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Lord Adonis: My Lords, no question from the noble Lord could possibly be frivolous, by definition, and I take his point seriously. I did not have immediately to hand the reply, but that was no comment at all on the seriousness of the issue, which I fully recognise. I know how inconvenient it is to pedestrians, cyclists
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What proportion of savers deposits, as opposed to accounts, will be covered by the proposed increase in the limit of the guarantee scheme to £50,000, and what is their estimate of the value of savings which remain unprotected.
Lord Davies of Oldham: My Lords, the FSA has published estimates of the effect of an increase in the deposit compensation limit to £50,000 in its consultation paper issued last Friday. For banks, the estimates are that a £50,000 compensation limit would cover 98 per cent of accounts and 60 per cent of deposits. The £35,000 compensation limit covered 96 per cent of accounts and 52 per cent of deposits. For building societies, the estimates are that a £50,000 compensation limit would cover 97 per cent of individuals and 77 per cent of balances. The £35,000 compensation limit covered 95 per cent of individuals and 69 per cent of balances.
Lord Forsyth of Drumlean: My Lords, with very substantial sums not covered by the guarantee, is it any wonder that people are moving their money about and adding to the pressure on banks and building societies? Does the Minister not see that what is needed is action this day to guarantee deposits, and to end the uncertainty and the leaks about government discussions with the banks, which is undermining confidence and making a serious situation worse?
Lord Davies of Oldham: My Lords, the noble Lord will appreciate the fact that the FSA has acted in increasing these figures, which is proof of the urgency of the situation and the necessity of a prompt response. The Government have gone to Europe to discuss with the other major economies there the fact that there should be some co-ordination on the degree of support. We are all well aware of the fact that in one or two cases co-ordination has been remarkably absent. We must look towards a European-wide standard for that co-ordination. In the mean time, the Government will do all that they should to safeguard the interests of taxpayers and depositors.
Lord Barnett: My Lords, while recognising that the noble Lord, Lord Forsyth, could turn almost anything into a party-political point, would my noble friend accept that even under the £35,000 limit it would be perfectly proper for anyone to move their account to a different bank without harming the bank? In any eventtaking the point that I made to him yesterdaywould it not be better if the Government made it quite clear that there was no likelihood of any depositor losing any money in existing banks or building societies?
Lord Davies of Oldham: My Lords, there is no such likelihood, because our major banks and building societies are entirely secure. However, we have had one or two instances of runs on banks and building societies which did require prompt action, which has been carried outaction which in the case of Northern Rock, as the Chancellor was able to report yesterday, has already produced some significant beneficial effects. The Government always make sure that any support that they give is against longer term securities, which safeguard the interests of the taxpayer in the longer term.
Lord Tanlaw: My Lords, could the Minister help to relieve some uncertainty? If a deposit is held off-balance sheet or in a liquidity fund offshore, will that count for an assurance of replacement of up to £50,000?
Lord Davies of Oldham: My Lords, the noble Lord will recognise that the scheme, and the increase in the limit, is there to protect relatively small depositors. Very large tranches of money through institutional investors are not covered by the scheme, but no one in this House would expect them to be.
The Minister of State, Department of Energy and Climate Change & Department for Environment, Food and Rural Affairs (Lord Hunt of Kings Heath): My Lords, there is time for both noble Lords. Perhaps the noble Lord, Lord Higgins, could go first.
Lord Davies of Oldham: My Lords, that is an extremely difficult calculation to make. We are not in a position to make it. We are in a position to protect the retail depositor, and that is what we have carried out. The noble Lord will be all too well aware of the fluctuations in resources between banks and countries which reflect the global position which we all confront at present. The authorities concern is to reassure depositors with limited resourcesnot institutional investorswho have the right to see that their deposits are safe, and they are.
Lord Newby: My Lords, the Minister knows from our discussions yesterday that there is great concern about the situation of the banks in Iceland. Will he give an assurance that, if Icelandic banks go bust, UK citizens with deposits in those banks will be able to claim the full £50,000 compensation from the UK compensation scheme, with the Government then going to Iceland to get the proportion due, rather than expecting depositors in this country to tramp the streets of Reykjavik looking for redress?
Lord Davies of Oldham: My Lords, the situation with regard to Icelandic banks is a difficult one and changing each hour. My note says quite clearly that the Government are continuing to work closely with Icelandic authorities to understand fully the developments in the Icelandic banking sector. I therefore cannot add a great deal more enlightenment, except to reassure the noble Lord that of course the financial services compensation scheme and the UK authorities will work with the Icelandic authorities to achieve exactly the results that he enjoins on me.
Baroness Symons of Vernham Dean: My Lords, I confess to having some concerns still. Maybe it is because I have misunderstood the scheme. What about the small business person or the person on very modest income but not on PAYE who uses their bank deposit to, in effect, save for their tax liability and therefore forfeits some of the safety net for their personal savings which would otherwise be available to them? Surely those people, who may be of very modest means, are placed at some disadvantage?
Lord Davies of Oldham: My Lords, the Financial Services Authority is all too well aware of exactly the category to which my noble friend rightly draws attention; namely, those who have temporary high balances because of the businesses they transact. The FSA is addressing itself to that issue.
The noble Lord said: My Lords, I shall also speak to the other government amendments in the group. Ministers and officials have held a series of meetings with stakeholders over the summer to discuss qualifying earnings and, in particular, the impact on employers using money purchase schemes.
In response to the concerns raised and debated in Committee we have tabled a group of government amendments that together make clear that employers may meet the test on the basis of an assessment of the value of contributions paid into a scheme over an annual period regardless of the method by which these contributions are calculated.
This enables employers to assess the flow of contributions over a whole year and avoid any difficulty created by irregular payments if the assessment were done on a monthly basis, for example in a month when bonuses are paid. In effect, employers and their schemes will be able to smooth the flow of contributions into workplace pension saving over the course of a year while ensuring that all members receive the minimum standard. These amendments achieve the use of an annual assessment by making three broad sets of changes.
Amendments Nos. 1, 17, 18, 19, 20, 24, 26, 29 and 30 relate to the pay reference period that may be prescribed in relation to the money purchase qualifying test. Pay reference periods are used to determine the value of qualifying earnings for different purposes in the Bill, including for the purposes of assessing contributions in money purchase schemes. Stakeholders initially raised concerns that the test would require minimum contributions to be made every week or month depending on when the jobholder was paid. They feared this would mean a scheme would fail to qualify in periods when irregular payments such as bonuses were paid, even where the worker received contributions higher than the minimum in all other periods.
Taken together the amendments make it clear that regulations can require different pay reference periods for the different purpose in the Bill. They also clarify that the values of qualifying earnings in Clause 13 are expressed annually. This means that we can set the pay reference period for assessing the contributions required into a money purchase scheme at one year.
Amendments Nos. 13, 22, 34 and 35 address the risk highlighted by stakeholders that the reference to scheme rules in the quality test might be narrowly interpreted. Contribution arrangements can be contained
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Amendment No. 22 therefore removes any confusion that the contribution requirements have to sit in a single scheme rules document. This amendment makes clear that, provided the scheme requires the minimum contributions in respect of the member, it does not matter if this requirement arises by virtue of the scheme rules or from any other form of scheme documentation. Amendments Nos. 13, 34 and 35 are for consistency with Amendment No. 22.
Amendments Nos. 23, 25, 28 and 31 seek to address the concern of stakeholders that the wording of the quality requirement could be interpreted to force employers to replicate the minimum contributions formula of 8 per cent of qualifying earnings into their scheme documentation. The amendments therefore confirm that a scheme can use any formula for calculating pension contributions or any definition of pensionable pay provided the actual value of contributions required by the scheme is equal to or higher than the value of 8 per cent of qualifying earnings. This makes clear that employers with money purchase schemes will not be obliged to adopt the same method for calculating contributions as is used to express the minimum contribution requirement. Amendments Nos. 27, 51 and 67 are consequential to those dealing with pay reference periods. They ensure that the definition of tax year where it is used in Part 1 is clear.
When taken together, these amendments will enable the overwhelming majority of employers who already provide a headline contribution rate of 8 per cent to meet the test using their own definition of pensionable pay without the need for any changes. Departmental analysis shows that 98 per cent of the members who currently receive total contributions of 8 per cent and 3 per cent employer contributions under their DC scheme today will meet the test. We believe the annual equivalence assessment provided for by these amendments addresses the concerns raised by stakeholders at and around Committee stage.
Over the summer, stakeholders articulated further concerns and, as a consequence, I recognise that some do not feel that these amendments go far enough. However, we are still working with them and looking at further options. We need to be satisfied that any further options do not have an adverse effect on pension outcomes for individuals and do not introduce unnecessary additional administration. I believe that some of the remaining concerns of the stakeholders have been reflected in the amendments that have been tabled by the noble Baroness, so I will give way at this point to enable her to speak to her amendments. I will comment further when I make my winding-up speech. I beg to move.
Baroness Noakes: My Lords, I have Amendments Nos. 21 and 32 in this group, as the Minister said. They also address qualifying earnings, but from a slightly different perspective from the government
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Let me say at the outset that we recognise that during the summer the Government remained in dialogue with the organisations that have expressed concern about qualifying earnings and the way they are worked out in the Bill. Those organisations include the ABI, the CBI, the Institute of Chartered Accountants, the Society of Pension Consultants and the NAPF. We had also understood that dialogue was continuing, though I gather that last weekends reshufflewhich fortunately did not involve the Ministermay have caused some delay. I hope that the Minister can confirm that discussions will now continue in the search for a satisfactory solution.
When we discussed these issues with the Minister last weekI thank the Minister for the time that he made available during the Recess for those discussionswe recognised that further discussions with the industry participants were both necessary and desirable. That meant that matters would not be resolved by Report stage and would have to remain open until Third Reading. I hope that the Minister will confirm that the Government accept that further amendments on this subject can come forward at Third Reading. Neither of us can predict what those amendments might contain or indeed which side of the House might move the amendments. On that basisI hope that the Minister will confirm that it is agreedI have grouped my amendments today with the government amendments. I regard my amendments as probing for today.
Before I explain the amendments, I should like briefly to outline the nature of the concerns with qualifying earnings. The Bills approach to the calculation of pension contributions uses two concepts which most, if not all, existing schemes do not use. First, the Bill uses in-year banded earnings. Banded earnings are not unknown in existing pension provision, but I am advised that banded earnings for in-year calculations are never used because of the very complications that the Bill creates. Where banded earnings are used in existing pension arrangements, at present they operate off previous years data and hence are not affected by income variation in the year.
Secondly, the Bill uses a definition of qualifying earnings that includes the volatile elements of earnings that most workplace pension schemes avoid; in particular, bonuses. Again, existing schemes tend to use salary bases, which are stable and predictable, which is why bonuses are rarely included in earnings, at least in modern schemes. If employees have income volatility in-year, there will be peaks and spikes in contributions as calculated under the Bill, which is where part of the problem arises.
Taking those two factors togetherin-year banded earnings plus variabilitythe Government have created a system that is likely to produce a variance between the Bills minimum calculations and the employers scheme calculations. Of course, in many cases, the employers scheme will be more generous than the Bills minimum, because few private schemes stop at the earnings level that the Bill uses, but for some
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It is easy to argue, as the TUC has done, that every employee must be entitled to the minimum set out in the Bill, but there is another side to the coin, which could be much more damaging to employees generallynamely, levelling down. We are told that, whatever the early research on employee attitudes shows, as the details of the implications of the Bill have become clearer, there has been a hardening of view about the administrative pain that employers would be prepared to shoulder in terms of continuing with their existing provision. The economic climate is playing a part in influencing employer attitudes to the sustainability of costs and other burdens.
At present, employers prepare their payroll data for their businesses, but have to meet two sets of rulesthose operated by HMRC for income tax and national insurance. If the Bill were passed in its present form, it would require another set of data to meet the pension contribution rules for every employer whose calculation methods differed from those in the Bill, not just the employers of the 30,000 or so people who might be affected. One does not know that there is no difference until the last decimal point has been calculated for the last employee.
There has been a suggestion that modern software can provide the solutions at the touch of a button, plus software updates and implementation costs. But that misses the point. Businesses hate complexity. Complexity costs money and creates an environment in which it is difficult or costly to avoid errors. If the Bill becomes too complicated for employers to deal with, they will seek a solution that avoids the problems. The solution is simple and obvious: level down to the Bills calculation methods or, probably more likely, close the existing scheme and hand it all over to the personal accounts system. That is a rational approach and one which the employer groups and their advisers are telling us is what may well happen. If it does, every employee could end up receiving the minimum specified in the Bill, but hundreds of thousands of employees, or even millions, would get only that as wellto their detriment. A levelling down is not a theoretical possibility, but a racing certainty. The only question is: how much will occur? It is also pretty clear that it will hurt more than 100 per cent coverage or benefit.
That is the background to these amendments. Clause 16 has a quality test for qualifying schemes calculated for every member. That is the effect of paragraph (c) of subsection (1). My Amendment No. 21 introduces a further way of qualifying by reference to equivalence established at the level of the scheme as a whole. That
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