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I know that these are difficult decisions for the Government to make. I agree with the noble Lord, Lord Kirkwood, that a working group of experts to consider some of the important issues that have been raised today might be helpful in taking things forward. We must get this right in the long term as well as the short term.

12.26 pm

Baroness Noakes: My Lords, for the avoidance of doubt, I draw the attention of the House to my interests as shown in the register. I do not believe that

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any of them constitutes a relevant interest for the purposes of my participation in today's debate, but in these difficult times it is always better to be safer and certain. I congratulate the noble Lord, Lord Kirkwood, on securing this debate so early in this new Parliament. I also congratulate my noble friend Lord Freud on his appointment as Minister and I look forward to his response.

As my noble friend Lord Fowler pointed out, pensions are one of those topics that attract only a small group of usual suspects, who usually know rather a lot about the subject, and so it has turned out again today. It was certainly the case when we considered the Pensions Act 2008, which I am sure is engraved on the heart of the noble Lord, Lord McKenzie of Luton, who so ably led for the Government on that Bill. I support what the noble Lord, Lord Kirkwood, said about the noble Lord, Lord McKenzie of Luton, and his handling of the Bill-indeed, the whole of his portfolio-as Minister.

When I took part in the debates on the Pensions Act 2008, sitting in the seat now occupied by the noble Lord, Lord McKenzie of Luton, I was grateful for the briefing provided by a number of outside bodies, but in particular that from the Confederation of British Industry and the Association of British Insurers. I am grateful to those bodies for briefing me again today for the purposes of this debate. It is a pity that the noble Lord, Lord Lea of Crondall, is no longer in his place after intervening earlier and implying that the attitudes of industry were inimical to auto-enrolment. I can certainly confirm that the Association of British Insurers and the Confederation of British Industry support auto-enrolment and are trying to work on the practicalities of making it a success.

As has already been said in the debate, there was a broad consensus around the Pensions Commission's proposals for auto-enrolment as the basis for achieving a significant increase in the number of those saving towards their retirement. My party always registered some caveats about the scheme, in particular in relation to costs, to which I should like to return later. I understand that the coalition's Pensions Minister in another place, Mr Steve Webb, has said that the Government will go ahead with auto-enrolment but that they will review the specifics of the scheme. Like the noble Lord, Lord Kirkwood, I hope that my noble friend can give some more details today about that review. He must be aware that employers and the pensions industry need to know what this review will entail, who will undertake it, when it is expected to be completed and who will be consulted. If there is any substantial uncertainty about the way ahead, that will inevitably affect the willingness of the business community to devote significant resources to continuing to prepare for something that may change. I hope that we can have more clarity on this today.

In my view, the previous Government's approach had one fundamental flaw. They built their scheme of auto-enrolment around the proposition that every employee earning above the threshold should be included. I believe that this is an unrealistic approach, which in practice has produced real difficulties. The prize for society as a whole is to get a significant number of

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people saving for their retirement and saving more than was the case in the past-but not every last one. Policies that try to do too much often run into problems, as we have seen with many grandiose projects in the public sector. In the world from which I come, achieving an 80/20 solution-that is, 80 per cent of the benefits for 20 per cent of the costs-would be regarded as an excellent outcome. However, the former Government pursued the last percentile of benefit regardless of its cost.

Auto-enrolment is due to start in 2012, which does not leave much time to sort out the remaining details. The business community believes that the Government should look again at the draft regulations. The previous Government's first shot at the draft regulations was pretty dreadful and business bodies and the pensions industry have been working with the department to try to get them into a shape that is acceptable. While this has largely been achieved, there remain aspects that cause disproportionate cost and complexity for employers. Will the new Government's review be looking again at these regulations in order to see whether greater simplicity and lower costs can be achieved?

The noble Lord, Lord McKenzie, will recall our discussions about qualifying earnings, which have been alluded to. These had a particular impact on employers who already had good pension schemes but who used definitions that, although they are common in the private pensions industry, are quite unlike those used in the Act. The noble Lord was helpful and facilitated some amendments to the Bill, which allowed the regulations to accommodate the different ways in which employers are structured as regards their pensions, but that has simply deferred the problem to the regulations. I understand that the regulations in draft still do not recognise the difficulties for employers. The business sector has developed a self-certification approach that is practical and delivers a high degree of conformity, but that has not yet found favour with the Department for Work and Pensions. I ask my noble friend to ensure that his department will start to operate in a pragmatic way that supports employers who are trying to deliver good workplace pensions rather than penalises them for not guaranteeing the last percentile of benefit.

In addition to the qualifying earnings problems, the timing arrangements for auto-enrolment into personal accounts are also a problem. It is inefficient if, as currently planned, the rules require the enrolment of people who are likely to opt out-short-term workers, for example. Business would like enrolment to be delayed for, say, 30 days, which would avoid most of the unnecessary paperwork. To date this has been resisted, so will my noble friend ensure that the department looks at this again? The Government also need to look again at the impact on very small businesses. Again in their zeal to pursue the last percentile, the previous Government included even the smallest employer, including someone employing one person, such as a nanny or a housekeeper.

The previous Government also rejected using HMRC to administer the scheme alongside PAYE and, in so doing, they created an administrative cost for the scheme and a burden for small employers that are disproportionate. I hope that my noble friend will say

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that the new Government will look again at taking micro-employers out of the ambit of auto-enrolment.

The previous Government never faced up to the very real threat to workplace pensions of employers levelling down to the personal accounts scheme. Every time the Department for Work and Pensions insists on an employer-unfriendly rule, it makes it harder to maintain an existing workplace pension scheme and increases the likelihood that employers will simply default into the personal accounts scheme. This will hurt employees because most workplace schemes contribute more than is required under the 2008 Act. Our Government need to recognise that encouraging workplace pensions means encouraging employers, not hitting them with administration and regulation. This is part of a bigger theme of government action harming workplace pensions. It started in a big way with the ACT raid of 1997 and has got worse over the past 13 years. I hope that we can return to those broader issues on another day.

I emphasise that there is one area in which the business community does not want change-the timetable for implementation. I know that when my party was in opposition we criticised the previous Government's draft timetable, which will delay full implementation of the employer contribution until 2017, but I believe that it is a pragmatic approach that allows a reasonable time for employers to plan for the cost implications of auto-enrolment. I hope that my noble friend can confirm today that the new Government will not shorten the timetable.

I turn now to costs. In opposition, my party did not believe that the personal accounts scheme could be delivered for the 0.3 per cent annual charge that the Pensions Commission calculated, and so it has proved. While there will be an annual charge of 0.3 per cent, there will be a whopping 2 per cent upfront charge in order to cover the set-up costs. In addition, according to a Written Answer that I received from the noble Lord, Lord McKenzie of Luton, just before the Dissolution of the previous Parliament, the personal accounts scheme will start this summer with a debt of more than £60 million and over the following five years will borrow another £400 million from the Government. There is no sign that when we get to 2015 the appetite for public money will have run out.

While the 2 per cent upfront charge may be necessary to keep these huge borrowing figures from ballooning even further, no date has been set for its removal. The CBI is concerned that the 2 per cent charge will increase opt-out rates and thereby defeat the purpose of the policy. The perceived returns on saving will simply not be sufficient, particularly for older workers being enrolled. Is my noble friend satisfied that the costs that underpin the need for this upfront charge and the massive borrowing are reasonable and that the scheme has not been overengineered?

Perhaps more worrying is that the previous Government announced in March that they proposed additionally to subsidise the scheme to an unspecified extent on the basis that it would have to accept all comers, which the commission had not thought necessary when it produced its 0.3 per cent costing. Can my noble friend say today what this proposed subsidy will

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cost? Do the new Government sign up to the subsidy on top of the high lending that has to be provided to the scheme?

Lastly, there will also be costs to the Pensions Regulator for policing auto-enrolment. I understand that those costs, too, will be met by further public money. Will my noble friend say how much that will cost? Why is the cost of regulation not borne by pension savings, as happens with other forms of pension saving?

I do not have to remind my noble friend that we live in an age when public expenditure must be cut and that we cannot afford, as the previous Government planned, to carry on spending regardless of the consequences. That may mean that the scheme for auto-enrolment and personal accounts has to be trimmed in order to fit what can be afforded. We cannot have everything that we want. I support auto-enrolment, but not at any cost. I have major concerns about the cost to employers and the cost to the public purse. I hope that my noble friend will be prepared to take radical action when the Government review their inheritance on auto-enrolment. When they do that, I hope that they will also abandon the notion of chasing every last percentile.

12.41 pm

Lord McKenzie of Luton: My Lords, I join other noble Lords in thanking the noble Lord, Lord Kirkwood, for initiating this debate, which gives us a timely opportunity to understand the proposed direction of travel of the coalition Government on this important matter. I thank both him and the noble Baroness, Lady Noakes, for their kind comments.

The debate gives us a chance to test whether the broad consensus around pension reform hitherto still holds. Noble Lords will be aware-it has been referred to today-that this was anchored largely in the work of the Turner commission. It is a particular pleasure to note that another member of that commission, Jeannie Drake, will shortly join your Lordships' House on the Labour Benches.

It has been a very good, if short, debate. The noble Lord, Lord Kirkwood, called on the Government to show some enthusiasm for auto-enrolment-I certainly endorse that. He and others have pressed on the scope of the review, to which I should like to return in my contribution. I congratulate the noble Lord, Lord Fowler, on his upcoming 40th anniversary. I am delighted that he will soon be reunited with John Prescott.

We had a fascinating trip down the memory lane of pensions: graduated pensions, SERPS and S2P. I say to the noble Lord that S2P has been simplified, squeezing out some of the earnings-related component of it. Perhaps we might find another opportunity, together with the noble Baroness, Lady Noakes, to debate what has happened to defined benefit schemes. I might just ask the Minister whether the so-called tax raid on pension funds will be reversed by the coalition Government.

As regards the need to annuitise at 75-or the need not to do so-I have been an agnostic on that because it has nothing to say to those who are likely to benefit

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for auto-enrolment. Auto-enrolment is to deal with people who undersave, who need their income in retirement and who do not have the opportunity to store it up and pass it on as an inheritance. When the proposals come forward, we will look at the tax treatment of pots that are left and then passed on as an inheritance, and whether that properly takes account of inheritance tax. It would be quite wrong to use it to open up a tax loophole.

My noble friend Lady Hollis, as ever, made a thought-provoking contribution, stressing particularly issues around longevity and the huge potential for auto-enrolment. She spoke of the challenges of small pension pots and the emerging consensus around a new state pension. I take the point exactly that, if that were to be achieved, it would help on issues around the interaction of benefits.

The noble Baroness, Lady Greengross, remains supportive of auto-enrolment, and again stressed the importance of consensus, on this issue of the interaction with the benefit system. Consensus was an issue that the noble Baroness, Lady Noakes, also acknowledged. I am intrigued about proposals on the scope of coverage and all employees not necessarily having to be covered. I accept that issues around self-certification, trying to give administrative easements to employers while still encompassing a broad range of employees, have proved a challenge. I think that there were a couple of goes at it and would acknowledge that it was unfinished work in progress when we left office.

The Turner commission was established to consider the long-term challenges facing the UK pension system, characterised by undersaving for retirement, inequalities and complexity in the state pension system and demographic and social change. Changes to the state pension, making it fairer and more generous, were implemented from April this year, providing a firmer foundation upon which people can build savings for their retirement. Notwithstanding these improvements to the state pension system, including the coalition Government's announcements about uprating, which I welcome, it will not provide the retirement income to which many people aspire. It is estimated that around 7 million people are currently not saving enough to obtain a reasonable replacement rate of income in retirement. In excess of 40 per cent of working-age employees are not contributing to a private pension.

The reasons for that are complex, but they include issues around low financial literacy, inertia, lack of provision especially for those on low and moderate incomes, as well as declining employer provision away from defined benefit schemes towards contract-based DC schemes-hence a role for government intervention. That government intervention had two key components. One was a system of automatic enrolment requiring employers to make a minimum contribution to their workers' pension funds and a new national pension scheme designed to provide a simple, low-cost way of saving for low to moderate income earners-originally personal accounts. Put simply, that was our starting consensus, enshrined in primary legislation in the Pensions Act 2008. Like the noble Baroness, Lady Noakes, I remember it well. But the consensus did not just involve political parties; it involved a significant range

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of stakeholders, including the CBI, the TUC and the ABI. By and large, that consensus has held, which is to be welcomed.

As ever in these matters, the challenges come in the detail of the earnings on which employers' contributions are to be made; what the mechanics are surrounding the process of auto-enrolment and the right to opt out; what safeguards there are in the system to discourage employers with existing provision from levelling down and what existing provision satisfies the auto-enrolment tests; what information should be provided to employees; whether advice should be provided to all or any groups of individuals being auto-enrolled; and what compliance and anti-avoidance measures are required. On the low-cost national scheme, there are issues around not being favourably treated so as to prejudice private sector providers; the funding and charging arrangements; the sheer operational and governance issues of a trust-based scheme with potentially 1 million employers and several million members; the nature of the investments of the fund; and how lifestyling is to be organised for so many members-indeed, how the scheme administration is to be accomplished.

Much of this, subject to any review which the Government may wish to undertake and advise us of today, is settled. Regulations are in force which prescribe the arrangements which the employer must follow to comply with the employer duties on automatic enrolment. I believe that there was a broad consensus on that; we had two goes at it to try to improve the original draft, and I thought that there was an acceptance that there was a considerable improvement. There were issues around information requirements, opting out, and duties towards voluntary savers. Existing regulations also cover the point in time at which employers will have to start to comply with their duties and the minimum contribution level which employers and employees will have to make.

Arrangements have been made for the national scheme which provide for the winding up of the Personal Accounts Delivery Authority, as it has completed its task of providing its advice and designing and developing the infrastructure of the new low-cost scheme. Statutory instruments have given effect to the scheme order, which will actually create the new scheme-to be called the National Employment Savings Trust or NEST-as a trust-based, occupational pension scheme. This is currently due to inherit property, rights and liabilities from PADA in July 2010 and thereafter to be responsible for implementing and running the scheme.

A lot has been accomplished but there is a lot of work still in hand. Like other noble Lords, I acknowledge the desire of the coalition Government to take stock and review matters, and this obviously raises a number of questions. We have heard some of this from other noble Lords, but I should be grateful if the Minister would deal with the following points, either in responding to this debate or later in writing.

We understand that there is to be a review of aspects of auto-enrolment. Like the noble Lord, Lord Kirkwood, and the noble Baroness, Lady Noakes, I ask the Minister to tell us a little about the scope of the review and what drives its timing. I think that this is a separate review from the 2017 review. I take it that the coalition Government remain committed to the

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concept of auto-enrolment, and that this is not to be abandoned. I accept that already from the tenor of today's debate.

Is it envisaged that the scope would remain as currently planned, or are there any proposals to curtail the range of employers subject to the duty or limit the range of income to which the duty applies?

As currently planned, the auto-enrolment process would commence in 2012 and be staged over a four-year period so that all employers would be within the duty by 2016. As for employer and employee contributions, the phasing currently provides for an initial period where minimum employer and employee contributions would commence at 1 per cent each and not reach the full 3 per cent and 5 per cent respectively until October 2017. Is it envisaged that either of these would change, and is it the Government's desire to accelerate the employer duty obligations, leave them unchanged or introduce them at a slower pace?

Fears of employers with existing provision "levelling down" have been ever present, despite DWP research that shows that this is generally unlikely. Are the Government contemplating any further arrangements to allay any such concerns, which we have heard expressed again today?

On a wider point, one of the commitments in the coalition programme is the undertaking to explore opportunities for people to access part of their pension early, presumably looking at the New Zealand and US experience. I know that this concept is much beloved of my noble friend Lady Hollis, although of course not beloved of the Treasury, but I am interested in the Minister's view on this and on whether shifting emphasis from something that is overwhelmingly about provision for retirement to an effective lifetime savings account will change the paradigm with regard to employers' willingness to contribute beyond statutory minimums.

Another concern expressed about auto-enrolment was the risk of mis-selling because individuals would not get full value for their contributions as they would lose benefit-possibly, in some cases, pound for pound for any pension income secured-and this despite detailed analysis demonstrating that overwhelmingly individuals would get positive returns. At the time of the legislation there was much debate about whether people should be able to access advice as well as just receive information. There was a Lib Dem amendment, as I recall, that suggested that anyone of 50 or over should get one hour of free financial advice. In this regard, I note and welcome a commitment of the coalition Government to create a free national advice service, apparently to be funded by a levy on the financial services sector. Is the Minister able to tell us more about this, such as when it is expected to be up and running and the likely structure and level of the levy? Will this overlap with the proposed banking levy?

Whatever else the review is to cover, we understand that it will cover the suitability of NEST as a delivery mechanism for auto-enrolment. We know that NEST is well advanced in its preparations: it takes over from PADA in July, trustees have been appointed, arrangements for the scheme administration are in hand and an

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impressive team has been assembled to address the full-range challenges of running a scheme of this magnitude.

So what are the concerns? Is the suggestion that NEST has the wrong business model, or is the contention that the existing private sector providers could serve the target market better? The latter would be surprising, as they have lamentably failed to do so in the past. Will the Minister give us an assurance that there is no intention to move away from the universal service obligation envisaged for NEST or indeed that the scheme should be other than a low-cost scheme?

Securing dignity and security for tomorrow's pensioners is the business of Government. The reforms that we initiated were founded on the principles of personal responsibility, fairness, simplicity, affordability and sustainability, which has helped build the consensus. We hope that that consensus will endure. We look forward to hearing what the Minister has to say and seeing the results of the review in due course.

12.55 pm

The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud): My Lords, I thank the noble Lord, Lord Kirkwood, for raising this debate and providing the House with an opportunity to discuss this important issue. I also congratulate those taking part and join the noble Baroness, Lady Greengross, in her congratulations to those people on such an extraordinarily high quality of debate, which I personally found extremely valuable as we shape the immediate period ahead.

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