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In addition to this fundamental objection to the proposal, I am concerned about the practical implications and repeat what others have said. Any pension schemes used under the employer duty would have to absorb the costs of this extra functionality, particularly if access were to be restricted to prescribed circumstances. That might involve costly changes to scheme rules and there would be additional processes around transactions, payback periods, deciding on the reasons for access, verifying those reasons for access, pursuing outstanding funds, and so on. This would lead to greater costs for employers or scheme members depending on how the scheme administration was paid for. This is not just an issue for personal accounts. If you had this facility, you could not just focus it on personal accounts, and how it would work for a defined benefit scheme would be a particular challenge.
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Of course we recognise that there are times when people need to access funds for emergencies, but to cope with the complexities of life, individuals have the option of saving for the long term in a pension and of putting something away in a shorter-term tax-free savings product, such as an ISA, for rainy days. I accept the comment that it might be a struggle for everyone to save in two different pots, but from 2010 the savings gateway will provide stronger savings incentives. Through a matched contribution the scheme aims to kick-start a saving habit among people on lower incomes, enabling them to plan for the future and cope with financial pressures. The savings gateway will provide a better way to target those who want to access liquid saving, rather than allowing everyone to have early access to their pensions.
I remind noble Lords of the changes that have been made to help women in particular achieve a decent income in retirement. There have been transformational changes to the basic state pension, which we passed last year. There have been changes to S2P, and there is the whole concept of auto-enrolment and the scheme that we are discussing in this Bill, focused on people with low to medium earnings—the group, regrettably, within which women are overrepresented—to help them into saving.
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My noble friend referred to research. We believe that there is little evidence to support the assertion that low-paid individuals are unlikely to commit to pension saving because their money is locked in until retirement. Several sources, including DWP and international evidence, suggest that there is little demand for a facility that allows individuals to access their pension savings before retirement. DWP qualitative research in 2006 found that individuals felt strongly negative about the option of allowing people to access their pension funds for reasons other than their retirement. They felt that it was incongruous with the scheme’s aim of encouraging people to save. I believe that the US experience in the 401(k) accounts is that there was only 18 per cent take-up of the drawback facilities and no strong evidence to suggest an attraction to increased saving through that facility.
Finally, we should not forget that from 2012 all individuals will retain the choice as to whether to save in a qualifying scheme or whether a more liquid product might better suit their needs. There is a range of pension and tax-efficient savings products to suit individuals in all circumstances. Trying to address all of life's potential future complexities in one financial product would make schemes administratively burdensome and costly. There are substantial downsides as well. People who get into financial difficulties and have the facility to access scheme funds earlier could put those funds in the hands of creditors whereas they would otherwise be protected through the pension scheme.
It is paramount that our pension reforms focus on the key goal of increasing pension savings by providing simple and appropriate products. The amendment would undermine that. As I am sure my noble friend is well aware, it would be impossible to have a qualifying scheme if we adopted this proposal as it stands because you could not have a scheme that was registered under the Finance Act 2004 and that had these provisions. I know that she is aware of that. If we were ever to go down this route, the other place would have to change the tax rules to enable lump sums to be withdrawn from a pension scheme earlier. I am sure that she is aware that there is no great appetite for that.
I know that my noble friend will withdraw her amendment, because it is a probing amendment. I have no doubt that she will not see this as the end of the debate and that she will continue to develop and articulate this issue. However, I earnestly say to her that wherever that debate leads, there is no great appetite for this within the industry that we can discern. I have raised it anecdotally with a few people, though other people's experience may be different. But whatever the appetite, I do not believe that this is a matter for this legislation. I do not doubt that my noble friend will continue to develop and campaign around the concept. Nevertheless, I would ask her to withdraw the amendment in the interim.
Baroness Hollis of Heigham: “Campaign” may be putting things too strongly. First, I thank noble Lords. I am grateful for the range of contributions; they were thoughtful and helpful. Perhaps I may comment on the concerns that people raised over and beyond the
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Much of my noble friend’s speech seemed to miss the point: “Pensions are for retirement; therefore retirement savings are for retirement”. Yes, we know that. The problem arises when people feel that they cannot afford retirement savings because they may face a higher risk in their pre-retirement age. How do you manage to persuade them not only to auto-enrol, which I think they will do, but to continue to save at points of crisis? The alternative may be to go for high rates of debt, rates of 15 per cent or 20 per cent, when the CAB will say, “Stop making your pension contribution”. My noble friend has not begun to think about how we keep women in auto-enrolled schemes when the first financial crisis begins to hit. They will auto-enrol—inertia will see to that—but they will not necessarily stay in. Currently, half of all women drop out of a pension scheme on the birth of their first child. It will be even higher with auto-enrolment because they did not make a conscious choice to join in the first place, unlike today's schemes.
I heard what the noble Lord, Lord Hunt, said, and I thought that his words were very elegantly phrased. He said that pensions were “a poor fit for the risks and realities that women face”. One of those risks and realities is the rollercoaster of risk through lone parenthood and financial problems. A product such as this would simply add a top slice of liquidity to a pension pot. That is all that it is doing. We have that top slice of liquidity now and it is called the tax-free lump sum. It is already divorced from pensions and payment. You can take it at 50 though you may not take your pension until you are 75. All I am trying to do is to remove the age bar.
I accept that that complicates the product and that PADA would therefore not want it now. I accept that without industry support it will not go anywhere, and I accept this may be an appropriate subject to return to in the 2017 review if, as I hope, industry and Governments of any and all persuasions follow this through. But I think that we will have a problem of staying power with auto-enrolment when women hit their first financial crisis and cannot access their savings. This product might help to keep them in when otherwise they would opt out. As for how often, I would not put a limit on the circumstances in which you could access the funds. That would be unnecessarily intrusive, as my noble friend suggested. You might wish to limit the number of times you could access them in order to keep the tracking mechanism simple, but I would not want to prescribe the circumstances.
As I say, I think that my noble friend missed the point. He talked about how much we have done for women’s income in terms of the changes in pensions in retirement. That is precisely my point. Women will do
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This may not be the right solution and I do not expect industry to be enthusiastic. Why would it be? This would be a product sold to very poor women, with poor returns. The Government should realise that, if women have to choose between current rainy-day savings or money in an emergency and longer-term pensions, most women—and there is plenty of DWP research to support this hypothesis—will cut back on pension saving. They, and we, will be the poorer as a result.
I have said enough. I am grateful for noble Lords’ contributions to this short debate. I hope that my noble friend will take this away. I would like to see the department beginning to carry out some research on this, possibly on an all-party basis, to see whether there is a market and a need and whether it is structurally viable. Some time down the road—and I take the point about DC schemes, DB schemes and all the rest, so it is a longer-term haul—if the Government are so minded, when we come to the review in 2017, perhaps such a project could be added to the Bill that will be winding its way through your Lordships’ House. Under those circumstances, and again with gratitude for the contributions, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 16 [Automatic enrolment schemes]:
Lord McKenzie of Luton moved Amendments Nos. 54 and 55:
Clause 16, page 8, line 9, leave out “the scheme is an occupational pension scheme which” and insert “it”
On Question, amendments agreed to.
Lord McKenzie of Luton moved Amendment No. 56:
(c) it satisfies any further conditions prescribed.”The noble Lord said: I shall speak also to the amendments grouped with Amendment No. 56. Qualifying schemes used for automatic enrolment will need to meet minimum standards beyond those set by the existing regulatory framework. This is the case for both workplace personal schemes and occupational schemes. The Bill already provides for certain minimum standards for schemes used under the employer duty; for example, the minimum contributions required for money purchase schemes at Clauses 19 and 25. It also contains powers in Clause 15 to prevent qualifying schemes requiring excessive charges or contributions from active members.
We recognise, however, that it may be appropriate to introduce further safeguards specifically for automatically enrolled members. The market will undoubtedly develop up to 2012 and beyond. We therefore need to future-proof our policy, and may
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The noble Lord, Lord Oakeshott, and the noble Baronesses, Lady Thomas and Lady Greengross, are concerned about the level of charges in qualifying schemes. Our current evidence suggests that most occupational schemes have charges that enable individuals to accrue meaningful savings. The Pensions Commission found that charges in DC occupational schemes tend to be under 0.6 per cent, depending on the size of the employer. Similarly, we do not presently have reason to believe that charges to active members in workplace personal pensions are currently excessive. Although there are no comprehensive data, our understanding is that most large WPPs have charges of around 0.4 to 0.8 per cent annual management charge. Charges in group stakeholder pensions are capped at 1.5 per cent annual management charge for the first 10 years, and 1 per cent thereafter.
We are commissioning research to help us understand more fully some aspects of the overall pensions market, the products within it and practices. As part of this we are exploring current practices in the WPP market, such as charging and the investment options provided. This research will inform our considerations on the need for additional qualifying criteria and our planned consultation with stakeholders. We will, of course, be seeking both the views of the industry around best practice in areas such as charging and approaches to default investments, and those of consumer representatives about what further safeguards, if any, are needed to ensure that individuals have the right level of protection in these schemes. Given these assurances I ask the noble Lord and the noble Baronesses not to press their amendments. I beg to move.
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Baroness Thomas of Winchester: Notwithstanding what the Minister said I should like to speak briefly to Amendment No. 60 in this group in the name of my noble friend Lord Oakeshott and myself and Amendment No. 78 in the name of the noble Baroness, Lady Greengross. As the Minister said, the amendment continues the debate about the quality criteria for workplace pension schemes, both money purchase schemes and personal pension schemes. In particular, it is important that workplace pension schemes should be low-cost, have no transfer penalties and have an appropriate choice of funds, including a good default option. The amendment would ensure that total employee and employer contributions in workplace pension schemes, net of all costs and fees, will be at least equal to the level of default contributions in personal accounts. It is worth noting that the Pensions Commission’s second report recommended that auto-enrolment into an employer DC scheme—I think that the Minister alluded to this—should be permitted if,
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- “the employer's contribution is at least the same level or greater than the minimum compulsory match in ... Personal Accounts, or if the combined employer and employee contribution exceeds the combined level in the scheme, taking into account the level of charges”.
This amendment is supported by, among other groups, Which? and the Equality and Human Rights Commission. I look forward to further comments from the Minister.
Baroness Greengross: I support this amendment, to which my name is added, and would also like to speak briefly to Amendment No. 78. As we know, the amendments seek to ensure that auto-enrolled pension schemes meet additional quality criteria beyond the 3 per cent. I am pleased that the Minister has brought forward his own amendments on this important issue. Much of what I want to say has been covered in the debate, so I welcome the Government’s recognition that they must take account of the quality of workplace pension schemes if workers are auto-enrolled into them. Now that the European Commission has provided reassurance that auto-enrolment does not break the distance marketing and unfair commercial practices directives, the Bill has already been amended to enable this to happen.
Before I turn to the other amendment, perhaps I may briefly say something about levelling down. We have read quite a lot in the media over the past few days that personal accounts could represent a threat to existing pension provision. I do not think that that will be the case. It would be very serious if it were the case. It is certainly an unfortunate and bad message to be promoted. It could mean that employees—the very people we are trying to help to improve their pension provision—lose confidence in personal accounts before they have begun because of negative media coverage.
It is suggested that employers will level down their contributions to 3 per cent, the minimum required by personal accounts, or, even worse, stop providing pensions for their employees altogether. I am not sure why they would do that as a result of this Bill. I cannot understand that. My view is that the threat of levelling down could be one that we have to face in any event. But the threat is not created by this Bill or personal accounts, because employers can reduce pension benefits. As we know, regrettably, some have done so. It is one of the reasons why my noble friend Lord Turner was asked to chair his review and why he recommended what have become personal accounts. It would be a strange unintended consequence if the very thing that the commission recommended was the cause of declining pension provision. I very much hope that rather than levelling down, employers will increase pension benefits for all the reasons that we are debating the Bill, such as taking into account rising longevity.
Just prior to Second Reading I hosted a briefing session on the Bill on behalf of the People’s Pension Coalition which was attended by all the major stakeholders and many noble Lords, including the Minister. I recall that my noble friend Lord Turner—I send him my congratulations on his new role—argued that personal accounts were carefully targeted at those who make little or no pension saving or have no access to a good employer scheme. We know that this is the group that
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That is relevant to my other amendment because the threat, if any exists at all, may turn out to be to personal accounts rather than to existing schemes. I assume that auto-enrolment into workplace pension schemes will reduce the number of people who would otherwise have become members of personal accounts. That is a debate for another time, but can the Minister tell me what impact it may have on PADA’s planning assumptions? This matters because auto-enrolment into workplace pensions means that the existing non-occupational contract-based providers are likely to get many new members without much, if any, effort at all—probably at zero marketing cost. I support that, as have all the main stakeholders; they all recognise that this should increase pensions saving.
As Members of the Committee will know, the stakeholders wrote to the European Commission to support auto-enrolment and the broad thrust of the Government’s pension settlement following the Turner commission. I have seen a copy of that letter, which said:
“It is important to ensure savers get a fair deal. The legislation currently being discussed by the UK Parliament (the Pensions Bill) gives the UK Government wide powers to establish a quality threshold that can effectively protect consumers. The Government has committed to consult and seek consensus from all the stakeholders, including the Financial Services Authority, about this”.
The amendments with my name to them were tabled to ensure that this happens and that the other schemes into which consumers may be auto-enrolled are at least as good as personal accounts. We do not want employees enrolled into high-charging schemes with poor investment choice and unfair transfer penalties.
The wording of my Amendment No. 80 is carefully chosen. The words are used by the Pensions Commission itself. On page 306 of its second report, it recommended that auto-enrolment into an employer DC scheme should be permitted if,
- “the combined employer and employee contribution exceeds the combined level in the scheme, taking into account the level of charges”.
The “scheme” now means “personal accounts”. This was an implicit acknowledgment of the negative impact of charges. Yet the Bill is silent on what additional quality criteria there should be, although I know that the Minister has spoken on that. We do not want to go back to the bad old days of high-charging, poorly performing and ineffectively governed private pensions, especially if workers have not really chosen to join them but have been auto-enrolled.
I know that the Minister will be unable to accept the amendment, but I hope that he will accept the principle. The reassurance that we sought was that a comprehensive survey of existing workplace personal pensions will take place—the Minister has said that there is one—and that they will be monitored by the Government in the run-up to 2012, with the involvement of the FSA and the Pensions Regulator. The Minister has indicated that the Bill will allow the Government to make regulations to set additional quality criteria if that is necessary, as I think it may well be.
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Lord Kirkwood of Kirkhope: I support both Amendments Nos. 60 and 78 and the arguments put forward by my noble friend Lady Thomas and the noble Baroness, Lady Greengross. In confirming the noble Baroness’s fears over some of the levelling down, the important PricewaterhouseCoopers report, reported in the financial pages of today’s Guardian, is significantly worrying to me. Although colleagues across the Committee are accustomed to the trend of closing defined benefit schemes to new employees, the report clearly demonstrates that 16 per cent of participants have closed their DB schemes to future accrual by existing members and that another 11 per cent expect to do so. That is a worrying degree of change in a short time and I hope that the Government are actively considering it. It supports the argument and adds detail to the important points made by the noble Baroness. I hope that the Government have something to say on that trend, which, if sustained, will be extremely worrying.
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