| Previous Section | Back to Table of Contents | Lords Hansard Home Page |
Lord Skelmersdale: In response to the final remarks of the noble Baroness, Lady Hollis, I am interested in employees who move up the savings scale, not down it. In other words, as I said in my introductory remarks, I can see absolutely no reason why an employee cannot, as the noble Baroness said, start on the shop floor, work there for perhaps a year or two and be auto-enrolled into personal accounts, because they are too young to join the main scheme. Then, perhaps because they have a quickness of intellect or whatever, they might be promoted to a substantially higher position and move into the firm’s qualifying scheme. At that point, there is a tiny level of investment in the personal account, which essentially is frozen, until, possibly—I repeat, possibly—2017. I have said all along that I should like such amounts to be transferable into the firm’s qualifying scheme. Although the noble Lord said that I am being a little previous, and he does not like my suggestion at the moment, I shall keep making those remarks, because eventually, with a bit of luck, I
10 July 2008 : Column 930
I can tell the noble Baroness that I am also worried not only about levelling down—we discussed that on previous amendments—but in Amendment No. 113F I am worried about crowding out, which is a slightly different way of looking at things. I do not want personal accounts to crowd out good schemes, which is a possibility. The Minister’s remarks—
Baroness Hollis of Heigham: That is a crucial point. The noble Lord says that he does not want personal accounts to crowd out; in the abstract, they cannot crowd out anything—people have to take action. Who does he think will permit a personal account to crowd out a good scheme other than an employer, presumably? He seems to be suggesting that employers will level down—that is what crowding out means.
Lord Skelmersdale: No, it means two things. Personal accounts can, and perhaps will, crowd out non-qualifying schemes—that is perfectly obvious—unless the schemes can be so tweaked, as I put it earlier, to make them qualifying. The system allows that; by definition they will be crowded out. I do not quite see what the noble Baroness is getting at; perhaps she will take me aside in her inimitable way later if she does not want to pursue the point now.
If I were sitting a university oral, I would, from what the Minister said, get somewhere around half marks: he likes the idea in principle of a lot of what I have been saying but he does not like the actual formulation of the amendment. Fair enough; I will certainly not pursue any of this today. I am slightly surprised by his remarks on Amendment No. 113HA. He said that the four qualifying principles should be the province of the DWP. I will have to think further about that. He also repeated—I was delighted to hear this—what his honourable friend said in another place; that is, that the annual report will include compliance, so that does not need to be in the Bill. It would be an awful shame if we suddenly found that such compliance was not in the annual report or the Bill. However, I am not in the mood to divide the Committee so the Minister can relax.
Lord McKenzie of Luton: We have had fascinating exchanges on qualifying schemes. There are provisions in the Bill to enable schemes that are not qualifying to be easily converted into qualifying schemes to permit auto-enrolment. That is the point; we want schemes to be at least as good as the minimum that the Bill provides for. We cannot stop employers having two schemes and different arrangements for individuals but we want to ensure that schemes are qualifying schemes and that they are good quality schemes that provide for contributions that are at least at the level of those identified in the Bill for personal accounts and auto-enrolment.
Lord Skelmersdale: First, they may not want to do that and, secondly, there is the small matter—in fact, it is rather large—of qualifying earnings. They may never get to be qualifying, however much they tweak. I understand what the Minister said on a previous Committee day—that PADA will bend over backwards
10 July 2008 : Column 931
Baroness Hollis of Heigham: The schemes that will fall through the net are those that are less beneficial to employees than personal accounts. In other words, crowding out is crowding out only where those schemes fall below the level of provision that personal accounts offer, however you assess that—it can involve basic earnings, qualifying earnings and the like.
5 pm
Lord Skelmersdale: No, I do not think that that is right. There may be all sorts of reasons why, even with the tweaking that I was talking about earlier, a scheme cannot reach the standard for qualification. I have absolutely no doubt about that. I shall not pursue this argument now, as I do not see that there is any future in it. Therefore, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 113B not moved.]
[Amendment No. 113C had been retabled as Amendment No. 113HA.]
[Amendments Nos. 113D to 113F not moved.]
Baroness Noakes moved Amendment No. 113G:
Clause 70, page 34, line 33, at end insert “and initially based on an annual management charge of no more than 0.3% per annum”
The noble Baroness said: This amendment adds to paragraph (d) of Clause 70(2) a rider designed to ensure that a personal account scheme will be set up with initial costs of not more than 0.3 per cent. This is a probing amendment, moved more in hope than expectation, in order to get the Government to put on the record the current position on costs and charges.
The Pensions Commission, much to the surprise of the financial services industry, said that personal accounts could be delivered for a 0.3 per cent annual charge. The Government, in their 2006 White Paper, Personal Accounts: A New Way to Save, said at paragraph 4.5:
“Our analysis indicates that in the long term it would be possible to run personal accounts at a charge of, or possibly even below, the 0.3 per cent level. In the short term, charges will be comparable with the Commission’s estimate when this is adjusted to take account of the likely need to finance the scheme over a shorter timescale, and the need for a compliance regime”.
What are the Government’s estimates of the cost of a personal accounts scheme when expressed in annual percentage charge terms? The Government clearly had some figures available in December 2006. I assume that they are updating those, so could we have the updated view? In particular, the December White Paper went on to refer to 0.5 per cent as the initial figure. Is that still the figure for charges in the early years or might it go even higher? My noble friend Lord Skelmersdale has already referred to that, as some people are talking about higher figures. As the charge levels have a large impact on the net return in retirement, the Minister will be aware that this is an important area.
Will the Minister say what assumptions will be made about the period over which the scheme needs to be financed? The paragraph from the December 2006
10 July 2008 : Column 932
On our fourth Committee day, we had a brief discussion about the evolution of the personal accounts scheme in the context of whether PADA would deliver the scheme on time. We will be returning to that issue on Report but today I am concentrating on the costs of the scheme in both absolute and relative terms.
I have not been able to trace much information about costs, although the emerging smoke signals are that it is proving to be expensive. PADA is spending £36 million in this financial year, having spent £13 million up to the end of the last financial year. That is £49 million and we are still a long way from 2012. We do not know what that is being spent on, but there are stories of armies of management consultants moving in in large quantities by the day. That fills us with some dread of what the total bill will be.
Mr Tim Jones, the chief executive of PADA, gave evidence to the Work and Pensions Select Committee in another place on 7 July. Almost the only specific thing that he said was that the operational costs of the early years were large. I expect the capital costs will also be pretty huge, but it is possible that those costs will be translated into annual costs by PFI-type service contracts.
A prior information notice was issued last month in connection with a procurement exercise, but I noted that the cost boxes were left blank. Unless the Minister can point me to some information on costs, we might have to conclude that we are in an even worse situation on this Bill than we were when we debated the Identity Cards Bill. The Minister may recall that the paucity of information available then led to a requirement being introduced into that Bill for six-monthly cost reports to Parliament, but we had much more information then about the costs of identity cards than we have been given to date on personal accounts.
I am not yet going to be defeatist on this subject because I hope that the Minister will be able to give us some information on cost levels in absolute terms and in terms of the annualised rate of cost per member. I hope that the Minister will be prepared to share with the Committee, for example, the membership assumptions on which cost percentages are based and say whether there are trigger points at which step changes in costs occur, especially as the number of potential members in the personal accounts scheme has shifted to a lower level since the emphasis of this project shifted towards auto-enrolment and away from personal accounts—well, not away from them, but incorporating a significant auto-enrolment element.
I know that the Minister will be told by his officials to hide behind commercial confidentiality, but I would like him to reflect carefully on whether that is the correct thing for him to do. The evidence given by Mr Tim Jones on the shape of the procurement and
10 July 2008 : Column 933
Will the Minister say what role the DWP is playing? It is all very well setting up a quango to do the detailed design and procurement, but if things go wrong the mess will end up on the Government’s doorstep. Do the Government have firm control over what is happening? What oversight processes are in place? For example, how often are progress reports, including costs estimates, submitted to Ministers? The Committee will be concerned that this is not another runaway project in the making, so what can the Minister say to reassure us on that?
Lastly, will the Minister say something about the charging for compliance costs, which clearly have to be taken into account when arriving at the overall cost levels? When we discussed this on an earlier day in Committee, the Minister raised the prospect of the levy being used to cover compliance costs because of the difficulty of separating out work on compliance with this Bill and the other work of the regulator. Can he expand on that? As he will know, the corporate sector, which has to suffer the high levy payments, will be resistant to any suggestion that its levy should be used to cover anything else.
I said earlier that this is a probing amendment, but I should say to the Minister that we regard this as an important topic, so I hope that he will be able to reply with specifics, not simply fine words. I beg to move.
Lord Kirkwood of Kirkhope: I support this amendment. It is elegantly worded and has been put in a positive way. I am glad that it is a probing amendment because the Committee should be reluctant to put detailed figures—percentages and fractions of percentages—in primary legislation. The annual management cost is at the heart of this scheme and is crucial to its success. I cannot think of another way of signalling the Government’s seriousness about enforcing these levels of charges. I hope that the Minister will say that they will be enforced.
I cite the example of stakeholders, which was in many ways a failure in terms of the number of empty accounts and the rest of it. However, I was persuaded that the stakeholder process forced the industry to get serious about constraining costs and charges. The Government were absolutely right to do that then and they are absolutely right to do that here in this way. I like the fact that the amendment contains the important word “initially”, because circumstances may change; if we were seriously threatening to put this into primary legislation, we would need a little flexibility. Those who are watching the progress of this legislation need to be absolutely clear that there is a target that the Government intend to achieve when it all goes live in due course.
I hear whispers behind hands that, “It will be 0.5, don’t worry”. In the saloon bars after the meetings that I go to, there is a lot of loose talk like that, which is quite worrying. The noble Baroness, Lady Noakes, is absolutely right to bring to the Committee’s attention
10 July 2008 : Column 934
If this is allowed to drift and the Government get seduced into allowing this to float up, as the noble Baroness said—I commend her for the way in which she introduced the amendment—the people who will be affected by this substantially are the members who take the schemes. This is an important amendment and I am pleased that it has been tabled. I support it and I hope that the Government will take it seriously.
Baroness Hollis of Heigham: I am not sure whether the amendment should be in the Bill, which is why it is important that my noble friend is able to clarify exactly, as far as he can, what the strictures and structures are of the personal accounts. That this should be the policy intent, objective and outcome that we seek to deliver, I think is absolutely right.
When we were dealing with stakeholders, it was clear that even modest changes in charges, such as a rise in the stakeholders’ initial charge from 1 per cent to 1.5 per cent, could wipe out returns on schemes that are, by definition, not aggressive; they are largely default—75 per cent are likely to go into default schemes—and therefore fairly low risk and modest in the investment returns that can be expected in most economic climates. Over and beyond management performance, what really matters is charge levels.
In conference after conference, my noble friend Lord Turner made that point clear when he was pressed by the industry to raise the charges threshold. He said, “No, you can get it down to this and, for reasons of investment return, you must”. As I said, whether the provision should be in the Bill, I rather doubt, but I hope that my noble friend will today give us the reassurances that we need to address the substantial point made by the noble Baroness, Lady Noakes.
Lord McKenzie of Luton: I thank the noble Baroness, Lady Noakes, for moving the amendment and the noble Lord, Lord Kirkwood, and my noble friend Lady Hollis for their contributions.
The provision in Clause 70(2)(d) reflects our commitment to low charges in the personal accounts scheme. It requires the delivery authority to take account of the effect on members’ charges when making decisions relating to the design and implementation of the scheme. The amendment gives me an opportunity to explain more about our intentions and why it would be inappropriate to set a specific charge structure or level at this stage.
As we made clear, low charges will be at the heart of the personal accounts scheme. Charges can have an important effect on people’s pension income—my noble friend Lady Hollis has just expanded on that point—and it is important that this should be reflected in the authority’s work. I know from my meetings with Paul Myners and Tim Jones that they fully agree. However,
10 July 2008 : Column 935
While our aim is to create a low-cost pension scheme, we have also made it clear that the personal accounts scheme should be self-financing in the long run. We expect its set-up and operational costs to be recouped from member charges. During the scheme’s early years, before revenue flows from charges mature, costs will inevitably exceed revenues. The funding strategy for the scheme will therefore need to find a way of funding this shortfall until revenue from charges is sufficient to cover costs. PADA will advise on the funding strategy, but the exact funding solution will not and cannot be known until the design of the scheme is finalised and the commercial process is under way.
In making its recommendations, the authority will need to consider how to strike the best balance between repaying this shortfall quickly, which could put an unreasonable charges burden on earlier members of the scheme, and taking too long to do so, which could mean passing the cost of additional interest and charges on to all members of the scheme. A limit on membership charges in the early years could restrict revenues of the scheme in the early years and in turn extend the time it will take for the scheme to become self-financing. This would add to the cost of financing, potentially to the detriment of scheme members.
In addition, a limit on charge revenue could make private sector engagement in the scheme less attractive, as restricted revenue flows in the early years may mean that contractors have to provide more up-front financing and have to wait longer before they are paid back for their services. Aiming to set the charge level in this way might therefore compromise the authority’s ability to drive best value from the market through its commercial and procurement strategies.
Further to this, noble Lords will be aware that the delivery authority has been consulting on the best charging structure for the personal accounts scheme. Previous analysis has shown that there is no easy answer: no structure scores best for members’ outcomes, encouraging participation and the sustainability of the scheme. Instead, trade-offs have to be made. It is not wise to pre-empt these careful deliberations by requiring the authority to have regard to an annual management charge. The authority’s consultation document explains that there could be other more suitable charging structures for the personal accounts scheme. We should give the authority the opportunity to explore these as part of its wider work on funding the scheme. Therefore, while I agree with the spirit behind this amendment, it is important that we give the authority scope to decide how the set-up and early years’ costs of the scheme should best be met.
The noble Baroness asked about the membership figures in the financial model. We are exploring a range of options for the financing of personal account schemes, but it is too early to publish our current assumptions about costs and revenues due to inherent uncertainty and commercial sensitivity at this stage. The department has published a fact-sheet that, with the impact assessment, sets out our assumptions about potential participation, which are that between 4 million
10 July 2008 : Column 936
The noble Baroness also mentioned the figures of £21 million and £36.1 million. The £21 million figure that was included in the impact assessment that was published with the 2006 Pensions Bill was an early estimate of the funding requirement to support the delivery authority during its advisory stage, and was intended to cover the period from Royal Assent of that Bill, which is now the Pensions Act, up to July 2008. It was our best estimate at the time, but it was made early before the authority even existed and hence before it had a formal budget, a chairman or a chief executive, and at a time when our thinking on the work programme was still developing.
| Next Section | Back to Table of Contents | Lords Hansard Home Page |