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However, having listened to what the Minister said, I am particularly concerned about the impact of Amendments Nos. 60 and 78 on small—I mean small—enterprises: the kind of businesses that are the mainstay of the economy of my home region of south-east Scotland, in the Borders. If the Government are doing this work—I am glad that they are—can we have some assurance that specific parts of it will address micro-businesses and not just small enterprises in the normal sense of the phrase? The Minister was reassuring in that he said that this work is being done. My worry is that most of his approach addressed much bigger enterprises and companies of a scale that are more realistically able to limit administration costs. I am thinking of family businesses with five or six employees, maybe 12 at most. I hope that, in any work that the department does in investigating these important matters, it has a special section that satisfies itself that the condition applying in those circumstances will be adequately addressed, as well as the conditions for the bigger, more professional schemes with teams of accountants who can more easily deal with these things administratively.
Baroness Noakes: I shall make a brief response. The noble Baroness, Lady Greengross, hopes that levelling down will not occur. We will return to that as we go through our Committee stage. Certainly, some of the evidence that is starting to come from organisations such as the ABI shows that employers are increasingly concerned about how compliance with the personal accounts scheme—we will come to this again, probably later this evening—and how definitions work in the current scheme are pushing them towards levelling down, because it is too much like hard work to comply. We will return to that theme. We cannot regard it as an idle threat. It is a real problem, which we must bear in mind.
The Minister prayed in aid his friend flexibility when he introduced his amendments. I hope that flexibility will not accompany him to the Dispatch Box for every amendment that he moves today, but we shall see.
I have one comment on the amendments on charges that the Liberal Democrat Benches and the noble Baroness, Lady Greengross, have spoken to. When the
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Lord Oakeshott of Seagrove Bay: The noble Baroness, Lady Noakes, should accept that charges are exceptionally important in the case of personal accounts. Almost by definition, personal accounts will be a simple—I expect an index-tracker—type of product. Uniquely—this applies more for personal accounts than for any other form of investment medium—charges are critical. Returns obviously matter, but charges are particularly important for personal accounts.
7 pm
Lord McKenzie of Luton: I thank all noble Lords who have contributed to the discussion around the amendments. I think that we agree that the level of charges is an important component in making sure that auto-enrolment and personal accounts work. I confirm to the noble Baroness, Lady Greengross, that the power that we are taking in our amendment will provide the flexibility to address that issue if our research shows something untoward or difficult in how charging is undertaken in workplace personal pensions. The issue has not reared its head as a problem thus far, but we need to do the research in relation not only to that but also to how default investments work. We need to address that, which is the purpose of the government amendment.
The noble Lord, Lord Kirkwood, said that he hoped that we would focus particularly on micro-businesses. The research is focused on industry practice around these products and opportunities, although I take the point that the issue of how industry practice relates to different sizes of business should be covered.
The noble Baronesses, Lady Greengross and Lady Noakes, and the noble Lord, Lord Kirkwood, referred to levelling down. That is an important issue. Our reforms are designed to complement and not to replace existing employer provision. A number of key measures will help to focus the personal accounts scheme on those without access to existing pension provision and to discourage levelling down. These will include a ban on transfers between existing pension schemes and personal accounts, as well as an annual contribution limit for the personal accounts scheme, which was set at £3,600 in 2005 earnings terms. Employers with existing good schemes will be encouraged to continue offering them via a straightforward qualification test, which we will discuss shortly. New minimum contribution
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Our research shows that most employers with good schemes support our reforms and that the majority, particularly the larger employers, plan to maintain their schemes at current levels. However, we are not complacent and we need to continue to track employer attitudes and likely reactions to the reforms as we move towards 2012. There is a worldwide decline of DB schemes for reasons that we have discussed on a number of occasions. We have taken care to ensure that qualifying tests for DB schemes are workable. We have also put in place phase-in arrangements.
It is too early to say precisely what the charging structure will be for personal accounts and what levels can be achieved. PADA does not yet have the full authority—I hope that it will do as a result of the Bill—to complete its work in designing the scheme to engage with providers of various services. It has launched consultation on how charging might take place, so that is very much work in progress. Personal accounts were predicated on low charges, because over the lifetime of a pension scheme they can make a significant contribution to the end result, as can investment policy. I hope that noble Lords will feel reassured and not press their amendments, because we are taking a power to deal with the issues on which we have focused.
On Question, amendment agreed to.
Lord McKenzie of Luton moved Amendment No. 57:
On Question, amendment agreed to.
Clause 16, as amended, agreed to.
Clause 18 [Personal pension schemes]:
Lord McKenzie of Luton moved Amendment No. 58:
On Question, amendment agreed to.
Clause 18, as amended, agreed to.
Clause 19 [Quality requirement: UK money purchase schemes]:
Lord Skelmersdale moved Amendment No. 59:
The noble Lord said: We have been told several times that, in order to be deemed a qualifying scheme, a United Kingdom occupational money purchase scheme must have rules that assure an employer contribution of at least 3 per cent of qualifying earnings and total contributions paid by the employer and jobholder of at least 8 per cent, including tax relief. In other words, it must be as good as or better than a personal account.
However, I am confused, because the Pensions Act 2007 legislates for the repeal of contracting-out arrangements
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“However, in the event that this has not occurred when the employer duties commence, subsection (2) enables regulations to be made to modify the contributions required for money purchase schemes that are contracted out ... It will not be possible to increase the minimum contributions required for money purchase schemes, including the scheme established at Clause 58, without amending these sections”.
Why can this not be done under the procedures in the 2007 Act? There is plenty of time before 2012, when the Government are adamant that personal accounts will roll out.
As I understand it from government amendments, a hybrid scheme, no matter where it is owned, can be a qualifying scheme as long as it is managed in the United Kingdom, but if it is both owned and managed overseas, it cannot qualify except in certain circumstances. Government Amendments Nos. 76, 77, 79 and 80 to Clause 25—I except Amendment No. 78 in the name of the noble Baroness, Lady Greengross—make provision for non-UK-based schemes potentially to qualify if they are properly regulated. My noble friend Lady Noakes will speak about them. What does that mean for schemes that have their being in the European Union or the EEA? I should know the answer to this, but could schemes operating in and under the regulating powers of, for example, France or Germany still qualify? It seems from Clause 17 that they could. However, just because it is an occupational retirement provision within the meaning of the IORP directive does not help me very much. The definition of the IORP directive in Clause 86, while technically correct, is not exactly clear. IORP should be set out in full—“institutions for occupational retirement provision”—and not as an abbreviation, especially as I am told that is so called by practitioners. I hope that these schemes are to be regulated to the standards that we have in the United Kingdom. What, therefore, are the differences, if any, between the IORP regulations and our own Pensions Regulator?
Although I have not put down a specific amendment to this effect, I would also like to probe paragraph (c) of Clause 17, which allows the Secretary of State to prescribe a pension scheme that has its main administration in jurisdictions that are not in an EEA state. Will the Minister give me an undertaking that such schemes will not be prescribed unless their regulation is at least as stringent as ours? After all, by definition, they are not covered by the IORP directive. I beg to move.
Lord McKenzie of Luton: Clauses 19 and 20 set out the quality requirements for UK-administered money purchase and defined benefits schemes acting as qualifying and auto-enrolment provision under the employer duty.
Amendments Nos. 59 and 66, spoken to by the noble Lord, Lord Skelmersdale, would extend the scheme quality provisions to include qualifying money purchase and contracted-out defined benefit pension schemes administered anywhere in the world. It is very much our intention to enable employers who wish to use occupational schemes based outside the UK to do so under the duty, provided they meet the necessary regulatory and quality standards.
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However, while we are confident that all UK schemes fall within the categories of defined contribution, defined benefit or hybrid schemes, we cannot make the same assumption about schemes based elsewhere. It is possible that overseas schemes will have different benefit structures that will not be assessable against the quality requirements we have put in the Bill. Given the potential diversity of occupational pensions arrangements around the world, it is not possible to set out global standards in the Bill. That is why we have taken regulation-making powers, at Clauses 16 and 24, to set out additional regulatory and quality requirements for overseas schemes and to respond should new types of scheme emerge in the future.
The noble Lord asked about contracting out. The commitment to abolish contracting out is to be introduced by the end of the next Parliament. In the event this did not happen before the duties came into effect, we need to ensure that contributions in contracted-out money schemes are appropriate. However, there is no intention to change contributions through primary legislation. I may need to come back to that point after reading the record. As regards the point the noble Lord raised on Clause 17 and occupational pension schemes, he is right that an occupational pension scheme is defined under paragraphs (a), (b) and (c) of that clause. Paragraphs (b) and (c) concern those administered elsewhere than in the EEA and those that come within the IORP directive. Incidentally, as regards the point about drafting and the terminology, we shall wish to consider whether this is appropriately described.
I direct the noble Lord to Clause 24, which states:
“The Secretary of State may by regulations make provision as to the quality requirement to be satisfied in the case of an occupational pension scheme within section 17(b) or (c)”.
Therefore, we are dealing with occupational schemes here, not personal pensions. Clause 24 picks up the point about schemes that fall within Clause 17(b) and (c).
I should like to reflect on the issue that was raised about contracting out and what that means in terms of contributions and write to the noble Lord as I am not sure that my explanation was particularly coherent. I hope that that enables the noble Lord to withdraw the amendment at this juncture, but if he is not satisfied he can return to it at a later stage.
Lord Skelmersdale: I am very grateful to the Minister. He will be relieved to hear that this is one occasion when I approve of flexibility. Therefore, I do not intend to seek the Committee’s opinion on the various matters that I set out.
The Minister said that he would write to me. I am very willing to accept a letter, which may result in a little chat with some of his advisers. I have no doubt that as we go through the Bill other matters will arise on which a little chat will be desirable and save a lot of time. He said that the commitment given during the passage of the 2007 Bill, now the Pensions Act 2007, concerned the alterations to be made to contracting out by the end of this Parliament. This Parliament probably has another two years to run. As the Government are determined to do this, I can see no good reason why they should not do it in that time, but perhaps the Minister’s letter will answer that point. I rather hope that it will.
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The other matter concerns the regulatory requirements for those schemes registered in jurisdictions that are not in an EEA state. I hope that the Minister’s letter will also respond to that point. I cannot take this matter any further tonight and the Minister is devoid of ideas in that regard. Therefore, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
7.15 pm
Baroness Noakes moved Amendment No. 60A:
Clause 19, page 9, line 2, leave out “jobholder’s qualifying earnings” and insert “aggregate qualifying earnings of all jobholders in the scheme”
The noble Baroness said: I shall move Amendment No. 60A and speak also to the other eight amendments in this group.
These are, for today's debate, probing amendments, dealing with the difference between qualifying earnings as proposed in the Bill and earnings definitions widely used in existing pensions provision. We had a first canter round the course on this at the very end of our first Committee day when my noble friend Lord Skelmersdale moved Amendment No. 42. The Minister said that this was work-in-progress, but he gave no hint of what the finished product might look like and so I shall use this group of amendments to test him a little further.
I apologise in advance for the length of my remarks but this is an important topic. It raises complex issues for which the solutions that my amendments explore are, in turn, not easy. I have tabled these amendments to the quality requirements for money purchase schemes in Clause 19, but the issues apply equally to personal pension schemes in Clause 25. When we return to these issues on Report—I think it is fairly certain that we shall—our amendments will cover Clause 25 as well.
There is also the issue of whether the definition of qualifying earnings in Clause 12, which is the definition which drives both Clauses 19 and 25, ought also to be amended because of its impact on defined benefit schemes, and I shall be asking the Minister about that as well.
There is a basic question behind these amendments: how much disruption to existing pensions provision are the Government seeking to make and, linked to that, how much levelling down are they prepared to risk? The Committee will be aware that the approach to contributions in this Bill is not in line with pension practice at present. The use of an upper and lower limit, while understandable in the context of the default personal accounts scheme, is not used in private sector money purchase schemes. Typically, they have no such limits or bands. However, the most significant difference is the definition of earnings. The Bill uses a definition which includes commission, bonuses and overtime. Definitions vary in private sector schemes, but the practice now is overwhelmingly to focus on a definition of basic earnings. Sometimes some elements of variable pay are included, but these are increasingly rare.
So the problem is that the way private pensions work at present does not fit easily into the Bill's view of qualifying earnings. Because the private sector schemes
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The problem is exacerbated by the pay reference period which we expect the Government to set in line with the payroll periods used by employers; that is, weekly or monthly. Where an individual has a variable element of pay in one or two pay reference periods, the calculations under the Bill may well produce a spike in required contributions which, in that pay period, and that pay period alone, are higher than the amounts that the employer calculates under his existing pension scheme. Taken over a whole year, the employer's scheme may produce a higher amount of contributions, but it would fail the test set out in Clause 19 because of its focus on the pay reference period.
I am sure that noble Lords will have seen the rather complicated calculations that produced that result, and a number of submissions from outside organisations have exemplified the problem. I hope that the Committee will not ask me to make mathematical proof of the issue. There is a consensus among both employer groups and those associated with pension provision that there is a real problem here. My amendments in this group set out a number of ways of tackling the problem, and I shall spend a few minutes of the Committee’s time explaining the amendments and the solutions that they offer.
Amendments Nos. 61, 62 and 63 are the ideal solution from the employers’ perspective. They allow the quality requirements to be met by reference to the definition of “earnings” as used in the employer’s own scheme. I expect that the Minister’s answer will be along the lines of, “We must not let employers manipulate the definition of earnings in order to evade the obligations that the Bill sets out”. Of course, the vast majority of employers would not even think about doing that. In any event, the compliance regime in Chapter 2 could easily be expanded to cover the case of deliberate manipulation of earnings components to avoid the basic intent of the Bill, if that were the only objection to using the employer’s definitions of earnings.
My other definitions are less than ideal but try to preserve the employer’s ability to operate schemes with different definitions on a modified basis. Amendments Nos. 60A, 61A, 61B and 62A propose that an aggregate test be adopted, so that if the employer could satisfy the tests over the whole of its workforce, the quality requirement would be met. In effect, swings and roundabouts between employees would be tolerated. That might well mean that some employees ended up getting less than others in terms of individual contributions allocated to them, but the employer would at least be meeting the overall 3 per cent limit.
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