Work & Pensions Committee - Minutes of EvidenceHC1494

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Oral Evidence

Taken before the Work and Pensions Committee

on Wednesday 2 November 2011

Members present

Dame Anne Begg, in the Chair

Debbie Abrahams

Harriett Baldwin

Andrew Bingham

Karen Bradley

Sheila Gilmore

Mr Oliver Heald

Glenda Jackson

Brandon Lewis

Stephen Lloyd

Teresa Pearce

________________

Examination of Witnesses

Witnesses: John Longworth, Director General, British Chambers of Commerce, Neil Carberry, Director of Employment Policy, Confederation of British Industry (CBI), Graeme Fisher, Head of Policy, Federation of Small Businesses (FSB), and Nigel Stanley, Head of Campaigns and Communication, Trades Union Congress (TUC), gave evidence.

Q31 Chair: We are normally in the Grimond Room in Portcullis House, but unfortunately we have been moved to this room. It is a bit more crowded, but hopefully we will manage to get through our questions. Can I thank you very much for coming along this morning? Sorry to have kept you waiting-we had quite a lot of business to do in our private session-but we do appreciate your time this morning. Can I ask you to introduce yourselves very briefly for the record?

John Longworth: John Longworth; I am Director General of the British Chambers of Commerce, relatively recently appointed. I have run businesses, and I am still involved with business as a director.

Graeme Fisher: Graeme Fisher, Head of Policy at the Federation of Small Businesses. I have also recently run small businesses and joined the FSB quite recently.

Neil Carberry: Neil Carberry, Director of Employment policy at the CBI.

Nigel Stanley: Nigel Stanley, Head of Campaigns and Communication at the TUC. The Committee should also know I am a member trustee of the NEST (National Employment Savings Trust) Corporation, although I am clearly speaking on behalf the TUC today, not NEST.

Q32 Chair: Thank you very much, and welcome this morning. Can I, perhaps, address my first question to the FSB? I think in the submissions that we received from all of you, the FSB was perhaps the organisation that had the most concerns-if I can put it that way-about the introduction of auto-enrolment, and it reflected the concerns of your members. Can you very briefly, perhaps, list for us those concerns, particularly around the costs? I think the FSB disputes the Government’s estimates of how much it is going to cost both to implement and to run auto-enrolment for small businesses. Perhaps you can quantify the main concerns of your members.

Graeme Fisher: The main concerns centre on administrative costs for small businesses to run the scheme, the basic point being that small businesses are not experts on pension policy. The feedback from our members is they will not have much confidence in actually delivering this scheme.

In terms of the actual costs the DWP came up with, they have £46 per employee per year, and we think that underestimates the level of costs that small businesses are going to face. To look at it another way, if you put a wage rate at £10 an hour, that would roughly mean 20 minutes a month per employee, which seems to us, on the basis of experience, using existing systems such as HMRC’s tax returns, to be a very low estimate of the amount of time. There will be considerable start-up costs as well, particularly in the first year, in implementing and getting used to the system.

In addition, we estimate the additional cost for a business with four people earning around £25,000 a year each would be roughly £2,500, which would be money the business could have used elsewhere in terms of marketing and business development. We question what sort of impact that would have on wages, prices for the business and other consequences.

Q33 Chair: Clearly, it would be the employer’s contribution that is going to be the big cost to the business, rather than necessarily administrative costs.

Graeme Fisher: I would say the administrative costs would be very considerable. The time that you would take to administer the scheme would be the biggest concern.

Q34 Chair: So you don’t think that employers are concerned about the 3% that-

Graeme Fisher: Yes, they will be concerned about that as well. So there are two main concerns: the cost in terms of purely financial costs, and then the administrative costs of actually carrying out the duties underneath that in administering the scheme for a small business.

Q35 Chair: The other organisations before us: how do you think that employers will fund either the administrative costs or the 3%? Will it be by laying off workers, or will it be about reducing or freezing wages? What are your members telling you might happen in order for businesses to meet their obligations?

John Longworth: From my point of view, having looked at this legislation afresh in the way it might operate, it has been a bit of a revelation. I have come at this with a fresh eye; I am not an expert in the detail. The thing that actually struck me about it is the complexity and the bureaucracy surrounding it. It is an extremely difficult piece of legislation to get your head around for that very reason and, clearly, members of the panel will be completely familiar with it. A business has to deal with a thousand different things, and to handle this would be extremely difficult for a lot of small businesses. Even if they are actually able to grasp the full implications and deal with the associated bureaucracy and also the lack of joined-upness with other Government policies, for example agency workers, they will find it extraordinarily difficult to meet the demands of what will be necessary to implement. For example, it is very difficult to deal with this issue, if you go into the NEST arrangements, without adequate IT; it is not a paper system, so that is going to be significant.

Q36 Chair: Surely most businesses nowadays are all computer-

John Longworth: Not necessarily.

Chair: They don’t do their HMRC, their-

John Longworth: Some of it, but they have to adjust their existing systems to deal with this particular area of business activity. They will also have to deal with the costs, ultimately, which means they may well have to depress other benefits and remuneration packages in the lead-up time to this proposal being implemented in order to afford it. I guess the other thing I would say is that in business there is only one pot. Unlike Mervyn King, we cannot actually print any money. There is one pot to deal with everything. If there is a cost in one place, it has to come from somewhere else.

Chair: We have questions, obviously, about how a business might cope with the bureaucracy, as you described it, coming up, and whether we can make it simpler.

Q37 Stephen Lloyd: I ask this of both John and Graeme, and possibly the others too. Firstly, in principle, do you think that this group, which is many millions of people, having some sort of auto-enrolment pension is a good thing? Do both your organisations-the BCC and FSB-in principle think it is a good thing, and it is just the delivery of it that you are challenging? I stress that I am very pro small business and a member of the FSB, no less, and I am a great supporter of it. However, on this issue, my second question would be: as we have KiwiSaver and a similar scheme in Australia that has been going for very many years, presumably you would not in any way suggest that the small business owners in the UK are dimmer than the small business owners in New Zealand or Australia, who have somehow managed to cope with this. The first question is: in principle do you think it is a good idea or not? Secondly, I am sure you would not be impugning the intelligence of the splendid small business owners in this country.

John Longworth: That is a leading question.

Stephen Lloyd: I thought it might be.

John Longworth: Our position has always been that in principle we support the concept. We understand fully why the Government would want to have a regime that creates satisfactory pensions for people and deals with the costs of that. What we have said is that there are a number of things that can be done to mitigate the bureaucracy and the complexity of it, particularly for small and mediumsized businesses. We have asked, as you probably saw in the submission, for a period of time, for example, from the first enrolment of an individual in a sole trader business, for this to be implemented, rather than it having to be implemented immediately, or for a 10-employee threshold, which would be the threshold we would propose-whichever comes first.

We are not asking for this thing to be swept away, although I have to reiterate that when this concept was first introduced, which I believe was around 2005, we were in a period of largesse-a period of supposed economic prosperity. It has transcended into a period where we are under severe pressure for business growth. It goes without saying: all costs on society come out of productivity of the country, and our major priority in periods of austerity or in periods of growth should be to create wealth and economic growth. That is my starting point on all legislation. It is very important to focus on how it affects growth and prosperity and it should be designed in a way that best helps growth and prosperity.

Q38 Chair: If we are going to have a pension system for the next 50 to 100 years, and pensions planning has to be within that timescale, then it has to survive all the different ups and downs of the economy, so you cannot vary what you do because of the economic situation. This will be the real test for auto-enrolment in introducing-

John Longworth: I absolutely agree with that. It is the point I am making, actually: in times of prosperity we should be as scrupulous about making sure that legislation is pro-growth and pro-wealth creation as in times of austerity, because we should not differentiate between the two. Growth and wealth creation are fundamentally important, but this particular policy we support in principle, because it will create a general regime in the economy that is beneficial. It is about how it is done.

Graeme Fisher: We would very strongly echo John’s points about the design of the scheme and being behind it in principle, but it seems to have moved quite far away from the Turner recommendations in 2005. The complexity and administrative burdens have increased, which is why we have been arguing for an exemption for smaller firms, beneath 10 employees, because the administrative burden is so considerable for them.

Turning to the point about KiwiSaver, I am not that aware of the scheme over there, but I think it is run on a very different basis to the one proposed here. We would just draw the Committee’s attention to the implementation of auto-enrolment in Norway and the difficulties they have had, particularly on the IT side, in implementing their scheme.

Q39 Chair: Neil, if you answer the principle question, and then on some of the difficulties.

Neil Carberry: I think we need to draw a distinction between the principle of whether it is right that smaller employers are included in the regime or not, and the current economic circumstances, for exactly the point you set out, Chair. Lord Turner recommended a new pension system, and it has to work both in good times and bad. Certainly, we thought long and hard over the summer about whether the current economic tumult is sufficient to suggest that we should delay the reform. Actually, we came back to the conclusion that the phasing and staging programme, which of course sees smaller businesses not coming in for several years yet, plus the phase-up of contributions, plus the capacity to offset costs-and many of us are seeing the LPC around the 2012 national minimum wage award to offset costs perhaps against the national minimum wage awards in the coming years-makes it possible to deliver this slowly.

The critical thing is that we probably will have higher levels of opt-out than we would have in the years of largesse. I don’t think that holes the reform below the water line. If people come in at the first reenrolment date in 2015 or 2016, we are still getting them into saving. Our view is that you create more barriers in the labour market by having an exemption than you create benefits. One of the challenges for Nigel and his colleagues, with his other hat on, is to make sure that NEST do as much as possible to make sure that they are taking on the costs of delivering the scheme, rather as KiwiSaver does in New Zealand, to reduce the figure that is pushed back on to small business.

Q40 Brandon Lewis: I just wanted to pick up on something from the comments Graeme made. Like Stephen, obviously my company has been a member of the FSB. I have wide experience of small business. One of the things that has concerned me is the issue raised around the small businesses of 10 employees or fewer; I have a lot of sympathy for that view. However, the other side of that argument, and what I am also quite concerned about, is it is those very employees that this scheme is most probably aiming to help, who would otherwise not be in a situation to organise this. From your point of view, what is the FSB’s answer to that?

Graeme Fisher: I think it goes back to this issue about the design of the scheme. We are in principle for a good default scheme that is simple to administer. The argument goes back to improving the scheme and reducing the administrative burden as far as possible so it is easy for small businesses to administer and to include their employees in the scheme.

Q41 Brandon Lewis: So your suggestion around the 10 employees or fewer would go away if it were more cost-effective.

Graeme Fisher: If we could see a significant improvement in the administrative burden, similar to the point Neil has just made.

Q42 Debbie Abrahams: I am grateful to you in terms of reaffirming your support for auto-enrolment in principle. I think that is very important, and I recognise the context that you are talking about around the particular pressures that small businesses are facing at the moment. It did remind me a little bit of some of the objections and arguments for not introducing the minimum wage; I have particular concerns about delaying any auto-enrolment for low-paid workers, who this hopefully will be protecting in the future. What other particular support do you envisage that you would need, other than, for example, the support through NEST, to make this work?

Neil Carberry: I think the primary thing is that the enforcement body for this is the Pensions Regulator, and the Act from 2008 gives it a very substantial stick with which to hit employers-rather larger than the Cabinet Office guidance on enforcement suggests they should have. The Pensions Regulator is a body that is very good at talking to some very large employers because they have defined benefit schemes, and they are used to talking to people with complex pensions frameworks. They are now going to be talking to businesses who don’t even know who they are. The single biggest challenge is making sure that the regulator is able to speak the language of small employers, to support small employers and, first and foremost, to come around with the arm around the shoulder before the big stick comes out of the closet. I think that is the critical thing for us.

Chair: We have some questions on the Pensions Regulator.

Q43 Teresa Pearce: I have a wee supplementary to that. There was a comment about how we had moved away from the Turner recommendations, and that had made it more complex. Can you just clarify what you meant by that?

Graeme Fisher: It was just the point that there has been a move away from the good, simple default scheme, and there has been a muddying of the waters on the administrative costs that were envisaged under Turner.

Q44 Chair: Turner was going to auto-enrol everybody into a default scheme, so there was no real thought around it. Would you have welcomed that rather than the fact that employers now have a choice?

Graeme Fisher: We would have welcomed the implementation of the Turner recommendations, yes.

Q45 Harriett Baldwin: Again, I want to add my words of appreciation for the fact that these small businesses and microbusinesses have led us out of slow economic growth in every single recession in history, in every country in the world. You have a Committee here who fully appreciate that. I just wanted to clarify, in terms of definitions, micro-businesses is under 10; is that correct? Small is 10 to 200 employees; is that right?

Graeme Fisher: Small is up to 49, medium 49-249 and large 249 plus.

Q46 Harriett Baldwin: Okay, 50 to 250 becomes medium, and then 250 and above is large. Under the current proposals, in what year would microbusinesses be coming in?

Graeme Fisher: They will start coming in from 2014.

Q47 Harriett Baldwin: Would the panel accept that we don’t know what the economy is going to be like then, but the Office for Budget Responsibility’s forecast is probably the most plausible forecast that there is out there, and the economy may well be different then from what it is today?

John Longworth: Could I say a few words about that? The reason why I took the opportunity to make a macro statement at the beginning was this very point. Whether times are good or bad, it would be fantastic if Government took the view that their number one priority was economic growth and prosperity, because everything else flows from that. For me, and for the members of the British Chambers, one of the key things is that that is always kept as the number one focus in the Government’s mind, and in every Department, not just the Treasury and BIS (Department for Business, Innovation and Skills). Everything else flows from wealth creation, economic growth and business growth. Whether it is good or bad, we should try to minimise the amount of bureaucracy and complexity in proposals, even if the proposals are inherently ones that everybody would agree to.

Q48 Harriett Baldwin: If we are going to think in terms of these longer-term horizons, 82% of small businesses, according to the FSB’s survey, currently don’t offer any kind of pension scheme to their employees. Does the panel agree that a world where, in fact, those employees are accumulating pensions savings over their lifetime might be a world where there was a more prosperous group of retired individuals, which actually might contribute over time to economic growth?

John Longworth: I would just reiterate what I said at the beginning. From the point of view of the Chamber network, we believe that this is, in macro terms, a good proposal because it will create benefits for employees, for society and for business in the round. However, we have to recognise the fact that it does have consequences, and if you can minimise the consequences, all the better. We surveyed 7,000 firms; one in four of those firms said the way in which these proposals were introduced would cause them to be disinclined to take on an employee. It will have the impact, unless we handle it in the least bureaucratic way, of minimising employment at the very time when this is a really big issue. It is always a big issue; even in good times we want to maximise employment.

If you are a business, even if this were a very simple piece of legislation, it isn’t the only thing you are dealing with. From the Government and this Committee’s perspective, this is the main thing. But then the firms have problems with working capital, and we are actually relying on them to create economic growth in the UK through exports, and that may be choked off as a consequence. They have issues around the fact that they are facing a lack of confidence because of the eurozone crisis. I am going slightly offpiste now, but the point I am making is that businesses have a lot of things coming at them, not just this.

Q49 Harriett Baldwin: Can I make a point back to you in terms of the BCC’s submission? Again, let’s try not to focus on what is happening in the economy today and think about 2015, when this will apply to your members. Your proposals are to exempt sole traders for three years from the date of their first employee, or until they have 10 employees, whichever is soonest, to amend the 12-week auto-enrolment postponement period, to remove the right to opt-in and to remove this requirement to re-enrol people after three years. Your proposals would actually add to the bureaucratic complexity of the scheme.

John Longworth: No, I don’t think that is right. We have over 104,000 businesses in the network, many of them, not all, are small to medium-sized enterprises. Your definitions-again, I just want to challenge that slightly-are Government definitions of what micro, small and medium are. In fact, in any particular sector, a technology sector business, whether you are big or small, very much depends on the type of business that you are undertaking in terms of what the business can cope with and what it thinks of itself. That is a complex point in any event. But the removal of the requirement to introduce it the moment the first employee is taken on actually encourages businesses to get some level of scale before they have to deal with this. At that point they are in a better position to deal with it, so that helps a lot.

We are trying to deal with the issue on the 12 weeks and the in-out, in-out situation, where the businesses are having to issue forms to their employees, and also then reverse out if they decide to opt-out of it subsequently. There is also the compensation to an employee, which we calculated might amount to 37p. Then you obviously have to go through a process that costs the business money to refund the employee that 37p. It is the complexity and bureaucracy of handling those potential changes in those first few weeks that we are trying to eliminate.

Q50 Harriett Baldwin: On those thresholds, the legislation now requires employees to be included once they cross the £7,475 income tax threshold, so there is consistency of those thresholds to simplify it. Also, the contributions are on earnings above the £5,035 national insurance threshold, so actually the current proposals in the legislation eliminate those very small payments like the 37p. That was done directly based on feedback from organisations like yours. Do you accept that is an improvement?

John Longworth: It is an improvement, but it does not change the chopping and changing aspect of those initial weeks of employment, which causes complexity for the business in handling that process. Furthermore, we also said in our submission that we wanted to try to get alignment between this legislation and the agency workers legislation, because again that introduces a layer of potential complexity in the way in which businesses handle agency workers and the agencies handle agency workers, and what the businesses will end up having to ask the agencies to do. In a sense, this will be counterproductive, I suspect, in relation to both employment and achieving the objectives of this legislation.

Q51 Harriett Baldwin: If the Chair will permit me one last question, can I ask the panel: isn’t it the case that, although any change is obviously complex to manage, the simplest thing that all businesses could do is just implement the scheme and not argue for different levels of implementation for different types of businesses?

John Longworth: I suspect that a lot of small businesses will probably head for the NEST option because it is simplistic. Businesses do worry about whether in fact they are offering their employees the best option. A lot of businesses that will be involved in this have not done it before and they will genuinely worry, as human beings, that they are not giving the best option to their employees, and they will come back later and say, "Actually, you gave us bad advice." Therefore, the whole issue of helping businesses understand what they should do, and what the best advice they can give to their employees is, is also important.

Neil Carberry: There are two critical changes in the current Bill that are helpful. One is the three-month opt-in window, and we lobbied for that, and John’s organisation lobbied very strongly for it as well, which helps sort out the problem of having to do it all in week one. Many of the smaller organisations are still on weekly pay, on paper and pen, and that is primarily designed to help that, and the point that you raised. If I talked to our members at the smaller end, now their critical challenge is, "Tell me what this means, and what that means, and what this means," which is a process question that we have to sort out with the regulator and is worth further study.

Nigel Stanley: If I can just come in here, I think it is worth emphasising that those micro-businesses that are the smallest and least able to deal with the administration of it will be those tending to employ part-time workers on the minimum wage. If they are a highskill IT business, they won’t have any problems using the IT. It should not be forgotten that contributions only become payable on about the 19th hour of a minimum wage employee’s working week. The median working hours of part-time workers is significantly less than fulltime. I am not quite sure of the exact figure, but it is not much higher than that. Many microbusinesses employing part-time workers on the minimum wage won’t actually have to auto-enrol anybody or pay very much in the way of contributions. Although we all use the 3% employer contribution shorthand, it should not be forgotten that the maximum contribution that any employer pays is 2.55%, and that is on someone earning exactly at the top of the earnings band. Someone earning a little bit above the lower earnings band would have 3% of really quite a small amount of their pay deducted, so the percentage becomes very small. The contributions that micro-businesses in particular, other than very high valueadded, very small specialist ones, will have to pay won’t be that big compared with the amount that much bigger businesses employing more fulltime staff on higher salaries are likely to pay.

Q52 Karen Bradley: I just wanted to touch on communications. What do you think the level of awareness is amongst your members at the moment, and how do we get that level of awareness up? Do you see the risk that I see of the media potentially misrepresenting what is happening and what we are doing, and the possibility of a campaign being run to try to stop this legislation because it is seen as somehow being Big Brotherish or Government interfering in a way that it should not?

Neil Carberry: I think the opt-out is a critical part of the reform for exactly that reason. On the opt-out for individuals, who in some cases may be better off opting out, we should admit that there are people who are prioritising cash. If you are, for instance, taking a three-month contract at a shop over Christmas and you are looking to earn some money to buy the kids’ Christmas presents, it is clearly likely to be in your interests to opt-out. We should not dispute the fact that there are some people in whose interests it would be to opt-out, so that is a critical part of stopping it being seen as a tax. I think, if there wasn’t an opt-out, it would be seen as a tax.

More broadly, in our membership, I think people who are coming in soon-the big guys-are really well aware and well advanced. This is an 18-month, £1 million programme for a lot of larger companies, and their questions at the moment are actually about, "Can we get this Bill that is going through at the moment finished so we know precisely what we have to do in July or October next year?" That is not an unreasonable position to take, I think. The further out you move, the less the awareness is, and we come back to the point I made earlier about people just not knowing what the structure of this reform is. The truth of the matter is that will require a big Government communications effort.

There are two things to do there: one is we have to sell the reason why this is happening, because we have not touched on the demographics yet, but the underlying problem and the thing that persuaded our members was that this is not a choice about cost or not cost for taxpayers; this is a choice of taking the cost gradually over time through a new pension system or taking the cost in a giant lump later on through the taxation system, when we have to adjust the state pension to take account of the fact that we have a load of under-savers reaching retirement age.

Within that framework, it is important that the regulator and DWP take the lead. NEST has a valuable role to play, but it would be unhelpful if NEST became "the" pension scheme that we have in this country. I think it is important to maintain diversity, and in particular to maintain the higher levels of DC1 saving that currently go on in a lot of businesses around the country.

Q53 Chair: That is interesting, because you just said you want to maintain diversity, but Graeme from the FSB said that they would prefer the Turner model.

Graeme Fisher: We like the element of simplicity within Turner but, yes, there is now an element of diversity as well.

Neil Carberry: I think the very small businesses will default to NEST or possibly to ATP, the competitor that launched earlier this week, who will be very focused on that small-business market. I think the larger a business gets, the more likely it is they are going to want to do something that is more about how they want to engage with their employees.

Q54 Chair: Is it right the FSB are going to offer their own scheme?

Graeme Fisher: That is right.

Q55 Chair: Does that not contradict what you were saying? You are concerned about complexity, you are concerned about administrative costs, but the FSB is setting up its own pension scheme-

Graeme Fisher: I think it is this element of the moving away. We supported Turner in that it removed the element of choice, but the position we are in currently is that the FSB-and I would need to talk to Member Services-have developed their own scheme, which might provide more flexibility for-

Q56 Chair: But that scheme won’t have the kind of money behind it that NEST or some of the big competitors will have.

Graeme Fisher: Yes.

Q57 Chair: And, in fact, the charges are going to be much higher.

Graeme Fisher: I think, from what I understand from Member Services, the charges are comparable to the NEST scheme.

Q58 Chair: One of your leaflets says that, but it isn’t. It is 0.7% or 1% for-

Graeme Fisher: Yes, I think someone has not reflected accurately the situation, because I understand the management charges on the scheme are comparable to the NEST scheme.

Q59 Chair: Back to the question, you are complaining about administrative costs, complaining about confusion, complaining about complexity, but you are adding to that by having your own scheme.

Graeme Fisher: I think the answer is that the FSB have developed this scheme in part to respond to-

Q60 Chair: You can do a better job than NEST or some of the big pension-

Graeme Fisher: I think it is a members’ service. It is an option there for members to take up if they so desire.

Chair: I think Brandon might want to come in and defend you.

Q61 Brandon Lewis: Yes, I am just thinking it through. I appreciate the Chair’s point, actually, about complexity and adding to it with another scheme, although that partly is the competitive market, but surely there is also, I assume, from the FSB’s point of view, a logic that says that you have a lot of members out there who don’t have the time or the inclination to look at this or think about it. They trust the FSB, they are part of the FSB, and therefore they will go with that scheme, because they understand it and they trust it, because it is the FSB.

Graeme Fisher: I think that is right, yes.

John Longworth: Can I just come back to the point on awareness? It is a concern for the Chamber network. The ACA2 report said that two-thirds of employers had a very low level of awareness. The work that we have done with the Chamber network says to us that, actually, there is a very low level of awareness. The regulator, as I understand it, is going to start communicating 12 months before implementation day. We think that is way too late. There needs to be a lead-in time. For example, some of the businesses I have been talking to have contracts for the provision of business activity that are longer than the implementation dates. If they do not know about it, they cannot start to adjust their internal cost structures in order to be prepared to pay for this. That is going to create major problems.

We are using our network to communicate with the Chambers about this scheme coming in, so at least businesses are aware of it, and we will also use our website to do that too, but we really think that the regulator ought to be communicating much earlier.

Neil Carberry: We would strongly support that point.

Chair: Yes, because of the bidding and things like that. We have some questions now on regulation.

Q62 Stephen Lloyd: If I can turn initially to Nigel, please, the RSA3 and others have expressed concerns about the lack of transparency of charges. Do you agree that this is a problem, and if so, what further action would you like to see?

Nigel Stanley: I think it is a problem. I think the RSA deserve a lot of thanks and credit for the work they have done in making people aware of just how much difference even quite a small change in charges can make to your retirement income. We are very worried that there is a lack of transparency. We are worried that the sale of pensions for the purposes of auto-enrolment is about the only unregulated pension sale allowed in the pensions world. As an individual, if I want to buy a pension, it is very heavily regulated, and rightly so, because there are all kinds of records of mis-selling and people buying inappropriate products.

In terms of the particular issue, for example, of what the industry call active member discounts-what we would much prefer to define as deferred member penalties. It should never be in the interests of an employer to buy a pension scheme in which to auto-enrol their staff that, if when their money stays in that pension after they have left that employment, it starts having higher charges on it, particularly in an environment where they don’t have the choice of transferring it into, say, NEST - perhaps the leading example of a low-cost pension scheme designed for people with small pots and small savings. I think there is a real issue here.

I think we would like to see active member discounts simply outlawed, so that you have to have the same charges on a pension, whether you are contributing to it or not. I think that there needs to be much more transparency. I looked up to see if I could work out what the FSB scheme’s charges were, and I could not find out what they were. You did better than me, Chair, in finding that out, because I could not find it on the FSB website or on the Scottish Widows website. As a good employer, the first thing I would want to know is, "Am I getting good value for money for my contributions and my employees’ contributions?" I think that is a very important angle: that we have a good definition of what charges are, and they have to be absolutely up front in all literature about that pension scheme.

Q63 Stephen Lloyd: A supplementary to that: would you agree or disagree that, as it is obviously a public body, NEST is going to be very, very transparent about its charges, and the market forces that NEST will bring to it will actually mean that it is more likely that its competitors will need to be equally transparent, because if they are not, conclusions could be drawn? Would you think that is a fair comment?

Nigel Stanley: I don’t think that is right. There is a good philosophical argument about whether markets work in pensions anyway, given that you don’t really know what you have bought until you have retired some years later. I think the problem is: who is doing the buying? What is good for the employer in buying a pension scheme might not be good for their employee. High charges taken from pension contributions don’t really cause any detriment to the employer. Of course, most employers will be good and they will look for something that is good for their staff and they will want to see their own contributions doing well as well, but there is no market incentive to do that. You are relying on them being honest and principled, and having the time to think about it and go into this, which is, as we know, quite hard, because these charges are not transparent anyway. I would not rely on market forces. I think market forces just don’t work in pensions generally. That is why we have to regulate them. I think it is not particularly controversial, and not just from my part of the spectrum, to say that there is a lot of market failure in pension sales.

Q64 Stephen Lloyd: That is fine. Thank you for that, Nigel. If I go back to the transparency thing and ask Neil, Graeme and John.

Neil Carberry: At the risk of starting a predictable CBI/TUC argument, I don’t think the facts of the last five years bear that out. Since a low-charge default scheme appeared on the market, charge levels in GPPs4 have come down to levels that, when we began this discussion in 2005, people did not think were sustainable. Relatively small schemes-ones with, say, 100 people in them in DC, so not a small employer’s pension scheme, and we have discussed that they are more likely to go to NEST anyway-but just big enough to want to have your own scheme and do a bit more, are being charged at 0.6% or 0.7%, which is, I agree, more than NEST, which comes in about 0.47%, once you take into account its quite complex, I have to say, dual-charge model. Therefore, there has been some movement.

I would agree that it is absolutely right that savers should be aware of what they are being charged for their pensions. I don’t think many people appreciate how 0.6% translates to an impact on the final pot. I think there is a debate to be had on that that involves the scheme-providers, employers, employees and their representatives, before we decide on what the right interaction is.

From our position, we don’t necessarily oppose having some form of arrangement to protect employees. I think it has to be designed correctly, which means taking time over it, and it has to be set at the right level. It actually reminds me-coming to the point earlier-of the national minimum wage, where the issue with employers’ organisations, of course, was not necessarily having a national minimum wage, but the level at which it was set. That is what is really instrumental in this debate.

Q65 Stephen Lloyd: Carrying on on the transparency thing, from the FSB and the BCC’s perspective, would you broadly-

Graeme Fisher: Clearly, the FSB supports transparency of charges. I will just pick up on the TUC’s point: the information is just being developed and is in draft form, and once that has been issued it will be on the website and be freely available, and the benefits and the cost of this scheme will be clearly set out for prospective users.

Q66 Stephen Lloyd: I think we can probably all agree, the more transparency in this area, the easier it will be for employers and employees.

Graeme Fisher: Yes.

Chair: The importance is that the difference between 0.3% and 0.4% is huge, and the difference between 0.3% and 0.5% is huge, and the difference between 0.4% and 0.7% is huge-they are not comparable, and that is the thing that many people will not understand, because it does not sound a lot, but it is in terms when it is the whole pension fund.

Q67 Stephen Lloyd: If I can drill down a little bit more on the regulatory framework, do you consider the proposed regulatory framework for auto-enrolment sufficient to ensure that the scheme is run in the best interests of scheme members, as we understand the proposals at the minute? Nigel, if I can go back to you again.

Nigel Stanley: I think I have kind of dealt with that in my earlier answer. What worries me is how employers choose the scheme they offer for auto-enrolment, because I think there are some market incentives that are not right in the system. Many employers will rely on outside advisers to help them choose-and quite rightly; there is nothing wrong with that-but for those looking to IFAs, are commissions going to be paid there, and are trail commissions being paid that will reduce the value of pensions over time? Employee-benefit consultants don’t work on a commission basis but are often involved in selling services to do with pensions administration directly to employers too. Again, I am not saying there is a massive abuse there, but the history of pensions shows that these incentives do distort behaviour and do result in employees not necessarily getting the best deal.

I think we need the kind of regulatory regime that, if employers make choices that are not around very low charges-the lowest possible charges-and around not having deferred member penalties, they need to have a good reason for making choices that don’t offer a clear best deal to their staff. I am not sure we have quite got that yet, although lots of employers are doing it very well, and I don’t want to suggest that is a huge issue. But the system has to work for everybody, as we have already said. It is a system for everyone in work to build up a pension for the future.

Q68 Stephen Lloyd: Fine. I am just going to move quickly on to the trade associations, if that is all right. Could you give us some idea of what plans each of you have currently to communicate information to your members about auto-enrolment? I will go to John and then Neil, because I know that the FSB has already been talking about that a wee bit.

John Longworth: I said earlier in the evidence that the BCC are communicating with the Chamber network, and the Chamber network are communicating with their members, on this proposal. Once it is clear exactly where we are, we will continue to communicate that clarity and we will also provide access to the information on the website. We will also seek to direct members to the regulator’s information, which is one of the reasons why having the regulator communicate early will be extremely helpful.

Q69 Stephen Lloyd: Will the BCC be communicating it glass-half-full, glass-half-empty, or just dead neutral?

John Longworth: No, just the information. This is business activity, business-as-usual information. Once we get to the stage of implementation, we are really helping businesses to implement, not having a debate about whether it is good, bad or indifferent.

Q70 Debbie Abrahams: Can I just follow that up? Was I right in understanding that you are communicating currently on your proposal rather than what the scheme is?

John Longworth: No, we have consulted the membership on the evidence that we have given, which is something we would do, but we are also communicating that this proposal is on its way, so that they understand there is a change.

Q71 Debbie Abrahams: So, not what you have said you would like to do. That is fine.

John Longworth: No. The most important thing for everybody is that businesses are as clear as they can be about what they need to do, so that is what we are focusing on.

Chair: It is the law-they have to comply. Glenda, do you want to come in?

Q72 Glenda Jackson: It is me, it is not you, but I am getting the impression from the answers that there seems to be a perception that NEST is the only scheme out there. We have already established that it has to compete. It does not have the market. All this concern about the regulation that is going to be imposed on NEST-or, as you may see it, the lack of regulation, certainly on the issue of charges and transparency-surely has to apply to the whole of the pensions industry. There is nothing, as far as I am aware, that says that auto-enrolment means that an employer has to go for a NEST scheme. The market is out there for them, and surely it is the whole market that should be examining its practices here.

Neil Carberry: At the end of the day, NEST is just a pension scheme. I have a tendency of opening conversations with CBI members by saying three things happen in this reform, two of which are revolutionary, which is the employer contribution and auto-enrolment, and one of which is just a big pension scheme. Ultimately, that is what NEST is. NEST is of the market and should be of the market. That is certainly where our members want it to be.

John Longworth: I said earlier that micro-businesses may well default to NEST to some degree, just simply because of the difficulty of getting their heads around what they have to do. It is as simple as that. We have asked for certain changes in the bureaucracy around it, like the whole business of the 12-week auto-enrolment postponement but with a possibility to opt in, and then the four weeks with an opt-out. Why don’t we just go, "12 weeks, auto-enrolment, no opt-in"? It is simpler for the employee as well. They make a decision about whether they want the pension or not.

Glenda Jackson: With respect, you are presenting -

Chair: Hold on, Glenda, because Oliver now has the questions on NEST.

Glenda Jackson: I beg your pardon-as always, Oliver, sorry.

Chair: So, let him take that up, and if you still want to come back in, you can, but I don’t want to take all his questions.

Q73 Oliver Heald: Following up on Glenda Jackson’s point, in terms of the restrictions on NEST-the contribution cap and the fact that you cannot transfer your pot into it-to what extent are these complications going to put employers off? I will start with the CBI, if I may.

Neil Carberry: I think, in the development of the process, there is a very clear policy aim not to replace the long-term savings industry in making these reforms but to augment it in areas where, perhaps, saving was not reaching. The genesis of the restrictions was based on that, and there was justifiable concern at that time. Our view is that, over the long term, we want to look again at these restrictions. This slight delay in implementation, which now means that the 2017 review happens before the end of the rollout, offers the 2017 review as a time to have a look at these restrictions and make a decision whether to persist with them or whether to leave them behind. Our view would be that it is probably best to leave it until that point. Given all of the complexity that we have discussed so far, at this stage further instrumental changes to the shape of the reform will only cause cost and issues for those businesses, who are, after all, starting to come in in July next year.

Q74 Oliver Heald: Isn’t it right that, if you have an employee in the business who earns more than £53,000 a year, NEST cannot be your only scheme?

Neil Carberry: Yes.

Q75 Oliver Heald: Isn’t this going to mean that employers say, "Look, we prefer a scheme where we are all in this together," to coin a phrase, and so do not go for NEST on that basis?

Neil Carberry: I think that is a possible outcome, and I am not sure I am particularly troubled by the idea that an employer who is willing to make that decision is happy to go to another provider to do that.

Q76 Oliver Heald: What do the other employers’ organisations think? Is this too complicated for employers?

Graeme Fisher: An element of this is one of our issues: that small employers are not in a position to make these choices but might be forced into a situation where, yes, they need to make these choices. I would say, again, with the TUC, I think that the majority of employers will try to act in the best interests of their employees and choose the best scheme. They work side-by-side with the employees for many years and feel responsible for their wellbeing.

Q77 Oliver Heald: What about you, Mr Longworth? Do you think this is too clunky for employers?

John Longworth: It is very difficult for employers, particularly micros and small employers. I agree with what the CBI was saying about any major reviews being left to the review period in several years’ time. We do not want major shifts now because we have to try to implement this in a way that is going to be the least burdensome for employers and the best outcome for employees.

The point of transparency earlier was an important point in the sense that, if you are a small employer, you will want to do the best thing you can do for your employees, and transparency is just as important for the employer as it is for the employee, quite frankly, in order to assess that. But it is extraordinarily difficult for them to make those assessments. Let’s face it: most people have difficulty assessing for themselves what the best choice is.

Q78 Oliver Heald: Bringing in the TUC, one of the other features of this is this trail of small, stranded pension pots that many workers will be leaving behind them. Do you have concerns about that and about the other features of the scheme?

Nigel Stanley: Yes, I agree with the premises behind all your questioning here. One of the great difficulties with auto-enrolment is going to be the development of a large number of small pots, and it seems to us to be rather dangerous if all those small pots end up in different funds, as it will not be very economic for the pension-provider to have them, so they will want to put economic charges on those pots, and that will be to the detriment of the member’s pension.

The ban on transfers into NEST, as well as out of NEST, seems to the TUC to be very bad news and just really protection for the pensions industry. Your colleague was asking, "Can we rely on market forces?" but it seems to me that we don’t have a level playing field for NEST. The ban on higher contributions means, as you say, that NEST is not a suitable scheme for any employers that will want to put better-paid employees into it. They would have to have two schemes. It means that it cannot offer transfers in and transfers out, and it is clearly a good home for small pots. It is facing competition as well from new entrants into the UK, who don’t have those provisions. It is a bit odd that ATP, which is part of the Danish state pensions apparatus, does not have these restrictions on it, while NEST, which is an independent pension scheme but was set up because there was a gap and a market failure here for these people, does. We need to lift all of these, and I think we need to do it as quickly as possible. Employers are choosing pension schemes now, and if they cannot use NEST for all their staff, they probably won’t use NEST, unless they are a very big employer and have very different segments in their labour force. That is another important issue.

I think the other issue as well is the regulatory loophole that allows trust-based schemes to offer short-service refunds, which I think is a marketing ploy for some insurance companies who, during the whole discussion about the Turner review, said that trust governance was not suitable for auto-enrolled pensions, but who are now constructing auto-enrol pensions in order to make short-service refunds so the employers can get their contributions back. Now the employees can get their contributions back, and one would hope they would transfer them into a pension pot, but they probably won’t-they will spend it, because that is what humans are like. Again, we defeat the system a bit; we want people to build up and keep on building up and get that persistency of pension saving, which is the best guarantee of having a reasonable income in retirement.

Chair: I think there is a final question.

Q79 Teresa Pearce: Could I just ask a question to see if I am right in my thinking? We have heard a lot-and the Government has heard a lot-from the employers and from the industry, and concessions have been given and advice has been taken, but the real risk in all this lies with the employee. It is the employee’s real pension in their real life that might disappear or be devalued, and yet their voice has not been heard. The industry has got its concessions and it is going to make its money, the employer is going to fulfil its requirement by paying into and providing a pension scheme, but the employee is the person who does not have any voice here. Does that concern any of you at all?

Nigel Stanley: I suppose it is my job description to speak with the loudest possible employee voice in all circumstances. I think there are two points to be made. I think there are some worries-and I have tried to express them today-about some of the limitations on NEST, some of the opportunities for mis-selling and some of the impacts of charges, but I think it is worth saying that this is an area of policy that needs to be done, as much as possible, by consensus. I think it is a real tribute to Lord Turner and his colleagues that the work they did in that commission was really quite radical in setting a new direction for the pension system. It survived a change of Government, very largely, and there is a good consensus around the principles of auto-enrolment, a better state pension and a better deal for women in the pension system, and these are all things to which I think we all, even on this side of the table-perhaps some a bit more reluctantly than some others-sign up.

I think that, as we have gone through that journey, we have discovered some of these elements which we did not foresee at the time we were having those discussions about how to achieve that consensus. I think some of the points about the lack of regulation of the sale of pensions to employers for their employees are really at the root of this, because one does not see how market forces work in that situation to correct errors. Relying on the good will, honesty and good intentions of employers may work, but it does not work all the time. There will always be exceptions. That is why I think some of these areas do need thinking about. That is why I think there still needs to be a powerful employee and general consumer voice, because there has been a very strong input from other consumer groups as well as unions into that process during this journey.

Chair: Our time is up so I am going to wind it up there, but can I thank you very much for coming along this morning? What you had to say was very interesting, and there was a remarkable amount of consensus, considering the different organisations you represent. But thank you very much, and we will get our second set of witnesses in.

Examination of Witnesses

Witnesses: Marta Phillips OBE, Chief Executive, and Alison-Jane Bailey, Head of Policy and Technical Development, The Pensions Advisory Service, Niki Cleal, Director, and Chris Curry, Research Director, Pensions Policy Institute, gave evidence.

Q80 Chair: I think we will just start. I appreciate that there is another witness that will pop in, but hopefully she will be able to pick up when she arrives. Thank you very much for coming along this morning. Can I ask you just to introduce yourselves very quickly in turn for the record?

Marta Phillips: I am Marta Phillips. I am the Chief Executive of The Pensions Advisory Service, shortened to TPAS, and I have been there since April 2010. I am not a pensions expert.

Chair: I would like to ask the obvious question, but I will not.

Alison-Jane Bailey: I am Alison-Jane Bailey. I am the Head of Policy and Technical Development at The Pensions Advisory Service, and I am a pensions expert.

Chair: Chris, do you want to introduce your colleague and yourself?

Chris Curry: I will introduce us both. My name is Chris Curry. I am the Research Director at the Pensions Policy Institute. I think working at the PPI makes us pensions anoraks, rather than experts. My colleague and Director, Niki Cleal, will be joining us shortly.

Chair: Okay. Brandon, I think, has the first set of questions about incentives.

Q81 Brandon Lewis: Yes, I am curious what your thoughts are on how the opt-out will impact on auto-enrolment and whether you think going for such a high opt-out runs the risk of damaging the scheme or, indeed, if, because there is auto-enrolment, people just will not bother to opt-out and, therefore, it will be successful. How do you think that will work?

Chris Curry: There is a lot of uncertainty around opt-out-I think that is the first thing to say. We did some work on this a couple of years ago looking at the range of possible scenarios for how many people might opt-out based on what evidence there was available at that time, so looking at international experience, what had happened in KiwiSaver, but also drawing on consumer research from the UK. The range that we have come up with is anywhere between 4 million and 9 million people might become new savers as a result of this, but that was based on opt-out rates of anywhere between 20% and 50%. What we don’t really know is exactly where that is likely to come out.

There are a whole range of factors that might influence that: individuals may have other needs, and, especially in the current economic climate, there is likely to be perhaps a different response from that envisaged at the time the Turner Commission was making their proposals for auto-enrolment. There are some differences as well in the group that is covered, with things like the introduction of an earnings limit, which you have to earn above in order to contribute, so that will affect the type of people affected. It is quite early to tell what exactly is going to happen, and we will have to wait and see, to a certain extent, what individuals feel and, in a way, how the policy of auto-enrolment is communicated. I think, at the moment, there is a large amount of uncertainty for individuals, and a lot of people don’t realise exactly what auto-enrolment is and what it is likely to mean, so I think there is still a wide range of possible outcomes.

Q82 Brandon Lewis: Even where we are at the moment, is there anything more you think should be done at this stage in order to ensure that the opt-out is minimised, as it were?

Chris Curry: I think there are two things you need to bear in mind: one is that, for some people, opting out would be the right thing to do, so I think it is not necessarily a case of making sure that opt-out is as low as possible. It is more about ensuring the opting out of the right people happens, and the people who actually benefit from being in pension saving do not opt-out, so it is getting the right opt-out level rather than just trying to minimise it. I think the key to that is to have a good communications programme and to make sure that people are aware of what the benefits are of being auto-enrolled, what that means for their pension income and what might happen to them in later life, and what the costs are as well. I think that is quite a difficult balancing act, which I am sure The Pensions Advisory Service will have quite a key role in when we get to that stage.

Q83 Chair: Can I just ask: is there a danger that, because people tend to concentrate on the negatives of something, that is what attracts attention and gets the headlines in the newspapers-back to, I think, Karen’s questions in the earlier session-and therefore people’s whole view of auto-enrolment is coloured by the fact that human nature will always concentrate on the negative rather than the positive?

Chris Curry: That is something that we have certainly talked about in the past, and I know that the Department for Work and Pensions ran a whole series looking at incentives to save and how you could tell whether people would be better off being auto-enrolled or not. I think that one of the big barriers is human nature, but one way of trying to overcome that barrier is by using auto-enrolment, and so the power of inertia, I think, is the main hope: that people, even if they are not sure if they are doing the right thing, will find themselves saving, because they have to take a positive action not to be saving.

Obviously, the danger of that is that there are some people who probably should not be auto-enrolled who will be, but there is a balancing act in doing it. The key is to build on inertia and to use that and to make sure that the people who do benefit are likely to remain in, but also find a way perhaps to try to identify particular groups who might be most at risk of not benefiting from pension-saving, and target information towards them to help them come to the best decision.

Q84 Brandon Lewis: Just as a follow-up, picking up on your comment about the right people to be in, one of the areas that have been affected is people who earn the right amount but are still relatively low-paid and switching jobs-an awful lot of seasonal workers. What do you think can be done and what should be done to ensure that seasonal workers on short-term placements working pretty much all through the year but in different places and different parts of that industry, particularly for tourism, which is the fifth biggest employer, are given the right service or the right structure in terms of auto-enrolment or pension provision and savings?

Chris Curry: That is a difficult group to reach in all kinds of employment areas and not just in auto-enrolment. Again, it is important that there is not just a blanket assumption that, because they are only working for a short period of time or changing employers, they should not be pension saving. It does not just depend on what they are doing at that particular point in time but what they do for the rest of their working life and their career as to whether they end up doing well from having been auto-enrolled in pension saving. Again, although there are particular issues among the more transient workforce and people who change jobs frequently, the issues overall, based on how much they earn in that particular year or how much they earn over their lifetime, are probably still the same, so it is important not just to ensure that they take into account what their needs are at this particular point in time, what their income requirements are, how much they think they can afford to save, but to help them understand how that influences what will likely happen through the rest of their working life and what will happen with their income in retirement.

I think one of the key advantages of auto-enrolment is that, certainly for the younger people-and I think a lot of the transient workers you are talking about probably will be younger individuals when they come in-if they enter the labour market with auto-enrolment already in place, they won’t necessarily realise what the impact of auto-enrolment is. That means, for that particular group, they may be more likely, over the long term, to not realise that they could opt-out, or the benefit of opting out, because they have not really had a pay packet where that deduction was not made. I think, in the rollout, the responses from groups where individuals see their take-home pay change from month to month could be different from those changing jobs or going into employment for the first time, where it would become just the same as income tax or National Insurance contributions: another part of the payslip that they do not really understand or know the value of or see how much it is changing their take-home pay in that respect.

Q85 Stephen Lloyd: Just a quick one, Brandon, if that is all right: on the opt-out. In the PPI submission you reminded us that the Government’s proposal is very similar to the KiwiSaver scheme; what is the opt-out percentage in the KiwiSaver scheme?

Niki Cleal: I think it is fair to say that the KiwiSaver scheme has been quite a success, so there are about 1.7 million members of KiwiSaver, which is about half of their population aged 18 to 65. I think, in most people’s minds, people would see that as a success. The KiwiSaver scheme operates slightly differently from our scheme, so the majority of members-60%-opt-in to the scheme. However, when you join a job for the first time in the New Zealand scheme, you are automatically enrolled, and about one third of those people who have been automatically enrolled have chosen to opt-out.

Stephen Lloyd: That is quite high.

Niki Cleal: In terms of the potential parallel for the UK, when PPI did some modelling on this, our central assumption was that we might expect about one third of people to opt-out.

Q86 Karen Bradley: I just want to come back on the figures in New Zealand. 50% of the working-age population is within KiwiSaver. Of the other 50%, how many have got private pension provision or occupational pension provision, and how many are just without any form of pension savings?

Niki Cleal: I think that is a valid question. I don’t have those specific figures at the top of my mind, but I think that the research that was done suggested that, of those people who are members of KiwiSaver, around half of them said that they were not previously saving for their retirement, so it suggests those in that half are new retirement savers, as it were. I think the point behind your question is well made, which is that there will be some displacement here. There will be some people who effectively use KiwiSaver or NEST or whatever the equivalent is over here instead of using some other vehicle, so we can expect there to be some shifting of money around. I think the New Zealand Government estimates that KiwiSaver has reached about a third of their target population, which they specified as people who frankly would not otherwise have been saving enough for their retirement.

Q87 Andrew Bingham: I think I have read somewhere that the pot you accumulate in KiwiSaver can be used towards a mortgage contribution. Is that right?

Niki Cleal: It is not quite a mortgage contribution, but it is similar.

Q88 Andrew Bingham: Like a pension mortgage.

Niki Cleal: You can save in KiwiSaver and then you can actually withdraw some of those funds as a first-time buyer to help get you on the housing ladder. There are additional freedoms and flexibilities above what has been proposed here, so that is one key difference. That scheme is only just about to go live, because you have to have been saving in the scheme for three years before you can take any money out. At the moment, we don’t quite know how many KiwiSaver members will make use of that new facility, because it is only relatively recently that that option has been opened up.

Andrew Bingham: I personally think, given where we are with the housing market for first-time buyers, this could be something we could perhaps revisit at a later date when that has become apparent.

Chair: I think we need to explore how KiwiSaver actually works.

Q89 Oliver Heald: Just coming in on that point, that means that there is less lock-in than a traditional pension-saving scheme. Have you done any work as the PPI on whether that is something that may encourage a wider group of workers to stay in their pension or be part of the pension contribution?

Chris Curry: We have. Firstly, on KiwiSaver, there are a number of other areas or times at which you can make withdrawals, so in times of severe hardship or disability, and of course there is no annuitisation requirement in New Zealand either, so you don’t need to buy an annuity when you reach pension age. In terms of the work that the PPI has done looking at what we termed at the time early access to pension saving, the responses are generally mixed. There is one school of thought-and some survey evidence-to suggest that there are some people, but a relative minority of individuals, who feel that they do not want to save in a pension because it is locked away and they cannot access the money, and they worry that they might be better off saving somewhere else. On the other hand, there is also probably a fairly equal-sized group who actually find the lock-in an attraction, because they know, if they did not have the money locked away, they would use it for something else and later regret it. There is a real almost polarisation of views as to whether it would be a good thing for individuals or a bad thing for individuals.

Work that we did looking at the different schemes and how they operate in different countries, found, for example with the US and the 401(k)5, that there was not a lot of use of early withdrawals worldwide. Sometimes, where it does work, it is in the form of a loan, so the money is repaid anyway, but the one thing that we don’t really know is how it will work in a UK context. The concern is that individuals who probably might benefit most from having some pension saving retirement income may also be the ones who are most likely to withdraw that money before they get there, so there is a question as to the way in which individuals build up their savings.

It is also relevant to auto-enrolment: whether people ought to be aware that saving in NEST or saving through an auto-enrolled workplace pension scheme equivalent does have some implications, and it is not necessarily going to be money that is available for them, so they might want to consider where their priorities are in terms of where they make their saving.

Q90 Debbie Abrahams: I would like to build on the question that Brandon started. The Committee is very keen to understand the equality implications of the scheme design as a whole, and in particular which workers may be the winners and which may be the losers in this.

Niki Cleal: I think one important group of beneficiaries, if you like, is women, because historically women have often worked for the type of employer that has not offered a pension scheme. For the first time, many women will have a legal right to both be a member of a scheme but, importantly, to get a 3% employer contribution. I think that would equally apply to many people in some of the lower-skilled, lower-wage occupations, where, again, traditionally pension provision has not necessarily been high. There are some important groups who stand to gain from these reforms in terms of getting access to some kind of employer contribution.

I am sure we will come on to this: there is a question about whether or not a combined contribution of 8% is sufficient for people, and I think we would argue that it is probably not, but it is at least a first step and it does mean that people, for the first time, will be accruing some kind of pension rights in their own right, which I think we would see as a step forward.

Q91 Debbie Abrahams: Linking on then to the 8%, when do you think that we may need to rethink that level of contribution?

Niki Cleal: When the Pensions Commission designed the system, it was designed such that an 8% combined contribution would deliver a median earner a replacement rate of about 45% of their pre-retirement income against a target of 66%. At that time, it was felt that you probably needed double the amount of contributions, so a combined contribution of about 16%, for a median-earning man to hit their target replacement rate. In terms of the original system, the Pensions Commission were very clear that these were minimum contributions. They were never going to provide people with, if you like, a comfortable standard of living in retirement, so I think the question for policy going forward is: how can we try to encourage that behaviour? The evidence from KiwiSaver is that, when you have default contributions, the vast majority of people will go in at the default level, so I think we can expect the same here: that most people will make the minimum 4%. Over time, it is going to need quite a lot of education and communication to explain to people that is a good start but it is not, in and of itself, enough, and that they need to be saving more than those minimum levels.

Q92 Debbie Abrahams: You talked about the winners: who do you think may be the losers, thinking about the seasonal workers and the difficulties we see with them? Are there any other groups that you think possibly are not going to win?

Chris Curry: It is hard to define, I guess, what you lose by being auto-enrolled. In a way, it is a trade-off and a distinction between how much you would rather have the money now and how much you value having a pension in retirement. In each individual case, it is going to be slightly different, and it will depend on people’s circumstances-whether they have a partner who is working, how much income they have, and what their other expenditure and outgoings are.

We did some work looking at trying to do a fairly technical calculation and looking at what the value of the auto-enrol contribution was to individuals in terms of rate of return, taking into account how it interacts with the tax relief and the means-tested benefits system at the end of working life and in retirement as well, to see whether people would get back what they might consider to be a reasonable return from the amount that they put in. We found that there are some specific groups who are more at risk than others of having a lower value of saving and so may be more at risk of not doing well from auto-enrolment. The most important group, or those with the lowest value of saving, were those who are renting in retirement and are eligible for housing benefit, so the interaction with the taper rates for housing benefit, council tax benefit and, currently, savings credit can mean that people actually get back less than the value of the contributions they put in, even after allowing for tax relief, employer contributions and investment returns. It is quite difficult to argue that group of people should be saving. Obviously, it is quite difficult to tell, if you are a 20-year-old, whether you are going to be renting in retirement or whether you are going to own your own home, so you cannot use that as a hard-and-fast rule.

There are other groups who do less well: people with continual low earnings or times out of the labour market; in particular, women who may have caring breaks. Those are people who may not be building up higher state pensions and missing out on employer contributions over a period of time, and may do slightly less well than others; similarly, people who are self-employed. It is important to say that, although those people may be more likely to be eligible for means-tested benefits, it does not mean that they won’t get value from saving; it just means it is not quite as big a value as other people would get.

Q93 Debbie Abrahams: So there are definite losers, and those that might be losers.

Chris Curry: Yes.

Q94 Karen Bradley: This leads on from the comments we have had so far, and I would like to address how communications with individuals are carried out. I suppose, just to open it up to start with, do you think there is going to be sufficient advice for individuals, and do you think that there is going to be enough information available for them in layman’s terms to enable them to make an informed decision about whether to opt-out?

Marta Phillips: On the communications front, you are probably already aware that the Department has been doing a lot of work with key stakeholders in this field to map out the communications and to use common language. That is definitely a benefit. The plans in terms of precisely when specific communications will take place have not yet been fully formed, so it is difficult to comment on that right now. We have already contributed to sample-type letters and information booklets that the Department is working on and which it says it is going to share, particularly with small and micro-employers, because they are the ones that, as has already been discussed this morning, are more likely to have difficulty in meeting the requirements; they are less likely to have an HR department that will create bespoke information for them. A lot of groundwork is already being done in developing vanilla products that employers can just use.

The Department has also carried out research into the customer journey and into how people might respond to the various messages that it is developing to inform people about automatic enrolment. A lot of the thinking and a lot of the strategy is around inertia, as has already been discussed. I think, from our perspective, one of our concerns is that potentially, as has already been mentioned, people already in employment and on low wages will notice when the contributions start, because they have tight budgets. Our concern is, despite the communication and the efforts being made to inform people-and particularly to make them aware that, if they don’t participate in this, they will lose out on the employer contribution and they will lose out on the tax benefit-people will still make decisions because they have to buy clothes or shoes for their children now.

There is still a lot of work to do. The Department is quite clear about what it feels needs to be done. I think one of the issues is about whether there are going to be enough resources made available to make sure that the communications are as comprehensive as possible.

Q95 Karen Bradley: We have had a briefing from the Department about the sort of communications there are, and there appears to be quite a lot on the internet, some of which was using layman’s terms and some of which was still using what would appear to us to be jargon. "Staging date" was one of the examples that we thought was a bit confusing for people. The internet is not going to be right for every employee. What sort of need will there be for one-to-one discussions or telephone communication or written communication? How much wider does it have to go than just the internet?

Marta Phillips: I think all possible channels need to be used to communicate this message, because it is such a big message and it is going to affect everybody. We agree with the comment that not everybody is going to be comfortable using the internet; not everybody has access to the internet. We think it is really important that, within the communications that are being set out, a telephone helpline is available.

What we have been discussing with the Department is what has been termed the magic questions that help triage where questions go, it will direct the telephone help to start with, as to who is going to handle what. We are working through, with the Department, the boundaries of where stuff will be handed over to us at The Pensions Advisory Service, because, particularly if you have people with multiple jobs-either multiple jobs at the same time or lots of short jobs-the issues about the decision making they might need to go through would tend to be more complex, and that is where we have particular expertise in giving that kind of information and guidance and support to people. Yes, stuff in the press, stuff on television and stuff on the internet is important, but help on the end of a telephone line is also very, very important, because people will want to just check out that their understanding is correct.

Q96 Stephen Lloyd: Is the Advisory Service modelling at all the possibility that there may be some populist campaigns against it? Are you modelling any plans to do television advertising or television rebuttals and what have you? I am hopeful there won’t be, but I do think that there is a danger. I just have a picture of the sorts of groups I am talking about who might decide to run a "this is Big Brother and it is all outrageous and we are going to fight it tooth and nail". Are you modelling the possibility of that?

Marta Phillips: Our plans are not yet that far advanced. We have only recently agreed the Department resourcing for this year to map out what the plan for 2012-13 onwards should be for our resourcing. Our board is highly concerned about the fact that we are not as advanced as we feel we should be, but we are making progress on that. Therefore, we have not yet got to the point of thinking about how we ourselves would counteract that kind of behaviour in the press.

Q97 Stephen Lloyd: Does your board believe that you are getting adequate funds from the Government for the next couple of years to manage this?

Marta Phillips: My board and I are not in a position to say yes or no to that question, because we have not had the discussion with the Department yet, which is the concern that we have.

Stephen Lloyd: Do let us know if you think you are not.

Marta Phillips: In terms of the campaigns, what I should say at the moment is we are not funded to run campaigns like that. The point having been raised, I think it is something that we will feed into the discussions with the Department as to how they would counteract that, because I think our size means that we are unlikely to be able to mitigate that. What we can do, and what we do when we are approached, for example, by television programmes, is give out very positive messages, but we do not have the capacity to underpin a campaign like that.

Q98 Sheila Gilmore: It is really just a slight follow-up to that, although maybe you have answered it by saying you cannot campaign, but there has been a spate of reports in newspapers even recently about people’s pension pots being shrunk to nowhere. The headline is pretty negative about the point of it and that is not a very good atmosphere, and that is partly because of, obviously, what has happened to you. Quantitative easing partly makes that worse, the interest rates that can be achieved and so on, but doesn’t it make it even more important, if we are in that kind of atmosphere, to overcome that?

Marta Phillips: It does make it important to overcome that. One of the concerns that you have not mentioned is the issue of volatility affecting people’s savings. If you have a small amount of money and you suddenly see it shrink, you are going to be worried: "Shall I continue? Shall I move it? Shall I cash it in? What do I do with it?" Therefore, the kind of information and guidance that we are able to give to people will help them to think about the fact that it is long term. There are a couple of things: once it is in the pension pot, so to speak, they cannot take it out until they come to retire, so that is a plus on that side. It is not a very comfortable plus, but it is a plus.

The second thing is to encourage people to think that the more you save, the more likely you are to be better off in retirement, so if you have already built up a fund, stopping now is probably not the best option for you. But we will need to go through with them their specific circumstances in order to tailor the guidance that they would need to help them make that decision. We are already aware of the work that organisations like the NAPF6 is doing on encouraging pension funds and encouraging a better image for the pensions industry to counteract the sort of things that people have already put forward. But I think it is something that everybody involved in the pensions industry has to take part in. It is not one person’s responsibility as opposed to another person’s responsibility. I think we have to be honest and we have to be fair, and we have to make people understand both the pluses and the minuses, because we regard our reputation in terms of the information and guidance we give people as paramount, and therefore we would not want people to mistrust anything we say. We want to be fair and balanced in what we say, and if there are issues about particular things that people need to be aware of, then we need to point those out to them.

Q99 Karen Bradley: It seems to me that we are going to be entering a new paradigm, I suppose, where so many more members of the population are going to have a stake in the financial services industry and in the stock market. At the moment, people feel detached from that and it is going to be a situation where a large part of the population is going to have a stake in it, and there is a lot expectation around what a pension will deliver and affordability and what you will have in your retirement in terms of your spending power, and a lot of misunderstanding about what a defined contribution scheme is and what it can deliver and the volatility. So do you have any suggestions or thoughts that we could take back to the Department as recommendations about how they and pension schemes might manage expectations in this area and communications and understanding of what is a very complicated issue?

Marta Phillips: I will start, but I will hand over to Alison and she can cover anything that I don’t pick up in this area. I think you are right. One of the things we have to be really clear to people about is exactly what potentially their pension savings might buy, because we are concerned already that people might think that because they are automatically enrolled into a scheme that is it, they are covered; with a state pension and automatic enrolment, they are covered-they do not need to do anything else. The likelihood is that people may not understand what size of pension pot they need in order to purchase or to have x amount of additional income. To me, from the lay person’s perspective, the messages that need to go out is to say to people, "If you are thinking that you might want x amount of retirement income, you might need to save this amount of money," and be quite clear to people about what that might mean. Otherwise people will get to the end of their employment, look in their pension pot, look to start to use it and then find they are hugely disappointed.

I don’t know if there is anything else you want to add, Alison.

Alison-Jane Bailey: We have a concern that there is too much information given to individuals when they first join a pension plan and then annually as part of their annual statement. It has been done with the best intentions, but I think what has happened is that there seems to be a thought that the more information you give people, the better position they will be in to make an informed decision. In fact, I think it has had the reverse effect and what happens is that those papers just go straight in the bin, because you get a wodge of papers this thick with your annual statement. So we are working with the Department to try to simplify the regulation around that so that more prominence is given to the critical information and there is less bumf with it..

Q100 Karen Bradley: Risk management has made it very difficult for anybody to understand what is going on.

Alison-Jane Bailey: That is right, and it makes the pension product look so complicated that people just don’t want to read it. Again, I think that is where the Pensions Advisory Service can play a key role. We do have the technical expertise to talk people through the information. We have a team of people who go out into the workplace and talk to employees about why they should join their employer’s pension scheme, and we find that the moment the penny drops is when we say, "Could you live on £102 a week, which is the current state pension, in particular if you are still renting in retirement?"

Q101 Debbie Abrahams: Is there any information, baseline data, on the levels of awareness within the general population around pensions and the information that they need to know about? Do we know what percentage-30%, 10%-of the population have an adequate understanding of pensions?

Alison-Jane Bailey: I don’t have that data, I am afraid.

Marta Phillips: The people most likely to have that data would be the Department, because they fund research to do that.

Chair: Okay, we will pursue that. Andrew, I think we maybe want a last one and then to move on.

Q102 Andrew Bingham: Yes. I want to ask about employers, but before we do that, the NEST system, from what we have seen, has quite a simple online tool where you click in what you put in, what you get out and everything. Do you think that will push the market that way as well, so people can quite easily go online for that information? I know not everybody has internet access. Do you not think that will help simplify it?

Alison-Jane Bailey: A lot of pension providers other than NEST do already provide online systems. Our experience is that people do not understand how defined contribution pension policies work well enough to use them. They do not understand unit linking, so they might come to us and say, "I have got a pension," and we say, "What type of pension have you got?" and they will say, "It’s with Standard Life." We say, "Yes, but what sort of pension is it?" and they say, "I don’t know." Then we will ask whether they are invested in unit-linked funds, and they don’t know or where to go to look up the unit prices or how to go about switching funds online.

Q103 Andrew Bingham: Right. You have already said that you think small employers and particularly micro-businesses, because that is the background of one or two of us around here, may struggle to comply with the new responsibilities without help and support. You touched earlier on one or two of the things that you were doing. Do you think the support the DWP are making available is enough? If not, what is missing?

Marta Phillips: It is a little bit difficult to say what is missing right now, because of the way in which employers will be brought into the scheme. I think that the way in which employers are being brought into the scheme is a good thing, because you bring in the larger employers who already have the HR support around them, and although they are larger employers, they do have large numbers of people on lower incomes. I think we will learn from that response as to how people on lower wages behave when they are subject to automatic enrolment and the sort of questions they are likely to ask and the sort of concerns they have and therefore how we need to re-plan. We are planning now, but we will need to re-plan and respond to how people react to that. For me, the issue is about ensuring that there is enough resource behind this project to ensure that any additional work that we might need to do can be properly resourced, because right now we simply do not know what that is going to look like in about four or five years’ time. That is when the micro-employers and SME employers come on stream.

Q104 Andrew Bingham: When they come on stream, obviously NEST is probably the most suitable, but it is not going to be the only show in town. As an employer, you will effectively have a choice of what scheme to offer your employees. Where will they go for truly unbiased advice in order to get the best for themselves and their employees?

Marta Phillips: The theoretical answer is they should be getting independent financial advice, but clearly if they did that or if they went to a employee benefits consultancy they would have to pay for it. When people come to us or when we join, for example, with HMRC, and we join them in their roadshows for small and micro-employers, we make them aware that there are certain schemes that have been designed specifically with their requirements in mind and that they meet the basic requirements. So if they are an employer who is on a budget, it does mean that they can enter into that scheme, which is NEST, as we have all been speaking about, with confidence that: a) it meets requirements; b) the technology support is there for them; and c) they do not have to pay for independent advice in order to enter into that scheme. Clearly, we are not selling NEST. We say to them, "There are a number of schemes, and if you want to explore other options there is independent financial advice, there are the insurers and there are other pension schemes that you can go to." But, at the moment, I don’t think we are aware of any specific place that employers can go for "here is a list of potential pension schemes that you might need to sign up to."

Q105 Stephen Lloyd: Shouldn’t that be an opportunity for TPAS, because it is going to be a competitive market? Today, if this were already running, we would turn probably to Which? I know the Consumers’ Association is not a Government body, it is an independent consumer group, but they have a robust reputation. This is an ideal opportunity for TPAS as an independent advisory body, or what have you, to provide that independent neutral advice. Wouldn’t this be a big opportunity for you to be an even more trusted advisory body?

Marta Phillips: It could be, but the expertise that TPAS has is talking to scheme members about their scheme benefits. It is not about the comparative merits of various pension schemes.

Q106 Stephen Lloyd: But if it is not TPAS, where will it come from?

Marta Phillips: We could grow into that area, but that would require changes in our framework agreement with the Department and it may well require changes in our funding, so there are consequences of that kind of decision that we would need to negotiate.

Q107 Stephen Lloyd: Can I ask PPI? You can see where I am coming from, because crucially in a few years’ time, when the micros and the SMEs move into it, people are going to be confused and they are just going to want to go to some trusted area that gives them a sheet of paper or two sheets of paper and says, "These are the charges, these are the variables, this is exactly what it is," completely legitimately. Who should provide that do you think?

Niki Cleal: I think the question is a valid one, because as an employer these are quite complex issues: "If I have an existing scheme, do I auto-enrol my people into what I have? Do I think about NEST, or indeed one of these other new providers that has come in?" I agree with what Marta has said that in a sense the classic provider of this type of advice at the moment is the IFA sector and, as a small business, you can go to an IFA and they will help you to look across the market at the different offerings. But there is a cost to that, and so there is a question about whether small businesses will use that route.

Q108 Stephen Lloyd: Or, more to the point, if they do, will they get objective, neutral advice? Some of my best friends are IFAs and they are brilliant and their integrity is unsullied, but I also know human nature and I know that if the employers are going to be relying on the IFA market a lot of them will not get absolutely independent neutral advice.

Chris Curry: There are a couple of other potential areas. One is The Pensions Regulator, who will be monitoring compliance in the area, may well also be able to be a provider of information potentially. I think we might need to speak to the regulator about how comfortable they would feel in doing that and whether that is currently within their role and responsibilities or not, but that is an organisation that will be at least nominally in touch with all of the employers that have to make this decision.

The other two are currently more aimed at consumers but could be expanded to cover small businesses. The first is what used to be the comparative tables from the FSA7 looking at things like individual pensions and annuity purchase, for example, and that could be an area where it could be developed. I think linked very strongly to that is the Money Advice Service, another independent organisation, which may be able to give some kind of guidance in that particular area.

Q109 Andrew Bingham: From the answers we have there is not an easy place where there is a single point of contact that those employers can go to, because they will be experts in doing what they do, but not in this area.

Alison-Jane Bailey: The Pensions Regulator is already doing some work on what a good pension scheme looks like.

Stephen Lloyd: But normal people cannot understand it. I have been on the Pensions Regulator website. Maybe I am just dim, but I cannot understand it at all. I would not count too much on the Pensions Regulator putting out a clear, crisp, two-page sheet of "these are the different pension providers, these are the charges and these are the consequences".

Q110 Andrew Bingham: Yes, but does the Pensions Regulator have the capacity to deliver that?

Marta Phillips: From TPAS’s perspective, given the expertise we have in-house, it would be a relatively easy step for us to take. It is about remit and some other things that would need to be ironed out if that was where the Department wishes to go.

Chris Curry: There is also, I think, some kind of precedent in the area. If you go back to 2001 and the introduction of stakeholder pension schemes, there was a central registry held of all stakeholder-compliant schemes that employers could use. Back in 2001 any employer with five or more employees had to nominate a stakeholder pension scheme, so they could go to get a list of potential schemes they could use from there. So that may be another avenue that is worth exploring.

Q111 Andrew Bingham: I am conscious of the time, because we do not have long left. Some employers are already contributing more into employee schemes. Are you concerned or have you done any assessment whether this will, shall we say, cause a bit of a race to the bottom and they will reduce their contributions?

Niki Cleal: Yes. I think there is a very valid question about how employers will respond to the increased costs that they will face or some of them will face due to auto-enrolment. It is a difficult question to answer. DWP did a survey in 2009; 30% of employers said they would absorb the cost through lower profits or their overheads, 20% said they would respond by reducing wages, 15% said they would increase their prices and 16% said they would reduce or restructure their workforce. So I think there is a real world impact from this cost increase.

For the minority of employers who contribute more than 3% at the moment, only about 10% of private sector employers currently contribute more than 3%, but they cover about 50% of pension members, because it tends to be the larger employers. Those employers are the ones that potentially could level down. But I think it is also important to remember that there is 60% or so of private sector employers who are doing nothing at the moment who, frankly, will effectively be told "you will be levelling up" because of the legal requirement that will be placed on them. I think realistically there will be some levelling down.

Q112 Andrew Bingham: But the upside far outweighs the levelling down.

Niki Cleal: It is hard to say, but from a policy point of view what we want is for employers to auto-enrol into their existing good schemes where they have them. That will minimise the risks of levelling down.

Q113 Chair: I am conscious of the time, and the House is now sitting, so people are starting to drift away. So can I maybe just ask a couple of final questions of you all?

It strikes me in the answers that you have given that the whole point of auto-enrolment was to make it a no-brainer for the employee that they would end up saving for a pension. The original Turner proposal was that employers who did not have a pension scheme would have a default scheme that their employees would be auto-enrolled into, and that would be NEST or whatever the Government came up with. Now the waters have got muddied. The auto-enrolment for the individual is still relatively simple, but from what we heard from the employers’ organisations this morning they are now faced with quite a complex and a difficult decision, particularly for small employers, as to which scheme is going to give them and their employees the best chance. On top of that, NEST now has restrictions that were not envisaged in the original Turner proposals as well. So has the ideal been diluted to such an extent that the ease with which employers will be able to auto-enrol people has been lost and we are back to square one and it is all going to be too difficult for them and they are all just going to put their hands up in horror and say, "We cannot do this because it is too complex"? I suppose that is a question to the PPI.

Niki Cleal: I will start off, but then I might ask Chris to add something. I think we have to go back to the original policy intention here. The policy intention was to try to get particularly low to median earners into pension saving for the first time. There was a perceived market failure that the existing pension market was not necessarily very good at providing pensions to very small businesses, with five or six employees, and the kind of offerings they would have been given in the absence of all of this reform would have been quite costly, and they might not have had very much choice.

Q114 Chair: Right, I think we know that. But the point is, have all the things that have happened in order to allow the wider pensions industry to now bid for this market, which they were not interested in before but now seem to be, undermined whether NEST will survive or be the best option for people?

Niki Cleal: It is a hard question to answer. Personally, I think employers having a multiple choice of pension provider, whether that be NEST as a plain vanilla, low-cost option or-

Q115 Chair: That is good, right. Sorry, I am interrupting because I am conscious of the time. So if that is good there is a choice, should therefore all the restrictions on NEST that do not apply to all the others in the marketplace be lifted?

Niki Cleal: I think there is an important point here. The contribution cap on NEST will not bite for most low to median earners. Most low to median earners would not be in a position to be contributing £4,300 per annum.

Q116 Chair: Yes, but it might make the difference as to whether an employer chooses NEST, because if they already have higher paid people in a pension fund, they are going to avoid NEST and go with their existing provider because NEST cannot give that full range.

Niki Cleal: Yes, but I think we have to go back to the original intention: that NEST was designed to meet a market failure and a particular target market.

Q117 Chair: Yes, I don’t know if that market failure has quite been solved, but certainly from the interest the industry is now showing in this group it seems <?oasys [pc10p0] ?>that market failure has been solved. But my point is NEST is now hamstrung in that open market, and therefore hasn’t NEST been undermined by being hamstrung, because they now have a much more difficult job to do because the market is open than they would have had had they been the default provider or, indeed, had they not had these restrictions placed on them?

Chris Curry: I am not sure, and it will probably take a while to find out how much it has been hamstrung, because despite what we have been talking about in this session and the previous session I think we will be likely to find that at least a majority of eligible people will still be auto-enrolled and will not opt-out. So there will be a big increase in the number of people saving for their retirement. I think we will still find that the majority of employers use NEST. That is probably the least or the minimum required outcome for something like this to be successful, because the aim of NEST is to serve the market that cannot be served by providers. If, as a result of NEST being introduced and auto-enrolment coming in, providers are starting to serve the rest of the market in a better way, then that is not necessarily a bad outcome either.

Although there are lots of things around the edges that lead to lots of discussion, the general intention of increasing the number of people saving for their retirement and having somewhere a low-cost, decent default option, which people will be able to use-and which I still think the vast majority of small and medium employers will use, because it is the obvious easy alternative to use-is going to mean that there will be something. That does not mean it cannot be improved when we get to review in 2017, but this is almost-and this is the problem with pensions-a transition, even if it is a 10-year transition. But in order to get somewhere stable in 10 years’ time, where there is a well-developed market that serves every part of the employment population, this is probably something we need to go through.

Q118 Chair: Can I just move on to governance? Sorry, I am very conscious of the time. Hopefully, there should not be any governance issues with regard to NEST because of the constraints and the regulations that exist, which do not exist for other providers. Is there a potential problem there for mis-selling from the other providers, simply because they are not regulated in the same way as NEST will be?

Chris Curry: In any market there is always potential, but I think again this is linked also to The Pensions Regulator’s role and the work they have been doing recently in defined contribution schemes and improving the governance structures within existing schemes. If that is successful, it should feed through into the schemes.

Q119 Chair: You are right-these are questions for the regulator. Sorry, I interrupted you, but I will let you have the last word.

Marta Phillips: I was just going back to the point about the boundaries between NEST, and I would echo what Chris has said. My view is we need to go forward with what we have and then, when we come to the review point, the restrictions probably need to be re-examined, because if the rest of the pensions market is encroaching into NEST property, then NEST should have the freedom to encroach into their property.

Alison-Jane Bailey: May I just add I am not sure what the relevance is anymore of the contribution cap on NEST. It was originally proposed by a Life Office that I was working for, as there is a requirement in the Pensions Act that the Personal Accounts Development Authority, which developed NEST, had to be guided by a principle when carrying out its functions that any adverse effects on qualifying schemes should be minimised. The cap was suggested at that time at £3,600 a year, because that was the cap on contributions that could be paid to a stakeholder pension scheme without a member having any earnings at all. I am not sure what the relevance is of that cap still being in place.

Chair: That is a point well made, and thank you very much. Thank you very much for coming along this morning. We never ever have enough time. I think it is the nature of these things that we expand on the time and beyond. So apologies from some of the Committee but they have questions, so they had to be in the Chamber. But thank you very much.