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Amendment No. 32 backs that up by inserting a new clause after Clause 27 to set out a regulation-making power, whereby the Secretary of State could set up a self-certification scheme on equivalence to be enforced by the regulator. The Minister will be aware that the Association of British Insurers, on behalf of itself and other organisations who have an interest, is discussing how such a scheme might work in practice and might be turned into a practical scheme for the regulator. I know that the ABI is keen to continue those discussions.

No one wants to create loopholes through which rogue employers can avoid their proper obligations. For that reason, we have not constrained the regulation-making power in my new clause. The approach is designed to enable employers to comply with their obligations, the vast majority of whom will want to do that in a way which fits with their business. The more we try to make employers retrofit their businesses to the concept of pension contributions in the Bill, the more we put at risk existing, more generous provision.

The Minister will not be surprised that I am not wedded to the wording of the amendments, which I have already said are probing for today. However, we are wedded to trying to find a solution to this problem that goes with the grain of reasonable business practice because we do not want the Bill to create incentives for employers to level their existing provision down. We do not want the Bill to create a presumption that future provision should always be based on the minimum in the Bill, and we do not want the Bill, in its search for perfection, to end up being the enemy of good pension provision. I look forward to hearing whether the Government’s approach is capable of shifting by the time we reach Third Reading in order to avoid these problems.

Lord Oakeshott of Seagrove Bay: My Lords, I am glad that we have started in a reasonably consensual mode today and I hope that that is how it will be for most of the afternoon. This is a proper way to work together to improve the Bill and, like the noble Baroness, I thank the Minister for the full and frank discussion that we had last week on all aspects of the Bill. It was very helpful. Perhaps I may say how pleased we on these Benches are to see that he is still with us. He is a listening Minister and I hope that his new colleagues at the DWP will listen to him. I welcome Rosie Winterton to the position of Minister for Pension Reform. Obviously, it must be very difficult to have these changes so late on in a Bill but we look forward to continuing to improve it.

Like the noble Baroness, I also thank the organisations that have been lobbying us and discussing these issues with us over the summer. They include many of the same representative organisations, which I shall not list again, but I should also like to thank individual companies—Legal & General and Norwich Union, in particular—for the helpful discussions that we have had. Legal & General, in particular, used rather a good phrase when we were talking through the detail

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of some of the qualifying earnings matters. It is getting some feedback and said, “The trouble is that the DWP and pension scheme providers don’t speak quite the same language”. I am glad if communication is improving.

We are broadly happy that progress is being made but, like the noble Baroness, we feel that there is a little further to go. I am not over-impressed with the argument that it is all right for big companies, with the attitude that you have the software and just have to run it to the end of the year. It is all right for big companies to check that no single employee is worse off but in the Bill we are talking about millions of small companies with five or 10 employees. They will not all be computerised and matters will not be so easy for them. We need to get out of a big company or big organisation mindset, if I can put it that way, when we look at practical problems of this kind.

Having said that, I believe that the approach is right. I believe that we are moving forward and I hope that by the time we get to Third Reading there will be something on which we can all agree.

Lord Blackwell: My Lords, I welcome the amendments that the Minister has put forward but perhaps I may add my voice to those urging him to go a bit further along the lines of the amendments tabled by my noble friend Lady Noakes. In this case, it is a matter of the prize of simplicity being more important than the prize of precision.

If my arithmetic is right, someone whose basic earnings were at least 75 per cent of their total earnings would be better off getting 8 per cent of basic earnings rather than 8 per cent of earnings above £5,000 until their total earnings were well in excess of £20,000. Obviously, the higher their ratio of basic earnings, the higher that number goes. Therefore, it would be possible to have a simple test of the sort that my noble friend may have been imagining. So long as an employer ensured that bonuses and other one-off payments did not account for more than 25 per cent of the total wage bill across all employees—that is, an aggregate measure—he would be allowed to use the very simple test of paying people a percentage of basic pay, as is the case now. I know that would mean that there may be some individuals for whom that might not apply, but this is a matter of the benefits of simplicity outweighing the risks of having one or two individuals caught out. Most employers would not choose to run a system which deliberately disadvantaged employees in that way.

For the sake of precision, the risk is that rather than allowing a simple rule, the Government lose the bigger prize of having a high take-up of the national pension scheme, while encouraging those employers who have generous schemes to maintain them. If we drive many employers to take the simplest route, the Government will lose much more than they will gain by trying to make these laws too precise. I suggest one example—I am sure there are many others: you could have a rule when certifying the schemes that the higher the aggregate percentage of commission and bonuses, the higher the ratio of basic pay that has to be paid to take account of that. I urge the Government to be flexible and to consider whether there is a simpler way of addressing this which would address the concerns raised.

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3.30 pm

Lord McKenzie of Luton: My Lords, I thank the noble Baroness for the constructive way in which the amendment was moved, and I thank other noble Lords who have spoken. We share the desire to prevent levelling down and to do all that we can to ensure that existing good-quality schemes remain and flourish.

As for the reshuffle, stakeholder discussion will proceed. I understand that the ABI has already been in touch with the new Minister of State. I am not sure whether this is good news, but—apparently as part of my departmental responsibilities—I shall be more directly involved in some of that.

A noble Lord: Hear, hear!

Lord McKenzie of Luton: My Lords, I was not looking for a cheer—well, perhaps I was. If the Government do not come forward with further amendments at Third Reading, and I do not guarantee that we will, then we would certainly recognise the right of the Opposition to do so.

I do not want to address in detail the points about banded earnings and the basis on which pay has been calculated. I believe that we addressed those issues in Committee. That concerns replacement rates, ensuring that auto-enrolment is right and that it pays to save, which is the reason for some of those parameters. I again acknowledge the benefit of avoiding complexity where possible. Administrative costs are an important issue and we need to keep them as low as we can. There is also the importance to business of certainty in how they conduct their affairs.

I note the comment of the noble Lord, Lord Oakeshott, that Legal & General does not think that the DWP speaks the same language. I would not accept that, of course, but we shall do all that we can to encourage the department to do so.

The noble Lord, Lord Blackwell, again stressed the prize of simplicity. I acknowledge that point. There is nothing to stop employers paying into the scheme as they currently do. They do not need to change the basis on which they make their payments, as the amendments today have made clear. At the end of the day, the challenge, now on an annual basis, is to ensure that contributions are at least equivalent to the requirements under the Bill.

We recognise that the amendments reflect the further concerns of stakeholders, who want employers to have greater certainty in advance of their existing schemes’ quality. We take these concerns very seriously and are considering how they might best be addressed.

The amendments tabled by the noble Baroness would enable the Secretary of State to create an alternative standard for qualifying money purchase schemes and enable an employer to assess its provision at scheme level rather than at individual saver level. A scheme would qualify providing that the employer followed a certification procedure set out in regulations and guidance from the regulator. A form of certification procedure is one of the options we are considering. However, I must be clear that anything that moves away from a standard which guarantees the minimum to all jobholders

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will need very careful consideration. Until we have better understood the feasibility and implications of this and other options, we are unable to go further. We will continue to talk to a wide range of stakeholders on this issue. If we are persuaded on an option that does not jeopardise the outcomes of the reform and we can find a suitable means of achieving it, we would be content to bring forward further amendments at Third Reading. I appreciate that this remains an open issue and am content to debate it further at Third Reading.

At the heart of the matter is the situation in which the move from the standard laid down in the Bill facilitates arrangements whereby the quality of standards may occasionally not be met because of unexpected arrangements in bonuses and pay. We need to compare that, perhaps, with something that builds in a structural arrangement whereby there is likely to be a cohort of people who occasionally or routinely do not receive the minimum contributions. Grappling with that dilemma is part of our challenge, but I recognise the concerns. We need to keep talking to see whether we can end up in the same place, because we have that shared objective.

On Question, amendment agreed to.

Lord Hunt of Wirral moved Amendment No. 2:

2: Clause 1, page 1, line 12, at end insert “, and

( ) who is not an exempt jobholder for the purposes of that employment”

The noble Lord said: My Lords, I declare my interest as a partner in the national commercial law firm, Beachcroft LLP, and also my longstanding connection with the insurance industry, culminating in my presidency this year of the Chartered Insurance Institute. I also welcome such a consensual approach to the issue we are debating: the House’s spontaneous reaction to the news that the Minister will be more closely involved in the development of this policy should not go unremarked. The Minister, with his normal modesty, referred to it. It reflects a genuine belief that he has taken a tremendous amount of time and trouble with noble Lords, particularly those on the Front Benches, who have sought to preserve and strengthen the consensual approach to this scheme. I endorse the remarks of my noble friend Lady Noakes in that respect.

Although this is a highly technical Bill, I hope that I can explain this group of amendments in a simple and straightforward manner. The rationale behind personal accounts is very much to develop and provide a good quality of pension provision for those who do not currently have access to a workplace pension. I believe that that objective is shared by everyone. However, “good quality” had not been defined until the introduction of this Bill, and even now that definition remains somewhat illusive and mercurial. That point will take me to the heart of this group of amendments.

The decision by Ministers to allow some existing schemes to become qualifying ones is widely welcomed. However, I have tabled these amendments to draw attention to a serious concern that the proposed criteria for judging the quality—and therefore the qualification or non-qualification—of existing pensions would be unworkable for many schemes. During the recess, I

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spent some time sitting down with a number of people who will have to implement the procedures we are debating, and I have been made aware that some aspects of what is proposed would threaten to undermine much good quality existing provision, which would have serious negative consequences for those customers with valuable benefits such as guarantees.

It is sensible to set up a simple quality test regarding contribution levels to ensure that people are not disadvantaged by being auto-enrolled into a qualifying scheme if it pays a level of contributions that is lower than personal accounts. However, I ask the Minister to take account of the fact that that does not relate to the age and complexity of the whole range of UK pension provision.

Contribution rates are one useful measure of the quality of a pension scheme, but they are not necessarily the only measure, and quite often they are not the best measure. By focusing on contribution levels alone, this legislation may force people out of pension schemes with potentially valuable benefits by using an arbitrary and inflexible definition of what constitutes a good quality scheme. These additional benefits may take the form of guaranteed income levels in retirement, protected rights or additional insurance, which are hard to compare with a straightforward contribution level.

We know that British business is already overburdened with regulations and red tape, and the Government’s proposals could make the situation worse unless a step or two is taken in line with these amendments. The dirigisme that I have described could poison the well of existing good quality provision and dramatically reduce diversity in the marketplace. Of course, that is not the intention of Ministers, but they will be as aware as I am of the law of unintended consequences. One provider has told me that it estimates that pension contracts covering many hundreds of thousands will be unable to change to the basis imposed by personal accounts and will be unable to accept fluctuating payments. Should the contribution requirements remain unaltered, employers will have no alternative but to shut such schemes down and move employees to a qualifying scheme or personal accounts. People with additional benefits would be particularly hard hit, as they would miss out on the guarantees and returns that they rightly anticipated and expected to be the bedrock of their plans for a secure retirement.

The Bill lacks an acknowledgement of the need to treat existing members of existing schemes differently from new members of new or existing schemes. This goes back to first principles because such people are by definition outside the target market of personal accounts, which is those without access to current pensions, and they should not need to be auto-enrolled as they are already members and, in many cases, actively applied to join a scheme on its existing basis. Of course, they are not pension experts as a result of that, but the Bill must find some way of recognising historic decisions made by many people to go into that type of pension scheme. There is nothing in the Bill’s fundamental policy objectives to suggest that we should be seeking retrospectively to fit pension contracts going back decades into the new framework imposed by personal accounts.

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The amendments tabled in my name allow existing members of existing schemes to be exempt from auto-enrolment into qualifying schemes. They empower employers and employees to make considered judgments about the value of their pension provisions, enabling them to decide which scheme best suits their needs without unnecessary coercion or complexity. That could be their current scheme, which may not accept fluctuating contributions or have a total contribution of 8 per cent, but which may offer guarantees and a higher employer contribution, or a simpler new scheme aligned with the structure of personal accounts. Existing members must be allowed to have a clear and honest choice before being auto-enrolled in a qualifying scheme. Otherwise they may be steamrollered into making a decision that they later regret because they lose benefits—they will be unable to access those benefits once they have left the scheme.

3.45 pm

The detail of the amendments would effectively replicate a more streamlined sequence of events, which would occur should what is described as the exempt jobholder opt out of personal accounts to stay in their current scheme. It avoids members opting out of both their existing scheme and a qualifying scheme. Of course, members must be given protection against unscrupulous employers—the Minister kindly gave me an opportunity to talk to him about existing provision—so, as he will see, I have included in the amendments additional safeguards which would kick in if the basis of their current provision stops or reduces.

In conclusion, I feel strongly that additional administration and the requirement to make unpredictable additional top-ups may encourage some employers just to stop their scheme and move to a qualifying or personal account scheme to avoid the burden of liability. The ideal solution is one which allows employers to say in advance that X per cent contribution of their chosen salary definition is going to comply.

Money purchase schemes work on the basis of delivering a target income on retirement. These may be particularly affected by the contribution requirement. They have an expectation that overall the scheme will deliver a percentage of final earnings or an end benefit in monetary terms. Generally, they work on a set level of contribution for the life of the member, not just month by month. Changes in the benefit basis would be made by means of the employer buying additional levels of benefit in a separate contract and/or paying large single premiums at intervals.

Such a scheme would clearly be non-qualifying under the current criteria, yet it may well provide a benefit in excess of that expected from a qualifying scheme. I have seen some schemes which are based on a guaranteed end result rate of annuity, for example, paying £1 income for every £9 saved. To put this in context, if that existing scheme were lost to the member, each £1 income would now cost nearly £15 on the open market, an increase of nearly two-thirds. For these schemes, the contribution may be level or fluctuating, but the overall return is likely to be considerably greater than the level of retirement income that could be achieved with the same level of contributions in a qualifying scheme without those guarantees.

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Many of those contracts are historic schemes, no longer sold. I am definitely open to the argument that the changes I am suggesting might be transitional, with sunset clauses attached. I am very much in the hands of the House on that. Certain schemes may be exempted from auto-enrolment until, say, 2020. Natural staff turnover and retirement levels within that sort of a window would make it likely that many of the issues that I have outlined to the House would be marginal and can be addressed in coming years, once the new system of personal accounts and qualifying schemes has been able to bed down.

I hope that the Minister will think carefully now that people are beginning to focus on how the whole scheme will be implemented and recognise that there are some anomalies here that I do not think that the Government or the House had contemplated when we went through the Bill in detail in Committee. I just want to limit the upheaval for members, employers and providers for those schemes not considered part of the original target for personal accounts, but ensure in time that all employers will have access to schemes that the Pensions Bill will make the norm.

Any action by the Government now that causes further damage and instability within the pensions industry would be especially unhelpful. I therefore propose the amendments to give the necessary protection to the embedded value of a number of the UK's major financial institutions. Changes are needed to enable individual citizens and pension providers alike to plan ahead with confidence, rebalancing their portfolios over a longer transition without causing unnecessary damage to the legitimate interests of individual members of pension schemes. I look forward to the Minister’s response. I beg to move.

Lord Oakeshott of Seagrove Bay: My Lords, I listened carefully to that interesting speech. The noble Lord is always persuasive; indeed, at times he can sound quite seductive. None of us is in favour of dirigisme and poisoning the well, but I felt a little uncomfortable as I listened to some of the speech. I struggle in particular with the idea that a pension scheme with an employer contribution of less than 3 per cent can be a good-quality scheme. I simply do not feel in my heart that that is likely to be or can be right and I worry that the amendments water down the protections too far. “Good quality” would replace “qualifying”, and I have difficulty knowing what that means.

I listened with interest to the noble Lord’s reference to what I can only call the Equitable Life guarantee, because that is what it is—the one that brought that company on to the rocks. It would have a guaranteed annuity buyout but, if you think about it, the real ongoing cost of something like that is pretty high and will certainly in practice involve more than a 3 per cent employer contribution. So although the principles of simplicity and so on that he mentioned sounded quite attractive, I would require a lot of convincing that such schemes would also pass the test of having an employer contribution that was the equivalent of at least 3 per cent. The numbers simply do not add up.

Lord McKenzie of Luton: My Lords, I thank the noble Lord, Lord Hunt, for his kind remarks at the start of his speech on the amendments and for the manner

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in which he introduced them. I am afraid that I cannot accept them, but I hope that on the way I can give him a degree of comfort on some of the points that he made.

We recognise that the amendments reflect pension providers’ concerns about the impact that the quality standard will have on existing provision. Let me be perfectly clear: we want good-quality existing provision to continue unfettered. The noble Lord referred several times to fluctuating contributions. Again, let me be clear: the Bill does not require fluctuating contributions. As we said in our discussion on earlier amendments, it is the total quantum of the contributions measured over a 12-month period that is key.

We want all workers who are currently accruing pension benefits either at or above those that would be required by the Bill to continue to do so. As I have said, we are still working with stakeholders to look at ways to address their concerns, but we do not think that the amendments are the right way to balance wider stakeholder needs. I hope that we all agree that the core purpose of the reform is to tackle not only non-saving but undersaving for retirement. The Bill achieves this by establishing a duty on employers to enrol jobholders automatically into pension saving that meets the minimum criteria set out in Chapter 1.

The criteria for money purchase schemes include minimum standards of contributions. The noble Lord’s amendments would result in the establishment of two standards: the one envisaged by the current version of the Bill and the other a new lower standard for some existing members of money purchase schemes who would be denied the benefit of automatic enrolment into a qualifying scheme with a certain level of contributions.

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