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10 July 2008 : Column 923
Baroness Thomas of Winchester moved Amendment No. 113:
Clause 70, page 34, line 23, at end insert “and the Authority must exercise an overriding duty to act in the best interests of future members and, from 2012, members of the scheme”
The noble Baroness said: The amendment is in the names also of the noble Lord, Lord Oakeshott, and the noble Baroness, Lady Greengross, who want very much to be associated with it. It is a simple, probing amendment which would give PADA a clear focus on its core activity. The authority, as the Minister has said we should call it, is given in Clause 70 no fewer than six broad principles under which to work. It is important that it does not lose sight of its main purpose, which surely should be to act in the best interests of members and future members of the scheme. Giving PADA an overriding duty would help ensure that if there was any conflict between the principles outlined in the Bill, it would be clear where PADA’s duty lay. It would also give an important layer of security to scheme members.
When the consumer organisation, Which?, carried out market research into pension provision, people said they would trust most an independent body such as that recommended by the Turner commission. If they knew that such a body was to be set up with a clear, overriding duty, such as that in Amendment No. 13, to look after their interests first and foremost, rather than with at least six different principles and no one overriding principle, I think that I know which they would prefer.
It is stated in the Explanatory Notes to the Bill that the six principles are matters to which the authority will have “express regard”. That may be a term of art—I am very ignorant about terms of art—but what exactly does it mean?
In responding to the amendment, the Minister will probably say that PADA has to get the balance right between employers and other qualifying pension schemes and that an overriding objective for PADA is therefore undesirable. However, that is a matter for debate. It is entirely possible that PADA finds that its plans for personal accounts conflict with the need to encourage participation in qualifying schemes. Minimising the adverse impact on qualifying schemes might dilute the impact of personal accounts on the target group. Others would argue that getting the balance right between the new scheme and the broader pensions industry is the business of the Pensions Regulator and not that of PADA. But whatever reply the Minister gives, it is important that we have this debate now so that we can be clear what PADA’s main objective is. I beg to move.
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Baroness Turner of Camden: I support this amendment, although I had assumed that the authority had this duty anyway—to look after the best interests of members. However, as the noble Baroness points out, it does not actually say that in the section of the Bill dealing with principles. I see no reason why it should not be stated in the Bill, as she suggested.
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Lord Skelmersdale: I rather wonder whether the noble Baroness, Lady Thomas of Winchester, regrets the absence of her noble friend Lord Oakeshott. I have to say, with no disrespect to her, that I rather regret it.
Even though this is a probing amendment, I cannot support it. From a narrow point of view, it appears entirely sensible: the trustees will, by trust law, have to consider the best interests of the membership. So why not the authority, as we have to call it now? That ignores an important difference between the two bodies; the trustee corporation is specifically set up to handle personal accounts and only personal accounts. In contrast, the authority is being established not only to set up personal accounts but to give advice and assistance to the Secretary of State on the proper functioning of auto-enrolment in general. On these Benches, we are very much aware that personal accounts, while better than the complete lack of provision currently available for many in the target group, are considerably less generous than the majority of private pensions that we are hoping will qualify for auto-enrolment. It would therefore be in many cases counterproductive and deeply inappropriate for the delivery authority to promote membership of personal accounts ahead of membership in other qualifying schemes—a point that I sought to make a little earlier in our debates this afternoon. Yet that is what this amendment could lead to.
It is cheaper to administer a large scheme than a small scheme. Given the impact that administrative charges will have on the eventual return, it will certainly be in the interests of members with personal accounts for the authority to engage employers to use personal accounts rather than other qualifying schemes. Your Lordships may consider that to be rather a reductio ad absurdum, and perhaps it is, but it highlights effectively my wider point that we should not allow the authority to establish a nationalised pension system. It is to manage the implementation of auto-enrolment. I believe that this amendment would add nothing to that duty and might very well hinder it instead, which we do not want to happen.
Lord McKenzie of Luton: I start by saying that I am delighted to see the noble Baroness involved in this, as she has been involved so ably in lots of other pieces of legislation that we have debated recently.
Clause 70 requires the authority to consider a number of guiding principles in carrying out its work; these principles provide the framework within which the authority will undertake its functions and deliver its objectives. I fully agree with noble Lords that the interests of future members are of central importance in the set up of personal accounts. The principles and other measures in this Bill provide a focus for the design of the personal accounts scheme. That focus is on moderate to low earners without access to good-quality workplace pension provision. The principles and other measures in this Bill already ensure that the authority takes account of those core matters which will be important to the prospective members of the scheme—those in the target group. This is why there are principles covering the need to encourage and facilitate participation, minimise costs, take account of members’ preferences in making decisions about investment choice, and
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While the interests of prospective members of the scheme are important, they are not the only consideration. The authority must also have regard to those other matters that are fundamental to the success of the reforms. Those include, for example, the impact on employers and on the broader pensions industry. I cannot, therefore, agree that the authority should have one overriding duty. It is vital that the authority gets the balance right between the needs of the personal accounts scheme and its future members, the overall impact on employers and the impact on the broader pension industry—including members and prospective members of other qualifying pension schemes.
The authority has established a consumer representative committee and has launched an extensive strategic and targeted customer insight and research programme. These measures will ensure that it has an accurate understanding of the needs of those who are likely to be members of the scheme, and that relevant processes are thoroughly tested.
Finally, on the point about members’ interests after 2012, I remind Members of the Committee that, once the scheme is operating, the trustee corporation, as with any other trust-based scheme, will have a duty to act in members’ best interests. I hope that that has helped the noble Baroness.
It is not simply a matter of the authority complying or not with the principles. Clause 70 requires the authority to have regard to the principles as it carries out its functions under Clause 69. It cannot choose to not comply with one or more of the principles. Its statutory duty will be to have regard to the matters articulated by the principles in everything that it does. Inevitably, in considering the principles, there will at times be competing priorities. However, the authority will need to balance and make judgments across the set of principles to reach conclusions that can provide the best solution in the circumstances. Depending on the matter under consideration, the authority may have good reason to give one particular principle more sway than others, but this is not the same as saying that it has not complied with the principles. I hope that, with that further explanation, the noble Baroness will be satisfied and feel able to withdraw her amendment, and I hope that it also satisfies my noble friend Lady Turner.
Baroness Thomas of Winchester: I am grateful to the noble Baroness, Lady Turner, for her support and to the Minister for his kind words. As the noble Lord, Lord Skelmersdale, knows, I have my L-plates on for this debate, but I was always going to move this amendment, not my noble friend Lord Oakeshott. I thank the Minister for his words of elucidation. I found them extremely helpful. I beg leave to withdraw the amendment.
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Amendment, by leave, withdrawn.
Lord Skelmersdale moved Amendment No. 113A:
The noble Lord said: I speak to a larger group of amendments than usual: Amendments Nos. 113B, 113D to 113F, 113HA and 113M. My amendments are reasonably clear. They tweak the principles under which the authority will operate to ensure that it does not inadvertently do more harm than good, or even less good than it otherwise might.
As I said previously, I remain acutely aware that the authority is, despite its name, not limited to the establishment of personal accounts. Although setting up personal accounts is an important part of its duty, it will also have an equally important—even critical—role to play in establishing a landscape where saving for your retirement is more common at low incomes, whether through personal accounts or not.
Amendment No. 113HA sums up the thrust of our concerns quite well, especially in its sub-paragraph (iv). The Government’s and the authority’s overriding aim must be to increase total savings. It must not be considered an acceptable outcome if the existing pot of savings is merely redistributed more widely. If this existing pot does not expand, the Bill will have failed, and failed dismally. To prevent that happening, my amendments seek to ensure that the authority actively seeks to prevent the basic levels of employer and employee contributions becoming in any way the accepted norm across the industry.
As we have said many times, and as Amendments Nos. 113A and 113D highlight, existing pension schemes tend to offer considerably more generous terms than personal accounts will. These schemes need to be fully appreciated by the authority, and membership into them should be encouraged. Amendments Nos. 113B and 113E make a slightly different point. It is likely that some existing schemes will not make the qualifying criteria but would still result in better retirement income than personal accounts. For example, the Tesco pension scheme would fail the qualifying test because workers are auto-enrolled only after a year with the company. It is not beyond the bounds of possibility that a similar company might comply with auto-enrolment into personal accounts, but keep its more generous scheme running in the hope that workers transfer to the better scheme when they become eligible for it. As the Bill is drafted, it will be a breach of employers’ duties for them even to point out the existence of their non-qualifying but more generous scheme. It will also be impossible for employees to port their personal accounts money into a firm’s much better scheme after a year or so in personal accounts. What price, then, the very successful portability arrangements of my noble friend Lord Fowler that even this Government have improved?
The pensions market is a highly complex and frequently innovative place. The authority must have the flexibility to use common sense when weighing up whether workers are being materially harmed by remaining in non-qualifying schemes rather than being shunted willy-nilly into personal accounts. The authority should focus on giving low earners who have no access to a pension scheme the opportunity to start saving. The Minister
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Amendment No. 113M seeks to improve public scrutiny of the authority by ensuring that its compliance with the Clause 70 principles is published. It would also throw up any inherent contradictions in the principles—paragraphs (d) and (f) in particular could be mutually exclusive. I beg to move.
Lord McKenzie of Luton: Clause 70 goes to the very heart of our ambitions for these reforms. It captures in legislation those matters which have shaped the development of our policy, and which must guide the authority as it moves forward with implementation.
I know that we all support the goal of more people saving for retirement, more people contributing more for longer and, ultimately, higher incomes in retirement. Equally, we know that to achieve these aims we need to address that combination of individual inertia and poor commercial viability which has resulted in large numbers of moderate to low earners not saving enough for their retirement.
Amendment No. 113F would alter the principle at Clause 70(2)(d) to require the personal accounts scheme established under Clause 58 to be aimed at a target group. The Bill is drafted to provide the legislative framework to deliver a scheme focused on the target group of moderate to low earners who do not have access to good quality workplace pension provision. However, the Committee will appreciate the difficulty of achieving a precise legislative definition of a target group that will stand the test of time. Instead, our approach is to achieve the same goal by setting the scheme a clear focus through the unique features of the contribution cap and prohibition on transfers, and the requirement on the authority to design a scheme within the framework of the principles. The authority fully understands this. When Tim Jones gave evidence to the committee of the other place, he made clear the authority’s role, saying:
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Amendments Nos. 113A, 113B, 113D and 113E seek to broaden the scope of the principles requiring the authority to have regard to all existing schemes. I make clear that the personal accounts scheme is not being introduced to replace good quality pensions. Instead, it will be an additional pension scheme focused on the target group of moderate to low earners, which will sit alongside other schemes in the pensions market. That is a core ambition of our reforms.
The amendments would broaden the scope of the principles beyond the pension provision that is defined as “qualifying” in Clauses 15 to 25. They would mean that, in designing personal accounts, the authority would be required to have regard to all existing schemes. That could include schemes that do not meet the minimum standards that we consider important in providing for a reasonable income in retirement. That
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I share the noble Lord’s wish that the private pensions industry, which works well for many millions, should be allowed to flourish. We want to preserve good quality existing workplace pension provision, much of which offers greater member benefits than the minimum standard prescribed by the reforms.
Amendment No. 113HA seeks to include a new principle for the authority about the overarching ambitions of the reforms. Our ambitions for the reforms are clear; more individuals saving and more pension contributions. However, that should not be expressed as a distinct legislative principle for the authority, as Amendment No. 113HA seeks; rather it is part of the rationale behind the Bill and the pension reform programme.
As such, it is for the DWP to monitor the likely impact and evaluate the extent to which our objectives for the reforms have been met. Already, we have an extensive programme of research and data collection to inform this. We are tracking employers’ and individuals’ attitudes and responses to the reforms, we are continuing to develop our evaluation strategy in consultation with external stakeholders and we expect a full evaluation to be undertaken after the reforms have bedded in. Much of the research and evaluation will be publicly available, and will provide opportunities to examine the impact of the reforms on pension saving and the wider pensions market.
Amendment No. 113M would insert a new clause requiring the authority to include in its annual report a report on how it has complied or otherwise with the principles set out in Clause 70. During the debate on the principles in the other place, my honourable friend the Member for Warwick and Leamington explained that the authority’s annual report will provide detail on the delivery and performance of its business, which will include information on how the principles have been considered during the year. Therefore, we do not think that this needs to be enshrined in legislation. I can also confirm that the authority’s forthcoming annual report for the 2007-08 financial year states that future annual reports will include such information.
In closing, we take very seriously our responsibility in ensuring that the reforms achieve our aims. I believe that the measures in the Bill, including the principles as they are drafted, provide both the framework for delivery and a framework against which success will be assessed. I hope that I have been able to reassure the noble Lord that we share the ambitions behind the amendments, but that there is no need to amend the existing drafting of the Bill to achieve those aims. Accordingly, I hope that the noble Lord, Lord Skelmersdale, will feel able to withdraw his amendment.
Baroness Hollis of Heigham: Before the noble Lord, Lord Skelmersdale, responds and decides what to do with his amendment, perhaps he can help me on a couple of questions. I listened carefully to him and to my noble friend. I am particularly puzzled by the implications of Amendment No. 113F. Like the Minister, I share the objectives expressed by the noble Lord, Lord Skelmersdale, that we are seeking to target lower income people who are currently not in saving schemes to come into a very simple, stripped down scheme and
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I do not understand why the noble Lord seems to be suggesting, despite the remarks of his noble friend Lady Noakes on previous occasions about how we always assume that employers are “unscrupulous”—on this side we always distance ourselves from such allegations—that unless something like this amendment is in the Bill, employers will close down better, more generous, contributory schemes and focus the conditions of personal accounts on people who are better paid than the lower paid and who are already protected in schemes. In other words, the noble Lord seems to be worried that the employers will use the arrival of personal accounts effectively to dilute their pension promise.
Is that what the noble Lord is worried about? If so, he seems to be confirming the allegations of the noble Baroness, Lady Noakes, that there may or may not be unscrupulous employers. If that is not his allegation, his worry or his concern, why would any employer or employee seek to move to a personal account with a 3 per cent contribution on only half median earnings—half the salary range—compared with the conventional DC scheme of, on average, a 6 per cent contribution on the full salary range?
If we are not to end up with two schemes within a company—one for the higher paid and one for the lower paid—how does the noble Lord overcome the problem of someone who starts on fairly modest earnings, perhaps on the shop floor, and then ascends to office management or supervisor or whatever? Does the noble Lord expect that person to go from one scheme to the other? If so, they will pay a very high cost in terms of what happens to the old personal account scheme that will be frozen when they have to move to a new DC scheme, given the refusal to allow any portability between the two schemes.
What is the noble Lord actually afraid of? Who does he think will warp or manipulate the system? Why would employers who were willing to continue with a decent DC scheme not wish to do so? Why would employees wish to move from one scheme down to the other? What happens to the occupationally mobile?
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