Work & Pensions Committee - Minutes of EvidenceHC1494

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Oral Evidence

Taken before the Work and Pensions Committee

on Wednesday 25 January 2012

Members present:

Dame Anne Begg, in the Chair

Debbie Abrahams

Harriett Baldwin

Andrew Bingham

Karen Bradley

Sheila Gilmore

Glenda Jackson

Brandon Lewis

Stephen Lloyd

Teresa Pearce

________________

Examination of Witnesses

Witnesses: Steve Webb MP, Minister for Pensions, and Jos Joures, Head of Workplace Pension Reform, Department for Work and Pensions, gave evidence.

Q365 Chair: Thank you for coming along this morning, Minister. We are very much looking forward to your evidence. Before we get into the more detailed questions, a written ministerial statement was laid before the House at 9.30 this morning. As the time is just past that, can you explain what it says, and what it means in terms of the delay to the implementation of auto-enrolment?

Steve Webb: Yes. We would have liked to have given you a copy of the statement last night, but we were told that that would not have been proper, because it should first be laid before the House. Apologies for the short notice. As you will recall, before Christmas we indicated that we had looked again at the process of staging the dates on which different employers of different size have an auto-enrolment duty. We had taken the view that, because of the continued concerns of the smallest firms in the land about the impact of auto-enrolment, we would give them more time to prepare, and, specifically, that no firm that employed fewer than 50 people would have its auto-enrolment staging date this side of the end of the Parliament in May 2015.

We have today published our revised schedule. We propose that no change at all be made until around February 2014, so for anybody who thought that their staging date would be any time between now and 2014, nothing has changed. We have taken the rest of the firms down to 50 and spread them out, up to the point at the end of the Parliament. There is then a detailed process that will go beyond that and into the next Parliament. It is worth saying-I am sure that the Committee knows this-that the process of roll-out was always going to be into the next Parliament. It was always a five-year process, so the smallest firms will come in after the end of the Parliament. The other crucial point is that the point at which the 2% and 3% contributions come in has also gone back by about a year.

Q366 Chair: Before we knew the exact timetable, Adrian Boulding of Legal & General said that delays to auto-enrolment would mean £5 billion in pension contributions lost. He estimated that about 4 million employees would have to wait at least another year. Do you recognise those figures? Are they the kind of figures we are talking about as a result of the new timetable?

Steve Webb: That is an overstatement.1 Clearly, if you put everybody back by 1%-from 1% to 2% and 2% to 3%-by a year, you are talking several billion pounds, but we think it is significantly less than £5 billion. We want people to know where we are going as quickly as possible, which is why we published this today, but the way in which these things work, as I have discovered over the past 18 months, is that we have to go through a tortuous process of impact assessments and consultation. We publish this, and we now prepare an impact assessment, which has to be ratified by the Regulatory Policy Committee. We then publish a consultation document, alongside an impact assessment. We then have to have a consultation period, at the end of which it will all be finalised, but because we want people to know where they are going, we published this today. All the detailed figures about the impact on contributions and so on will be in the impact assessment, which will be published probably around March.

Q367 Chair: Rather than waiting for the impact assessment, let me ask you this: do you think that making small employers wait an extra year before they go into auto-enrolment will make very much difference to them?

Steve Webb: I think that it will help in two ways. We will talk, no doubt, about awareness later, but clearly awareness about auto-enrolment is very high among the biggest firms, which will be able to auto-enrol in the next year or two. It is quite a big job. Although the minority of workers work for small firms, the majority of firms are small firms, so it is a big job to get the messages out. A bit more time to do that will be a good thing. Inevitably, it will give us time to refine the process of auto-enrolment. If things are not working well, and if we learn lessons as we go-if we learn things about opt-out and so on-we will be able to apply those lessons to the smaller firms, and NEST and other providers will get more experienced at servicing medium-sized firms before we go on to the small ones, so I can see benefits. Obviously, we hope that by that point the economy will be in a much stronger shape for small firms as well.

Q368 Chair: I am glad you mentioned the economy, because one of the reasons that you gave for the delay was that the economy was not performing well. Since then, the Office for Budgetary Responsibility (OBR) has revised its projections downwards. We always hope that the economy will recover, but still it does not. I suppose my question is: is this a moving target? Will you keep delaying if the economy does not pick up?

Steve Webb: No. This is it. This is the plan; this is the programme; this is what will happen. It is worth stressing just how gradual it is: even once someone is staged, they are phased. They are in, but the minimum contribution is 1%-that is tax-relieved for the employee and the employer-and even by the end of it, it is only 3%. By the end of the roll-out, six years hence, we will have got to 3%, which is tax-relieved. It is worth saying that, even when they are in, it is a very gradual process. Clearly, any change to the roll-out schedule is not ideal, and the last thing we want to do is to change it again, so this is it.

Q369 Glenda Jackson: You said that one of the reasons for the delay was your concern that smaller firms would not be up to speed as far as information is concerned. This is something which we in the Committee have been pursuing. Are you confident that the other end of this equation-namely, the Department’s responsibility to get the information out there-is going to keep pace with this, or are you simply going to wait and then start informing a year before?

Steve Webb: No. There are two types of communication: one is the general publicity, and the second is the employer-specific. I have noticed from the transcripts that you want to discuss whether a year ahead is enough, and perhaps I will come back to that specific point in a minute. The general publicity to make employers aware has already started. I have brought along one of this week’s newspapers-

Q370 Chair: Maybe we can hold off on that, because we have questions about communications, and the communications strategy. Glenda’s question is specifically on whether everything else slows down, or whether you keep the pace of implementation going, and this just gives you more time to get your messages out.

Steve Webb: No, we do not slow down at all. As I say, until February 2014 nothing changes-the roll-out schedule is the same-so right now, this week, we are communicating. In terms of notifying employers ahead, there is a balance to be struck. We have been talking to the very biggest firms 18 months ahead, just because of the scale of what they are doing, but the norm will be 12 months. There is a balance here: if you are a busy employer and you get a letter saying, "In two years’ time, you will have this duty", it goes in the pending tray and you will not pay any attention to it at all. We need a wake-up process and then, three months out, a bigger wake-up process, but if you go too far ahead, it will just get binned. That is the balance we are trying to strike.

Chair: We will come back to that. In the meantime, we are going on to the thorny issue of charges, and Brandon has some questions.

Q371 Brandon Lewis: Minister, the National Association of Pension Funds (NAPF), as I know you are aware, is working on a code of practice on the transparency of fees; we had a Westminster Hall debate on that. What, at the moment, would you like to see coming out of that code of practice? Are there any particular issues that you would like to see it deal with or cover?

Steve Webb: First, I welcome the initiative, and the fact that it is industry-led. Practice in the industry has been variable, at best, on charges and transparency. I could have brought-as I am sure the Committee could-reams of examples of opaque, hidden charges and all the rest of it. Transparency and plain English is the key. The NAPF has perhaps talked about pounds and pence, rather than about percentage points, basis points and so on-transparent, plain English and consistent information about charges. I am in no doubt that charges are crucial and that even apparently small differences in charges can have a huge impact on final pensions, so it is a very welcome initiative. We are supporting it, but trying not to meddle too much, because it is crucial to us that the industry actually owns the product and then follows it.

Q372 Brandon Lewis: Is that why-or is there another reason?-the Government, in setting out the auto-enrolment process, have not taken the line, for example with stakeholder pensions, of saying, "This is what the charge structure will be and how it will work, and that is it," in order to give that certainty and protection?

Steve Webb: Just to reiterate, I do not belittle the issue of charges at all. They are very important. We do not think, in the context of auto-enrolment, that we have a problem on charges in the short term, starting with the biggest firms. There are two reasons for that. The first is simply scale. In 2012, just 10 employers will be auto-enrolling. If those 10 cannot get good value for money and low charges, we might as well all give up. Everybody wants that business. It is on a huge scale. We are already seeing NEST competing for it. New providers are coming in; people are trying to undercut NEST. That is what we wanted-competition, people getting in-and NEST is clearly driving charges down; there is no doubt about that.

The issue for auto-enrolment will clearly be when we get further down, in years to come, particularly as regards the default funds. The thing about auto-enrolment is it could be passive. The firm chooses the scheme, but the member has no choice in that. On the whole, we expect that the member will not make an active investment choice, so they will end up in the default fund. It is clearly important that those default funds are good value for money, so we are looking very closely at what is happening in the market and making sure that those default funds are good value. We already have powers to cap. We observed that those powers to cap charges were incomplete. We did not have the power to cap charges for deferred members, so we took that power in the 2011 Act.

I can reassure the Committee that we do take the issue seriously, and we have given ourselves the power to act if we think we need to, but in the short term we do not think that there is an issue about charges in auto-enrolment. Certainly, over the next year or so, the biggest firms are actually getting really good deals compared with just a few years ago, in terms of charges.

Q373 Brandon Lewis: Expanding on that a little, and going slightly beyond the remit of auto-enrolment, we spoke about pounds and pence as opposed to percentages, and about different breakdowns being easy to understand; has the Department done any work on whether that is achievable and easy for the industry to do?

Steve Webb: Not specifically. We have done general survey work on levels of charges in different sorts of schemes-more is being undertaken by the Department at the moment-but not specifically on whether pounds and pence are easier to understand.

Q374 Brandon Lewis: My last question is about the code of practice that the NAPF is trying to put together. It seems to be universally agreed that that is an important line to go down, and that we should see something come out of that. If the industry is not able to come together and accept and acknowledge something, and put something in action that achieves the desired result of transparency in fees, is there a point or a time scale at which the Department will say, "Look, we now need to act. This is the code of practice that we have brokered"?

Steve Webb: The industry should be in no doubt that if it does not get its act together, we will cap. On capping, it is tempting to think, "Why don’t you just do it, anyway?" That was my first instinct: "Why don’t we just do it? What could possibly be wrong with just capping charges?". It is worth flagging up a couple of the issues that would be raised. One is definition. Stakeholder pensions, which you mentioned, have capped annual management charges, but we know that there are dozens and dozens of different sorts of charges, and it could be a bit like a tyre: you squeeze this bit and think you have got it capped, and all the charges rush off over there. That is our first concern. The second is diversity. Plain vanilla default funds are fine, but if somebody wants tutti frutti or knickerbocker glory or whatever, they should be able to choose that, if they know what they are doing and it is an informed choice. Perhaps the charges are higher, but they feel that they are getting something for that. We would need to be clear about what we were capping and how we defined it. That would be the challenge.

Q375 Brandon Lewis: That makes sense; I agree with that. My point is that rather than looking at capping, is there a point at which the Department would look at enforcing something around transparency if no agreement came forward from the NAPF? Obviously, the transparency has that potential effect without having to cap.

Steve Webb: That would be another approach; it is not the principal one. If the industry comes up with a set of guidelines on transparency, and people adopt them and find that it is still not working, it may be that transparency is not enough. That is the issue for me. Transparency gets you so far, but most people will not bother; most people will not read up and so on. The big question in auto-enrolment for us is defaults-people who make no active choices-which will be most people, and protecting them.

Q376 Brandon Lewis: I appreciate that. Again, this goes slightly beyond auto-enrolment, but is this purely focused on auto-enrolment? Could transparency in auto-enrolment have a positive impact across the pension industry? On the issue around charges, auto-enrolment is the easy one; it is everything else that potentially needs clarity and transparency. Is there a view that we can use the opportunity of auto-enrolment to have that impact across the pension arena?

Steve Webb: Absolutely. I will ask my colleague, Jos Joures, who is the head of workplace pension reform, to chip in briefly. Clearly, today our focus is on auto-enrolment, but you are absolutely right that if we can get transparency on charges in investment management and in fund management, it will be beneficial across the piece.

Jos Joures: A lot of it depends on what you want to achieve by transparency. If you think about what individuals want to know, it is some pretty simple information. Transparency around some of the complexity of charging-how many transactions a fund manager makes, how much stamp duty is paid on them, whether they are effective in the return they achieve-is meaningless information for an individual.

There is an interesting challenge in the transparency argument. When are you revealing information that will lead to pensions experts and the industry in general understanding what is going on, improved practice, increased information and therefore better competition, better practice and so on? Which elements of transparency are you targeting at, say, an employer who is making a scheme choice? That would be a different set of information. Ultimately, what does the individual need to understand about their pension? What the individual needs to understand is quite simple. Are they in the right asset base for their kind of saving, their point in life and when they want to retire? Are they getting a decent rate of return, given the set of assets that they are in? That is difficult to compare, because you can get a better return but at higher risk, or inappropriate assets. Is the amount that they are paying for pension administration reasonable?

The transparency agenda involves quite complex information. It can improve competition in the market, but we need to think about what information an employer needs to make a choice, and what information can help an individual to feel confident in their pension. That is a complex problem.

Q377 Stephen Lloyd: I appreciate that charges are a bit like a length of string, so I understand, Minister, how difficult it is for you to be specific, but let me give you an illustration. We already know that NEST is driving charges down. Let us say that a pension provider charges double what NEST would be charging. Is that a point at which you would come in with caps?

Steve Webb: You have to remember that in the auto-enrolment context, we are talking about a market where the employer is making the scheme choice. Clearly, it must be transparent to employers that they are being offered a scheme that is coming in at double the charge, for example. Unless there is clear value for money in that charge, we think employers, on the whole, will go for the lower-cost schemes-and there are plenty out there that are substantially less than that. It is not obvious to us that those charge levels will be sustainable in what is becoming a competitive market.

We were worried that no one would be interested, particularly in the bottom end of the market. NEST came along and now, suddenly, we have the People’s Pension and NOW: Pensions, and we can see the FSB2 and all the big insurers bringing in theirs. Suddenly, we are finding that it is a very competitive market. In theory, you could have outline charges, and a firm might accidently choose a high charge and not know about it, but in reality, with the competition, particularly for the biggest and middle firms, that will not really be happening.

Q378 Stephen Lloyd: You are probably right, but pension fees are so complex, and the pensions industry, in its own way, has been so adept at charging in very obscure ways, that you almost need to be a mathematician or a Pensions Minister to understand it. I do not think that will change. I agree that NEST will drive the competition, and things will be more competitive, but if history is anything to go by, I do not think I am being too mean in anticipating that some pension providers will have a headline charge that is comparable to NEST, but underneath that will be the more obscure hidden charges. Without having the DWP or someone keeping an eye on that, your average employer-certainly those in SMEs,3 because they are so focused on running their businesses seven days a week-will not spot that. Can we be reassured, Minister, that the DWP will keep a constant searchlight on the charging process, including some of the more subtle administrative charges that could get under the wire?

Steve Webb: Absolutely. As I said, it is no good my saying, "We’ll cap if we need to," and then not watch what is going on. We absolutely have to watch. A 1% charge is not inherently evil-it depends what you are getting for it. What is inherently evil is covering up the charge; we need the transparency. Our sense for some considerable time is that, as is already clear from what is going on in the market, charges are not anywhere near that level. The dilemma for us in setting a cap would be precisely as you say: an AMC4 is one thing, but there are all these other charges. Let us say you have a cap that includes transaction charges, and a company is bumping up against a transaction charge cap, and there is some share it really ought to sell, but it can’t sell it because it would hit the transaction cap. You can see.

It seems a no-brainer-you just stop evil firms over-charging by capping-but you could have some counter-productive results. Ideally we want transparency and competition to deliver low charges, but we need to protect people if that is not what happens.

Q379 Stephen Lloyd: Because of the whole mass of responsibility of auto-enrolling, I am obviously seeking to get a commitment-and I think you are giving it, but I will be really clear-that the DWP will consider now as part of its remit to keep a close eye on charging in the pensions industry.

Steve Webb: Yes.

Q380 Stephen Lloyd: Good. Some pension providers charge more for deferred members than current contributors. In your judgment, is that justifiable? If not, do you plan to take action to stop the practice?

Steve Webb: Yes. The first thing we have done, as I mentioned, is bring deferred members into the scope of our capping powers. If we brought in a cap it could apply to deferred members. Clearly, there may be some additional costs from deferred members, but I think the sort of premiums charged for deferred members can sometimes be quite hard to justify.

One thing that would be the best solution to all of this in my view would be tackling the issue of deferred members. Why are there so many people with so many stray pension pots all over the place that they have forgotten about, that they can’t keep an eye on the charges of? That is where our pre-Christmas document on transfers and small pots comes in. If we were to follow one of the two radical suggestions in that document, you could have a situation where deferred members are not quite a thing of the past but more or less. For example, if the pot follows the person, every time you change job, the money goes with you, you are never a deferred member unless you stop working. Therefore, the issue largely goes away. Likewise if small pots particularly auto-transfer to a third party, which would not have deferred member charges.

Legislating on deferred member charges would be an option, but ideally I would rather have people knowing where their money is, knowing what the charges are. I think that would probably be a better outcome. If we can get the transfers problem sorted out, I think we may deal with deferred member charges.

Jos Joures: There is a difficulty, in that all charges are redistributional in some way. Some members will pay more under one charge regime than another. If you look at deferred members, quite often they will have a smaller pension pot than an active member, as an active member is still contributing and a deferred member has left the scheme. If they are being charged a very small annual management charge on a very small pot, they may not even be covering the administrative cost of being in that scheme. The other members will be subsidising, if you like, the residual deferred members. In that instance, you could see that levying a charge on a deferred member might be appropriate. The problem is that if schemes are motivated to have a punitive charge for deferred members, because they are often not welcome members of the scheme, that is a very different motivation and would lead to a different kind of argument about whether that was a legitimate charge.

Q381 Stephen Lloyd: Again, because of the changes in auto-enrolment and the DWP’s responsibility, you would clearly also be keeping an eye on those variables as well.

Jos Joures: Absolutely.

Q382 Debbie Abrahams: I just want to push you on your answer about the code around transparency of charges the industry is going to introduce. How will you judge that that is satisfactory before you intervene? What criteria would you use?

Steve Webb: Outcomes are the crucial thing. In other words, one thing transparency will do is drive down charges. If people have not been able to see hitherto what they are being charged and now can, we will see charges coming down. We know we are seeing charges coming down anyway because of competition, even before greater transparency. One thing we would expect to see is some of the higher charges for vanilla coming down. There will still be high charges and exotic products and all the rest of it, but for the bog-standard products we will see, I think, a fall and a convergence in charges. If people are able to sustain excessive charges for standard products, we will know that transparency is not working.

Chair: Glenda, you had a question, too.

Q383 Glenda Jackson: Yes, it is on the same line. How long are you going to give the industry to come up with this code of practice? When they gave evidence to us they were very clear; they don’t even speak the same language.

Steve Webb: Which is why it is a bold and welcome initiative that they are taking, as you say, because trying to convert all these different activities and languages into a single language is a big job. I am not going to say, "If it is not sorted by 30 March, we’ll be off." Clearly, auto-enrolment is a five-year process. We do not think that we have an issue with charges in the first few years, to be honest, given the scale of what is going on.

The big advantage of auto-enrolment is that the employer seeks out the pension provider. In the past with pensions, a lot of the cost has been sales-sales people have had to go out to sell pensions to individual people-but with auto-enrolment, employers, who may have hundreds, thousands or tens of thousands of employees, are seeking out providers, and that makes a massive difference to the cost structure. We think that costs will be substantially lower than they have been in the past for some considerable time, so I am not going to set an artificial deadline, but clearly, if we are not seeing progress during the roll out of auto-enrolment, we will act further.

Q384 Glenda Jackson: I am sorry; I do not quite understand that. You mean that the pension industry can sit back and wait for the employers to come to them, and that is competition?

Steve Webb: No. What I am saying is that a huge amount of the cost of pensions in the past has been sales-a sales force had to go to an individual member of the public to sell them a pension, and that is incredibly expensive. If you are a firm that employs 50,000 people, with a legal duty to have a pension, you ring up a pension provider, because you have this legal duty, and it thinks Christmas has come, because it does not need to sell to those individual 50,000 people-it has one firm coming and choosing it as a provider. That has a massive impact on cost, so this is about consumer benefit. We are on the same side here-of consumers, and they will get massive benefit from auto-enrolment. Costs are coming down and will come down.

Q385 Glenda Jackson: That does not sound like a consumer benefit to me; it sounds as though, in a funny kind of way, the pension industry is being presented as offering some kind of treat to employers, yet it is the one taking the money.

Steve Webb: If it was hogging the profit that it got from that, I would agree with you. People say the stakeholder pension, which capped at 1% and 1.5%, brought charges down to that level and people thought that that was a great triumph. NEST is coming in at about 0.5% and we are getting private companies trying to undercut NEST, so that profit that I described to you is being passed on through lower charges, as we would expect.

Q386 Glenda Jackson: So why has it taken them so long to come up with a code of conduct, if it is all sailing into their offices and they do not have to do a thing?

Steve Webb: That is auto-enrolment, which obviously has not even started yet, but I welcome the fact that they are taking the initiative. It is long overdue; I agree with you.5

Q387 Glenda Jackson: You have also been using the example of large employers for this competitive search, but my concern is with those massive numbers of very small employers, who are also going to be delayed in getting into this. Do you have the powers to ensure that when it eventually meets the small employers, they will be in the same system as the big ones? I am trying to work out whether you have the power to ensure that the pension industry is as competitively keen-even though we do not agree on the definition of competition-in providing services to the small employers, as it apparently is at the moment for the big ones.

Steve Webb: NEST is the crucial part of my answer to your question. In other words, the letter to the small firm, which we are all concerned about, specifically flags NEST. We know that NEST will be good value for money and, frankly, if they are busy making widgets and they would really rather not be doing this thing, they can just go to NEST and they have good value for money. NEST is there for those very people and we have guaranteed that there is a value-for-money provider there for them. If they want to go elsewhere, they are free to do that, and we have seen plenty of relatively low-cost providers entering the market, so there is competition as well. We have put in place infrastructure to help those very firms.

Q388 Glenda Jackson: Are you allowed to do that? Are the Government actually allowed to advocate NEST?

Steve Webb: We have to be careful because it is a competitive market, so the wording of the regulator’s letter has been checked by one or two lawyers. We do not say, "Choose NEST", but we do say, "There is this firm called NEST, and they have a public service duty to take your business, if you want to go to them, and that is unique to NEST." That is the balance we strike.

Q389 Chair: We are about to come on to questions about the operation of NEST, but before we leave the charging, do you think that there are enough incentives for employers to look for the lowest-charging fund on behalf of their employees? If the big boys are not going to have to do all the selling, advertising and all of that, will they be able to offer some nice sweeteners to employers to encourage them to auto-enrol into their pension funds, which may not necessarily be the lowest-charging fund for the employees?

Steve Webb: There is no doubt that there is a lot of competition at the moment for the huge employers, as you would expect, and I suspect there are terms being offered to the huge employers that will not be offered to the small employers. That is clearly true, and it would be a worry if NEST was not there. Because we have guaranteed a good-value provider to everybody, if the big insurance firms are not interested in the small-firm business, which some of them might not be, that is why we have created NEST. That gives us our security.

Q390 Chair: On the cap, you mentioned the stakeholder pension. Is there an issue around the fact that if you introduce a cap, it might become the default and it could be higher than what the competition is going to do?

Steve Webb: That would be a worry if NEST was not there. If you simply said, "You cannot charge more than-to take a round number-1%" there would be a risk that everyone would say, "Oh, well, that’s the norm, so we will charge 1%." Because we have made sure that there is a provider in the market charging the equivalent of 0.5%, if you capped above that and anybody headed for the cap, there would be somebody undercutting it in the market.

Chair: I said that we would come on to questions on the operation of NEST, and I will hand that over to Debbie.

Q391 Debbie Abrahams: Thank you. Could you comment on the review? We know that it is due to take place in 2017, but in view of the delays in the introduction of auto-enrolment, is there likely to be any delay in this review as well?

Steve Webb: We do not anticipate so, no. That will be five years into the roll-out. The roll-out will start on time in October 2012, and it is worth remembering that some firms could go up to three months early. It would not surprise me, when the starting gun is fired at the 100 metres in the London Olympics, if the starting gun on auto-enrolment had also been fired. There will be somebody in, and that will be my focus that day. We have got five years, and we think by then it will be pretty clear what has happened to the market, what is happening to opt-out rates, and so on. You could put it back another year but it is in primary legislation as 2017, so that would be an obvious point to review the whole process. The statutory requirement to review is just on the NEST constraints, which I am sure you will want to come on to, but the Secretary of State can add other aspects to it. I am sure that we will want to look at the whole process of roll-out, and I think five years through would be good enough.

Q392 Debbie Abrahams: Thinking about restrictions that have been placed on NEST, whom do you think these restrictions are intended to benefit?

Steve Webb: The constraints on NEST, as originally brought in, have focused NEST’s attention on the key people whom we are concerned about. Because NEST cannot take the highest earners-because there is a transfer ban-it has had to think about the people whom the rest of the industry has not been that interested in. There is clear evidence of that. NEST has led the way on transparency of language, because you need to talk to people who do not talk pensions. The beneficiaries of those constraints have been that NEST has had to focus in a way others have not, and we have all benefited from that.

The other issue is that NEST’s being in there, even in a constrained way, has clearly had a beneficial effect on the market and on charges. We can debate whether those constraints are appropriate now, but certainly historically NEST has had a beneficial effect even with those constraints in place. Charges have clearly come down, and competition has been brought in.

Q393 Debbie Abrahams: Based on the fact that NEST operates on economies of scale, would it not be better if it was not restricted by these restrictions?

Steve Webb: All our modelling with NEST volumes has been based on the constrained version. We are clear that NEST is viable with the constraints that it currently has. All the numbers, all the predictions, all the millions of people going into NEST and so on are based on that constrained assumption. Clearly, if you take the constraints off, NEST will do better, it will get more business and we will get the loan paid back quicker. That is clearly true, but we do not think that the success of NEST depends on taking the constraints off.

Q394 Teresa Pearce: Just before I go on to my questions, I would like to say how pleased I am, when driving my car to and from the station, to hear adverts on LBC for auto-enrolment. I was so surprised to hear it-it was really good. But it serves me right for listening to LBC. David Pitt-Watson, when he came to see us, told us that removing the cap on contributions could save the Government £100 million in state aid. Do you agree with that figure?

Steve Webb: I think if I used that figure, my officials would describe it as a courageous level of precision. In other words, clearly, there is a benefit to the Exchequer; you lift the constraints on NEST and presumably it gets more contributions and more business, so it can borrow less and repay the loan quicker. So there is a benefit.

On the other hand, an awful lot of other things have changed since we first did the NEST numbers. The economy is in a different place. The roll-out schedule is different. There is a heck of a lot going on and interacting, and I do not have David’s confidence in that level of precision. It would clearly be a worthwhile benefit to the Exchequer and to NEST, but that number is, as I say, more precise than I would be confident in giving.

Q395 Teresa Pearce: On the state aid issue, we have heard other evidence-often from the same person-about whether some of the restrictions are really essential for state aid or whether that is a misapprehension or an assumption. Much of what has been said about state aid seems to conflict with what NEST is, because state aid is about European competition and NEST is purely UK. What do you think about that?

Steve Webb: The guts of the state aid case were twofold. We have a pension provider in the UK that will be competing with other market providers, and those market providers, as we know, include one that has come from Denmark to compete here, so the EU angle is that although it is a domestic market for British employees mainly, the firms that compete in it could be international. The argument is whether the Government should be subsidising one firm to compete against others in the market.

The case for state aid is overwhelmingly twofold. There is the public service duty, which is that NEST has to take everybody, including loss-making business. Secondly, the charging levels that NEST has to have are low, and those of other competitors do not have to be. A subsidy is warranted for the public good, because it costs money to set up NEST and do all those things such as charging a low charge and taking on unprofitable business.

The constraints on NEST are part of the narrative, but they are not essential to the state aid story. The state aid story stands, because of the public service duty and the duty to have a modest cost. The duties are reinforced, if you like, by the constraints, because they are evidence that we are focusing on the bottom end of the market and so on, but they were not integral.

I will ask Jos to follow that up, because he has been very involved in the state aid case, and I know that it is something the Committee is particularly interested in.

Jos Joures: There are basically three tests to pass. Do not quote me to a lawyer on this, but I will paraphrase what state aid is all about. The first test is that there has to be a public policy reason for an intervention in a competitive market and that is typically identified with a market failure. In the pensions market, we know that there is a range of people, such as low to moderate earners, people working for small employers and people who move jobs a lot, who cannot get a suitable low-cost pension product, so for the public policy ambition-tick, yes. There is a reason for an intervention.

The second test is whether the intervention that you make is sufficiently focused on solving that market failure. Is your intervention focused on resolving the problems that the market cannot resolve?

The third test is, as the Minister says, the cost to a public provider or public-sponsored provider in taking up the business that a commercial provider would not take at a particular cost.

The constraints are important in steps 2 and 3. In step 2, you need to say that we are focusing NEST on a target market, and the constraints do that by stopping it going for higher earners, who do not currently have a problem, and stopping it taking over existing asset bases. They are pertinent in the third test in that they affect NEST’s ability to create scale and therefore the amount of subsidy that it needs to achieve scale and then become self-financing. The argument around whether the removal of the constraints would be consistent with state aid would be to ask whether the existence of the constraints means that the market failure is not being adequately addressed by our intervention. If the constraints mean that there are people out there who are still not getting the pensions that they need to save for their retirement, or if employers do not have the right choice in getting those people those pensions, then there would be a case for re-looking at those constraints. Does that make sense?

Q396 Teresa Pearce: It does make sense. Given that the restrictions on NEST have made it think outside the box and that that has had an effect on the rest of the industry, do you believe that those restrictions are still all necessary?

Steve Webb: We are starting to hear-your evidence sessions have picked up some of this-some sense from stakeholders that the constraints are perhaps not working in the way that they should. You will occasionally hear an anecdotal story and a firm will say, "I was thinking of using NEST plus a commercial provider,"-NEST for the lower earners and a commercial provider for the higher earners-"and I have decided that life would be simpler if I just had one provider. That cannot be NEST, so I am going with the other provider." I would describe that as anecdotal at this stage.

As I said a moment ago, there are only about 10 firms coming in during the whole year, so we know who they are and we know pretty much what most of them are doing. We have not got the volume of evidence yet, but we are just starting to pick up nuggets of questions. NEST is clearly getting some contracts with big firms, but some firms are saying, "Well, we are not sure, because of the constraints." When the policy was devised-I think that it was right when it was devised-the assumption was that there would not be much competition at the bottom end of the market. There has been more competition than most people anticipated. We have made no firm plans and I do not think that an unequivocal case has been made either way on this issue. We welcome the work that the Committee has been doing on this and we look forward to hearing what you have to say, based on the evidence that you have taken on this specific issue.

Q397 Teresa Pearce: In 2017, when you do your review, given that the NEST loan will possibly be repaid by then, could you lift the restrictions if that was the case?

Steve Webb: We do not think that the loan will be repaid by then, sadly. In fact, we never did. The NEST loan will be with us for a while. The Making automatic enrolment work review that we commissioned, which was published in 2010, argued the case that we should announce now that they were going in 2017. We took the view then that we were not going to pre-empt what would happen in 2017, but the evidence that you have heard suggests that there is quite a strong consensus around that position, but we have not taken a final decision on that.

Q398 Teresa Pearce: Also, one of the things that you have spoken about quite a lot is trying to consolidate those stranded small pension pots. How does the ban on transfers into NEST impact on that? Surely that will hinder you in what you intend to do.

Steve Webb: Yes, we floated in our Green Paper before Christmas a third-party aggregator for small pots. It would not have to be NEST, though we float NEST as one of the options. Again, that would be a material consideration in terms of the constraints. If the view based on the Green Paper was that a third-party aggregator was the best place to do it and to NEST was the right place to do it, clearly you would have to think about the implications of that for the constraints. The consultation on this closes in March, so we are still at an early stage in that thinking.

Q399 Teresa Pearce: Finally, given that in Professional Pensions magazine it says: "In the House of Commons on Monday, the Minister said he would discuss the issue in more detail"-this is about NEST-"with the Department for Work and Pensions select committee on Wednesday," is there anything else that you would like to tell us?

Chair: Now, there’s an invitation.

Steve Webb: It is indeed. It’s funny, I think I used the word "reflecting" on Monday and it has turned out to be a rather more vigorous verb than I realised. The Committee can be assured that I continue to reflect. No firm decisions have been made on this, but we certainly eagerly anticipate your conclusions and recommendations.

Q400 Karen Bradley: I want to take you back to the point about NEST and its suitability for some employers. We have had anecdotal evidence as a Committee that some employers are looking at taking their existing pension provider and bolting NEST on at the back. The front end for the employer would be the existing pension provider, but NEST would be doing the lower end pensions. One of the points made was that, for employers, the biggest technological problem is identifying the people who need to come in and when they come in, and ensuring that the employer meets the regulations and does not fall foul of anything. NEST, of course, does not offer that as a technology solution. Other pension providers do. I wonder whether there is any consideration of encouraging NEST to do that so that NEST could offer a one-stop shop for employers.

Steve Webb: To some extent that will be a commercial decision for NEST, but I know that they are working with providers of payroll systems-I think they are called platforms in the jargon. They know that there will be large numbers of firms dealing with NEST and that each of those firms will need the infrastructure in place, so they are making sure that the NEST infrastructure is compatible with the main software programmes and the main payroll providers. I sense that it may have been a commercial decision for them not to go too far down that avenue.

Q401 Karen Bradley: On the payroll providers-I was going to come to this point later, but as you have raised it-we have also been told that at the moment they do not seem to be telling the market what technology they are going to put into their systems to enable employers to be able to deal with this. An employer running a payroll needs to know that they are going to meet their obligations on compliance as well as getting the deductions right at the right time. Again, have you anything to add to the Committee about what can be done to encourage payroll providers on that?

Steve Webb: Yes. We are in an accelerating phase. People have said that they do not know what the staging date is, that they have not started thinking about it, and all the rest of it. We are really in a ramp-up phase now. We have been finalising a lot of our regulations, consulting inevitably, and finalising that, and a lot of the providers have said, "We need to know this fine level of detail." We are now finalising all that stuff, so I think you will see a great deal of acceleration in that area.

Jos Joures: It is one of the issues we have, as a programme delivery issue, about both the readiness of the software industry and the knowledge among employers that the software industry will be ready. I think when The Pensions Regulator gave evidence to you they talked about that. They are very proactively engaging with the software companies, both to make sure that they have the software that is required to support employers, and to encourage them to start talking to their clients and saying, "We are developing this and we are going to have it available."

Q402 Glenda Jackson: I want to go back to the possible lifting of restrictions. The economy at some point is going to come up, so will restrictions be lifted then, as far as NEST is concerned? I am concerned with the pension holders. Their earnings will go up and they may want to put more into a pension pot. Will the restrictions be lifted then? Do Government have the power to say, "Now that the average salary is not £7,700 or whatever for first entry and it is this much more, okay, you can take them in, and this is the kind percentage of payments that we want"? At the moment, we are still in a sense presenting what is happening based on the big employers. As I have said, my concern is with the small employers and their employees. At the moment, it is almost as though they will be given a tiny pension to get them into the mood. Will there be some way that NEST can match a growing economy?

Steve Webb: It is worth stressing two things. First, the small firms, the under-50s, will not even be in until three and a bit years hence, so it will not make a blind bit of difference to them what we do with the NEST constraints in the next three years. The very smallest firms are years away. It is also worth stressing that these constraints are not thruppence-ha’penny. If people are putting £4,000 a year, or getting £4,000 a year put into their pension, that is such a transformation compared with where we are now. In a way, if the lower-paid are bumping up against the NEST thresholds, I will have a party. We are such a long way away from that for most of the people who are most under-saving, but I absolutely take your point.

Q403 Glenda Jackson: That day may come.

Steve Webb: Absolutely.

Q404 Glenda Jackson: What I am trying to find out is whether it is possible within the existing legislation structures for the constraints on NEST to be lifted.

Steve Webb: We can change them without primary legislation.

Glenda Jackson: Well, there you go. That is the answer.

Q405 Chair: With the whole issue of market failure, we do not know whether it is going to be there in reality. It was there before, but lo and behold, in respect of NEST and enrolments, it certainly seems there is a lot of competition, but we will not know about the small firms until they start to be enrolled, and whether the existing providers will then say, "No, actually, we are not going to touch any firm of less than 30 employees, because it is not economically viable." It is 2016 when they come in. Would it not be sensible that if NEST is to be the fund of last resort that the restrictions are lifted before 2016 when they start to come in?

Steve Webb: Clearly, the NEST constraints will only bite on a limited number of those small firms anyway. Bear in mind that if you are in a basic minimum level of contributions, you can be earning £50,000 and still be within the threshold, and on the whole, if you are talking about a company that has never had a pension scheme at all, in most cases NEST will be able to provide for all their employees in general. It is important, first, to keep some perspective on the impact. These constraints do bite but they bite higher up than perhaps our discussion has indicated, but we have to do it based on evidence. If the evidence is that this constraint is hampering the ability of NEST to deliver what it is there for, that will be the crucial issue for us.

Q406 Chair: Of course, if NEST does not work, it costs the Government money.

Steve Webb: Yes. That point has been made to us.

Q407 Sheila Gilmore: On that point, if, because of the restrictions, some of the larger and medium-sized employers in the next few years choose to go with a company that can take the full range, is there a risk to the viability of NEST? That could be a problem, just at the point when smaller employers need it.

Steve Webb: All our modelling on the viability of NEST, and it covers a pretty broad range of scenarios, is based on the constrained version of the world. We have done our forecasts based on the assumption that NEST is constrained and therefore would not be used by certain sets of firms, so that is already built in. In a way, lifting the constraints gives you better outcomes than we have modelled; it is not that having the constraints gives you worse outcomes, because that is what we have assumed is the constrained world.

Chair: We are going to move on to the important people in this whole equation-the employers.

Q408 Andrew Bingham: On the admin costs on businesses, particularly small businesses, the Federation of Small Businesses (FSB) claims that the Department has vastly underestimated the costs. Are you sure that the estimates that the Department has done are correct and robust, and what methods did it use?

Steve Webb: Clearly, this is a significant burden. When we produced the Making automatic enrolment work report in 2010, we made it quite clear that it was the smallest firms that have the biggest proportion of burden. We are not disputing that for a second. It was a judgment call as to whether you just excluded them altogether, because they would have the biggest costs and, potentially, the smallest benefit if there was only one person or whatever.

Having said that, we tend to find that people say, "Oh, the costs are much bigger." When we go back and say, "What costs are you talking about and what exactly is included?" we have actually had a lot of trouble getting very precise examples of things we have not included or things that we have underestimated. Our goal is not so much to make out that the costs are not very great, but to make it as cheap as possible. Again, that is where NEST is crucial. I know that you have visited NEST as a Committee. All the NEST interactions with firms-websites, literature and all the rest of it-have been extensively trialled with the smallest firms to make sure this is as painless a process as possible, so that we get those costs down.

I do not dispute that the proportionate cost is biggest on the smallest firms, but these cost estimates have been around for several years. They have, as you say, been challenged, but we have not seen robust evidence of higher figures.

Jos Joures: We went through a process. We started off with the initial impact assessment, with costs for employers, and they were criticised. We went through a process where we had a cross-Government working group brought together with BIS6 and all the people that look at employer costs from their perspective. We went through all the assumptions that we had made in our impact assessment, one by one, through cross-Government working groups with some groups of employers to comment on what we were doing and looking at the research that we had done. We have been through them pretty rigorously in the sense that we were aware of that challenge, and we revisited every assumption and brought other people in to make sure that what we were doing was reasonable.

Anecdotally, it is quite interesting. This is only an anecdotal observation, but some of the people who are in the early testing of NEST-some of the volunteer employers-are commenting on how it is much easier than they thought it would be to go through the process of putting a member in and working out their contributions. Sometimes, automatic enrolment sounds like a very scary process, because it is dealing with processes that a lot of employers have never used before and never had to engage with before, but if you get a pension provider that is set up to help an employer set up a pension scheme, it is not actually as difficult as people think.

Q409 Andrew Bingham: From what we have seen, it looks quite good. The Pensions Regulator has done a survey. Given what Teresa has said and I think Harriett has had a similar experience-I have heard ads for auto-enrolment on my local radio station-I am not sure that I agree with The Pensions Regulator’s (TPR) survey. It claims that only 17% of employers knew that they would be required to offer a pension and 10% knew that they had to contribute. Are you concerned by the survey results? Personally, I find that NEST is a presence in my constituency, so I am not sure that it is right. I am interested to know what you think.

Steve Webb: Sure. Again, as a percentage of employers, awareness may not be that great, but as a percentage of the people who are coming in early, it is overwhelming. If you are one of the 10 biggest firms coming in in 2012, they all know about choosing their providers and they have already been contacted. The 2013 people are already starting to get letters. The people who need to know now really do know about it in very high numbers and the publicity campaign is going to raise awareness, and I am delighted it has already reached you. It is coming soon to a bus shelter near you.

Q410 Chair: Can you hold up your newspaper advert?

Steve Webb: Yes. Can I do that now? The likeness to me of this slightly nerdy, techy chap putting tax relief on top is a bit worrying.

Clearly, we are not complacent about this, so there is a general level of awareness-raising for employers and then there is the targeted stuff. Obviously, TPR is dealing directly with the biggest firms that are coming in first, and that is hundreds of thousands of people.

Q411 Andrew Bingham: TPR is contacting firms about a year before. Do you think a year is enough? Most businesses tend to plan financially more than a year ahead. Do you think that is far enough in advance?

Steve Webb: It comes back to the conversation that we started earlier. Clearly, for the biggest firms the engagement started 18 months out. It is a huge job for the big supermarkets and so on. There is a 12-month and a three-month contact, and it is striking the balance between getting them interested in something that is just about on the horizon. At the risk of raising the issue of state pension age, it is a bit like when you contact people in their 40s about state pensions and they are not interested, but then they get to 60 and say, "You never told me about state pension age changes 15 years ago". We say, "We did, but you weren’t interested." It is trying to get the right level of notice. It is not a science, but 12 months plus the general publicity and awareness-raising and a further nudge in three months is about right.

Q412 Andrew Bingham: It would be interesting to know whether the publicity on the radio and in the bus shelters will spark interest in the firms that are not going in until three or four years hence, not the immediate ones.

I was going to ask you about the communications, but the effectiveness has been demonstrated. What sort of budget has it got? We know that it has started. Will it just keep going now all the way through?

Steve Webb: Yes. There are a series of phases this year. The target market is principally the employers on whom the duty will be placed. But we have also segmented the groups of individuals we are most interested in. We have the daunted and unprepared. I hate marketing speak, but we have segmented the population and we have the folk who are in their 40s, who are not very good with finances, who mainly deal with cash and pension is over there-that set of people. We then have the people in their 20s, who have a fair bit of cash and spend it on gadgets and high-tech stuff and the rest of it, and for whom pensions are decades away. Those are the two key groups: the young who have some money, but spend it on other stuff and the people who have gone a bit further through their life, but who just deal with cash and don’t really think long term.

We have done quite a lot of market research on who needs to hear the messages. For the older people, the message is, "It’s never too late to start saving"; the general message for people on lower incomes is, "Don’t opt-out. Don’t miss out because this is an employer contribution and a taxpayer contribution." You will be reassured to know that I have not been honing the marketing messages personally, but a lot of research and testing has been done to reach who we are trying to get to, and what the key messages need to be.

Q413 Karen Bradley: Continuing on communications, do you have contingency built in for the risk of negative publicity? If there were a big failure up front if a large employer fails to enrol people and that gets some publicity, or if an organisation decides that it is against the move and that it was an extra tax or mis-selling, do you have contingencies in place for that?

Steve Webb: Yes. We are spending public money on the advertising. Across the Government, there is not much appetite for spending public money on advertising. We had to make a strong case to do it at all. One of the arguments made against us was that it was all about inertia. "Why do you need to advertise, inform and communicate? Don’t you just want to leave people alone?" Our counter-argument was that these people are not inert in a neutral environment. They have been bombarded with negative messages about pensions every day, and we need the positive communication-not propaganda, but the positive reasons for being in a pension.

We are being proactive in communications. Obviously, we cannot guard against disaster. You mentioned a big firm not doing its job. Clearly, with TPR, the goal is to educate, to enable and then to enforce. It is all about prevention. It is pretty unlikely that a big firm will not do what it should. If we think about the minimum wage and so on, there are breaches but they tend to be at the smaller end of the scale.

Jos Joures: We are also tracking people’s response to the advertising as we go through. There are six propositions that we want people to understand from the advertising, some of which are about their positivity towards the reforms. We have review points in March and June on whether the messages that we want people to get from the advertising are actually getting through, to allow us to respond and change our approach if we need to.

Q414 Chair: You are working with the media to make sure that you get nice positive headlines. You are spending an advertising budget, but it is not just the adverts, it is front-page headlines.

Steve Webb: One thing that we want to do is to deal with some of the potential negatives. I am sure we will return to state pension reform on another occasion, but one of the points of trying to get the state pension reform sorted is so that the newspaper headlines are not, "Don’t bother to save, because you’ll be means-tested." Obviously, we cannot control the media, but one financial journalist has said to me, "If you deal with the means-testing issue, we will be writing advertorials for you, because auto-enrolment is such a good deal. It is employer contribution and good value for money. Deal with that problem and we are on your side."

Q415 Karen Bradley: On advice for employers, where would you recommend an employer to go for impartial advice on selecting a pension provider?

Steve Webb: Clearly, TPR is giving people guidance on how to approach all of this. Again, there is a distinction between the big firms and the small firms. The big firms can afford and pay for employee benefit consultants to look at the market and so on. Further down the track, we clearly do not want firms to have to spend money on advice if it is not necessary. If what people are providing is a fairly standard product at a low charge, I almost do not want firms to agonise over whether they go with firm A or firm B, because essentially it will be a simple product and will have regulated characteristics in the default fund, so I almost want to say that I don’t want most firms to have to seek a lot of expensive advice. There will be generic information on TPR’s website. Obviously, we will flag NEST; its website has a lot of information. I would rather that firms got on with being firms, as it were, and that we made it as easy as possible for them.

Jos Joures: But there will be specific guides on choosing a pension scheme that The Pensions Regulator will provide.

Steve Webb: Yes, on the TPR website.

Q416 Karen Bradley: What about the Pensions Advisory Service (TPAS)? Will they be involved in this?

Steve Webb: Their focus tends be more on individuals ringing up, but we are giving extra resources to TPAS as well.

Q417 Karen Bradley: So they will focus on the individual.

Steve Webb: More so. Anyone can ring TPAS, but it tends to be individuals.

Q418 Karen Bradley: It has been put to us that small firms in particular will use their IFA or accountant to get the advice. What communications are there from the Department to the professional bodies-to IFAs7-to make sure that they are aware of what is available?

Steve Webb: Most of our communications strategy is not paid for; it uses professional networks. They all have newsletters that go out and I seem to spend my life writing articles for these things. We go through the people who advise to make sure that they are up to speed, and that is incredibly cost-effective. If I write an article in an accountancy magazine that is read by 10,000 accountants, that is an amazing number of firms we have reached.

Jos Joures: Again, The Pensions Regulator has done some work for accountants-the eight things you need to know to advise your clients on automatic enrolment-and it is putting that through the professional bodies.

Q419 Karen Bradley: If in the worst-case scenario it turns out that employers come to the Government, The Pensions Regulator or whoever it might be for advice, and we hit the point of 45,000 employers-that is the figure we have been given for the number of employers in one of the brackets-coming through together, is there any way that the advisory services could cope with that number of employers, and is there anything you could do to mitigate that?

Steve Webb: I have two observations. One is that auto-enrolment is all a bit strange and new at the moment at the start of 2012, but by the time it has been running for three-odd years it will be in the mainstream and people will be familiar with it. It will not be so strange and NEST will be a household name. On the fear and uncertainty, most of the questions will have been asked a long time before. Most people will get a letter from the Regulator saying, "You’ve got this duty. Go to the Regulator’s website and look at the frequently asked questions." Our goal is not to be able to answer 45,000 phone calls, but to make those 45,000 phone calls not necessary. It is only somebody who employs a worker who spends half their time in the Bahamas-someone who has a special question-that we will want to deal with. The generic approach is to make sure that people do not need to make those calls.

Jos Joures: Of course, in the business case for the programme, there are volume estimates for The Pensions Regulator in terms of their business, for the Money Advice Service and for the Pensions Advisory Service. They all have resources allocated on those estimates.

Q420 Karen Bradley: So you will be monitoring whether the estimates meet the reality and if it looks as though there is a problem, there are pinch points at which you could change the strategy.

Jos Joures: We will certainly know how much demand they are getting and whether they can cope with it.

Q421 Stephen Lloyd: May I come in on the back of that? It is an incredibly important point, because a lot of micros will not want to go to the website and will want to make phone calls. I think that will change over the next 20 years or so, but I know that because I have worked with an awful lot of micros and I have worked with the FSB. A lot of them are still not comfortable or do not feel confident about going on the website, so would your model identify whether some of those people who are missing have the opportunity to check what to do with the website?

Steve Webb: There is phone-based support as well.

Jos Joures: Our ambition is that the first port of call is digital, but there will be call centres as well.

Q422 Karen Bradley: Continuing the point on employers, one of the points made to us through evidence is that some of the legislation is unclear. When employers are coming to make decisions about implementing the legislation, for example, there is an issue surrounding some of the definitions and the level at which they are using weekly National Insurance definitions and the legislation uses annual income tax definitions. Is anything being done to assist employers with that, and is there any move to make the legislation slightly clearer?

Steve Webb: We are just about to finish a consultation on all the thresholds. Our central proposition in that consultation is that we should use thresholds that employers are familiar with. So the proposition is that you would be auto-enrolled and the trigger would be the tax threshold. If it is someone for whom you are doing PAYE income tax, you ought to enrol them, but the band of earnings on which you ought to enrol them comes from a National Insurance threshold that employers are familiar with. The idea is to diminish those things.

I am aware that, here I am, it is the start of 2012 and we are consulting on the thresholds. Clearly, this stuff now needs nailing down, publishing, circulating and so on. Again, I think we are in that ramp-up period when we are just about to publish some regulations with a lot of fine detail. It is absolutely understandable that employers do not know, because we have not published it. But that has all now been finalised and I think that will change over time.

Jos Joures: There is a Pensions Regulator piece of guidance. We are literally just waiting for the Regulations to be tabled before Parliament, and then we will publish it.

Q423 Karen Bradley: To add to that, there was a point about whether there was a plan for the threshold to automatically increase in line with income tax and personal tax allowances. Obviously, there is a coalition agreement that they will increase quite significantly over a Parliament.

Steve Webb: That is right and obviously we discussed that at length in the Pensions Bill. The Making automatic enrolment work review recommended that tying it to a threshold such as the tax threshold was an attractive thing. Clearly, the thresholds are reviewed each year, so if there was a particular reason to diverge from that, we could do so. But, in principle, the central proposition is that you use the tax threshold.

Q424 Karen Bradley: If I can finish on the point about employees and individuals opting out, it seems that there are some complications. For example, an individual’s deductions are taken from them by the employer and then, three months later, they can decide, "Actually, I want to opt-out." There seem to be burdens on business and on the employer.

On the actual opting-out process for the employee, how will they make the decision? Will there be a helpline that they can go to? Will there be somewhere that gives impartial advice? Finally, on the opt-out, there could be a situation where somebody changes jobs quite regularly-in a very transient industry perhaps every 12 months. They are potentially opting out every 12 months, with each employer having to deduct the amount for the three months once they qualify and then opt-out. There are all sorts of burdens that you can see. Can you give us some figures on that?

Steve Webb: There was an argument that said, "Look, if it’s obvious someone is going to opt-out, don’t opt them in-just don’t bother." But that undermines the fundamental concept. It is putting people in and the fact that it is a bit of an effort to get out that gives us the inertia. Clearly, there will be employers for whom that is a hassle. We accept that. If you change jobs a lot, there is a hassle factor. But of course, the people who change jobs a lot are just the people who do not end up with pensions. So it is all the more important to us that we keep enrolling them, so that they start saying, "Pension? Oh, all right, I’ll have a pension."

If, for example, those people are with a series of small firms that have all chosen NEST, that is a real prize because they are auto-enrolled. It is then really simple because NEST knows all about them. So they go to a second firm, the firm is auto-enrolling into NEST because that is what they have chosen to do and NEST says, "Hello again, Mrs Scroggins. We know you. We don’t need to fill in any paperwork because we know all about you. You have already got some money with us. We’re building it up." She might then say, "Oh, all right." Clearly, there is a hassle in these cases, but we think it is a worthwhile hassle for the benefit of the individual.

Q425 Debbie Abrahams: My question is on the communication side. We have had some evidence that there is regional variation in terms of awareness of auto-enrolment. When I was with an Oldham business leaders group recently in my constituency, there were real blank faces about what is going on. What are you doing to address these regional variations?

Steve Webb: The sequence of the roll-out is crucial. To us, the most important thing is that the people who have got the roll-out duty this year-the biggest employers-know what they are doing, and are aware and getting on with it, and they clearly do know what they are doing. There is not anybody who is due to enrol this year who does not know it is coming and who has not been planning for some considerable time. I do not dispute for a second that you have got blank faces, and I have seen them myself. That is why we are now ramping up the general publicity, which I am pleased to hear has made some impact already. Clearly, anyone in that room who had an auto-enrolment duty 12 months ahead would have had a letter. None of them would have done, I suspect, but they would be getting a 12-month wake-up.

Clearly, from our point of view, contacting employers is quite cost-effective, because instead of 10 million workers, we can just do 1 million firms, or whatever it is. We are emphasising our comms on those employers and working our way down the market. Many of the folk in that room probably would not even have a duty for two and a half years, but we are doing general publicity. The other thing we are doing is sector publicity, which may answer your regional point to some extent. There are plenty of sectoral ways in. We know that hairdressing, or something like that, is a big area for auto-enrolment, so we will be using the trade press in that area. That will correlate with regional differences as well.

Q426 Debbie Abrahams: That does not really reassure me, Minister, about what specific measures you are taking at a regional level. I understand what you are saying about the trade focus, but there seems to be a bias towards the south and greater awareness in the south. Around awareness raising, I recognise what you are saying about direct contact with employers, but raising awareness at a regional level is also about employees.

Jos Joures: One of the most effective ways of getting to the target audiences that the Minister was talking about is local radio. We started campaigns on local radio on 16 January, and I think someone on the Committee heard one on their way in this morning. They are right across local radio, so we do Metro Radio in Newcastle, Hallam FM in Sheffield, Radio Clyde in Glasgow, Key 103 in Manchester and so on.

Debbie Abrahams: Manchester? Okay.

Steve Webb: He made that one up, actually.

Jos Joures: It’s on the bit of paper, honest. Chambers of commerce are also important regional networks that we are linking into.

Steve Webb: Chambers of commerce are also important regional networks that we are linking into.

Chair: I suspect that this question will be about micro-businesses, because Glenda always asks about those.

Q427 Glenda Jackson: It is the last group of employers and employees whom you will be contacting. If I look at my own constituency, or at London as a whole, there are many small employers who do not have English as a first language, and their employees in some instances do not have English at all. Have you taken that fact on board? That must surely add an additional cost to the communications budget. Is that in place? Will it be possible for those employers, and particularly those employees, to be informed about what is coming down the pipe?

Steve Webb: You raise an important issue. The general publicity, as you have seen, is national and in English, but the detailed information will be available in different languages. I do not belittle the point that you make-I think it is important-but the key for me is how far auto-enrolment will become part of the national conversation. It will not just be a techie, nerdy pensions thing; it will be 10 million people. Everyone will know someone who has been auto-enrolled, so it will reach minority communities. It will be everywhere, so it will not be something where unless you have had something specifically said to you in your language, you will not know anything about it. As a country now on the brink of auto-enrolment, it is hard to imagine what it will be like. By the time you get to the micros, it will be 2016 or whenever and we will have been doing this thing for four years. I think it will be very familiar, funnily enough. It does not feel like that now, but that is the way I see it going.

Jos Joures: There are two distinct aspects to that. In terms of the employers, when The Pensions Regulator was giving evidence earlier in the month they were talking about having products and having a fair amount available in different languages. That is very important when employers have to carry out very specific activities in auto-enrolment. When it comes to more general awareness, as the Minister said, our adverts are in English, but the question we are thinking about at the moment is developing partnerships and PR relationships with people-can we find the local ethnic press and so on to form partnerships with us to get our information across in that way?

Q428 Glenda Jackson: As long as you are looking in that direction, and also at the mosques and community centres-those centres where people naturally gravitate to. The money is there, is it? That is really the bottom line of my question.

Steve Webb: Most of the comms is not paid for; most of it is networks and news sheets and so on. I would not want to pretend that there is a huge budget for what we are talking about, but we think we can deliver a lot of messages without spending serious money. We take the challenge you have given in this and previous sessions, and we will take it seriously.

Q429 Glenda Jackson: I take on board your point that by the time the last tranche comes in, auto-enrolment and NEST will not be a foreign land or language. Equally, you are going to come up against people whose natural instincts may not be to join. I am trying to pin down that I hope the energy level will not have diminished. It may be that some of the toughest people are going to be in that tranche.

Steve Webb: In a way, the energy levels will almost grow. This year we have about 10 huge employers, pretty much all of whom have pension schemes. It is the people who work for them who are not in pensions. That’s great and we want them in. The whole exercise is particularly driven by that final set of people. If we don’t get them in, we fail.

Q430 Chair: To pick up on your answer to Karen on thresholds, if the coalition does put the income tax threshold to £10,000 and the auto-enrolment threshold follows that, is that not therefore too high? You are missing out that very group of people between £7,500 at the moment to £10,000. They are not going to be auto-enrolled and they are the ones who should be.

Steve Webb: I am happy to return to that debate, which we had at length in Committee on the Pensions Bill. The key point is that there are two sorts of people at those income levels. You have the folk who are temporarily at those levels, and not being auto-enrolled when they have a temporary low income does not make much difference to their pension. It is a temporary period when they are on a low income. You have also got people who always earn that amount, who are relatively few and far between. Frankly, if you have a state pension-we talked about the £140 pension; that is £7,000 a year. If you are earning £9,000 a year and getting £7,000 of state pension and that £9,000 is what you always earned, putting a few extra pounds into a pension-great if you want to-is not going to make a lot of difference. If low pay and wages are temporary it is not going to make a huge difference in terms of a lifetime pension. If it is what you always earned, the state is going to give you a good replacement rate anyway.

Chair: This will be on top of your state pension, so it would make a difference. It would double what you have got. Karen wants to come briefly back on that and then we will go to Sheila.

Q431 Karen Bradley: I wanted to pick up on the point about the employers who have got a very good pension scheme at the moment and they have now got to auto-enrol perhaps 50% of their employees. There is an enormous cost on those employers in enrolling 50% of employees on what is an existing extremely good pension package. Is there not a risk that they will end up just dumbing down? They will say, "What we will do is keep the existing pension in place for those who have got it. We will auto-enrol on much less favourable terms all existing employees. Any new employees will go into the auto-enrolment pot." You have dumbed down the occupational pensions of people coming in, who would otherwise have chosen to go into a much better pension scheme.

Steve Webb: There are two phases to what you describe. Leaving aside for the moment the people who join subsequently, you are moving from a world where half the workforce have a damn good pension and the other half have nothing, to where half the workforce have a damn good pension and the other half have something. That is not dumbing down; that is fantastic and a huge step forward. It is up to the employer what they do with someone who comes in then. Obviously, they have an extra cost for half the workforce, although some of them are locked out and so on. When people say "levelling down", I think the term is misunderstood. You see comments that firms will "level down". It is implied that they won’t just do what you have described, but they will take their current scheme and make it worse. I do not think that will happen very much. Saying to your existing workforce who are in a good scheme, "Guess what, guys, we are going to cut your pension," is a heck of a difficult conversation. It is not a trivial thing to do.

Q432 Chair: We are seeing it with public sector pensions.

Steve Webb: Which was not a trivial thing to do. Clearly, it is a cost pressure on firms, but we are doing it incredibly gradually. People will opt-out, it is tax-relieved, we are trying to cushion it as much as we can.

Q433 Karen Bradley: I accept the point about levelling down. I agree that is not likely. For future employees coming in, I think there will perhaps not be the option of going into the much better existing pension scheme. We could end up with a whole demographic of the population with an okay pension, but nobody has the great pension they had before.

Steve Webb: It is worth saying that it is often the new workers who do not qualify for the company pension scheme anyway. There is often a waiting period-maybe even two years. At the moment, those very people come in to nothing; at least they will be coming in to NEST or whatever it is. I think many firms will use this idea as part of the progression. They will say, "You join us, you go into something vanilla-something at a minimum level-but stay with us and you get access to these better schemes."

Jos Joures: It is also worth thinking about why employers offer pension schemes now when they do not have to. There are two reasons. One is that they want to attract the best people to work for them and it is a benefit that people appreciate. The second is that employers care about their employees and want to give them the opportunity to save. I do not think that the introduction of automatic enrolment changes that. Employers will still see pension schemes as a benefit that they want to offer. They will still see a generous pension as something that they want to offer to attract a particular kind of person. It is probably true that you may start to get some two-tier pensions, but that will not be a general rule-it will probably be people who have not got a pension at the moment getting something, as the Minister was saying.

Chair: I think Sheila has a question on this and then she will ask some questions on regulation.

Q434 Sheila Gilmore: This is a question that occurred to me earlier. If an employee who is auto-enrolled for the first time into NEST then leaves that employer and goes to another employer, which also uses NEST, is it actually necessary for them to go through a process where they are given yet another option to opt-out?

Steve Webb: I am trying to think how you would write the Regulation to stop that. The new firm would have to find out from the new employee which pension scheme they had come from. It would put them in, but it would not allow them to opt-out. This is a voluntary scheme. The ability to opt-out does not cost anything. You join your new firm, it enrols you statutorily into NEST, which is what we want to happen, and life goes on. There is no great cost with allowing them to opt-out. If that is what they want to do when we put them in, they just sail on and life goes on. It is not like the employer has to sit them down after three months and ask, "What do you want to do?" Inertia takes control.

Q435 Sheila Gilmore: Inertia might take control, but in terms of participation it seems like an extra opportunity for people perhaps to make the wrong decision.

Steve Webb: I cannot see that we can ban people from opting out. It is not compulsory saving; we have to give them the option of opting out. We are not promoting opting out and they are in for several months before the issue arises.

Q436 Sheila Gilmore: The difference is that they have been given the first opportunity to opt-out at the beginning, and they are saying to that same employer, "We’re not taking it up."

Steve Webb: But they could have done that at any point. With the first employer, they could have decided after 12 or 18 months, "I’m off."

Q437 Sheila Gilmore: If you stay with your employer, you become compulsorily in it.

In terms of regulation, some of the witnesses that we have seen have had concerns that The Pensions Regulator would find it difficult to regulate effectively the large number of employers that it will now have to deal with. Are you satisfied that, in the model that you have done with the regulator, it is sufficiently resourced for this job?

Steve Webb: Yes. As you know, they have sub-contracted some of the more bread and butter administration. We have given them a budget for that in the employer compliance regime. Capita has got a contract to do a lot of the routine administration. The Pension Regulator will use its specialist knowledge for complex cases, difficult cases and risk-based regulation. Clearly, all the action is going to be further down the scale. It will be pretty obvious if a big supermarket does not auto-enrol. I think we will notice that.

As with minimum wage legislation, there are always breaches and there is always enforcement. You cannot get absolutely everyone, so you have to ensure that there is good whistleblowing, so that if someone says, "We have not been auto-enrolled and we should have been", we know that action will be taken. As I have said, however, we are talking about a huge number of firms. I think that the analogy is with minimum wage legislation. It is a duty on everybody. Some very small firms might not do what they should do and we have to ensure that there are mechanisms for picking that up.

Q438 Sheila Gilmore: That is an interesting analogy, because there are some serious concerns that sometimes it has been hard to keep on top of that. Relying on whistleblowers or spot-checking has not always been effective in terms of that legislation. Do you think that that is good enough as a means of ensuring that the regulator controls it?

Steve Webb: Yes, employers will have to register with TPR and confirm that they are doing their auto-enrolment. TPR will know if people have not registered when they should. There is monitoring going on, but clearly it would be dishonest of me to pretend that every last breach will be picked up straight away.

Q439 Sheila Gilmore: The other concern that some people have had is about the reduction in DWP funding for the regulator, and indeed for the Pensions Advisory Service. Do you think that reducing funding in this way will place this project at risk?

Steve Webb: I would distinguish between squeezing the core running costs of non-departmental public bodies, which we are doing across the board-we have done it with our departmental headquarters-and funding for specific projects. I probably cannot say what the value of the contract is, but TPR has been given a significant budget for the employer compliance regime, a big chunk of which has been spent on the subcontract with Capita. That is, if you like, separate funding earmarked for this project. We have asked TPR to be leaner and meaner, just as we are trying to be leaner and meaner, but we have identified additional specific funding for this regime. TPR has not had to find tens of millions of pounds to do employer compliance out of its shrinking core budget; it has been a separate pot of money.

Q440 Sheila Gilmore: Is that likely to continue, or is it a one-off?

Steve Webb: Clearly, the employer compliance regime is focused initially on the roll-out period, but then there will be a watching brief, obviously on a more limited scale.

Q441 Glenda Jackson: Is there a sufficient budget to police whether employers are actually paying their contributions? TPR told us that it expects the pension provider to inform them. NEST has absolutely no funding to enable it to do that. Who will be the police in this instance?

Steve Webb: The provider is clearly the organisation with the interest here. The individual will not know if the employer has made the contribution; they might spot that it is not on their pay slip, but they might not, because it would not be there, as it were. The key thing is that the provider will be the chivvyer. If there is a serial problem, providers can raise that with the regulator, if they want to.

Q442 Glenda Jackson: But then what happens? Someone has paid their bit, but the employer has not. Who is going to make up the shortfall? Is there any kind of regulation to ensure that the shortfall is made up?

Steve Webb: Firms are fined if they do not comply. We want to encourage and enable firms, but if they do not comply, they can be fined and have to pay the money. There is a legal duty to pay. This is like not paying your tax: firms have to pay this; if they do not, there are fines and penalties.

Q443 Glenda Jackson: Yes, but we know this will happen. I am not saying it will happen in a major way, but it is inevitable that something like this will happen. Does the money go to the Treasury, or to the employee’s fund?

Steve Webb: No, we make the employer put the money into the pension fund and we fine them.

Q444 Glenda Jackson: A trust-based pension scheme trustee has a fiduciary duty to look after the best interests of their members. Does regulation need strengthening to place a similar duty on the providers of contract-based schemes? Is there wriggle room there at the moment?

Steve Webb: It is an interesting issue. We published a document last year on the regulatory differences between trust-based and contract-based schemes. Some of the focus was on short service refunds, which were different, and which we are dealing with, but governance is clearly an issue. What TPR has found is that for contract-based schemes, some sort of governance committee or management committee is starting to become the norm. It is not universal, and it has not always got great teeth-it is early days-but I think there is recognition that good governance is a good thing, and that an employer who is concerned about the welfare of their employees may well want to think about it.

You could just have a contract, send your contributions off, which are invested, and get a pension at the end, so what do you need governance for? Clearly, governance can help to ensure, for example, that the risk profile matches what the employees need. It is in the employees’ interests to have good governance, and I think firms are increasingly saying, "Just handing our money over to an insurance company and forgetting about it probably isn’t good enough." We do not have specific proposals at the moment to require these things, but where firms are choosing, we would certainly want employers to think about whether the governance arrangements are delivering the best for their employees.

Q445 Glenda Jackson: That again, I presume, is taking the model of the big employers and what their actions would be. The whole thrust of auto-enrolment is surely aimed at small employers and their employees. If what you have described works, and if that comes out of the four years before everybody is supposedly involved, would the Government consider making that best practice for all such schemes-not imposing it, but making it best practice?

Steve Webb: I am not sure what the Government making it best practice means.

Q446 Glenda Jackson: It is ensuring that the wheel does not have to be reinvented every four years, if that kind of structure is working and people are happy with it. This is simply on the level of information and passing it out there.

Steve Webb: Sure. I hesitate to say that I will hold up my NEST card at this point, but again, we think the bulk of the smallest firms will go to NEST, and NEST has excellent governance structures. A firm would actively have to choose to go somewhere else for the issue to arise.

Q447 Glenda Jackson: It is a slide in, but this is essentially about regulation. Do you not think, because of the changes that are coming down, there should be one pensions regulator? Is the split not working against the best interests of particularly those employees who work for small employers?

Steve Webb: This was looked at about four years ago. There was a specific review of the role of the FSA8 and TPR and whether they should be combined or separate. That review concluded that there was a case for continuing the separate roles. I do not have a doctrinal position on that. It seems to me that the crucial question is what works. Clearly, TPR has built up a lot of specialist expertise, which you would not want to see lost in a single sort of super-regulator, but you may get boundary issues from time to time and things falling between the cracks with separate regulators. I do not think it is self-evident that one or the other is best.

The FSA and TPR work together. For example, at a European level, the FSA is on the board of the Europe-wide regulatory body, but TPR does specialist pensions stuff there. They are not totally separate. As I say, I do not have a strong doctrinal view either way. It was looked at about four years ago and, on balance, it was felt that having a separate organisation gave you that specialism.

Q448 Glenda Jackson: But this is a major earthquake-a major fundamental change-and the essential part of it is to encourage everybody always to save for their future, which is a very difficult task, given the difficulties with pensions, the lack of trust and all that sort of thing. Given this fundamental shift, which I hope will be very positive, is it not worth considering keeping a watching brief on this and creating, out of the experience of the FSA and TPR-and everybody’s experience of this-some other form of regulation?

There are people who do not trust the FSA, because their direct experiences have been lousy when things have not gone well for them. I am sure that is the case for TPR. It is more about solidifying, so that everybody in this country eventually accepts that if you want a decent old age, you will have to start saving soon. I am sorry to bang on about this. What I am trying to dig down to-I am having great difficulty doing so, as I am sure you are all aware-is the idea that this is about a sense of individual responsibility; it is about more than money. There should be a body that can combine those two aspects of personal responsibility and make sure that you get a good return.

Steve Webb: I could not put it better myself. I just observe that the FSA is about to be split up and restructured. A little bit of me thinks, "Oh, my goodness! Then we splice this on there", and so on. Actually, there is a case for a bit of stability at the moment.

Q449 Stephen Lloyd: I have a question on the back of what Glenda is talking about. The mood music I am hearing is that the Treasury is actually very keen on incorporating more and more within the FSA.

Steve Webb: You may be better connected in the Treasury than I am.

Q450 Stephen Lloyd: I am not sure about that. Certainly I have met a number of the different regulatory bodies, and that is what they think is the direction of travel. I share the view of Glenda and you and others in the Committee that auto-enrolment could, and hopefully will, be an absolutely transformational opportunity for millions and millions of people who have never had a pension. I would be quite concerned if TPR was folded into the FSA. Are you able to give the Committee any sense of whether you would share that concern and would fight tooth and nail to keep it separate, or are you fairly relaxed about waiting to see how it will develop? If we end up with an enormous FSA, are you quite relaxed about that? What is your position?

Steve Webb: It is not a live issue for me at the moment. Last week, I picked up Pensions Week to discover that everyone was worried that I had got too much in my in-tray. I do not feel that I need to add this one. A bit of stability in the regime would be no bad thing. The FSA is about to be split up, and we will have the Financial Conduct Authority. This does not feel like a priority. Good regulation is a priority, but I am not sure that yet more churn, at this point, would be helpful.

Q451 Brandon Lewis: Picking up on Glenda and Stephen’s points, in evidence from The Pensions Regulator, what came through was that although it was wary of taking a position-it works within the framework that it is given-it has concerns about the potential eventual format of having three regulators once the FSA splits up. Even in the industry there is a lot of confusion about that. The difficulty is that they look at very different sides. The FSA’s interest is obviously in the investment side, and you cannot tear that away from it. How would it work with The Pensions Regulator? Does the Department see NEST as the answer to that problem? Effectively, it is setting out a best practice framework, because it has the Government’s support, but everyone else has to either play catch-up or be left behind. That in itself is a free-market way of creating regulation in a soft format.

Steve Webb: NEST is clearly driving down costs and driving up standards. I cannot play my NEST card completely, because we have to look after the welfare of people who are not in it. Before we started restructuring regulators, we would have to be clear what problem we were solving. Is there a regulatory gap-something that is not regulated at all? Is there something that is double-regulated? I am not yet clear what that problem is. If we need to refine the regulator’s role and actions, we will do so, but it does not feel like the biggest issue we have to tackle.

Chair: The Committee will probably return to the issue of governance and pensions later in the year. We are on the home straight. Harriett has some questions on participation.

Q452 Harriett Baldwin: Participation rates is obviously another area of reputational risk for the scheme. This year, there has been some evidence of higher opt-out levels, even from defined benefit schemes. KiwiSaver is a model for this Committee of something similar that has been set up. It has experienced something like a 36% opt-out rate in the first 18 months. Is the Department sticking by its estimates, which were that 65% would stay in and that 20% would opt-out?

Steve Webb: That was survey-based evidence. We keep updating this, and one of the things that we will do is talk to people as they make their choices. If people opt-out, we will do in-depth qualitative research, talking to them about why they did, and seeing how we could influence that decision. We have not sat down and said, "We suddenly think that the numbers will be very different." We have talked about between five million and eight million people newly saving, or saving more. That range covered a broad set of possible scenarios, and we still think that we are in that range.

Jos Joures: We undertook two different individuals’ surveys, one in 2007 and one in 2009. The number of people changing their opinion about opt-out did not change at all. Other surveys support the broad conclusion that about a third of people might opt-out. We recognise that there is uncertainty. Our expectation of the programme’s outcome is that between two million and four million people will opt-out. We have built an uncertainty factor into those estimates, because there is a range of "don’t knows" in that.

Q453 Harriett Baldwin: If you were to start getting headlines saying that half the people were opting out, what would you do?

Steve Webb: Two things: first, I would point out that the glass was half full. Every person who does not opt-out is newly saving, and every person is a gain. Secondly, I would tell people to bear in mind that this is not a decision for life. If you opt-out, then three or six years later, I’ll be back, as the man said-or my successor-but-three will be back. There is a constant process of re-enrolment and "nudge, nudge"-keeping going. Thirdly, we will try to learn as we go. There might be things about how we are doing auto-enrolment, or about certain groups of people opting out in larger numbers, and we will monitor that as we go. If we need to refine the programme, we will.

Jos Joures: The question would be: why? If it was a question of communication and understanding, we could change our communications campaigns, the level of investment and where we target those things. If it was a question of people actually looking at this, and deciding that saving was not for them at this moment, that is a much bigger policy question.

Q454 Harriett Baldwin: Let me turn to what Private Eye keeps describing as the biggest mis-selling in history, and the potential for auto-enrolment to bring into saving the low earners who otherwise would obviously qualify for Pension Credit if they did not have any savings. It is obviously crucial, as you said, to tackle the issue of the means test. Will there be legislation in the next Queen’s Speech to simplify the pensions landscape in the way that you seem to be indicating you would like?

Steve Webb: Obviously, I cannot pre-empt the next Queen’s Speech, but I can say that we published our Green Paper last Easter, and the consultation responses from people in the summer. They showed overwhelming support for the single-tier model. We are making good progress in our work on that. It is a big reform. It will affect things like contracting out, which involves millions of people. It will affect billions of pounds of public expenditure over many decades. It is a big reform, which we must get right, but I am encouraged by our progress.

Q455 Harriett Baldwin: For the low earners we were talking about-people on the minimum wage whom we are so keen should start to save something-obviously the state pension replaces a much higher percentage of their earnings than of the earnings of people on mean incomes. The decision on whether you want consumption now or want to prepare for consumption later will be an individual-level decision, won’t it? We were talking about the restructuring of the FSA and so on. Who do you see advising those low-paid workers on whether auto-enrolment is right for them? The FSA is bringing in much higher qualification levels for independent financial advisers, and it is thought that 10,000 may leave the industry, so fewer people will be providing advice. Who will give that advice?

Steve Webb: Someone on the minimum wage was not going to pay for independent financial advice. That was just not going to happen, and no IFA would touch them with a bargepole unless it was feeling charitable. In a sense, our goal must be to take the difficulty and the risk out of that choice for those people, and that is partly where state pension reform comes in, and partly where NEST comes in. There will be generic advice. We are resourcing the Money Advice Service, TPAS and so on. There will be a lot of general information, but there will not be specific, individual, tailored, expensive financial advice. Our goal is to make that unnecessary, because it would be crazy.

For some people the answer will be no. For some, it will not make sense to save. We do not want take-up to be 100%, but we want to make sure that people on a modest income can find general advice that will give them good enough information on products out there that are good value for money.

Q456 Harriett Baldwin: That will come from the Money Advice Service.

Steve Webb: Yes. Clearly, we are networking with much of the press and so on, because people will turn to it for advice and information. In our comms campaign, we are talking to financial experts and so on. We are talking to the websites that have millions of people on their e-mail lists. We are trying to get general information out, because we know that many people will not turn to a Government source; they will turn to the papers and to programmes. I will not name names, but we all know websites that are famous. They will turn to Watchdog and so on, so we need to make sure that we have put the information out there.

Q457 Harriett Baldwin: But they will all say, at the end of the article, "We recommend you talk to an independent financial adviser", won’t they?

Steve Webb: They probably will in the footnote, because they have to, but it would be a generally benevolent IFA; the charge on a small contribution would not be worth having.

Jos Joures: The point about the communications campaign we have just started is that people will hear something about pensions, and that will direct them initially to the Directgov website, which will give them basic information, so that they understand what it means for them, and what the factors in their decision are. If they need more, they will be passed on to the Money Advice Service and The Pensions Advisory Service. There will be a sort of flow-through for the level of advice that you need. It starts with the adverts and works through.

Q458 Harriett Baldwin: I know that the increase in the tax threshold is, at the margins, helping to take more women than men out of tax, and that the increase in the state pension is helping more women than men with their pension income, but an argument has been made that the threshold for auto-enrolment might affect certain groups, such as part-time workers, temporary workers and women, more. What are your thoughts about that?

Steve Webb: That is clearly true. It will. It is worth stressing that you can still opt-in, so we are not depriving people of the opportunity to both be in and have an employer contribution. If you opt-in, you trigger the employer contribution as well. So if you want it and are aware, you can still have it. But if we thought everyone was going to do that off their own bat we would not be doing this. It is a safety valve for those who particularly want it.

I return to my previous point. We looked hard at who these folk are on this cusp. On the whole there are two sorts of people: a youngster early in their career, or whatever, with a low wage, the bulk of whose pension saving will be when they are on higher incomes; or folk who are in a household with a lot of pension saving going on and, as a household, provided that they think they will stay together-you cannot presume that, but that may be their judgment-it may not be rational for them. The people we are taking out at the margins would be putting small amounts in and are, on the whole, maybe at a point in their career when most of their earnings will be made later on. We have looked quite hard at who those people are.

Jos Joures: The recommendation to put the threshold up came from the Paul Johnson review. Paul was worried, when thinking about the thresholds, that there is a risk both ways. The lower your earnings, the more likely it is that you might be better off not saving. The higher your earnings, the likelier it is that you would be better off not saving. That relates to your point about when it is appropriate to switch consumption from one time period to another.

Paul felt that, although there was a differential impact on certain groups, in raising the threshold that may not be a bad thing for them. It may exclude people from being caught up in saving and not opting out when perhaps it would be better for them not to be saving. It is a balance of risk.

Q459 Harriett Baldwin: We have heard from you previously, in evidence, that everyone acknowledges that 8% will not provide a replacement income for someone on median earnings. How do we effectively communicate that and should there be a long-term aim to build up from that 8%?

Steve Webb: Absolutely. Part of our communications is that 8% is a minimum and we should encourage people to go beyond that.

Just as auto-enrolment is based on behavioural economics about inertia, there is a lot of behavioural economics about moving people on up the scale. For example, there are schemes whereby you commit today to do more tomorrow, so that when you get a pay rise, part of that automatically goes into the pension through what is called "automatic escalation". People do not want to sacrifice now, but as long as they don’t take a cash hit, there is a lot of evidence that they will sign up for that kind of thing. That will get people beyond the minimum quite quickly.

Getting people in is our focus and our key and for the lower earners getting people in at 8%, plus a decent state pension, is a pretty good replacement rate. But you are quite right; once you get into median earnings and beyond, we need people to go beyond that.

Q460 Harriett Baldwin: Could you update the Committee on the progress of the Treasury working group on the purchase decision on retirement income?

Steve Webb: The big picture of what we are trying to do in pensions is that, for every pound that goes into pension, we want as much pension out the other end as we can. That is why we are looking at charges-we have been talking about that-small pots and at the open-market option. DWP and Treasury have had an open-market option working group that I am embarrassed to say has been running for four years and has now pretty much reached its final conclusions, which are being presented to the Financial Secretary to the Treasury, who will make an announcement shortly thereafter, I think, on how the Government will respond.

Having said that, the industry has improved the way it works. The ABI9 changes, on which it is consulting, will improve the situation and we are considering whether we need to go further than that.

Q461 Andrew Bingham: Harriett talked about the KiwiSaver scheme. The Minister can relax, because I am not going to ask the Government for a $1,000 kick start. The one that I would like to plug, which we <?oasys [cn ?>haven’t got, is the ability to draw funds for certain things, particularly a house purchase. Getting young people into the house market is difficult. If they have these pots-was it really looked at as a possibility here or could it be considered when it is reviewed in a few years? My personal view is that it is a really good option.

Steve Webb: I have a lot of sympathy with that view. The Coalition Agreement said that we would look at it and the Treasury undertook a consultation on this issue of early access. Rather disappointingly from my point of view, the responses were overwhelmingly negative. I would have been quite happy had they not been, but the judgment was taken that we would not take that further at this stage. What we have said, however, is that, when we talk to the people who opt-out, if "I didn’t want to tie my money up" is one of the big reasons, early access might be something that we would look again at in the future. Also, if you change the product in quite a fundamental way on the eve of auto-enrolment, that is quite a big upheaval.

Q462 Andrew Bingham: I am not suggesting that we change it now, but it struck me when it came in front of us a while ago-there is a document here-that it was a good idea.

Steve Webb: I agree with you.

Andrew Bingham: On that consensual note, I will shut up.

Q463 Chair: Thanks for coming along today. On the timetable that has been announced today, is that it?

Steve Webb: That’s it.

Q464 Chair: There will be no more delays, and you are absolutely unequivocal that it is going ahead, that it will happen and that it will happen to this timetable.

Steve Webb: That is it.

Chair: Thank you very much for your evidence today. Although I felt that we were going to finish slightly earlier, it is good to have a Minister who does not waffle, so that is great praise indeed from me. We appreciate it. We will be writing our report now, and it will hopefully be published in about a month’s time, and your evidence will be extremely useful.