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Clause 22 [Test scheme standard]:

Lord McKenzie of Luton moved Amendments Nos. 2 and 3:

2: Clause 22, page 11, line 12, leave out “such persons” and insert “them”

3: Clause 22, page 11, line 14, at end insert “J and”

On Question, amendments agreed to.

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Lord McKenzie of Luton moved Amendment No. 4:

4: After Clause 27, insert the following new Clause—

“Sections 20, 24 and 26: certification that quality requirement is satisfied

(1) The Secretary of State may by regulations provide that, subject to provision within subsection (6)(f), a scheme to which this section applies is to be taken to satisfy the relevant quality requirement in relation to any jobholder of an employer if a certificate given in accordance with the regulations is in force in relation to the employer.

(2) The certificate must state that, in relation to the jobholders of the employer who are active members of the scheme, the scheme is in the opinion of the person giving the certificate able to satisfy the relevant quality requirement throughout the certification period.

(3) This section applies to—

(a) a money purchase scheme to which section 20 applies;

(b) a personal pension scheme to which section 26 applies;

(c) a hybrid scheme, to the extent that requirements within section 24(1)(a) apply.

(4) The “relevant quality requirement”—

(a) for a scheme within subsection (3)(a), means the quality requirement under section 20;

(b) for a scheme within subsection (3)(b), means the quality requirement under section 26;

(c) for a scheme within paragraph (c) of subsection (3), means the requirements mentioned in that paragraph.

(5) Regulations may make further provision in relation to certification under this section.

(6) Regulations may in particular make provision—

(a) as to the period for which a certificate is in force (the “certification period”);

(b) as to the persons by whom a certificate may be given;

(c) as to procedures in connection with certification or where a certificate has been given;

(d) requiring persons to have regard to guidance issued by the Secretary of State;

(e) requiring an employer to calculate the amount of contributions that a scheme, and any section 26 agreements, required to be paid by or in respect of any jobholder in the certification period;

(f) as to cases where the requirements of a scheme, and any section 26 agreements, as to payment of contributions by or in respect of jobholders of an employer did not satisfy prescribed conditions.

(7) Provision within subsection (6)(f) includes in particular provision for a scheme not to be treated by virtue of regulations under this section as having satisfied the relevant quality requirement unless prescribed steps are taken (which may include the making of prescribed payments).

(8) In subsection (6) “section 26 agreements” means the agreement required, in the case of a scheme within subsection (3)(b), by section 26(4) and any agreement required, in the case of such a scheme, by section 26(6).

(9) The Secretary of State may by order repeal this section.”

The noble Lord said: My Lords, I shall speak also to the other government amendments in this group.

I now return to qualifying earnings, which we discussed in earlier debates. On Report, we amended the Bill to confirm that employers may assess whether their arrangements meet the new quality standard over the course of a year and not just pay period by pay period.

Following further detailed discussions with stakeholders, Amendments Nos. 4, 30 and 31 now go one step further. They will enable employers or a designated person connected to them to certify that their scheme meets the forthcoming quality standard.

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Our intention throughout the passage of the Bill has been to make it as easy as possible for employers who offer generous pension contributions today to continue to do so under the employer duty. The trick has been to find a way to achieve this without opening up the unacceptable risk that some individuals might routinely or materially save at levels below the minimum standard.

I believe that the certification procedure provided for in the amendments strikes the appropriate balance. Certification will be based on three principles, which I agreed last month with the employer and industry stakeholder group.

The first is that, if employers or a connected person are confident that each worker in their scheme is on course to receive the new minimum level of pension saving, they will be able to certify that their arrangements meet the new quality standard. The second principle deals with cases where a member’s contributions unexpectedly fall short of the minimum during the certified period. In such cases, employers will not be required to make retrospective reconciliation payments unless the detriment to an individual exceeds certain minimum levels. The third principle is that the minimum levels for reconciliation will be set in such a way as to protect individuals from significant, systematic or persistent detriment.

Certification on the basis of these principles should provide greater certainty to employers and some key administrative easements around reconciliation payments, while at the same time protecting the savings outcomes for individuals that are fundamental to the success of the reforms.

I shall now give way to the noble Baroness, Lady Noakes, who has tabled an amendment to Amendment No. 4, and I shall have an opportunity to respond to that. I beg to move.

Baroness Noakes moved, as an amendment to Amendment No. 4, Amendment No. 5:

5: After Clause 27, line 10, leave out subsection (2)

The noble Baroness said: My Lords, we congratulate the Government on bringing forward their amendment to the qualifying earnings test. This is one of the issues that have been with us throughout our consideration of the Bill, and at times I wondered whether we would ever get to this stage.

We have made it clear from the outset—not least to the organisations that have provided briefing to us—that the best outcome would be a government amendment. A victory in the Division Lobby may have given us a passing thrill in this House but a solution embraced by the Government gives hope for auto-enrolment arrangements which will work well in practice.

Amendment No. 4 offers the possibility that existing private sector provision may be preserved and not levelled down. If Amendment No. 4 avoids levelling down by existing employers, it would, in turn, help to maintain a body of pension provision which was above the minimum and, if that were the case, it would set a market level which may encourage new employers in the market to offer more than the minimum. What is at stake is potentially important. As we know, levelling down could take the form of rewriting an

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existing pension scheme to meet the formula in the Bill or, more plausibly, would result in employers just saying that they are not prepared to continue with their own scheme and defaulting to personal accounts. Either way, it would result in less pension saving. At present, employers contribute more than 6 per cent to defined contribution schemes, which compares with the Bill’s 3 per cent. Admittedly, the bases are different, but I would guess that on average the difference is slightly more than 3 per cent, which, over a working lifetime, is a lot in pension provision.

My probing amendment deletes subsection (2) of the new clause. At the heart of whether this new clause will do the trick is whether the regulations made under it will allow the calculations to be made at the level of the whole active membership of the scheme or whether they will directly, or indirectly, force the calculations to be made at the level of the individual. The question posed by my amendment is whether subsection (2) allows the certificate to be given at the level of the active member jobholders as a whole. I am aware that the Government changed the drafting of subsection (2) at a late stage before tabling in order to clarify its meaning, but I believe that the version in Amendment No. 4 can still be read either way. My request to the Minister is to clarify the Government’s intention of what subsection (2) is intended to mean in practice.

The Minister will also be aware that the provisions in subsection (6)(e) and (f) and subsection (7) cause some concern because those provisions would allow the Government to produce regulations which were onerous in both administrative and financial terms. I have to put the Government on notice that if they produce regulations which are onerous in administrative and financial terms, the likely outcome will be the levelling down, which this clause is intended to avoid. In particular, the tolerance levels of employers for sticking with their own schemes may well be tested if, by virtue of subsection (7), significant payments are required by the regulations.

The Bill does not require the Government to draft the regulations in a way that results in levelling down, but the danger is there and it is entirely in the Government’s hands. The groups with which we have discussed these issues are keen to work closely with the Government on the content of the detailed regulations so that they achieve the aim, which I think is shared by all parties, of keeping private provision going. I hope that the Government will work closely and constructively with those groups. I would be grateful for the Minister's comments on that.

Lastly, I must mention subsection (9), which seems to be a rather unnecessary act of aggression. Subsection (9) contains the unusual power for the Secretary of State to repeal the whole section and, with it, the hope that levelling down might be avoided. That is unorthodox drafting. Most Bills are not drafted with such provisions. Admittedly, this Bill contains another example in Clause 69. The Minister never satisfactorily explained that one, but I invite him to explain why it is appropriate for this new clause. I even harbour a faint hope that the Minister will say that subsection (9) is a big mistake and that, if we pass this amendment today, as I hope we shall, the Government will amend it in another place. I beg to move.

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Lord Oakeshott of Seagrove Bay: My Lords, inevitably we cannot be sure how this will work in practice, but it seems to us on these Benches a sensible compromise, following the discussions which we had on Report. As the Pensions Policy Institute, in its characteristically helpful and thorough note, said, there has to be a trade-off. A trade-off has to be made between a lower burden on employers with a small minority of individuals receiving less than the minimum but the majority of individuals receiving the minimum and higher, and ensuring that every individual receives at least the minimum but, as we know, with a potentially much higher administrative burden on employers. From the discussions I have had—I particularly pay tribute to Tim Breedon and his colleagues at Legal & General, who took me through it very carefully and discussed how their discussions with the ministry were going—I am satisfied that this is a sensible compromise. The right trade-off has been made, and we look forward to seeing how it works in practice.

Lord McKenzie of Luton: My Lords, I am grateful to both noble Lords for their support for the thrust of this amendment. I am particularly grateful to the noble Baroness for providing me with an opportunity to explain the significance of subsection (2) of the government amendment, which sets out what the certificate must state.

Subsection (2) requires a certificate to state that in the opinion of the person giving the certificate the scheme is able to meet the minimum contributions standard for all its active members throughout the certification period. This subsection effectively achieves in the legislation the first of the policy principles I set out earlier; namely, that an employer must be confident at the point of certification that the scheme will provide minimum contributions for everyone participating under the duty. This is crucial if we are to ensure that certification may be used by employers with good schemes only. We do not want to leave open a risk that some individuals could be enrolled in schemes where it was clear that from the outset they would persistently save below the minimum level. I am sure we have common cause on that issue.

The noble Baroness indicated—I accept that her amendment is a probing amendment—some concern that subsection (2) could drive employers to undertake individualised checks of their membership in the same way as they would under the existing test. Let me reassure her on this matter. Certification enables an employer to look at its scheme once a year and, provided it is confident that it meets the minimum standard at that point, to proceed for the coming year in the knowledge that it will remain compliant even if individuals go on to experience minor or sporadic shortfalls. In that sense, certification reduces the need for an employer to consider whether to future-proof an existing scheme in case of unexpected changes to an individual’s pay.

While the standard that must be met at the start of each certification period relates to all members, we envisage the process in part being a matter for regulations. I accept that some of the important detail is yet to come through in those regulations, particularly what de minimis will mean in this context. We anticipate

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that the process will include scope for discretion on the part of the employer or connected person; for example, in relation to the extent of the analysis he must undertake before signing a certificate. In that way, employers or connected persons who are confident of the quality of the scheme could elect not to conduct fully individualised checks. It will depend on the circumstances of the individual scheme and in part on the level of contributions that are paid under the existing scheme and on the number of employees whose pay is comprised of components that are not covered by the existing scheme arrangements and perhaps on how sensitive outturn pay is to the varying business levels that are undertaken.

Although there will probably be a degree of prescription in the regulations, it will be important for employers to have discretion about the extent of the work they need to do to gain the assurance that they believe is necessary to go through that certification process. I hope that on that basis the noble Baroness will feel that she need not press her amendment. There is still some detail to be worked out. We want continued engagement with stakeholders. It has been important in taking us from where we were to where we are.

In relation to subsection (9) and the opportunity to repeal, it was put in place, at least in part, because we believe that there is a reasonable prospect that, once auto-enrolment gets under way, employers will be less inclined to follow this route, and it will be easier for them down the track to establish that their schemes are compliant.

From another point of view, if, in the event, the certification process is not working satisfactorily and is throwing up persistent undersaving by people, we would not want to proceed with it, but we want to give it a fair wind and work with stakeholders to see whether we can complete the detail. As the noble Lord, Lord Oakeshott, said, it is important to strike the right balance. This is part of the arrangement that we are putting in place to avoid levelling down, which is crucial, especially at the current time.

4 pm

Baroness Noakes: My Lords, I thank the Minister for that reply and I shall not prolong the debate. We share the same aims. From our perspective, some of the language in the subsection could be used in a way that does not achieve the right result; that is the point that I was trying to make. Much will depend on how the Government implement this in practice in whether they achieve the agreed outcome, which is to maintain private provision at a higher level than the basic required under the Bill. As we share that aim, we will just have to see how things turn out, but I just record that if the Government do not implement it with sensitivity, levelling down will follow. I beg leave to withdraw the amendment.

Amendment No. 5, as an amendment to Amendment No. 4, by leave, withdrawn.

On Question, Amendment No. 4 agreed to.

Clause 37 [Calculation and payment of contributions]:

Lord McKenzie of Luton moved Amendment No. 6:

6: Clause 37, page 18, line 44, after “pay” insert “on behalf or”

On Question, amendment agreed to.

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Clause 60 [Powers to require information and to enter premises]:

Lord McKenzie of Luton moved Amendments Nos. 7 to 9:

7: Clause 60, page 33, line 5, leave out “qualifying scheme” and insert “pension scheme that is relevant to the discharge of those duties”

8: Clause 60, page 33, leave out lines 11 and 12

9: Clause 60, page 33, line 16, leave out ““worker” or “qualifying scheme”” and insert “or “worker””

On Question, amendments agreed to.

Clause 66 [Duty to establish a pension scheme]:

Lord McKenzie of Luton moved Amendment No. 10:

10: Clause 66, page 36, line 24, leave out “powers conferred by subsection (1) are” and insert “power to make provision in pursuance of subsection (1) is”

The noble Lord said: My Lords, I shall speak also to the other government amendments in the group. As noble Lords will recall, during Committee, the noble Baroness, Lady Noakes, successfully moved an amendment that resulted in a duty on the Secretary of State to set up the scheme, rather than providing a power to do so. There was a clear feeling in the Committee that there should be no ambiguity in the drafting. The need for clarity on such a crucial issue is understandable, which is why we will not seek to overturn that amendment.

However, I want to introduce these amendments to ensure that we do not inadvertently restrict the Government's ability to make future changes to the scheme order. As I explained during Committee, the details of the scheme will be set out in the scheme order and it may be either desirable or necessary at some time in future—we are potentially looking at a long time here—to amend the scheme order.

In accordance with the provisions of the Interpretation Act 1978—much maligned last time that I used that expression—we would have been able to use the power in the clause as drafted to do so. These technical amendments to Clauses 66 and 67 will ensure that the duty remains without unintentionally harming the objectives or technical workings of the Bill.

Amendment No. 10 amends Clause 66(8) and will put beyond doubt that the scheme order could be amended under Section 14 of the Interpretation Act if that proves necessary. Amendments Nos. 11 to 15 then amend each of the subsections in Clause 67. The amendments will make clear that subsections (2) to (5) of that clause refer to any order under Clause 66, not just an establishing order. So they would, for example, apply to an amending order also.

I hope that noble Lords will agree that, in addition to the amendment moved by the noble Baroness, Lady Noakes, in Committee, these amendments will provide absolute clarity about the duty to establish a scheme. I beg to move.

Baroness Noakes: My Lords, taking it on trust that the effect of the amendments is what the noble Lord says, we have no objection to them.

On Question, amendment agreed to.

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Clause 67 [Scheme orders: general]:

Lord McKenzie of Luton moved Amendments Nos. 11 to 15:

11: Clause 67, page 37, line 2, after “order” insert “under section 66”

12: Clause 67, page 37, line 5, after “order” insert “under section 66”

13: Clause 67, page 37, line 7, after “order” insert “under section 66”

14: Clause 67, page 37, line 9, after “order” insert “under section 66”

15: Clause 67, page 37, line 15, after “order” insert “under section 66”

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