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Under the amendments, an individual would have to decide actively to give up membership of their existing scheme in order to become eligible for automatic enrolment into a qualifying scheme. Given the challenge of undersaving, we believe that the converse should occur: an individual should have to decide actively to save in a non-qualifying scheme with lower contributions. It is therefore important that all jobholders are automatically enrolled. We have taken care to ensure that, should they wish, jobholders will be able to choose to save on terms that fall below the new minimum level of pension saving.
I stress that nothing in the Bill prevents an employer from coming to a separate agreement with a jobholder outside the duty, provided that any movement away from the minimum level of pension saving is voluntary on the part of the jobholder and not coerced. I understand that there is concern that, as it stands, Clause 49 would prevent an employer from offering an alternative to a qualifying scheme or from advising an employee that membership of a qualifying pension scheme might not be in their best interests. That is not the case. The clause prevents an employer from making any statement or asking any question during the recruitment process that indicates that an offer of employment would be determined by the applicant’s decision on whether or not to opt out of membership of the qualifying scheme.
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Employers are free to offer alternatives to a qualifying pension scheme and to explain the benefits of membership of such an alternative to job applicants. However, we believe that they should not be free to indicate to applicants that they can work for them only if they are prepared to opt out of the qualifying scheme. Neither should any alternative offer be made available in a manner that contravenes Clause 53 on inducements. Clause 53 prohibits employers from attempting to induce individuals to opt out of or cease membership of a qualifying pension scheme.
Amendment No. 44 would extend the protection offered by Clause 53 to exempt jobholders so that their employers would contravene the measure if they attempted to induce them to cease membership of the relevant existing scheme. This amendment flows from the “exempt jobholder” amendment. Because I cannot accept that, I cannot accept this for the same reasons.
However, it might be helpful if I try to clarify matters. I believe that the intention of this amendment is also to allow new members to join the existing non-qualifying scheme without their employer having contravened the general inducement prohibition. If the employer simply offers an alternative to the qualifying pension scheme, it should not be at risk of contravention of the prohibition on inducements. To be found to have contravened this measure, an employer must have taken action for the sole or main purpose of inducing someone to opt out of or to cease membership of a qualifying pension scheme. Offering an alternative non-qualifying scheme and providing employees with information about the benefits of membership of that scheme should not in itself constitute a contravention of this measure. Even if the “exempt jobholder” amendment were to be accepted, I do not believe that this amendment to Clause 53 would be needed.
Noble Lords mentioned guaranteed income schemes. Clearly, such schemes increase complexity and would not be appropriate to automatic enrolment products. However, there is nothing to stop those products being qualifying schemes, so long as they meet the quality test. An individual who has already taken an active decision to become a member of one of those types of arrangements, even one that fails to qualify, should be more than capable of understanding what is at stake. Following automatic enrolment, such individuals should be able to decide whether to remain in a qualifying scheme or in their current arrangement.
As the House knows, the Government have worked long and hard to secure a position where the EC agrees with their view that under the employer duty automatic enrolment into a WPP is outside the consumer directives. We have reached this position, but it does not extend to the cross-selling of other products, such as insurance benefits, which would still be viewed as financial products and their sale would be covered by the DMD and the UCPD.
The noble Lord proffered some heady numbers on likely returns, which were commented on by the noble Lord, Lord Oakeshott. I would be interested to discover where it would be possible to strike such advantageous deals in current times. But I want to stress that such jobholders, if they opt out of auto-enrolment and stay
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In summary, we think that the principle of automatic enrolment into pension saving that provides minimum contribution should hold for all jobholders, but where an individual wishes to save on alternate terms, this will be possible under the reform. As I said, we understand that these amendments, like those tabled by the noble Baroness, Lady Noakes, reflect residual concerns about the impact of the qualifying criteria on existing money purchase provision. This and previous discussions illustrate that the issue is difficult to resolve and reaches to the heart of the reform. I hope that the amendments that we have tabled demonstrate our commitment to address this difficult issue and maintain the balance between the needs of workers, employers and schemes. We do not think that it is possible to move beyond these within the scope of a minimum standard for all, but in the light of stakeholder concerns we are considering options to go further. However, in assessing those options, we need to be satisfied that any solution will not have an adverse effect on pension outcomes for individuals or introduce unnecessary additional administration. If we are able to find a solution that does not open up significant risks to the outcomes of the reform, as I have said, we will bring forward further amendments at Third Reading.
On that basis, I hope that the noble Lord will feel able not to press his amendment. Although I have explained that we cannot accept it because we think that the primacy of auto-enrolment is the proper way to proceed, that does not preclude the outcome that the noble Lord wants, which is that existing schemes can continue even though they are not qualifying, provided obviously that the hurdles of inducements are not breached. I hope that that is at least in part helpful to the noble Lord.
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Lord Hunt of Wirral: My Lords, I am grateful to the Minister. Being the eternal optimist, I see that he came half way towards me rather than half way in the wrong direction. I also thank the noble Lord, Lord Oakeshott of Seagrove Bay, who similarly moved half way towards me. All I would say about guarantees is that we are talking about schemes that were entered into 20 or 25 years ago when such guarantees were commonplace. Of course, the noble Lord, Lord Oakeshott, has reminded us of one example, but he with all his background experience will know that many other guaranteed schemes are being honoured by the companies with which they were taken out. That is why the returns are substantially better than they would be on the open market today.
I think that the Minister slightly misunderstood my point. These returns cannot be secured today because the market has moved on, away from the investor and away from the person contributing to their pension.
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In the light of the Minister’s kind offer, which I proposed during my speech and to which I saw him nod in assent, as is his wont, I should like to continue these discussions. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Baroness Noakes moved Amendment No. 4:
4: After Clause 3, insert the following new Clause—
“Tax effect of automatic enrolment
(1) The Secretary of State shall ensure that every jobholder who—
(a) becomes an active member of an automatic enrolment scheme under section 3, and
(b) has not opted out under section 7,
receives value equivalent to the contributions made by him multiplied by the basic rate of tax applicable at the time of the payment of the contributions.
(2) The value referred to in subsection (1) shall be delivered in accordance with regulations made by the Secretary of State and may include—
(a) tax relief to the jobholder if that jobholder would otherwise pay tax at the basic rate an amount of income equivalent to the amount of his contributions, and
(b) direct payment by Her Majesty’s Commissioners of Revenue and Customs to the relevant automatic enrolment scheme.”
The noble Baroness said: My Lords, this amendment concerns the delivery of tax relief in respect of pension contributions under auto-enrolment. Noble Lords will recall that the Government portrayed the personal accounts scheme as 4+3+1; that is, 4 per cent from the employee, 3 per cent from the employer and 1 per cent in tax relief from the Government. The Bill, however, refers to 3 per cent from the employer and 8 per cent in total, with no reference whatever to tax. I moved this amendment in Committee in order to ascertain from the Government how tax relief was to be delivered, especially when the individuals concerned were not paying income tax. The matter arises principally where personal tax allowances are in excess of the qualifying earnings threshold and will depend in part on whether the lower threshold is the same as the personal allowance when the scheme is implemented. But even if they are aligned, which they are not at present, other factors, such as additional allowances and employment for only part of the tax year, could create problems.
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In Committee, the Minister described the current possibilities in relation to UK qualifying schemes. If I understood him correctly, where the employer chooses to operate relief at source, tax relief will be delivered regardless of the employee’s tax status. If the employer chooses to use the net pay method, tax relief will be dependent on the employee’s status. Employers can choose one or the other but cannot use both. But the Minister said in relation to personal accounts that a decision was not necessary until 2012, when it would be made on something called “the underlying tax landscape”, which he did not explain. So we left the Committee stage with clarity as to company schemes but with no clarity in relation to the millions of people who are likely to be enrolled in personal accounts.
Accordingly, I have tabled my amendment again in order to give the Minister an opportunity to provide further and better particulars on how the 1 per cent will be delivered to all in the personal accounts scheme. The amendment is drafted in relation to auto-enrolment rather than solely for personal accounts. As I mentioned, in Committee the Minister explained how tax relief was delivered for existing pension schemes. In addition to explaining how tax relief will work for personal accounts, will the Minister say what proportion of pension schemes currently use either the net pay method or the tax relief at source method? Can he extrapolate from that the number of employees in company schemes who might be at risk of not getting the full amount of tax relief because of the choices that their employers have made? I beg to move.
Lord McKenzie of Luton: My Lords, I again thank the noble Baroness for raising this issue and for originally prompting us on it in Committee. On her specific question about the proportion of schemes that are dealt with under relief at source rather than net pay arrangements, I do not have those data but I will see whether they can be dug out and provided to her. The extent to which we would have further authoritative detail on the number of people who would not necessarily benefit from tax relief at the moment is more difficult, but I will see what we can do.
Lord Oakeshott of Seagrove Bay: My Lords, perhaps I may ask the Minister whether he might be able to dig it out from the underlying tax landscape.
Lord McKenzie of Luton: My Lords, I shall live to regret having made that remark. I shall blame it on officials because I religiously read the notes that they put in front of me.
Tax relief on pension savings forms a valuable part of the incentive to save. Individuals who save at the new minimum level will see contributions worth 8 per cent of the banded earnings going into pension savings. Of these contributions, only 4 per cent will come from the jobholder’s pay; 3 per cent will come from employers, with 1 per cent being provided by the state for basic rate taxpayers. All UK qualifying schemes will have to be tax registered to ensure that members receive tax relief. As registered pension schemes for tax purposes, employer-sponsored schemes may choose, as we have heard, whether to operate either the net pay or relief at source method for delivering tax relief.
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The Government have decided that personal accounts will use the relief at source method for delivering tax relief to members, which is the crucial point on which the noble Baroness seeks our position. Under this method of paying tax relief, the individual saves up to £2,880 in any one tax year and the Government add another £720, giving a total pension savings with tax relief, irrespective of whether the individual is otherwise subject to tax, of £3,600. This method of delivery of tax relief for personal accounts will be set out in the detailed provisions of the scheme. We intend to consult on the draft scheme orders and rules next spring.
As I said, delivery of tax relief for other schemes is dependent on the mechanism chosen by the sponsoring employer. However, tax rules are clear that the same method must be used for all workers in that scheme. I accept that in certain limited circumstances those on low incomes who have a high personal allowance will not receive additional tax relief on their pension if their employer chooses to operate net pay arrangements. However, with the personal accounts scheme giving relief at source, the numbers of low earners with high personal allowances who would not receive tax relief are likely to be quite small. We believe that, if we were to change the basis for those operating the net pay arrangements, the administrative cost of delivering tax relief to such a small number of people would outweigh the benefits of creating a system to deliver that relief.
I am grateful for the opportunity to put that explanation on the record and hope that it will enable the noble Baroness to withdraw the amendment.
Baroness Noakes: My Lords, I am delighted to hear what the Minister has said and I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 4 [Postponement of automatic enrolment]:
Lord Tunnicliffe moved Amendment No. 5:
5: Clause 4, page 3, line 5, leave out from “that” to “the” in line 7 and insert “in prescribed cases”
The noble Lord said: My Lords, I shall speak to Amendment No. 6 as well. Regulations under Clause 4 will enable an employer offering higher level pension provision to postpone the automatic enrolment of a jobholder for a short period. Employers who take advantage of the postponement facility must not disrupt active membership of the higher quality scheme for a minimum period. This is to ensure that jobholders have the opportunity to catch up on the employer contributions forgone during the postponement period. The length of the minimum period will also be set in regulations.
The amendments are minor and technical in nature and ensure that the clause operates as intended. They make it clear that the regulations under Clause 4 will define the features of the higher level scheme that must be provided during the minimum period. They also make it clear that the scheme must retain those features during the catch-up period. I beg to move.
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Lord Skelmersdale: My Lords, this is the second case today—and I hope that there will be many more—of, as they say on the west coast of Scotland, thinking better later. The amendments have clarified the situation dramatically and I am very pleased to accept them.
On Question, amendment agreed to.
Lord McKenzie of Luton moved Amendment No. 6:
6: Clause 4, page 3, line 17, leave out subsection (4) and insert—
“( ) A scheme ceases to be a scheme of the relevant kind, in the case of any person, if it ceases to have a feature by reference to which regulations under this section operated so as to postpone the automatic enrolment date in that person’s case.”
On Question, amendment agreed to.
Clause 8 [Jobholder's right to opt out]:
Lord McKenzie of Luton moved Amendment No. 7:
7: Clause 8, page 5, line 40, leave out from “applies” to “(arrangements” in line 41 and insert “on any occasion when arrangements under section 3(2), 5(2) or 7(3) apply to a jobholder”
The noble Lord said: My Lords, I shall speak also to the other amendments in the group. Automatic enrolment into workplace pension saving will be the new pension savings default; even so, workplace pension saving will not be compulsory. Clause 8 ensures that people who are automatically enrolled into workplace pension saving are free to opt out if they wish. A jobholder whose employer enrols them into a scheme may give notice to opt out of membership within a period to be prescribed in regulations. A valid opt-out undoes membership and gives entitlement to a refund.
It is possible that a jobholder may have been an active member of the same scheme during a past period and have accrued rights in the scheme. We do not want any confusion arising that opting out affects those previously accrued rights. Any refund due following a decision to opt out is only for the current spell of membership. Without this amendment, workers could become entitled to a refund of contributions from past periods of active membership, not just the current period, which conflicts with existing law on vested rights and is likely to cause confusion. Vesting means that a pension pot is locked into invested funds and moneys cannot be refunded or paid out until decumulation. The amendment, therefore, brings greater clarity to the Bill and removes the potential scope for confusion with the vested funds. I beg to move.
Lord Skelmersdale: My Lords, again, this amendment is extremely helpful and clarifies things no end.
On Question, amendment agreed to.
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Lord McKenzie of Luton moved Amendments Nos. 8 and 9:
8: Clause 8, page 6, line 2, leave out from “become” to end of line 2 and insert “an active member of the scheme on that occasion;”
9: Clause 8, page 6, line 4, after “jobholder,” insert “on the basis that the jobholder has become an active member of the scheme on that occasion”
On Question, amendments agreed to.
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Lord Skelmersdale moved Amendment No. 10:
10: Clause 8, page 6, line 5, at end insert—
“( ) If the job-holder gives notice under this section before the first contribution is taken, no contribution may be taken from the job holder or the employer on behalf of the job holder.”
The noble Lord said: My Lords, as we have already seen, there is both an advantage and a disadvantage to the Government in having stages of the Bill separated by such an enormous length of time. The advantage is that it gives them much more time to consider, first, whether their responses at the previous stage hold water and, secondly, whether bits of the Bill should be changed because of comments made by the Opposition or their own Back-Bench Members. This has resulted in many more government amendments on today’s Marshalled List, with, I am told in one of the Minister’s numerous but welcome letters, more to come before we finish Report and yet more at Third Reading. I join those who expressed great satisfaction that the Minister’s role in the pensions arena will become—how shall I put it?—rather less passive than it was during Committee. The Minister, even if no one else, knows exactly what I mean.
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