However, we are wary of putting the responsibility for providing information to members solely in the hands of annuity brokers. It is better to drive up standards by ensuring that all the players in the annuity market—providers, schemes, trustees and consumers—are engaged. That is why the Government have led in support of a number of different initiatives to address this important issue and will continue to challenge the industry if there is no significant improvement.
6.45 pm
Lord Browne of Ladyton: My Lords, I am grateful to the Minister for his response. I am disappointed, although not surprised, that his speaking notes sought to deploy what I would call a diversionary tactic in addressing the issue that this amendment seeks to address, and that clearly concerns a number of Members of this Committee. I am grateful to my noble friend Lady Hollis for her intervention and for the detail that she extracted from the Minister. I am also grateful for the intervention of the right reverend Prelate the Bishop of Chester, who encapsulated in a couple of sentences the fact that the Minister had compounded the complexity and the difficulty of the challenge facing those approaching retirement in such pension schemes, rather than giving them any comfort.
Of course, we must all accept what the Minister says about the variety of choices facing those who reach this point before or at the same time as they engage with the issue of annuity. However, the fact is that the level of understanding of the vast majority of those retiring is such that significant numbers—400,000
a year—are entering into annuities. They are taking out these complex insurance policies at the point of retirement and the results that they are achieving, even within the annuities themselves, suggest that they are not making the best choices for their own futures. This amendment seeks, within the confines of this Bill and in the context of other work that must be done in relation to annuities, to provide at least a step in the right direction now, demonstrating that Parliament understands and engages with this issue and wishes to prevent it from becoming the next mis-selling scandal of the financial services industry.
With respect to the Minister, it is no answer to say that, of course, the answers can be bewildering but that these same people should engage with a whole other set of bewildering choices in order to avoid the bewildering nature of the choices in relation to annuities. That is hardly a way to move forward. This is a relatively simple initiative. It is not perfect but it seeks, within the body of the clause as drafted, to address the very issue that was the target of the Minister’s principal criticism. It seeks to establish a method of ensuring that best practice is adopted by those brokerage services and gives the regulator a role in defining what best practice is. Surely this is acceptable, if only as a place marker while we go on to deal with the much more difficult issues that have been revealed, through the reports and the information that I have shared, and that the Minister knows exist in the annuities market. There is something fundamentally wrong with the market and it is driven by exactly the same motives as we have engaged with in other parts of the private pensions industry and in our debates in this Committee.
I understand why the Minister gives this disappointing reply to this amendment. I understand why his Government are reluctant at this point to engage with this initiative. However, I am determined that, at some stage, your Lordships’ House will have an opportunity to consider whether or not this is something that it wishes to engage with. I predict with some confidence that this matter will come back on Report but, given where we are in these proceedings, I will look forward to the debate on this issue in the Chamber and to discovering how much those who hear that debate will be reassured when the Minister or others put forward the arguments that we have heard this afternoon. At this stage, I beg leave to withdraw the amendment.
Amendments 67ZB and 67ZC not moved.
67ZD: After Clause 47, insert the following new Clause—
“National Employment Savings Trust transfers
(1) In relation to NEST, the Government must by 30 August 2014 notify the European Commission that it wishes to lift the ban on transfers and the contribution cap.
(2) The Secretary of State must make a statement to Parliament within 14 days of the Government notifying the European Commission in accordance with subsection (1).”
Baroness Sherlock: My Lords, the amendment in my name and that of my noble friend Lord Browne would require the Government to lift the restrictions on the National Employment Savings Trust, or NEST, on transfers made before 30 August 2014, and to notify the European Commission that they wish to lift the ban on the transfers and the contribution cap. Following this, and within 14 days of the notification, the Government would be required to make a Statement to Parliament.
The Government’s decision to legislate now but not to lift the restrictions on NEST until 2017, and to refuse to lift the ban on transfers in and out until pot follows member commences, is cause for real concern. Crucially, it cannot be in the public interest for the Government to proceed in such a way. Incidentally, I am sure that the Minister has noted the recommendation from the Work and Pensions Select Committee that the restrictions be lifted without delay.
I agree that there was a good case for having restrictions before it was clear how the market would progress, but these restrictions are no longer justified. The auto-enrolment market is now well under way and NEST has not taken all the business, which had once been a concern among some. Indeed, the restrictions have meant that NEST has been able to get less of that low and medium-earning segment than it otherwise would have done, which will contribute to the increase in the number of small dormant pots.
While the contribution limit will be lifted from 2017 by legislation, the restriction on individual transfers in and out of NEST will be left to coincide with the beginning of pot follows member. Whether the income cap is such a problem up to 2017, the continuing ban on transfers in and out will be. The DWP’s own research found that more than 80% of employers want one provider. However, the ban means that any employer who is thinking about using NEST but currently has a pension scheme of any type will be discouraged from using NEST because they cannot transfer in the pension assets in their current scheme. The Government are encouraging employers to use NEST but, by refusing to lift the ban on transfers in and out right away, they are discouraging those employers who currently have a scheme elsewhere. In this way, NEST is being disadvantaged against many of its market competitors.
Our amendment would enable employers who currently have an existing pension scheme to take their employees with their existing savings into NEST. While there remains a ban on transfers in and out, those employers cannot use NEST, or can use it only by leaving any existing pension pots in a stranded place, with a different scheme. Has the Minister considered that aspect of the Government’s decision?
It appears that what the Government are actually doing is ensuring that the restrictions on NEST remain until every employer has staged. By the time the NEST restrictions are lifted, auto-enrolment will be complete. There are a number of significant problems with the Government’s position. First, as the pensions industry acknowledges, NEST provides best-practice standards, which has obliged the insurance companies to improve their standards. Yet NEST is disadvantaged in competing for many of the low and medium-earning
savers for whom it is designed. That may well result in customer detriment for many of those workers. Secondly, the Government’s proposals fail the public interest test. If large numbers of low and medium-earning employees cannot use NEST, it is thereby being prevented from delivering its public interest obligation. Thirdly, restricting NEST impacts on its financial position and makes it harder to pay back the state aid earlier and thereby allow it to reduce its charges even further. This again undermines NEST’s public interest obligation and its mission to deliver a low-charge, high-governance pension proposition. Finally, the rest of the industry is reported in the pensions press as increasingly not having the capacity or, possibly, desire to cope with all the employers who are still to stage in. Having had, it is said, the advantage of the NEST restrictions in place while larger employers move in, the rest of the industry is perhaps less interested in the smaller end of the market.
I trust that the Minister will be able to explain why the Government have so far refused to lift the restrictions. However, whatever has been said in the past, I urge the Minister to accept this amendment; but if he cannot do so today, I hope that he will take it away and reconsider before Report the strong case for these restrictions to be lifted—not in a few years’ time but now, before auto- enrolment is complete. I beg to move.
Lord Bates: My Lords, I thank the noble Baroness, Lady Sherlock, for giving me the opportunity to update the Committee on all things NEST.
As noble Lords know, the National Employment Savings Trust was established to support automatic enrolment, providing access to a quality, low-cost scheme for a target market of low-to-moderate earners and smaller employers. We are now just over one year into automatic enrolment and NEST has around 800,000 members and 2,500 participating employers. Opt-out rates are low, with only 8% of individuals enrolled into NEST choosing not to save for their retirement. NEST is already very successfully doing what it is there for—supporting automatic enrolment.
However, we are approaching a peak in the staging profile. Between April and July this year, 27,000 medium-sized employers will start to enrol their workers, and from April 2015 more than 1 million small employers will do the same. We anticipate around 65% of these small and medium employers will use NEST. By the end of staging we expect NEST to have admitted around 750,000 employers and to be providing a pension saving vehicle for between 2 million and 4 million members.
This implementation challenge is what we need NEST to focus on. We need to ensure that the millions of people currently not saving sufficiently for retirement are provided with an opportunity to do so, and that NEST plays its part in starting to make pension saving the norm rather than the exception. For this reason, during the implementation of automatic enrolment, it is critical that NEST focuses on the key task of getting employers and workers on board without distraction. That is why we announced that we will be lifting the annual contribution limit and transfer restrictions currently placed on NEST by April 2017, when implementation for all existing employers is complete.
I am pleased to advise the Committee that, following an invitation from the European Commission, the Government submitted a formal notification earlier this month of their plans to lift these two constraints. The Commission will provide its response in due course. Once this has been received, the Government intend to consult on draft regulations and bring forward secondary legislation later this year to lift the constraints in 2017.
These regulations will provide certainty that beyond 2017 NEST will be on a similar footing to other providers and its members in the wider pensions market. It will enable NEST to support the successful implementation of automatic enrolment but will send a clear message to employers that these constraints will not have any bearing on them in the longer term, helping them to make an informed decision about automatic enrolment scheme choice for their members.
The Government are committed to ensuring that the introduction of automatic enrolment is a success. Effective implementation is important for building and maintaining consumer confidence in the reforms. Removing the annual contribution limit and transfer restrictions by April 2017 is the right approach.
The noble Baroness asked if the ban on transfers stopped employers from choosing NEST. NEST already has 800,000 members and 2,500 participating employers. Given that the overwhelming majority of employers that have staged so far are large employers, the evidence suggests that the constraints have not unduly deterred employers from choosing NEST.
This is an operational capacity issue for NEST. The restrictions on transfers in and out of NEST were designed to enable NEST to focus on its primary objective of supporting the introduction of automatic enrolment. Between April and July this year, an anticipated 10,000 to 15,000 medium-sized employers will start to use NEST to meet their automatic enrolment duty. It will not stop there, with more than 1 million small employers starting to enrol their workers from 2015.
I hope that those comments and updates, and the responses to the questions that the noble Baroness rightly raised, will enable the noble Lord to withdraw his amendment.
Lord McKenzie of Luton: My Lords, I was not going to intervene in this debate but I must challenge something the Minister said. It is as though the ban on transfers and the contribution cap were originally put in place because otherwise there would be a distraction from the fundamental purpose of NEST. That was absolutely not the position. There was a lot of detailed discussion. My noble friend Lady Drake would have been involved in that.
When the legislation was introduced, the imperative was to try to get a consensus of employers, trade unions and the providers, to make them feel comfortable with auto-enrolment. That certainly means that the Government of the day conceded things to get that consensus, so that the thing could move forward. However, those restrictions were not put in place because NEST would be distracted from the very important task that it was given without them.
7 pm
Baroness Hollis of Heigham: I support my noble friend, as that is precisely my recollection too. During a series of meetings with the organisations, the temporary cap came up because of the fear among pension providers that they would lose significant sums of money they had under management and the associated fees. The sole reason for doing it at the time was to get consensus to get it off the ground. Distraction was not a word that was ever uttered, and I must have been in about three years’ worth of those negotiations.
Lord Bates: These recollections will be there. I take it that it was in the mind of the Government that NEST had a huge task to focus on in actually attracting people who had never saved for their retirement before to start saving. That was a major responsibility, and issues were debated around that time relating to the effect that NEST’s creation would have on the market. Certain things were considered. It would be wrong to say that it was the only thing that was considered in terms of restrictions and the need to focus, but it was certainly one of the things which should have been focused on.
Baroness Hollis of Heigham: Does the Minister have any evidence that NEST—its chair, chief executive or board members—wanted this limit?
Lord Bates: I do not have any information to hand on that. However, we have got the point that I was perhaps overegging this by saying it was the only thing, and I need to recognise that other factors were perhaps considered when it came to putting this restriction in place. There was no sinister purpose, it was simply to say that there was a huge task to be undertaken and to ensure that NEST’s systems and operations could actually handle this. We do not want to put excessive burdens on NEST so that it fails when so many are dependent on its success.
Baroness Drake: Will the Minister also accept that volumes are critical to the success of NEST and to its charges, and that there is a fine balance between accommodating the concerns of other operators in the industry and not maintaining constraints so long that it undermines the efficiency of the NEST project as a whole?
Lord Bates: The noble Baroness makes a important point in relation to this and I would not dissent from it. NEST has a vital role to play and we want it to be a success. However, it is new, and a new system is coming online, so this ought to be done through learning from experience in a gradual and incremental way rather than as a big bang, of the sort which has had its problems in the past.
Baroness Sherlock: My Lords, I thank all my noble friends who have contributed to the debate and am grateful to the Minister for his graciousness in revising his position. It is quite possible that my noble friends are in a better position to decide what the Labour Government intended by these measures than he perhaps is, despite his knowledge and his current position, since they were involved in shaping it.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud) (Con): My Lords, I think confusion may have arisen between the discussions that the previous Labour Government had on this and the discussions that we had in Committee on the previous Pensions Bill, which introduced NEST, or at least some revisions to it. I shall check the Hansard record but I distinctly remember discussing this point with the noble Lord, Lord McKenzie, and making an astonishingly similar argument about the importance of making sure that NEST got its primary role right before we moved on to other aspects and transfers. I shall look forward to writing him a letter—I hope—pointing him to the exchange that we had three years ago.
Lord McKenzie of Luton: I look forward to the letter and its contents in due course. We were relaying the origins of NEST in the first place. These issues—the restrictions—were not intended by the then Government that introduced it to avoid NEST being distracted.
Baroness Sherlock: I thank my noble friend for that. First, I am disappointed that the Government decided to go ahead and stick with their current position. I would have liked the House to have the opportunity to discuss this further, as I do not think the Minister took on seriously the arguments made from this side. There was no reference at all to the question of scale. If the reports one hears from the industry are correct, it is possible that some of the big players may, this year or next, shut their doors to new members. We should do everything possible to enable NEST to build an appropriate level of scale and to enable it—far from distracting itself—to do precisely what it was set up for: to fulfil its public service obligation by delivering a high-governance, low-charge offer to those who can benefit from it.
The Minister made reference to employer choice but of course, by definition, the constraints actually reduce employer choice. Employers who want to go into it are unable to because the restrictions remain in place. I am disappointed that, despite the pressure from this side of the House, the Government have not revised their position. However, given that we are in Grand Committee and I can do nothing else, I beg leave to withdraw the amendment.
Schedule 19: Pension Protection Fund: increased compensation cap for long service
67B: Schedule 19, page 101, line 18, at end insert—
“Part 4Transitional provision: schemes undergoing assessment or winding up on the commencement dateSchemes undergoing assessment on the commencement date15 (1) This paragraph applies in relation to an eligible scheme that is undergoing assessment on the commencement date.
Continue to use the old cap as the basis of assessment
(2) For the purposes of sections 127(2)(a) and 128(2)(a) of the Pensions Act 2004, ignore any effect that this Schedule has on the compensation which would be payable if the Board assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 of that Act.Going forwards, pay pensions on the basis of the new cap
(3) For the purposes of section 138(2) of the Pensions Act 2004 take into account any effect that this Schedule has on the compensation which would be payable if the Board assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 of that Act on the assessment date.
Schemes that begin winding up before the commencement date
16 (1) This paragraph applies in relation to an eligible scheme that is being wound up if the winding up began (or is treated as having begun) before the commencement date.
(2) For the purposes of section 73 and 73A of the Pensions Act 1995, ignore any effect that this Schedule has on the compensation which would be payable if the Board assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 of the Pensions Act 2004.Going forwards, pay pensions on the basis of the new cap during assessment
(3) If for any period the scheme is being wound up and is also undergoing assessment (“the overlap period”), sub-paragraph (4) applies.
(4) For the purposes of section 73A of the Pensions Act 1995 as it applies in relation to the overlap period, take into account any effect that this Schedule has on the compensation which would be payable if the Board assumed responsibility for the scheme in accordance with Chapter 3 of Part 2 of the Pensions Act 2004.
Meaning of “undergoing assessment”
17 For the purposes of this Part of this Schedule an eligible scheme is “undergoing assessment” if an assessment period has begun in relation to the scheme but has not yet ended.
Meaning of “eligible scheme”
18 Section 126(4) of the Pensions Act 2004 (list of provisions in relation to which regulations may provide that a scheme remains an “eligible scheme”) is to be treated as including a reference to this Part of this Schedule.
“Part 5GeneralInterpretation
19 In this Schedule “the commencement date” means the date on which it comes fully into force.
20 Other expressions used in this Schedule have the same meaning as in Part 2 of the Pensions Act 2004.
Further transitional provision may be made by order
21 The inclusion of Parts 3 and 4 of this Schedule does not prevent transitional provision being made by order under section 51(7).”
Amendments 67A and 67B agreed.
Schedule 19, as amended, agreed.
Clause 49: Regulations and orders
68: Clause 49, page 24, line 32, leave out paragraph (a) and insert—
“(a) regulations under section 3, 17, 18(3) or (5), 19, 20, 29, 31 or 33,”
Lord Bates: My Lords, in moving Amendment 68, I will also speak to the other amendments in this group. Government Amendments 68 and 69 respond to recommendations of the Delegated Powers and Regulatory Reform Committee. They provide that regulations made under certain powers in the Bill would be subject to the affirmative resolution procedure. I am grateful to the Committee for its consideration of the powers in the Bill and subsequent report.
As I do not wish to detain noble Lords for too long, I thought it would be helpful to briefly outline the regulation-making powers affected by the government amendments. They would provide that the regulations made under the following clauses would be affirmative: Clause 17, which provides for regulations to prescribe the rate at which deferral increments will be calculated for the single-tier pension; Clause 18(3), which provides for regulations to modify the amount of state pension to be used when calculating the deferral increase due where a person has been resident overseas during their period of deferral; Clauses 19 and 31, which provide that regulations may be made to disqualify a prisoner from being paid a single-tier pension or bereavement support payment; Clause 20, which provides for regulations to exclude people who are not ordinarily resident in Great Britain or a specified territory from entitlement to the annual uprates of the single-tier pension; and Clause 33, which provides for regulations to prohibit the offering of incentives with the intention of inducing a member of a defined benefit pension scheme to agree to a transfer of their rights to another pension scheme or arrangement.
Turning now to the other amendments in this group, Amendment 68ZA would make regulations under Clause 17(5) affirmative. As I have already said, Amendment 68 provides for regulations under Clause 17 to be affirmative so this amendment is not necessary. Amendment 68B would make regulations under Clause 42 affirmative. Clause 42 provides for regulations to be made to enable the recovery of Pension Protection Fund levies for past periods. This is a technical area relating to ensuring compliance with EU law on state aid, following a decision by the European Commission and a subsequent ruling of the General Court in respect of the BT pension scheme. This found that partial exemption from the PPF levies due to the existence of a Crown guarantee constituted unlawful state aid. The Government understand that BT has appealed the ruling of the General Court to the European Court of Justice.
Regulations were made in 2010, following the Commission’s decision, to ensure payment of the levies going forward. Clause 42 simply provides for regulations to allow recovery of outstanding levies relating to the period from 2005-06 until 2010, when the regulations took effect. In agreement with the Commission, an escrow account was set up pending the final legal outcome and already holds the maximum amount of risk-based pension protection levy that could be due, plus applicable recovery interest. The Government are not aware of any other scheme in the same position as BT, so any regulations would have limited application.
Given the limited scope of this power and the opportunity to scrutinise the Government’s intentions during the passage of the Bill, we consider the negative
procedure appropriate in this instance. Any regulations made under this power would simply ensure that the prompt payment to the PPF of the levies for past periods is possible should BT’s final legal challenge not succeed. This will ensure that the UK is in compliance with state aid law and so avoid possible fines. I therefore ask noble Lords not to press their amendments. I beg to move.
The Deputy Chairman of Committees (Baroness Harris of Richmond) (LD): My Lords, if Amendment 68 is agreed to, I cannot call Amendment 68ZA by reason of pre-emption.
Lord Browne of Ladyton: My Lords, I speak to government Amendments 68 and 69, and to Amendment 68ZA, for what that is now worth, and Amendment 68ZB in the name of my noble friend Lady Sherlock and myself. As the Minister pointed out, Amendment 68ZA is now unnecessary in the light of government Amendment 68.
We welcome the government amendments in this group. As the Minister explained, they have been tabled in response to some of the recommendations made by the DPRRC. I am pleased to see that the Government have come to accept the DPRRC’s recommendation that Clause 17 powers relating to the effect of pensioners postponing or suspending state pensions should be affirmative; that was the purpose of our Amendment 68ZA.
Amendment 68ZB is purely a probing amendment, and has been remarkably successful in drawing from the Minister an extensive explanation of the regulation-making power under Clause 42, and why the Government felt that it was appropriate that it should proceed by the negative resolution procedure. I am extremely grateful to the Minister for that detailed explanation and, in the light of his full explanation, which is now on the record, I will not press that amendment.
Amendments 68ZA to 68B not moved.
Clause 49, as amended, agreed.
72A: Clause 51, page 25, line 22, leave out subsection (3) and insert—
“(3) The following come into force on the day on which this Act is passed—
(a) section 28;
(b) section (Pension Protection Fund: compensation cap to apply separately to certain benefits);
(c) this Part.”
73: Clause 51, page 25, line 36, at end insert—
“(6A) Section (Public service pension schemes: transitional arrangements) comes into force on such day or days as the Treasury may by order appoint.
(6B) An order under subsection (1) or (6A) may appoint different days for different purposes.”
Clause 51, as amended, agreed.
Bill reported with amendments.
Committee adjourned at 7.15 pm.