime and so on—including 3% from the employer, that will again be good enough. That is different from the 8% of band earnings, which is the bit above the uprated £5,000 or whatever the threshold finally is. As I said, the certification test is to give firms that run schemes that are good enough but do not exactly fit our blueprint a tick in the box, so that they can get on with running those pension schemes and making widgets.
Clearly, some people in some firms will get less money put into their pension because we have made that easement. For some individuals, 8% of band earnings will be more than what is allowed under the certification rules, and the question is whether we are disadvantaging too many people. We did not design the thresholds and come up with numbers off the back of a fag packet; they were based on studying basic pay, total pay and what firms were putting in, and making a careful analysis of that. We always intended for the vast majority of workers to do better—or as well—in these tests as they would have done in the original tests.
There was a debate on this issue at some length in another place, which we welcomed and found helpful. It was suggested that reassurance was needed that the new certification tests will not water down the protection received by workers. We therefore tabled amendment 9 and the linked new clause, which will ensure that over 90% of employees, based on survey data, will do better or as well in each of these tests as they would have done in the original tests. We have looked at the annual survey of hours and earnings for private sector firms, and applied the two tests—the original 8% of band earnings test and the different tiered tests. With the tier 1 test, we found that 95% of employee jobs will get as much money or more; with the tier 2 test, that was true for 91% of employee jobs. It must also be true for the tier 3 test because that involves 7% of total earnings. Any individual to whom that tier applies will save at least as much as they would have done had contributions been calculated using qualifying earnings.
Rachel Reeves: I applaud the work done by the Minister and the evidence that he has cited. He gives the percentages of those who are likely to be better off, and I am pleased with those numbers. Does the evidence suggest that those who will not be better off belong to a particular group? Will it be those right at the top, for example, or those right at the bottom? I have worked for firms where people on lower incomes have a lower proportion of their income paid into a pension by both employer and employee. Is there a risk of that happening?
It is good that schemes that pay in from pound one are not invalid under this scheme because they do not fit specifically into the banded earnings. From his conversations with employers, can the Minister tell us what proportion of businesses will pay in from pound one? Will most wish to do that, or will they prefer to use banded earnings?
Steve Webb: The answer will be different for each of the tiers. Some involve payment from pound one, and some take differential account of overtime. To clarify, tier 1 involves 9% of basic pay and tier 2 involves 8% of basic pay. There is, however, a second condition that I forgot to read out a minute ago and the record will look a bit bizarre. As I was reading it, I thought, “How can that provision be as good as the other one?”, but the second requirement for tier 2 is that basic pay must be at least 85% of total pay. We do not want manipulation or a situation in which somebody reduces basic pay to nothing and pays everybody in bonuses—or does the opposite—and thereby gets round the rules. That is why we have the different tiers.
One problem with private sector occupational DC schemes at the moment is that many would fail the tests under discussion. These tests are not watered down. For tier 1, we think that around 50% of private sector DC schemes would pass and 50% would fail. It is not a weak test and requires a certain amount. We think that about 25% of private sector schemes would pass either tier 2 or tier 3 tests.
In terms of the people who do not get as much, we do not have strong evidence either way, but it will be different for each scheme according to whether account is taken of total pay, basic pay or whatever. In terms of how many schemes use contributions from pound one,
Rachel Reeves : I thank the Minister for his detailed response. I would expect the majority of employers who currently contribute to a pension scheme to pay from pound one. That is certainly my experience from talking to employers, and it would be good to think that they might do so under automatic enrolment. I realise that there might not be any quantitative analysis as we do not yet have automatic enrolment, but having talked to NEST, I wonder whether the Minister’s understanding is that many employers who do not currently have schemes might consider automatically enrolling from pound one.
Steve Webb: The short answer is that we have not had a significant amount of feedback to that effect, but as we discussed a moment ago, it might be attractive. Although it might be slightly more expensive to pay 7% from pound one or whatever, it might make life a lot simpler for firms, and that is partly the point of the exercise.
I might stop there. Although I could speak about the clause, I want to focus on the amendments, which are in response to discussion in the other place, and seek to provide the reassurance that we will regulate to provide easements, but that we will check annually against the data for the survey of hours and earnings to ensure that we are meeting the 90% threshold all the time.
Rachel Reeves: When the Minister is reporting back to Parliament on the success of automatic enrolment, it would useful to see what the proportion of paying in is from pound one, the lower earnings limit, or some other limit. That will say a lot about how much employers have engaged with it, and, as the Minister said, the burden on business could be reduced if fewer people are moving in and out of NEST, especially if there are high set-up costs for moving someone into NEST and then perhaps taking them out.
Steve Webb: It is certainly the case that if an employer is using certification easements to get clearance from the regulator that they are compliant, we will have statistical data on that, and I am sure that we can make such data available as appropriate.
On reflection, I have ranged fairly freely over the clause, but in summary the key thing that it will do when it is amended, as we hope it will be shortly by amendment 9 and new clause 2, is to give us the power to introduce a certification test for employers for money purchase schemes, personal pension schemes, and the money purchase equivalent element of hybrid schemes, and it requires the Secretary of State periodically to review operation of the test. I have described the test and the easements, and our proposed amendment. Let me make it clear what the test is.
The Secretary of State will be satisfied before publishing regulations that no more than 10% of individuals will receive contributions less than the statutory minimum. The key point of clause 10 is that it allows employers to continue to calculate their pension contributions on their scheme definition instead of switching to band earnings, and the alternative tests broadly replicate the minimum quality requirements for money purchase and personal pension schemes, and the money purchase element of hybrids. We are trying to protect individuals but give flexibility to employers. I hope that the Committee accepts that the clause takes us in the right direction, and that amendment 9 will provide the reassurance that has been sought by hon. Members, and in another place.
Steve Webb: Clause 11 is a technical amendment to section 30 of the Pensions Act 2008 and will correct flaws in the drafting. What is quite reassuring to know is that the Bill has no flaws in its drafting whatsoever and that there is no chance that my successor but three will be back here to amend our amendments. However, in 2008, mistakes were made, and I will forgive the people responsible.
As section 30 stands, it compels all employers using defined benefit or hybrid schemes to defer enrolment until the end of the transitional period in 2016. Clause 11 will make deferral a choice for the employer. The crucial point here is that section 30 makes that compulsory. While it remains an option for firms, we want to give firms a choice, so that if they have that particular sort of scheme, they can auto-enrol sooner. That will be a welcome flexibility, and it was always the original policy intent.
As we have just discussed, section 30 allows employers using defined benefits and hybrid schemes to delay automatic enrolment of relevant job holders. It provides that where certain conditions cease to be satisfied during the transitional period, the employer must ensure that the jobholder is enrolled into an alternative scheme. However, as drafted, the section allows employers to
Steve Webb: The clause relates to the difference, in the defined-contribution world, between trust-based schemes, which have trustees, as the name suggests, and contract-based ones, which have managers.
Section 32 of the Pensions Act 2008 provides that trustees in a trust-based scheme may, by resolution and with the employer’s consent, make certain changes to their schemes. That modification power was introduced to allow employers to make improvements, where the powers in the trust deed and rules are limited, to their money purchase schemes and certain hybrids, by increasing contributions, the basis on which they are calculated or their frequency. That power makes it easier for trustees and employers to comply with automatic enrolment requirements.
Clause 13 is a technical amendment that will correct the drafting of section 32. The clause will extend the modification power to scheme managers. The modification power will apply to schemes with managers as well as those with trustees; in other words, to contract-based defined-contribution pensions and not just trust-based ones. It will make it easier for employers with certain trust schemes to comply with their auto-enrolment duties. Without clause 13, employers offering certain trust-based schemes administered by a manager might find it difficult to modify their scheme if the trust deed and the rules were restrictive—to be absolutely clear, there was a power for a trust-based scheme administered by trustees to make amendment, but not trust-based schemes administered by a manager. That was never the policy intent, and clause 13 therefore deals with that. I commend it to the Committee.
Steve Webb: I am sure the Committee is enjoying this bit. Clause 14 does not correct a technical drafting error: it closes a loophole, which is another thing we regularly do in legislation. Section 256 of the Pensions Act 2004—it must have been a real corker of an Act: I forget how many clauses the Bill runs to, but we do not have 256 clauses —prohibits a trustee or manager of an occupational or personal pension scheme from taking money from the scheme to pay for a fine as a result of a conviction or penalty, and rightly so.
Clause 14 also prevents trustees or managers from being reimbursed from the scheme for payment, and this includes indemnity insurance. Sections 40 and 41 of the Pensions Act 2008 introduced fixed and escalating penalties in preparation for auto-enrolment. Section 256 prohibition should have been extended to cover the 2008 Act penalties, but was not. Clause 14 closes that loophole and extends section 256 of the Pensions Act 2004 so that it covers fixed and escalating penalties introduced by sections 40 and 41 of the Pensions Act 2008. The effect of the new clause is to prohibit pension scheme trustees or managers from paying penalties that they are personally liable for out of scheme funds, and as a result reducing members’ benefits.
I will talk about why such prohibition is needed. For automatic enrolment to work, the Pensions Regulator must be able to take effective enforcement action against trustees and managers where necessary. As a last resort, penalty notices could be issued, and the deterrent effect of penalty notices is nullified if recipients simply take the money out of the scheme. The thinking behind that prohibition is fairly clear. I can reassure the Committee that there have not been any prosecutions under section 256, and that is how we want to keep it. However, we want to ensure that we have a deterrent effect and therefore clause 14 corrects that omission in the auto-enrolment world. I commend clause 14 to the Committee.
‘(1) In section 22 of the 2008 Act (test scheme standard) after subsection (7) insert—
“(8) In the case of a scheme under which a sum of money is made available for the provision of benefits to a relevant member, references in this section to pensions are to be read as references to such sums.”
(2) For section 23 of the 2008 Act substitute—
“23 Test scheme
(1) A test scheme is an occupational pension scheme which satisfies—
(a) the requirement in subsection (2),
(b) the requirement in subsection (4) or requirements prescribed under subsection (6) (as appropriate), and
(c) any further requirements that are prescribed.
(2) The scheme must either—
(a) provide for a member to be entitled to a pension commencing at the appropriate age and continuing for life, or
(b) provide for a sum of money to be made available for the provision of benefits to a member commencing at the appropriate age and continuing for life.
(3) The appropriate age is 65 or any higher age prescribed.
(4) In the case of a scheme that provides entitlement to a pension as mentioned in subsection (2)(a), the annual rate of the pension at the appropriate age must be—
(a) 1/120th of average qualifying earnings in the last three tax years preceding the end of pensionable service,
(b) the number of years of pensionable service, up to a maximum of 40.
(5) Section 13(1) (qualifying earnings) applies for the purposes of subsection (4) as if the reference to a pay reference period were a reference to a tax year.
(6) In the case of a scheme that provides for a sum of money to be made available as mentioned in subsection (2)(b), regulations must prescribe requirements relating to that sum.”’.—(Steve Webb.)
Sections 21 and 23 of the Pensions Act 2008 set out the quality requirements for defined-benefits schemes used by employers to discharge their enrolment duties. Quality requirements are based on a test of overall scheme quality, which requires employers to compare the pensions from their scheme against a benchmark or model scheme. For some schemes this will be against a test scheme. Certain defined-benefits schemes, in which a member accrues an entitlement to a sum of money to be used to secure a pension within the scheme or purchase an annuity, have been inappropriately classified as hybrid schemes when compared to the benchmark test scheme. This erroneous categorisation means that those schemes are being regulated in a way that is inconsistent with the definition of hybrid scheme in the legislation. As a result, the existing regulations could be outside the scope of the Secretary of State’s powers, and we do not want that. That is ultra vires, as it says in my notes.
New clause 1 is essentially minor and technical. It amends sections 22 and 23 of the Pensions Act 2008 by including a reference to such schemes and introducing a regulation-making power that will enable the Secretary of State to provide for the detailed requirements for a test scheme for such schemes. The introduction of a new equivalent test scheme will allow the test scheme to operate as a straightforward benchmark for employers to use for their previously mis-classified defined-benefits schemes.
I shall clarify the effect of the new clause. The quality requirements have been set at a level that balances promoting individual responsibility for saving towards retirement with ensuring that workplace pensions remain affordable for employers. The new clause will correct an error by ensuring that a certain type of defined-benefits scheme, incorrectly classified as hybrid, can be treated as a defined-benefits scheme and meet the test scheme standard for defined-benefits schemes. It does that by inserting a regulation-making power under section 23, which enables the Secretary of State to prescribe further features of the test scheme under regulations. I stress that the reclassification does not alter the quality requirements for those schemes, except that the quality requirement is now provided for under the legislation relating to defined-benefits schemes rather than the legislation relating to hybrid schemes. I commend new clause 1 to the Committee.
‘(1) Section 28 of the 2008 Act is amended as follows.
(2) After subsection (3) insert—
“(3A) This section also applies to—
(a) a money purchase scheme that is an occupational pension scheme within section 18(b);
(b) a personal pension scheme of a prescribed description for which provision is made under section 27;
(c) a hybrid scheme that is an occupational pension scheme within section 18(b), to the extent prescribed.”
(3) In subsection (4) at the end insert—
“(d) for a scheme within subsection (3A), means a prescribed requirement.”
(4) In paragraphs (e) and (f) of subsection (6) for “section 26 agreements” substitute “contribution agreements”.
(5) In subsection (8)—
(a) for ““section 26 agreements” means the agreement” substitute ““contribution agreements” means—
(a) the agreement”;
(b) at the end insert “, or
(b) any agreement of the same or a similar kind that is required, in the case of a scheme within subsection (3A)(b), by regulations under section 27.”’.—(Steve Webb.)
‘In Part 7 of the Pensions Act 2004 (cross-border activities within European Union) after section 292 insert—
“292A Exemption from enrolment duty under Part 1 of Pensions Act 2008
Regulations may provide for section 2(1), 3(2), 5(2), 7(3), 9(2) or 54 of the Pensions Act 2008 (employer’s obligations regarding membership of a qualifying scheme) not to apply in relation to a person’s employment of—
(a) an individual in relation to whom the person is a European employer, or
(b) someone whom the person reasonably believes to be such an individual.”’.—(Steve Webb.)
The Committee will be aware that we tabled the new clause relatively recently to give us the powers to deal with what may be a problem relating to some of the international aspects of pensions. If Committee members consider that we been discussing technical minutiae, I have to tell them that once we start to debate people who work in one country, contribute in another, earn in another and are employed in another, matters become very difficult. We want to ensure that, in a world of auto-enrolment, we essentially make it as straightforward as possible. Obviously, we have discussed the issue with NEST, but it will be an issue for employers and for other providers.
What is the issue? There is a potential for tension between the regulations under the Pensions Act 2004 that implement the cross-border provisions of IORP—the EU institutions for occupational retirement provision
The 2004 Act and the cross-border regulations require the trustees and occupational pension scheme to go through an approvals procedure before they can offer pension services to an employer of a worker who is subject to the social and labour laws of another European economic area state. Once approved, the scheme must comply with those laws. It can be complex and costly for trustees to comply with the cross-border provisions, and schemes may refuse to admit workers who trigger the application of those provisions. A scheme may say, “No, we are not going to let you into ours because we would have to provide benefits that are to do with the labour laws and the minimum standards of another state, and that is too much hassle. We’re not going to do it.”
The purpose of new clause 4 is to provide a regulation-making power. It would enable the Secretary of State to provide that the automatic enrolment duties under the 2008 Act do not apply in the case of a person’s employment of workers who trigger the application of the cross-border provisions. Those regulations, if we chose to make them—at this stage we want to give ourselves the power to make them, so that we can do more work and examine the scale of the problem—could be made at any time, if necessary, before the onset of the employer duties in October 2012. New clause 4 would provide the Secretary of State with that regulation-making power. Without such a power, some employers may find it impossible to comply with the employer duty.
We are still assessing the character and scale of the problem. It affects a small number of cases—potentially, however, 30,000 to 35,000 people. If we put an employer in an impossible position, that has got to be a bad thing, even if it “only” affects 30,000 to 35,000 people. Those people may trigger cross-border activity. It may include people who are seconded to work in another country, but who do not acquire rights as a qualifying person, or individuals who may already be in a pension scheme. It will affect less than 0.5% of people who will be automatically enrolled.
The problem is that the process can be complex and costly for trustees to comply with cross-border requirements, and as I said, schemes may refuse to admit workers who trigger the application of those provisions. Approval to operate across borders can take a number of months. Statutory requirements are for the regulator to submit an application to the host state within three months of obtaining the necessary documentation. Host states must respond within two months of receipt of the application.
On the hon. Lady’s question, the folk that we are talking about will on the whole be higher-paid, pensioned workers. They will not be folk earning £9,000 in part-time, low-paid jobs, who we need to worry about. We do not glibly dismiss the pension position of 30,000 people, but it may well be that they are precisely the sort of people who can sort their own pension arrangements out. We do not want to require firms to enrol them in schemes that are inconsistent with other legal requirements. That is the point I am trying to make.
If we do not put new clause 4 into the Bill, it is technically possible for an employer to have a legal obligation to automatically enrol a jobholder—that is the term in the 2008 Act—but because that person is also a qualifying person, to be unable to find a scheme willing or able to provide a work-based pension to that person, because of all those cross-border duties. We could require an employer to put someone into a pension, but the employer could be unable to find a pension to put them into. We do not want to put employers in that position. We could be talking about some 30,000 to 35,000 people, but as I have indicated, some of those people could already be in a pension scheme, so the real number involved is likely to be lower.
The possible ambiguity in what I said related to the position of secondees. To make the situation absolutely clear, the 30,000 to 35,000 people includes those who are seconded, but those are exempted. So that is the worst-case scenario. For the avoidance of doubt, I want to make that clear.
Rachel Reeves: So if a construction worker employed by a UK company went to work in Germany for two months but was still paid in sterling and still living in the UK permanently, would they be affected by these changes?
Steve Webb: I will come back to the hon. Lady’s point in a second. The currency in which someone is paid is not particularly germane, but the question would be whether they count as a jobholder—a UK worker—under the 2008 Act and also as a qualifying person for whom the obligation to match the labour laws of another member state arose. A construction worker would be unlikely to qualify for German employment rights and will therefore be regarded as a UK worker. That is not the sort of example that we have in mind, but I am grateful for the hon. Lady’s question.
As I said, the recent EU green paper consulted on ways in which the IORP directive could be amended to simplify some of the conditions for cross-border activity, and we expect the Commission to publish a review of IORP towards the end of 2011, which may provide an indication of the Commission’s long-term thinking on
‘(1) The Pensions Act 2008 is amended as follows.
(2) In section 26(4)(6) after “pay reference period” insert “, taking into account the level of charges.”.’.—(Teresa Pearce.)
‘(1) The Pensions Act 2008 is amended as follows.
(2) In section 26(4)(b), at end insert “, ensuring they are protected to the same level as stakeholder terms and conditions.”’.
Teresa Pearce: I tabled new clauses 6 and 10 because they deal with fees and charges and protection of pensions and pension schemes. My aim is to ensure that any scheme to which an employee is automatically enrolled is fit for purpose and of a high quality. Employers can choose from a range of schemes, including NEST. As we have heard today, those of us who have visited NEST are quite impressed—it is easy to run, easy to access and value for money—but there is nothing to stop an employer choosing an inappropriate pension scheme, unsuitable for their employees.
New clause 6 is designed to provoke a debate on the charging structure for workplace pension schemes. Consumer groups such as Which? are particularly concerned about the increase in charges levied by some insurance companies for people who change jobs. Which? research has found that some companies are charging 0.5% to 0.7% in annual management charges to active members but, once the person leaves, the charges can then double to 1.2% to 1.5%. Many people move jobs from time to time, and around 60% of people who start contributing to group personal pensions have stopped contributions after four years. A substantial proportion of people will end up paying higher charges, far exceeding the charges that they would be paying were they involved in NEST. Such high charges could have a big impact on the pension received by the consumer, and would be counterproductive to what we are trying to achieve, which is renewed confidence in pension schemes. Insurance companies that operate the practice call it an active member discount, but a more appropriate name would be a deferred member penalty. Whether the change needed is regulatory or legislative, the Government need to address the fact that no one seems to be looking after the interests of past employees, or deferred members. Varying annual management charges through the introduction of extra charges for deferred members is a transfer penalty, penalising people who switch from job to job.
Rachel Reeves: I thank my hon. Friend for tabling the two new clauses. She talks about the extra charges levied on people who leave a job. Given that more people are doing part-time work or working in temporary jobs, which we have been discussing today, once automatic enrolment is rolled out, is her expectation that even more deferred members, if not in NEST, will potentially incur such surcharges?
Teresa Pearce: That is my concern. We have two ends of the spectrum: NEST, as far as we can see, which will be well run, value for money and easy to understand; and the top-end company pension schemes. The problem might lie in between.
I am also concerned about the Financial Services Authority’s proposals to allow employers to negotiate consultancy charges with their advisers, to be deducted from the employee pension pots. There should be more highly specified quality requirements, or employers must receive better advice where advisers are required to benchmark the charges against those in NEST to ensure that the workplace personal pension provides good value for money.
“if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a charge cap for qualifying schemes and auto-enrolment schemes.”—[Official Report, House of Lords, 3 March 2011; Vol. 725, c. GC249.]
Research by Which? on deferred member penalties demonstrated that charges are already high in comparison with NEST, and I would like to know precisely at what point the Government might step in. Will the Minister clarify the governance and regulation around these issues, so that we can work together to find a solution that is best for employees and supports employers?
On new clause 10, it is important that automatic enrolment increases access to good value pension schemes for all employees. As we have heard during our discussions, too many employees have no pension cover at all. There must be no reduction in consumer protection, and the experience of stakeholder pensions shows that the best way of ensuring that is through product regulation. Consumer groups such as Which? have pointed out that most consumers find pension charges difficult to understand and would find it difficult to know whether their pension scheme offers a good deal. The new clause would require all qualifying schemes to meet existing stakeholder standards. That would help ensure that all pensions sold to employers as qualifying schemes would meet certain basic standards, including a charge cap of 1.5% a year for the first 10 years and 1% thereafter. There would also be restrictions on transfer penalties to avoid pension companies using hidden or complex charging structures to lock employees into poor value pensions.
The introduction of stakeholder pensions was successful in preventing the mis-selling of poor value pensions and charges were brought down. One impressive thing about NEST is its ability to talk in plain English. Its leaflets and the information that will go out to employees mentions high risk rather than high return. People might think that high return sounds like a good thing, but they may actually be looking at a high risk. NEST will not use the words “low risk” when describing pension funds because, as it says, no investment is
No members of the Committee, and especially the Minister, would want a situation in which pensions are mis-sold. Often, however, mis-selling takes many years to come to light. Bearing in mind the resistance that business has to further regulation, will the Minister assure the Committee that there will be sufficient regulation to ensure that inappropriate pensions are not sold in the first place, rather than regulations being introduced after the event?
Rachel Reeves: The new clauses are important and raise the issue of the charging structure for workplace personal pensions. I thank my hon. Friend the Member for Erith and Thamesmead for tabling them. The new clauses seek to ensure that the scheme into which an employee is automatically enrolled is fit for purpose and high quality. Employers can choose from a range of schemes including NEST, but there is nothing to stop a disengaged employer from choosing an inappropriate pension scheme that is unsuitable for their employees. The new clauses seek to address that risk.
“the view that less regulation is required, is deeply dangerous for the success of pension auto-enrolment. Further, the view that action can be taken if it seems pensions are mis-sold, forgets that if these pensions are found to have been mis-sold, this will result in individuals withdrawing from pension provision. But much of the mis-selling may not come to light, because, as with endowments, it can take many years, if ever, for such mis-selling to become apparent. If we know what constitutes an inappropriate pension, this should be regulated against before it is sold, not after the mischief has taken place.”
Therefore, new clauses 6 and 10 seek to introduce some form of regulation to make automatic enrolment work for both employees and employers, who have to choose the pension scheme that they will automatically enrol their employees into.
The Committee consensus is that NEST is doing a good job and is a suitable pension scheme, particularly for small businesses. NEST fees have been set at 0.3%, although with a 1.8% contribution levy at the start to cover costs, levelling out to 0.48% overall, which will decrease in 20 years once the loan has been paid off. The 0.48% level is comparable to the 0.4% to 0.6% annual management charges that can be expected, excluding commission. However, there are some serious worries about how other schemes will be regulated and the fees that they will be allowed to charge.
“we know of no reliable source to back up the government statement that a majority of DC pension schemes have charges of less than 1%. Default funds typically have charges of 0.4 to 0.6%. These figures have been provided to the DWP by pension providers in qualitative studies, they have not been evidenced, and in any case refer to current large employers, not to those small employers who will typically be affected by auto-enrolment.”
“The most comprehensive attempt to work out pensions costs, amongst smaller funds, such as those to whom auto-enrolment will apply, is a quantitative study for the DWP, which reveals an average cost of 1.53%. This means that, over a pension lifetime, an average saver is losing 40% of their possible pension on fees. Many are losing much more. The study also reveals that existing employers do not understand pensions charges. Many for example do not realise that the costs are charged on the outstanding balance, rather than the contribution made”.
More generally, fees and charges are central to trust and predictability, which are important in long-term financial planning, and therefore particularly for pensions. The fact that someone who has saved throughout their employment stands to lose a potentially substantial proportion of their income as a result of hidden fees and charges erodes trust in savings. It also damages the predictability of retirement income, and therefore erodes the likelihood of getting people into the habit of saving and to trust that those savings will result in a decent pension income in retirement. Predictability and trust must play a part in ensuring that people have adequate pensions savings.
In the world of the stakeholder pension, there are some safeguards for the employee about the level of fees and charges that can be expected. Those safeguards do not, however, carry across to the automatic enrolment schemes outside of NEST. New clause 10 explores the possibility of encouraging the employer to take safeguards into account when choosing a scheme. It is important to consider the proposal, because automatic enrolment changes the nature of employers who are providing a pension. Neither the employers nor the employees are necessarily sophisticated consumers. Many of them will have little experience of pensions, yet they are being asked to make big decisions that might result in accusations of mis-selling later down the line.
Even larger employer schemes have been involved in mis-selling scandals that have eroded trust and confidence in savings. Many employers will make a positive contribution and will search for the best options for their employees because they recognise the value of giving them proper and decent workplace pensions. However, small businesses are worried about the regulatory burden. Limited capacity might frustrate the best intentions and some employers might not act in their employees’ best interests. The biggest concern, however, is the information available to employers and the regulation of the schemes that they have the opportunity of choosing.
Many of the reforms are designed to allow for the practicalities of a small business, which is welcome, and they are supported by employer groups. When the measure was mooted and then presented in the Bill, it became clear that employers were not necessarily in the best position from which to protect their employees from hidden fees and charges. We must ensure that protection applies in relation to the level of fees and charges that an employee can expect. Again, drawing on the evidence of the RSA, studies have revealed an average cost of 1.53% in smaller funds, which equates to up to 40% of the possible pension value over its lifetime being consumed in fees and charges. Clearly, when neither employer nor employee understands pension charges, dangers to the consumer are increased. If people find that their savings are whittled away by excessive charges because of the options selected by their employer, the very aims of automatic enrolment might be threatened.
I thank my hon. Friend the Member for Erith and Thamesmead for tabling new clause 6, which addresses particular concern about the increase in charges levied by some companies when people change jobs. The new clause calls for employers to be required to take into account the level of such fees and charges when deciding their contributions level. My hon. Friend referred to Which? research, which has found that some companies charge an annual management fee of between 0.5% and 0.7% for active members. When a member leaves, however, the charges might double to between 1.2% and 1.5%. According to Which?, given that 60% of people who start contributing to group personal pensions stop doing so after four years, mainly due to job changes, a substantial proportion of people might end up paying those higher charges, which would far exceed the charges that they would have been paid in to NEST, which applies no higher charges for non-active members.
Such high charges might have a big impact on the pension received by consumers, which might have reduced at their retirement by approximately 25%. The insurance companies that operate the practice call it an active member discount, but Which?, my hon. Friend and I agree that the more appropriate title would be a deferred member penalty. Does the Minister accept that whether the change is regulatory or legislative change, the Financial Services Authority and the Government must address the genuine concern that no one is looking after the interests of past employees or deferred members? Does he accept that such extra charges are currently penalising people who regularly switch employer?
There is also serious concern about the FSA’s proposals to allow employers to negotiate consultancy charges with their advisers, which would be deducted from their employees’ pension pots. There is a clear risk that excessive deductions might be negotiated with the employer to the detriment of the employee—the future retiree. The FSA has confirmed that it has no problem with deductions being made of up to 35% of the first year’s group personal pension contributions. Does the Minister agree that either there must be more highly specified quality requirements, or employers must receive better advice, with advisers being required to benchmark charges against those in NEST, which are much lower, to ensure that the workplace personal pension provides good value for money?
“if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a…cap for qualifying schemes and auto-enrolment schemes.”—[Official Report, House of Lords, 3 March 2011; Vol. 725, c. GC249.]
In the light of those comments, will the Minister explain what steps he is taking to research the level of charges and fees in qualifying schemes and auto-enrolment schemes? Will they be actively monitored and, if necessary, acted on in advance of the review in 2017? Will the Minister explain at what point he would deem it necessary and appropriate for the Government to regulate under the 2008 Act if excessive charges are applied by automatic enrolment schemes outside NEST?
The new clauses would be important to ensuring the success of auto-enrolment, and I welcome our discussion on Thursday. I hope that the Minister agrees that if we want automatic enrolment to succeed, we must also ensure that the scheme into which an employee is automatically enrolled is fit for purpose, of high quality and transparent. We must also ensure that it is not exposed to excessive fees or charges that might erode the value of the pension and undermine trust in pensions. That will be important if automatic enrolment is to work and to carry the confidence of both the people who are most likely to benefit from it and the employers, who have to make important decisions for their employees without always having the necessary expertise and experience that larger firms have.
However, I want to apologise to the Committee that during the scramble of the last seven or eight clauses, I moved Government amendment 9 to clause 10, but because I spoke about clause 10, I did not correctly describe new clause 2, which we were also discussing. I had already written to the Committee to explain what it does, but I want to read into the record that the purpose of new clause 2 is to give employers offering pension schemes, such as money purchase ones, where the scheme has its main administration in a member state of the European economic area, the option of self-certifying that their scheme meets the relevant quality requirement. To clarify, the purpose of the new clause, about which I had already written to the Committee, is to give the small number of schemes in the EEA the power to self-certify. I apologise for any confusion that I may have created. I am sure that other members of the Committee had spotted my mistake, and I wanted to correct the record.