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Amendment, by leave, withdrawn.
Clause 61 [Contribution limits]:
Baroness Hollis of Heigham moved Amendment No. 111:
Clause 61, page 31, line 12, at end insert “and must provide that additional contributions may be made by or in respect of a member in any tax year to make good the shortfall where contributions fell below the maximum amount in a preceding tax year or years”
The noble Baroness said: I shall speak intermittently also to the other amendments in this group, but I reserve the right to respond to the noble Baroness when she develops her arguments. This is a probing amendment which will, I hope, provoke us to spend a moment or two discussing the adequacy of personal account pots. I am sure that the amendment is technically deficient; I am not sure that it is even technically necessary, as my noble friend the Minister may tell the Committee.
The point of personal accounts is to ensure that low-paid workers—poorer women in particular—are encouraged to save for their retirement, but some of them may have a pay-to-save debate, which is an issue that we have explored under previous amendments. I have in mind the amendment of the noble Baroness, Lady Thomas, on advice, and Amendment No. 89 of the noble Lord, Lord Skelmersdale, on means-testing reviews. Therefore, such workers need, as I hope your Lordships may agree, a full basic state pension and as much state second pension as possible. However it is important above all that the personal account pot is as large as possible. Only that will securely float savers off, and allow them to stay off, pension credit.
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If the Committee will bear with me, I shall give some figures so that they may be recorded in Hansard—I am sure that your Lordships are already familiar with them. Over 40 years, a woman on median earnings of around £21,000 will build a pot of around £190,000, or about £14,000 a year on a level annuity—half of that on an indexed annuity. I am grateful to the IMA for these figures. On half of median earnings over 40 years—£11,000—that pot will be £65,000, or £5,000 a year on a level annuity and about half that on an indexed annuity. Now we come to the risky area: over 20 years, if a woman starts saving at 45 and stops at 65, the woman on median earnings will retire with a pot of £45,000, or £3,500 on a level annuity and £1,750 on an indexed annuity. If she has half of median earnings—that is the woman whom personal accounts should seek to help in particular—is working from 45 to 65 and paying into a personal account pot, she gets a pot of £16,000, or £1,200 a year on a level annuity and £600 a year on an indexed annuity, possibly within the range of trivial commutation depending on how it is developed.
A pot of £16,000, 20 years’ saving and trivial commutation is much higher than the cut-off point for pension credit, an issue to which we shall return on a much later amendment. However, I think that your Lordships can already see where the rocks are. Over and beyond issues of housing benefit and its tapers, the problem is for older women who are low paid, who save for a limited period and as a result have pots which may interlock them with a pension credit system depending effectively on the income of any second person in the household. If their partner or husband has a generous pension, they will not come within pension credit; if they do not or if they are solo, they will.
If some women a little above the trivial commutation figure take a level annuity, they will probably be free of pension credit in opening years but increasingly dependent on it in later years. If they take an indexed annuity, which they probably will not, they will need less pension credit but need it earlier. If they do the sums, they may decide not to save.
So the answer, I repeat, is to help them to build a bigger pot. It is absolutely key; it is the only decent, affordable and deliverable way in which to make it worth saving. That is why, as I understand it, I am opposed to the amendments in the names of noble Lords opposite, Amendments Nos. 111A and 111B, which appear to ban the possibility of an employer seeking to contribute more than 3 per cent. If the employer wishes to contribute more than that—because after all, if it was a conventional DC scheme, he would pay in 6 per cent on average—why should he not? It would not only be a decent thing to do, given the current state of DC schemes, but it would allow the pot to build. We can perhaps argue that point more fully in a moment. We can look at the trivial commutation level under a later amendment.
We can look, as a way in which to build a bigger pot, at unisex annuities, so that women get a better return from their pot, as I am sure the noble Baroness, Lady Howe, will argue later. They can shop around for a better return, as the noble Lord, Lord Oakeshott,
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For poorer women, possibly the single most important issue in the Bill that we will address is the ability for them, if they choose, to come into a pension scheme at nil earnings if they were already in it and then have a matching contribution. It is the only sure way in which they choose to build a bigger pot and ensure that it pays to save. If noble Lords opposite agree, as I am sure they do, and are concerned, as I am sure they are, about the worries of means-tested benefits, they should really help us to build bigger pots, and not seek to press amendments that cap the pot size. If they do, they lock poorer, older women into means-tested benefits.
This amendment tackles the problem in a different way—and in a way that is frankly less satisfactory than the way I would like to see. It would increase the contributions paid in particular years, which could be done by exceeding the contribution cap in any one year by £3,600, adding a right to transfer up to £10,000, say, from a small inheritance or a lump sum from divorce pension sharing, or by including small, stranded sums. That is something that I want to raise under the next amendment from the noble Baroness, Lady Noakes, or the noble Lord, Lord Skelmersdale. None of us wants to recycle money from existing schemes and destabilise them, but sometimes people acquire small, stranded pots and it would be useful for them to corral them into their personal accounts.
Another way is to allow people to pay in for missing years, which is what this amendment does. My noble friend may argue, and he may be right, that that should not be necessary. In practice the limit of £3,600 caps you at some £40,000 a year. In practice a woman on half-median earnings will contribute £1,000 a year and, on median earnings, £2,000 a year; simply upping their own regular contributions beyond that minimum would help but it would not attract additional employer contributions, especially if a subsequent amendment were to have any support in the House.
The other way in which to bring new money into what was clearly not drawn from the existing scheme is to allow contributions to make good missing previous years. That seems to me an innocent way forward to deal with this problem. I refer to those years in which people did not pay into a pension at all because they were not in work, they had children or were looking after an older person. Of course, they might have continued while not in work, but financial pressures may have interrupted their contributions. But several years later, possibly because they had a small inheritance or possibly a pension-sharing lump sum on divorce, they acquire a lump sum of £10,000 or £15,000, and they can see that they have missed the five previous years. This amendment would allow them the financial head space to put the whole sum in rather than having to drip-feed it in over later years between what they
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It is a modest amendment, a probing amendment and not a very satisfactory amendment. It is one of several ways in which we could, I hope, help lower-paid women to build up their pots. If we do not help women to do that, the pay-to-save argument, the fear of mis-selling and issues of advice about whether women should or should not auto-enrol will loom ever larger as 2012 approaches. I hope my noble friend will pay serious attention to the reasons behind an amendment such as this. I beg to move.
6 pm
Baroness Noakes: Perhaps the noble Baroness would let me speak to my amendments in this group. We could then deal with all the issues covered by this group of amendments. I have grouped my amendments here because the noble Baroness, Lady Greengross, tabled Amendment No. 112 in this group. I had not intended to group my other amendments with those of the noble Baroness, Lady Hollis, but since I have done so, I shall speak to the amendment of the noble Baroness.
Baroness Hollis of Heigham: I was somewhat surprised.
Baroness Noakes: My purpose was to group my amendments with Amendment No. 112, that of the noble Baroness, Lady Greengross. I have some sympathy with the amendment of the noble Baroness, Lady Hollis. She has helpfully clarified that she was referring only to employee, or individuals’, contributions, and that did not carry any sense of backdating employer matching for any purpose. That is fine. My concerns are practical rather than theoretical. The amendment will involve considerable additional complexity for personal accounts, which would then have to track records of contributions year by year. That record could extend for up to 50 years if somebody started contributing at the age of 16 and stopped when they were somewhere in their sixties, or possibly even older. This Bill allows contributions up to the age of 75, so I will change that to 60 years or more.
Anybody who knows anything about NIRS2, the system for recording NI contributions, as I am sure the noble Baroness, Lady Hollis, does, will know that recording, maintaining and holding details of contributions over these very long periods is neither easy nor cheap. I have a very real concern about the additional burden that the amendment would place on the implementation of this scheme, particularly in the design phase. From what I understand about their attitude, those running PADA would run a mile from that complexity. I am also concerned about the cost of doing this, and the impact on the cost limit that we were aiming at. This was set at 0.3 per cent or 0.5 per cent; we will come to that in due course. That limit is already under some stress. Those difficulties of both complexity and cost pressure are real. At heart, the amendment is sensible, but the practicalities may be very difficult to cope with.
My amendments in this group address the broad theme of not allowing personal account schemes to crowd out private pension provision. In that respect, it
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To be clear, we stand for healthy competition, but competition from a state and statute-backed pension provider may not be healthy if that becomes the default repository for all long-term savings from large swathes of the population. That will, in turn, weaken the UK’s financial services industry, a major contributor to our economic growth. We interfere in this sector at our peril. We agree with the Government—and, probably, with all sides of the House—about the need for greater pensions saving. We are not apart from the noble Baroness on that. We certainly support the creation of the personal accounts scheme if it can be delivered. Our support is tempered by the need not to create some kind of nationalised industry, which brings unfair competition to private-sector providers.
Let me deal with some of my amendments. Amendment No. 111A explicitly states that employers should not contribute more than the 3 per cent that the scheme is based on. The noble Baroness is shaking her head, but let me explain. The rationale for this is that personal accounts should be a default scheme for those employers who want to contribute the minimum. If they want to contribute more, they should research something like group personal pension schemes, to allow them to contribute higher amounts to a workplace-based pension scheme for themselves. We must not let the personal account scheme crowd out people who want more than the default, and should therefore go out into the market to find other options for their employees.
Baroness Hollis of Heigham: I am grateful to the noble Baroness for giving way. Why should they go out into the market? I can see that they might wish to do so, but why push them into the market if they would prefer the simplicity of adding to the existing personal account contribution? Why place additional burdens on business?
Baroness Noakes: They then do not go into personal accounts and add to them; they go into another form of scheme. If they choose to do more for their employees, we must not discourage that. At the same time, we do not wish to divert pension savings from pension providers that are part of the backbone of our financial services industry. There is a great danger that this scheme, in the way that it is set up, will become a magnet, attracting all forms of additional contributions from all over the place. Some will be from employers and some from employees; we will come to that. That is the reason. My amendment does not preclude higher employee contributions, which is what the amendment of the noble Baroness was about. It is a default scheme, where employers contribute the minimum and that is it. If employers want to do more, they should be out in the marketplace.
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Amendment No. 111B is designed to place in the Bill what we understand to be the Government’s policy; namely, that there will be a maximum contribution level of £3,600 for any employee in any year. I have provided that this should be uprated in the same way as the earnings band under Clause 13. It is logical that the band should be increased; that should be provided. The £3,600 limit allows contributions to rise above the minimum allowed by the band, but not by such a huge amount that it would start to displace private sector provision. The earlier proposal for a £5,000 limit, as the Minister will be aware, generated considerable opposition from the pensions industry, which remains concerned about the Government’s intention. The Government have said that it is their policy. If that is the case, they should be prepared to place it in the Bill.
Amendment No. 111C deletes subsection (3) of Clause 61, which allows the Secretary of State to prescribe an amount for top-up payments to be made by a member. The noble Baroness wants this subsection to be made mandatory. We believe that the Bill should specify an annual amount for contributions to the scheme, but the scheme should not get into the general investment business. Staying with the power, in Committee in another place, the Minister sometimes talked about a £10,000 limit under subsection (3) and sometimes about a higher limit, and even a lifetime limit. On Second Reading, the Minister said that the Government wanted flexibility, both in the amount of top-ups and for the period from which they will be allowed. I am not sure what the Government’s policy is. We have heard many figures and the traditional reference to flexibility. Could the Minister provide more clarity on that?
We believe that the personal account scheme is fundamentally about annual contributions to pensions, to build up savings for retirement. It is not designed to be an all-purpose investment vehicle. There should be no possibility of the Bill turning it into that. As I have mentioned, this will be a nationalised undertaking. All past evidence is that when nationalised industries compete in competitive markets, they operate relatively badly. However, when there are market imperfections, which there could be if we are not very careful with the Bill, they tend to clean up. That would be a very serious problem if the personal accounts scheme achieves that by trading from its position as a government-backed organisation with no effective capital market disciplines constraining it.
There is also a question of whether members will properly understand any ability to deposit additional money into the personal account scheme. Such payments will not attract any employer contribution—the noble Baroness, Lady Hollis, made that clear—and may attract tax relief; and, if fair competition rules the day, would not get tax relief. Again, the Government have not said what their position is in relation to additional payments.
Both issues are vital to an understanding of whether it is a good deal to invest in the personal account scheme. The problem is that members could easily be misled by the general information provided by personal accounts. They could be misled into thinking that their additional contributions could produce the same
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The API has pointed out that top ups could be made in an advice-free zone if the personal account scheme was allowed to take them, and that members are very likely to make investment mistakes. Does anyone really want to get into the sort of mis-selling scandal that could be involved? The Government will have set up and be standing behind the personal account pension scheme, so we can expect mis-selling problems to end up, ultimately, on the Government’s door step.
The Government may well think, as I am sure will the noble Baroness, Lady Greengross, that Amendment No. 111C, in removing the power in proposed subsection (3), is too harsh. If so, the Government should come off the fence and say what they intend to do and argue that on the basis of an amendment to place in the Bill whatever limits and constraints there are. A debate can then be had, in particular with those in the pension provisions industry, about the impact of that on existing providers, on the future flows of investment money and the impact on the financial services industry generally.
Baroness Turner of Camden: I received a lot of briefing from the TUC on Clause 61. I say at the outset that I agree with a great deal of what my noble friend Lady Hollis said in moving her amendment. The briefing caused me to give notice of my opposition to the whole of Clause 61, but that was simply a way of being able to say what I have to say about the clause. The problem is that there is not enough flexibility. There should be flexibility for individuals to put extra money into their personal accounts when they can, perhaps when they receive a small inheritance, there is a divorce settlement, when some kind of investment matures, or perhaps with some saving through something like an ISA.
The argument for allowing such additional contributions is that personal accounts will build up to a significant pension only if employees contribute throughout their working lives. Not everybody can or is willing and able to do that. In particular, that may not apply in the case of older workers who will start to save for a pension for the first time when personal accounts commence in 2012. Moreover, there are the working patterns of many women, to which my noble friend Lady Hollis has devoted quite a lot of time. They are much more likely to have breaks in pensionable employment due to child rearing and caring responsibilities, to work part-time or to be in low-paid employment that does not give them the opportunity to build up significant savings for retirement.
Anyone who has missed out on the opportunity to contribute may want to catch up later in their working life. It would be sensible to encourage this and to increase personal responsibility, which has always been a key government objective in the Bill as in other respects. It seems odd that the new system should forbid extra contributions of a size that would probably not make much sense if invested elsewhere in a separate private pension. People in the target market, with no
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As indicated earlier by the noble Baroness, Lady Noakes, I suppose that there is the possibility of unlooked-for competition with private investment business. On the other hand, the sort of people for whom this Bill is intended to provide benefits are not liable to be tempted into other investments if they are putting their pension investment into this scheme. It is intended, as everyone has said from the beginning, for people who are not well paid and who otherwise would not have any occupational pension provision except through the personal accounts scheme. If the scheme does not allow them sufficient flexibility to contribute, when can they contribute so that when they actually retire they have a pension entitlement that enables them to lead a reasonable life? They will be forced on to the benefit scheme, as indicated by my noble friend Lady Hollis. I hope that the Minister will consider carefully what has been said about the possibility of allowing extra payments in order to make absolutely certain that when people retire they have adequate retirement benefit.
Baroness Noakes: As to the advantages of putting pots of money into something like a personal account scheme, there are no tax advantages compared with ISAs. In fact there is a big disadvantage in that, having put it in, you can get out only 25 per cent as cash; the rest you have to take as an annuity. So it is a restriction and it may not be advisable to lead people to think that that is where they should put their money. Has the noble Baroness thought about that?
Baroness Greengross: At this stage I will speak to Amendment No. 112 standing in my name and to the other amendments in the group. I particularly support Amendment No. 111 tabled by the noble Baroness, Lady Hollis. Like my amendment, it is aimed to promote flexibility. I am grateful to the People's Pension Coalition and to the organisation Which? for their advice on Clause 61.
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