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I do not believe we should obstruct employers who want to use personal accounts and to contribute over 3 per cent. We should be doing all we can to encourage both employers and employees to contribute more to pensions saving if they are able to do so. The Bill will help preserve existing provision but I cannot accept that we would need to unfairly restrict employers who wanted to use the personal accounts scheme to achieve this aim.
Amendment No. 111B would put the annual contribution limit on the face of the Bill, adjusted annually, taking into account the changes in average earnings in the same manner as the qualifying earnings band. As I have just said, we have been clear that we intend to set the contribution limit at £3,600 in 2005 earnings terms and have reached a broad consensus with our stakeholders that this is the appropriate level.
We fully expect to uprate the annual contribution limit in line with changes to average earnings on an ongoing basis, but we must remember that this is a unique feature in an occupational pension scheme. It
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Details about how the annual contribution limit will work will be set out in the scheme order. PADA and the DWP are working jointly on developing the content of the scheme order and non-legislative rules for a public consultation in March 2009. We believe that our approach to Clause 61 and the annual contribution limit is the right one. Stakeholders believe that a sensible balance has been struck.
My noble friend Lady Hollis stressed the point about doing what we can to help people build bigger pots. That must be right. There is some headroom within the existing limit which will go some way—for lower earners quite a considerable way—towards her objective.
What has struck me since my involvement in the Bill—a lot of the consensus was created and driven before I ever got involved—is that a number of stakeholders have said, “We have not quite got what we want from this. We would like it to be better from our point of view in this direction or in a different direction”. Stakeholders have been prepared to sign up to the consensus and to try to make this work on the basis that it is a consensus.
In terms of a lifetime limit and possible one-off contributions, we have sought advice from PADA. That advice has now been received by my colleague Mike O’Brien, the Minister of State, and there will be consideration of that in due course. We are also committed to reviewing these matters together with issues of transfers in and out of schemes in 2017. The flexibility in the clause, therefore, is important in that respect.
In having disappointed everyone who has spoken today, I hope that I can at least escape with the proviso that I think we are in a place that will work, but some challenges and important issues have still been raised in this debate. I collectively ask everyone not to press their amendments.
Baroness Hollis of Heigham: Like my noble friend the Minister, I am grateful for the number of people who have spoken today because I think that, although this is a thin amendment in some ways, it seeks to open up a core issue: how you encourage people to save and make it worth saving. This is one of many ways in which to do that; I am sure that we will revisit some of the other ways. I am grateful for the contributions of all noble Lords, irrespective—as with unisex annuities—of gender.
I want to comment on Amendment No. 111A, in the name of the noble Baroness, Lady Noakes, which is grouped with my amendment. She emphasised several times that personal accounts involved a default scheme. I am sure that she is aware that if a woman on half median earnings of £11,000—she is the figure whom we are seeking to help—were in an average DC scheme, the employer would pay, on average, 6 per cent on the whole of her earnings from £0 to £11,000. In a personal account, half that would be paid on half of her earnings. Effectively, 1.5 per cent would be paid; that is all.
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Some employers, especially micro-employers, might not want to go into the market to set up a separate fund; they are currently paying, for someone earning £11,000 a year, £3 a week. The noble Baroness’s amendment would force them into paying perhaps £5 a week—£2 extra. They would be forced into the inconvenience, the hassle, the cost, the trouble and the inflexibility of going into the marketplace when they do not want to for the sake of £2 a week. I cannot believe that the noble Baroness, who is always so concerned to remind us of the burdens on business, is opposed to all burdens on business except where the employer might seek to avoid such a burden with a personal account by paying a contribution for an employee that is over the minimum. At that point, the noble Baroness would impose on the business the burden of going for a market option that it may not wish to seek. I find that, if I may say so, an extraordinary volte-face from the noble Baroness. It appears that she is so concerned with the meta-language of what may happen to the stability of bigger funds—I accept that—that she is willing to impose burdens of that size on micro-employers for £2 a week; she cannot regard that, on reflection, as reasonable.
The noble Baroness made some entirely valid comments on my amendment about NIRS2 and tracking. With personal accounts, we must, by definition, track in the contributions. We will therefore know, by definition, the years for which contributions have not been made. I do not see a problem; if you know that you are contributing from, say, 2015 to 2019, and you contribute again from 2022, by definition you know that between 2019 and 2022 you have not been contributing; the records will show that. The headspace is there and is available to be filled. NIRS2 was different.
Baroness Noakes: The noble Baroness should think about how that will work in practice. Unless there is a need to know the annual build-up of the contributions within the personal accounts scheme, why would that scheme need the kind of architecture that allows this detailed tracking, year by year, which is maintained, as I outlined, for up to 60 years? Once the money is in, within a certain limit—I refer to those years for which there might be corrections—there will be no need for the personal accounts scheme to have that detailed history of how it was built up, because it would just be in an allocated pot that was accumulating. The history will be history and of no relevance. That I why I believe that additional burdens will be put on to PADA.
Baroness Hollis of Heigham: I accept what the noble Baroness suggests but I find it extremely unlikely in relation to a personal account, for example, because of problems deriving from similarities of names and addresses or movements from house to house, property to property and job to job. I would be amazed if companies did not think it wise to keep those records. The noble Baroness may be right—I defer to her greater expertise on this—but it would be very rash indeed not to keep records to track, if only to avoid possible arguments about the size of the pot, the investments made and any access to following benefits.
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The problem with NIRS2 was not about tracking the records but the fact that NIRS2, as I know to my bitter experience, failed to notify people of their deficient contributions. The records were tracked; the problem was with the deficiency notices.
Finally, my noble friend cheered me up slightly when he said that it was perfectly reasonable that these things were under review. He talked about the need to keep this simple and not to make PADA’s job more difficult. However, he should consider the fact that flexibility is not the opposite of simplicity; it is the opposite of inflexibility and rigidity. The requirement down the years would be to revisit something because not enough headspace was built in in the first place. I am sure that my noble friend is well aware of that. With that moral homily, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 111A to 111C not moved.]
Baroness Greengross had given notice of her intention to move Amendment No. 112:
The noble Baroness said: In view of the Minister’s comment that this will still be under review, there is a glimmer of hope. On that basis, I will not press the amendment.
[Amendment No. 112 not moved.]
Baroness Noakes moved Amendment No. 112A:
“( ) There shall be an absolute prohibition on transfers between the pension scheme established under section 58 and other pension or savings schemes.”
The noble Baroness said: I will speak briefly to this amendment and Amendment No. 112A; we have covered some of the territory. This deals with transfers. I was grateful to the Minister for pointing me to the way in which the rules on transfers in and out will be constituted.
Transfers are rather like top-ups in that it is not absolutely clear that it will be right for people to transfer money out of existing pension rights in other schemes and into the personal accounts scheme. The Minister will be aware that there is a concern in the pensions-providing industry that personal accounts will suck in money and that the scheme could advertise itself as sucking in all these additional pension pots. There is a problem there. There is also the bells and whistles aspect that has been mentioned. The chairman of PADA has warned about that in relation to damaging successful implementation.
I have tabled two amendments. One says, “No transfers at all”, and the other says, “Transfers from 2017”. We understand that the Government’s position is that there will be a review, with the possibility to transfer in from 2017. The industry is happy with there being no transfers before then. What is the Government’s view of timing in this regard? Will there be a review ahead of 2017 to allow transfers potentially from 2017, or a review after five years of operation of the scheme, leading to transfers possibly being allowed from perhaps 2019? That would be an important piece of information. I should be grateful for the Minister’s latest view on the Government’s position on transfers. I beg to move.
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Baroness Hollis of Heigham: I want to use this debate as a hook with which to raise an issue that I am worried about. It has been raised by TPAS, whose 25th anniversary noble Lords have referred to, and I suspect that it may be a concern for many noble Lords. We may explore it more fully on Amendment No. 134ZB. It involves the issue of stranded pots and the capacity to transfer them in.
I am batting beyond my technical range here; I hope that noble Lords will forgive me if I am mistaken, but I believe that what I am saying is accurate. Let us assume that an employee in her 50s joins a personal account in 2012 and, over the next five years, puts in the maximum, which comes, in today’s prices, to £18,000. I agree that that is unlikely but it is possible. That sum could not be trivially commuted; she would be forced to annuitise it. Let us suppose that that employee already has two small personal pots, each in personal pensions, of £2,000 each. If those two small pots were based on occupational pensions, with an employer contribution or whatever, the 2008 Budget would allow her, as I understand it, to trivially commute them in addition to her £18,000 coming in from her personal account. In other words, they can essentially be ignored.
However, if her two small personal pensions are not occupational, but personal pensions, she cannot trivially commute them; she cannot annuitise them, because they are too small and, with the noble Baroness’s amendment, she cannot transfer them into her personal account. Those two £2,000 pots are completely lost; they are stranded in no-man’s land. She already has savings of £18,000 in her personal account. She has an additional £4,000. If those pots are in an occupational pension she can get at them, but if they are in a personal pension she cannot and they are totally lost. I understand that to be the case; if it is, frankly, something has to be done about it.
We can discuss this again when we get to the amendment on trivial commutation, but I am giving warning now, because I think that it is one circumstance in which problems might arise. Another circumstance is pension sharing on divorce; you may end up with a sum where the existing pension fund does not want to retain the split but the fund has nowhere else much to go. There may be cases like that where those sums need to be able to come into personal accounts. Whether that is effected through the code of practice or guidance—it does not necessarily have to be done on the face of the Bill—or through regulations, there is a bundle of such issues almost hiding under the stones, which we will uncover as we go through the Bill.
This is the issue that most grieves me. I raised it at the TPAS reception dinner last night. The chief executive of PADA and several financial advisers said that it is a real problem. I am persuaded that we should do something about it. That may not be today. My noble friend may not yet have sufficient answers; I recognise that this is primarily a matter for HMRC rather than DWP. However, I hope that noble Lords will agree with me that we cannot tolerate a situation in which modest savings are left stranded, not belonging to anybody, and just fall back to the general scheme members. Those modest savings will have been lost to somebody for whom every penny counts.
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Lord Oakeshott of Seagrove Bay: The noble Baroness is talking about stranded pots, which could be a particularly restricted, technical area. These are what some people call “zombie pots”. Many people to whom one talks, particularly those who are not well off, have little pots—£2,000 here, £3,000 there. They are hardly worth the bother and people do not know what to do with them. I talked earlier about how insurance companies are putting up charges and, similarly, this is not very economic for them. It seems to me that, for the reasons that we discussed in the debate on the last group of amendments, it must make sense to have a relaxed attitude towards letting people consolidate their little pots into personal accounts.
I cannot for the life of me see why the insurance industry is so worried about this. If it is giving a good, cost-effective service to these people already, it should not worry. It would just be offering consumer choice. From the point of view of PADA, I do not see that this is bells and whistles. To be able to have a number of small pots coming in will, by definition, reduce your cost base because you will have a higher average pot and economies of scale. For the same reasons and principles that we were talking about on the last group, we oppose these amendments and are in favour of people having maximum flexibility to bring these little pots in.
Lord McKenzie of Luton: I thank the noble Baroness for the amendment, which gives me a chance to clarify the Government’s position. I believe that we have made quite clear our commitment to banning pension transfers into and out of the personal accounts scheme. Our rationale for banning the transfers of pension funds to and from personal accounts, as with the contribution limit that we have just been discussing, is to minimise the impact on the market caused by the scheme’s introduction in 2012 and to ensure that the scheme remains focused on the target market of low to moderate earners. Furthermore, the transfer ban is designed to promote simplicity for employers, individuals and the personal accounts scheme, as transfers can involve complex financial decisions and processes for all parties.
Our policy on transfers was widely supported by our stakeholders. However, as always, we must allow the scope for some exceptions. First, we propose that there will be two exceptions to the prohibition on transfers into personal accounts. These relate to pre-vested pension rights and pension credits on divorce. These are tightly defined circumstances and we do not believe that these exceptions will dilute the focus on the target market or have a significant impact on the financial services industry. We will set out the detail of the ban on the transfer of pension funds into personal accounts in the scheme order, as I explained earlier. We plan to prohibit transfers out of personal accounts under Clause 111 of the Bill and we intend to amend the rules in the existing legislation, the Pension Schemes Act 1993, to prevent members from transferring out of the personal accounts scheme.
We recognise that the transfer-out ban could complicate the decumulation arrangements for individuals over 55 who may want to aggregate all their pension pots in
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Amendments Nos. 112A and 112B would place a blanket ban on all transfers, in and out, until 2017. I have some sympathy with the idea of a bedding-in period, effectively allowing the personal accounts scheme and the existing industry to adjust before 2017, when transfers may again be permitted. Indeed, our commitment to a ban on transfers and a subsequent review in 2017 will achieve this. However, as I have explained, we cannot support the idea of a blanket ban. It is important that we allow limited scope for a number of closely defined transfers that will benefit scheme members but will not impact adversely on the pensions market.
Even in the short time between establishing personal accounts and the 2017 review we do not believe that it makes sense to prevent, for example, transfers of pension shares on divorce into personal accounts. We will keep the position on transfers under review as the personal accounts scheme evolves and the wider market impacts become better understood. The 2017 review will address this issue specifically.
In response to the question put by the noble Baroness, Lady Noakes, the current proposition is that the review will take place in 2017. It will decide what will happen to the ban: whether it will be lifted and within what timescale. I hope that the noble Baroness is reassured by my iteration of our commitment to limit transfers in all but an extremely limited range of cases and I ask her to withdraw the amendment.
Baroness Noakes: I thank the Minister for that response and I thank other noble Lords for taking part in this interesting debate, which has highlighted the issues involved on both sides. I am happy with the Minister’s response. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 112B not moved.]
Baroness Noakes moved Amendment No. 112C:
The noble Baroness said: We are still in Clause 61 but this is a slightly different point. Amendment No. 112C proposes to repeal subsection (5) of Clause 61. We have just been discussing what restrictions on personal accounts, if any, should be placed in the Bill. The Government have generally signalled in their emerging policies that they do not want anything in the Bill.
This amendment is different and subsection (5) is a completely different part of the clause. It is predicated on there being limits and restrictions of some nature set under the order-making powers. However, subsection (5) allows the Secretary of State to repeal the section and
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We can obviously have a healthy debate, as we have partly had today, about what sorts of limits are appropriate for this scheme, bearing in mind the different desires of different groups of individuals and businesses. However, it is difficult to see whether there would be any circumstances in which the Secretary of State would give up the power to set limits and restrictions, thereby allowing the personal accounts scheme to extend beyond its target market without any reference to Parliament.
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