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The noble Baroness said: My Lords, I shall speak also to Amendments Nos. 49 and 50. These amendments are similar to some which I moved in Committee and focus on concerns which have been expressed about the way in which personal accounts will operate in practice. We had good debates in Committee but concerns remain, so I have tabled these amendments to seek further clarification from the Government. I have been briefed by the Association of British Insurers, which represents the insurance industry and has a considerable involvement in the provision of defined benefit contribution arrangements for employers and individuals. To put it in a nutshell, the industry wants to continue to be involved in defined contribution business but it has real concerns about the way in which personal accounts might operate.
Amendment No. 48 amends Clause 67. When a personal account pension scheme is set up, it must, at least until 2017, prohibit transfers in or out except in specified circumstances. Banning transfers has the advantage of minimising complexity in the early days of personal accounts, which PADA has said is an extremely important issue. However, there are also substantive reasons, and the whole area of advice on which we have touched today applies also to transfers. It is important that personal account holders make rational decisions on whether to transfer in or out, and it can never be assumed ex ante that transferring in or out is the correct decision.
The Minister explained in Committee that the Government did not intend to ban transfers in or out, at least until the review of personal accounts which will start in 2017. He said that there will be two exceptions to that for pre-vested pension rights and for pension credits on divorce. He then suggested that stranded pots might also be addressed, so it was clear that that was still something of a moving feast. Accordingly, while we were substantially happy with what the Minister said in Committee, I have tabled this transfer amendment in order to hear from the Minister the Government’s latest thinking.
I approach Amendment No. 49 in a similar vein. The amendment is to Clause 69 and states that the annual contribution until 2017 should be no more than £3,600—indexed, of course. No annual limit appears in the Bill, and this has been a matter of concern as different figures have been mentioned by the Government. There are still those lobbying for higher figures. The insurance industry is concerned that if a figure higher than £3,600 is used, the personal accounts scheme will stray out of its core mission to provide pensions for those within the target groups.
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To be fair to the Minister, which I am sometimes, in Committee he said:
“We are committed to an annual limit of £3,600”.—[Official Report, 2/7/08; col. 292.]
I ask him once again to say why, if the Government are genuinely committed to that figure, they will not place it in the Bill—even if it should last only until 2017.
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Amendment No. 50 also amends Clause 69, by deleting subsection (3). The subsection would allow for an amount of contributions over and above annual contributions. We do not support this added complication, especially as it is far from clear that people would be well advised to lock up their money in a personal account. That is another of the advice-free zones which could cause trouble, and other investment vehicles are available which could offer a better solution. But this amendment, unlike my two previous amendments, takes us into territory for which we do not have a previous government policy statement.
The Minister said in Committee that the Government were considering PADA’s advice on a lifetime allowance for extra contributions. Many people have been waiting for the Government to say what they intend to do in this area. If the Minister cannot accept my amendments, I hope that he can instead make a definitive statement of government policy. I beg to move.
Baroness Hollis of Heigham: My Lords, I am grateful to the noble Baroness, Lady Noakes, first, for tabling the amendment because it allows associated issues to resurface and, secondly, for being so fastidious in her fairness to the Minister.
I want to make three points, though I am more confident of the first two. On the third one, although I am batting technically out of my range, I suspect that the noble Lord, Lord Oakeshott, will be able to confirm my apprehensions in this area. My first point is about stranded pots, raised by the noble Baroness. Perhaps I may remind your Lordships of the example which I gave in Committee of a hairdresser who might pile up £18,000, say, in a personal account and have £2,000 and £3,000 in two other small pots as a result of previous employment. Currently, the £18,000 in the big pot means that she cannot commute the little pots, but the little pots are too little to annuitise. Without the right to transfer the two little pots into the bigger pot, she loses them altogether. Effectively, it is theft—bureaucratic theft, if you like. Presumably, the money will go to the members of the original scheme and their defunct assets.
My noble friend the Minister and other Members of your Lordships' House were sympathetic to this issue. We need some way of ensuring that a man or woman with modest savings does not lose a modest but sizeable chunk of them simply because they are too large to commute but too small to annuitise. There must be some way of corralling them. I take the point that we do not want to destabilise existing schemes and I understand the five-year rule, but I hope that my noble friend will reassure us that at the point of retirement—whether it is before or after 2017, and given the roll-up time for personal accounts it will probably be after then—when there is no risk of destabilising any existing arrangements, smaller pots where the provider is not willing to annuitise may be imported into the bigger pot which is above the trivial commutation limit. That seems the only way not to lose those funds.
My second point relates to Amendment No. 49. I do not think that it will happen often, but there could be circumstances in which someone would wish to
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With my third point I am very much out of my range, so I would welcome any comments from noble Lords on whether my apprehensions are valid. This is a growing issue which has been raised with perhaps two or three professionals in the field. It is that when prospective companies buy out defined benefit schemes from employers, they engage, or increasingly are likely to engage, in a form of cherry picking by encouraging enhanced transfer value—to encourage people not to stay in the DB scheme but to leave it. They do that and make it attractive by adding a cash bait to take up the transfer and not to stay in the scheme. The evidence is that in these hard-pressed times the cash bait—putatively, £5,000 on a transfer of £50,000, for example—is proving considerably attractive and will destroy people’s pension entitlement.
I was told by a pensions professional that this scandal is beginning to emerge and could turn out to be as serious as that of policy protection insurance. I do not know whether that is an overstated claim—it is not my field—but I know that at least one exceedingly major company is engaged in this practice. It is alleged that some other companies are considering whether they should follow suit or whether they regard it as unethical. I do not expect my noble friend to have an answer on the spot now, but I would welcome comments from Members who know much more about this field than I do whether that is a valid fear.
I am grateful to the noble Baroness, Lady Noakes, and I ask my noble friend the Minister to confirm that we will be able to make decent and fair arrangements for standard pots along the lines I have suggested. Will he also confirm that someone could make good missing years on their contributions into personal accounts before 2017 and continue to do so thereafter? Thirdly, does he share my worries about bribing people out of DB schemes with a cash bait associated with transfer values? If so, what will the implications be for long-term savings and pension provision?
Lord Oakeshott of Seagrove Bay: My Lords, that was an interesting and wide-ranging speech. I am flattered that the noble Baroness, Lady Hollis, thinks that I may be able to answer the riddle of the little and big pots. I am not an expert on that, but I agree that it is a problem. I would go further and say that I do not agree with these amendments. I say to the noble Baroness, Lady Noakes, that they are nanny-state amendments and are unnecessarily restrictive. We should be encouraging people to save for a pension in whatever way they wish. We believe that the Government have been weak in caving in to industry lobbying—it is interference in free consumer choice. We do not support restrictions such as these—indeed, we are doubtful whether restrictions are necessary.
At the end of her speech, the noble Baroness, Lady Hollis, raised an interesting point about enhanced transfer values and DB scheme buyouts. Although I
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Lord Lea of Crondall: My Lords, I very much follow the line of what has just been said. The argument which the noble Baroness, Lady Noakes, seemed to put forth in her analogy is that, as a figure is mentioned in Clause 13 and it is reviewable in Clause 14, the logical corollary would be to provide a figure in Clause 69. But I do not think that that is a logical corollary at all. Is that the nature of the argument? Amendment No. 49 refers to reviewing the value in the same way as Clause 14 does, but Clause 14 is reviewing the value of the figure in Clause 13. Will my noble friend comment on the apparent belief that this is simply a logical corollary of having the figure in the Bill in the first place?
Viscount Trenchard: My Lords, I can confirm the point made by the noble Baroness, Lady Hollis. I am a member of two defined benefit pension schemes. When I wrote to the administrators of both schemes about six months ago to find out what pension I might expect to be paid when I reach the retirement age in both cases, one of them interpreted my letter as a suggestion that I might like to transfer out of the scheme into another scheme and offered me a cash benefit to transfer out. Indeed, the letter was framed as though that would be the natural thing to do and that unless I took advantage of that within a certain period of time, this attractive offer would be lost.
Lord Oakeshott of Seagrove Bay: Hurry while stocks last, my Lords.
Viscount Trenchard: Exactly, my Lords. As I reckoned that I was much better off staying in the defined benefit scheme—of course, there is a risk that the body that will be paying it may not exist in its present form at that time—I did not respond to the letter. The noble Baroness is right that this is going on and is widespread.
Baroness Hollis of Heigham: My Lords, before the noble Viscount sits down—and I am very grateful for his intervention—will he agree that this practice, though I am not saying his particular case, could constitute the beginning of a new rash of mis-selling?
Viscount Trenchard: My Lords, the noble Baroness has a point. One has to look very carefully at the way in which such letters are written. The letter I received clearly showed a misinterpretation of my request to the administrator.
Lord McKenzie of Luton: My Lords, I thank the noble Baroness for these amendments and all noble Lords who have spoken in this wide-ranging debate on some fairly narrow amendments. We are committed to
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Amendment No. 48 sets out that the scheme order must include a ban on transfers into and out of the personal accounts scheme except in prescribed circumstances, and that the ban will be removed in 2017. Similarly, Amendment No. 49 seeks to insert into the Bill an annual contribution limit until 2017, adjusted annually in line with the qualifying earnings band.
We have clearly committed to set out in the scheme order the detail of the ban on the transfer of pension funds into personal accounts. We have also committed to specifying through secondary legislation the ban on transfers out of the scheme. Existing legislation, the Pension Schemes Act 1993, gives individuals the right to transfer out of a pension scheme. Clause 130 therefore makes amendments to those provisions to give us the scope to introduce a general ban on transfers out of the scheme. This amendment is therefore not necessary to give effect to the ban on transfers in and out of the scheme. Furthermore, it would tie a future Government to the date by which a transfer ban must be removed.
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On the contribution limit, we have always been clear that we intend to set the limit at £3,600 in 2005 terms. That has not changed. We fully expect to uprate the annual contribution limit in line with changes to average earnings on an ongoing basis. We must remember the uniqueness of this feature in an occupational pension scheme. We have agreed that it should be a feature of the personal accounts scheme to protect the existing market. However, as we also recognise the impact that it might have on an individual’s capacity to save, we need to avoid tying the hands of future Governments when it comes to ensuring that the annual contribution limit maintains its value.
Amendment No. 49 would also have the effect of removing the annual contribution limit from 2017. Combined with the lifting of the ban on transfers, this would enable an individual to place an unlimited amount of contributions in the personal accounts scheme from that date and to transfer pension funds in or out of the scheme. The aim of the 2017 review is to establish whether the transfers ban and the contribution limit remain necessary. These amendments would pre-empt the outcome of the review.
Our current policy of setting out in the scheme order the detail of the ban on the transfer of pension funds into personal accounts and specifying in secondary legislation the prescribed circumstances in which members will be prevented from transferring out of the scheme does not pre-empt the review. Only the current drafting of Clause 69—which allows for a contribution limit
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Amendment No. 50 seeks to remove the Secretary of State’s ability to prescribe other contribution limits. We have always been aware that there will be individuals with irregular contributions or broken work patterns who may want the scope to make lump sum payments to their personal account to boost their pension savings. This is why, as discussed previously, we are taking a discretionary power to allow for an additional facility such as a lifetime lump sum contribution limit that could run alongside the annual contribution limit. We have also been very clear from the start that we would implement this facility only if it can be done while delivering on the principles of low cost and minimising the impact on the existing industry. That is why, as noble Lords are aware, we have asked the delivery authority to advise on this issue.
The delivery authority has provided its advice and recommended against having a higher limit of £10,000 in the first year of the scheme or introducing a lifetime lump sum limit when the scheme commences because that would introduce additional complexities and complicate communication with individuals as well as increase risk for the administration of the scheme. It has also recommended that we reconsider the lifetime lump sum facility in 2017 when the scheme is fully up and running and when we know more about the saving behaviour of the target market. We have considered its advice very carefully and accepted its recommendation. However, we understand the concerns of those stakeholders who have called for these two features. That is why it is important that subsection (3) remains in the Bill, so that the scheme can offer an additional contribution facility from 2017 if that is considered appropriate and necessary.
I shall pick up on one or two other points. My noble friend Lady Hollis asked about stranded pots in pension schemes, an issue we touched on in Committee. We agreed to examine the Government’s approach to individuals with stranded pots. Although officials have discussed with stakeholders the extent and nature of the problem, there is no agreement on the scale of the problem or immediately obvious solution. Officials are currently working with the ABI and other stakeholders to understand the extent of the problem and the barriers that prevent individuals transferring their pensions into a single pension fund.
Abolishing contracting-out provisions in the Bill will help to alleviate stranded pots in defined contribution schemes. It was previously suggested that individuals should be allowed to transfer small amounts into the personal account scheme. However, we do not think that that is the solution for stranded pots in other pension schemes. Preventing transfers between personal accounts and the rest of the pensions market will keep the scheme focused on serving the needs of our target market, facilitate the smooth introduction of the new scheme, maintain simplicity in administration for individuals and employers, prevent replication of services for existing providers and, most importantly, help to keep costs down for members of the scheme.
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Baroness Hollis of Heigham: My Lords, before my noble friend leaves that point, can he assure me that the Government do not intend to allow the situation to continue where the very people whom we are all seeking to help—the low paid, especially women who have very modest savings—find themselves losing £2,000, £4,000 or £6,000 because we cannot agree on what should be done? It seems to me that there are perfectly good ways straightforwardly to do so. Surely my noble friend cannot be saying that the Government will allow that money to be lost to them in perpetuity.
Lord McKenzie of Luton: My Lords, indeed that is not what we are saying. We have recognised that as an issue; we have recognised that work needs to be done to understand the scale of the issue and provide an effective solution to it. One question that I posed to officials when we were discussing the matter was: do we need another Pensions Bill to provide a solution? The answer was: almost certainly not. Finance Bills would be the mechanism to do that, and, as my noble friend knows, they come along quite frequently.
Lord Skelmersdale: My Lords, surely that cannot be right. When my noble friend Lord Fowler introduced portability of pensions, it was necessary to have primary legislation. I know that in recent years the Government have changed the length of time for which one has to hold a pension before it becomes portable and that, I think, was done by statutory instrument. None the less, if a change such as the noble Lord has just talked about should come about, I would be very surprised if it was not by primary legislation.
Lord McKenzie of Luton: My Lords, I did not say that it would not be by primary legislation; I said that it could be dealt with via a Finance Bill. That is the advice that I have received, so there is a ready mechanism. In a sense, that is a subsidiary matter. I reaffirm to my noble friend that this is actively being worked on, but issues need to be resolved and a solution produced.
Lord Oakeshott of Seagrove Bay: My Lords, this is a wide-ranging debate, but I found that an exceptionally disappointing answer. I could hear the long grass growing as the Minister spoke. I do not see why a lot more work is necessary to establish the scale of the problem. Surely it is a very simple principle: if people have a pot of two or three small amounts such as that, one could set a limit, whether it is £2,000, £100 or £5,000. If that is the limit, that seems a very simple and straightforward principle. The arguments that the noble Baroness has given are quite clear. The amount of money involved cannot be enormous. It is a straightforward, simple question of justice. Unless we have some evidence and response before Third Reading, we shall move an amendment on the matter then. His response was extremely disappointing and does not match up to the problem at all.
Lord McKenzie of Luton: My Lords, I have not finished my response yet, but it is the noble Lord’s right to move whatever amendments he wishes at Third Reading. I simply hang on to the point that it may be easy to describe the circumstances one is
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I stress to my noble friend that this is work in progress; work is going on. I was especially going to say to her that, over the summer, there has been consideration of transfers out of personal accounts. It has been agreed that we will allow transfers out of personal accounts at the age of 55 for the purposes of decumulation. That is a contribution, although I accept that it does not deal with the totality of the issue.
My noble friend also asked about the missing year. Given that we are fixed on the annual contribution of £3,600 uprated by earnings until we get to the review in 2017, the scope for dealing with the missing years will be in the headroom that that already provides, but there is no proposal further to change arrangements before that review. As we discussed in Committee, that £3,600 level provides a reasonable amount of headroom, certainly to pick up one year.
My noble friend Lord Lea asked whether we have to specify in the Bill whether other provisions are in Clauses 13 or 14. I do not think that that follows. It is always an issue when the Government give assurances. Some want it firmly implanted in the Bill; some do not. It is a judgment in each case. Oppositions generally press us to put everything in the Bill; for some reason they do not trust the Government's word—is that not very strange? There is no logical reason why, just because it is in those earlier provisions, it should be in this one.
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