Consideration of Lords amendments
I must draw the House’s attention to the fact that financial privilege is involved in Lords amendments 1, 3, 9 to 13, 15 to 23, 27, 29 and 32 to 38. If the House agrees to them, an appropriate entry will be made in the Journal.
Entitlement to state pension at full or reduced rate
I beg to move, That this House disagrees with Lords amendment 1.
We are on the home straight of the Pensions Bill. It has been all the way through this House and their lordships’ House, and we have come back to it today to deal with amendments that, with one exception, make it a better Bill. I am grateful to my noble Friends Lord Freud and Lord Bates who, from the ministerial Benches, took the Bill through another place. I am also grateful to all my colleagues who have contributed to the Bill, and to peers on both sides of the House of Lords who have made insightful contributions and improved the Bill in a number of ways.
We have made a number of amendments in response to concerns raised by noble Lords, so I emphasise that our decision to ask this House to disagree with their amendment 1 is exceptional. Indeed, that is the only amendment with which we are asking the House to disagree, so I hope that we will be seen to have taken a constructive approach and that we have sought to improve the Bill on a cross-party basis wherever possible. For reasons that I will explain, however, we ask the House to disagree with this amendment.
As the House will know, access to the national insurance system through employment is dependent on earning above the lower earnings limit, which is currently £109 a week or, expressed annually, £5,668. People earning above the lower earnings limit but below the primary threshold of £149 a week receive a credit and do not pay national insurance but effectively build up national insurance rights. The issue raised by Baroness Hollis in another place related to the position of people who have more than one job, none of which, by itself, results in their paying national insurance but whose wages, if added together, would be above the lower earnings limit. It was suggested that there was apparent unfairness, because someone with a single job that pays £120 a week would get a year of national insurance, whereas someone with two jobs, each paying £60 a week, would not.
We are grateful to Baroness Hollis for raising the issue. We will set out the extent to which we think the issue is significant, the extent to which we think there is evidence for it and how the Government plan to address it. We ask the House to disagree with the amendment, but we accept the principle that we need a pensions and national insurance system that is fit for the modern age. Crediting and various other issues have evolved and need to evolve to reflect the fact that we are dealing with a changing labour market. I want to share with the House some examples of how that has happened and will continue to happen. One particular example is the introduction of universal credit.
At present, there is a set of low-earning individuals who do not get credits. When universal credit is fully in place and they come within its scope, they will receive credits. Potentially, some will be the very same people we are talking about in relation to the amendment. The House may not be aware that the introduction of universal credit will bring an estimated 800,000 additional low-earning households into the scope of crediting. That demonstrates that the Government are not complacent about the changing labour market, or the position of low earners and their access to the national insurance system. This is a concrete and substantive way through which people will gain access in future.
I understand the concern of Baroness Hollis that people might miss out on a qualifying year for national insurance. Why does that matter? If they were repeatedly to miss out on qualifying years, they might fail to build up a full single-tier pension. That requires 35 qualifying years, bearing in mind that these are years of contributions or credits. However, the mere fact that I have used the phrase “35 qualifying years” demonstrates the first reason why the problem might not be as significant as one might, at first sight, imagine. An 18-year-old might, for the sake of argument, have a 50-year working life, or possibly slightly more. Of that 50 years, only 35 years need to be qualifying years for a full single-tier pension. That person could, therefore, spend 15 years doing multiple small jobs—which is exactly what the noble Baroness is concerned about—and it would not make a jot of difference to their single-tier pension entitlement.
We do not know how many people spend how many years in this situation, and that brings me to one of my central points: we do not have the evidence base to know the scale of any potential problem, let alone to rush to solutions, which is what the amendment does. We have cross-sectional data. On the basis of surveys, we know how many people report having multiple jobs in any given year. We know what the wages are and we can have a stab at aggregating them. What we do not know very reliably is how that changes over time: whether the people who in any given year have multiple small jobs are the same people the next year and the next year. If it is just a transient phase that happens for a few years of someone’s working life and does not happen again, it may be entirely irrelevant to their state pension position.
This matter came to my attention through a constituent who was in exactly this position, and the Minister will be aware that I raised it in Committee. The amendment is an enabling amendment rather than a prescriptive amendment, and even if there are only a few people who will be in that position, is it not worth making provision for them? Not everybody will necessarily enter the labour force at 18, particularly with greater further education and so on, so reaching 35 years might be quite difficult for some people. If there is a small number, as the Minister keeps telling us, I do not understand the objection to the amendment.
I am grateful to the hon. Lady who, as she says, has shown an interest in this issue. There will be an issue of proportionality in any change. We estimate that perhaps 50,000 people might at any given point be doing multiple small jobs that together take them over the floor, but do not on their own. If, for most of those people, this happened for a few years and did not happen again, and it was relevant to the state pension for only a handful of people, should we legislate for that handful? It could happen and it probably does happen to some people, but to make well-informed policy the Government ought at least to assess the scale of the problem.
In particular, we should not rush into specific solutions. The amendment advocates a specific model, but I believe that we must begin by identifying not just the number but the types of people who are doing multiple part-time jobs of this kind. For instance, are they people with children? Is that why they are doing such jobs? If they have children under 12, they will receive credits under the general system.
We must match our data on multiple small jobs with data from other sources. We must look at longitudinal as well as cross-sectional data in order to gain a sense of the scale of the problem and the types of people affected, rather than legislating for a single solution. We believe that the amendment is technically flawed for a number of reasons, but we certainly think that rushing to amend the Bill in order to give ourselves power to do something that we might or might not want to do because it is one possible solution to a problem whose scale we do not know would be premature.
Is it not especially important to enable women to juggle caring for young children with part-time employment? Will the Minister reassure me that the great improvements that we have made in relation to credits will continue, so that women will retain the flexibility that so many of us really appreciate when our children are young?
My hon. Friend is right. It is important to attribute value to the time that people—both men and women—spend at home bringing up young children, and I can reassure her that years spent doing that will count in full as qualifying years towards a single-tier pension. For the first time, more or less, since the introduction of the system—at least, since earnings-related pensions were introduced— those years will count just as much as years spent running a FTSE 100 company. A year is a year, and a qualifying year is a qualifying year.
The provision will apply to anyone who is looking after a child under 12 and entitled to child benefit—well, it is slightly more complicated, but that is the basic idea—and to anyone who is caring for an elderly relative and receiving carers allowance, or, in certain cases, caring for more than 20 hours a week. There is, rightly, a network of credits which bring people into the system. Those will remain, and, in many respects, will become more valuable in the single-tier context.
The Minister advanced exactly the same arguments on Second Reading and in Committee. He said on those occasions that he did not have enough information. Given that we last considered the Bill several months ago, may I ask what steps he has taken to obtain the information that he feels is needed?
We have increased our earlier estimate of the number affected from about 20,000 to about 50,000. In 2010, the last Government reduced the scope of what used to be known as home responsibilities protection by reducing the upper age of children being cared for following the end of child benefit and not being covered by credits from 16 to 12, and that has slightly increased the number affected by our proposals. We also made a technical change in starting credits for 16 to 18-year-olds. Those two factors, combined with more recent data, give us an estimate of 50,000. So we have updated our estimates, but, as the hon. Lady says, we need to take the matter further. Although we do not accept the amendment, we do accept the need to build an evidence base, and I will explain in a moment how we plan to do that.
The Minister is demonstrating that for low-paid people the system is currently so complicated that they cannot tell whether or not it is worth working an extra hour. Will he make it simple for me? If the amendment were adopted, would low-paid people be worse off in that year while they were earning?
The honest answer to the question is that because there is not enough information in the amendment, we do not know, but that might be so.
Let us take the example of someone with two jobs paying £75 a week, who does not currently pay national insurance. If the two sums were added together to make £150 and national insurance were levied on that basis, that person would then have to pay national insurance. Such people might turn out not to need the qualifying year, because they would already have 35 qualifying years. As the hon. Gentleman says, a set of people could be worse off if the amendment were interpreted to mean what we assume that it means. It may merely mean opting in for a credit, which would be a free entitlement and would therefore constitute pure gain, but in that case there would be a different unfairness. We would have people who did a single job at £150 a week who had to pay NI and somebody else who had two jobs paying £75 a week who did not have to pay NI but got a free year of national insurance. My hon. Friend highlights an important point, and I am grateful to him.
We believe the amendment is both unnecessary from a legislative point of view, because we have crediting powers elsewhere, and sets a precedent which concerns us. The amendment is not clear either. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) has tabled a motion to agree with the amendment, indicating that he disagrees with the Government’s view on this amendment. In a number of respects the amendment is flawed, and were he to be successful in a vote on its staying in the Bill, there would be no further parliamentary opportunity to correct it. This is the only amendment on which we disagree with the Lords, so that would be the end of the process. He would therefore have ensured that a defective clause became part of the law of the land and I am sure he would not want that to happen.
Let me give some examples of the flawed drafting. The amendment refers to the “lower earnings level”, but in fact there is no such thing. There is the lower earnings limit, which is what we imagine Baroness Hollis meant, but the amendment is unclear and we could not have in primary legislation a reference to a threshold that does not exist.
Secondly, the lower earnings limit, if that is what is meant, is normally expressed in weekly terms and has to be multiplied by 52 to be expressed in annual terms, so we would have to make sure that there was consistency. The amendment refers to a year, but it is unclear whether it is a calendar year or a financial year; we presume it is the latter. There is a whole raft of reasons why the amendment is flawed. I am sure that the hon. Gentleman would not want to put a flawed provision on the statute book, but that is exactly what voting against the Government would do.
We do not know for certain how the proposal would work, although we have a clue. If it is about crediting—about giving somebody a qualifying year without their having to pay for it—then we think that crediting ideas would fit better in section 22 of the Social Security Contributions and Benefits Act 1992 rather than as part of this Bill. Extensive regulation-making powers are available to us to modify the crediting system, if that is what is intended, so we do not think that such a proposal would be necessary from a legislative point of view.
If, however, we are talking about combining wages and aggregating and then levying national insurance, that would bring in a different set of unfairnesses. That applies particularly to the example of a person with a single job at £150 who has to pay NI and someone who has two jobs at £75 who does not have to pay that but who could be credited. That creates different anomalies which we obviously want to avoid.
On the issue of the evidence base, we have looked at people who have multiple jobs. Clearly, someone can have multiple jobs and one of them might pay above £109 a week, so the fact that someone has multiple jobs does not of itself exclude them from national insurance. Each job has to pay below £109. Of course, some people do not go above £109 even when their multiple jobs are put together—someone who does two lots of babysitting, perhaps, or a couple of cleaning jobs—so presumably they would not qualify. We are therefore talking about a very specific group of people with multiple jobs which together take them over £109, but neither of which is over £109 on its own.
We also would not want to include in our figures those who have children, those who are doing multiple small jobs because they are carers, or those on universal credit, because they would all be credited in. There are quite a few people with two or more small jobs, but Members can easily see that it is a big leap to the assertion that there is a big problem. Furthermore, as I have indicated, the fact that in any given year a person is in that situation may have no effect on their eventual state pension, because it depends on how long they are in that situation. We therefore need more evidence before we rush to policy conclusions.
We take seriously and respect these issues, so let me explain how we propose to build up an evidence base. First, we need to look further at the characteristics of people in such situations—who they are and how long they might have that kind of working pattern. Secondly, we commit to updating and revisiting our 50,000 figure to make sure it is the latest available. In that context, before moving on I want to say a few words about the issue of zero-hours contracts, as I have a feeling that might come up in our debate.
It is said that zero-hours contracts are a growing part of the labour market; the recent official figures substantially increased the estimated number of people with zero-hours contracts. There is some suggestion that the number of zero-hours contracts certainly has not risen as quickly as the figures might suggest, and that because of the discussion of this issue in the media, people are more aware that that is the kind of arrangement they have. The Office for National Statistics has urged caution in assuming that there has been this big surge in zero-hours contracts. However, I am pleased to be able to tell the House that the ONS is undertaking employer research into the use of zero-hours contracts, which should, I believe, be published next month and provide us with some robust evidence on the scale and use of that form of contract.
Although zero-hours contracts are a feature of the modern labour market, they are not what we are talking about in this debate. To be clear, we are talking about people having two or more mini-jobs which together take them above the £109 threshold. They might be zero-hours contracts, but there is no reason to assume that a zero-hours contract is a mini-job, that it results in someone earning less than £109, or that people who have zero-hours contracts have multiple jobs. Those are all dirty great leaps to an assumption that we are not entitled to make on the basis of the data.
For example, I understand that the average person with a zero-hours contract could typically work 15 to 20 hours a week or so. The zero is just what is guaranteed, but the typical outcome is very often a week of work that pays someone enough to have to pay national insurance. Again, related to that is the fact that qualifying years for national insurance are based on the situation over a whole year, so even if someone is on a weekly zero-hours contract and does not work every week—they work zero hours some weeks—they could still build up a full qualifying year, because in the weeks they work they might pay significant amounts of national insurance. Therefore, again, simply saying there are lots of zero-hours contracts does not prove that it is an issue. The fact that someone is on a zero-hours contract does not mean they have multiple jobs. The fact that people are on zero-hours contracts and sometimes work zero hours does not of itself stop people getting qualifying years. I imagine the debate may move in the direction of saying, “Oh, there’s all these zero-hours contracts. It’s a scandal and therefore we need this amendment,” and there are about 17 logical flaws in that reasoning.
We have always been clear that there will be people who will not make the 35 years, particularly those who come into the country later in life, for example, but the link between multiple mini-jobs and not making the 35 years, which we are talking about here, is unclear at best. We simply do not know whether it is a transient phase for people or whether they are in a recurring pattern. Again, I counsel the House against rushing to policy conclusions in amendments that are not accurately drafted rather than saying, “Let’s get the evidence base together.”
As well as undertaking to update our own figures, we are happy to commit to a literature review of what is known about this end of the labour market, making sure we have access to all the available data. We are also content to convene what we have grandly called an analytical stakeholder forum—that is three words of jargon in one go, so it must be impressive. The point of that is to pick the brains of those who study this end of the labour market, and we will be very pleased to benefit from the insights of the noble Baroness Hollis, with whom I have already had an informal conversation about this matter. I should stress that she would like us to retain Lords amendment 1 to avoid misrepresenting her views. We are very keen to gain her insights and those of economists and others who study this end of the labour market to try to establish what more we might be able to find out through existing data and whether any further work needs to be done.
It seems to us that we need to take a step-by-step approach, rather than rushing to policy conclusions as the amendment would. If we found that there were lots of people in this situation and that something must be done, even the something that must be done might not be the thing proposed in this amendment, and it seems a bit odd to pick one option, which as far as we can see is a sort of opt-in crediting option, when there might be others. For example, one might think that lowering the lower earnings limit might be a better solution. That would reduce the number of people in this position because their combined wages would be more likely to be above that floor. It would not necessarily require an opt-in process, and it would be simpler. That might therefore be a better solution; there might be others. We might relax the rules on voluntary national insurance contributions and the deadlines for payment. One can think of a whole raft of solutions, but if we are not clear about the scale of the problem, the groups affected and the permanence or otherwise of the situation, putting just one such provision in primary legislation—giving ourselves a power we might not use through what is, at that, an ambiguous amendment—does not seem to us to be the way forward.
Let me try to draw these threads together, because we have a lot to get through. We are concerned that the amendment itself is unclear, and I have run through a number of reasons why, such as the reference to the lower earnings “level”, not “limit”, and the reference to “income”, not “earnings”. National insurance liability is based on earnings, so the wording would have to be thus changed. The lower earnings limit figure is currently a weekly figure, whereas the amendment refers to an annual figure. Of course, all these things could normally be tidied up, but we do not have the opportunity to do so because if the House accepts the amendment, that is it: it is the end of the parliamentary process, the Bill becomes law and a deeply flawed amendment is on the statute book.
It is unclear exactly how the amendment is meant to work. As was said earlier, would people have to opt in and get credited, or would there be a duty on Her Majesty’s Revenue and Customs to combine these incomes and then levy national insurance, which might be to the detriment of some? There are a great many issues to be examined, but it is not our view that we should not look at them. We should, and as I said at the outset I absolutely accept the principle that we should have a system of pension rights and national insurance that reflects the current labour market, rather than the one in existence after the second world war. We are making a number of changes in that regard, but as I have said, the amendment as it stands is flawed in a number of respects and ambiguous in others. It rushes to a single solution to a problem whose scale and nature we simply are not year clear about, so we believe that—
We envisage updating our own estimates by the summer and would be very happy to do that, and bringing together experts and trawling through the related literature in the latter part of this year. We do not want to kick this into the long grass. If we concluded that further data-gathering was needed, and it was qualitative rather than quantitative, that would take some time, but well-informed evidence-based policy making sometimes does take time, frustrating though it may be, and that is the approach the Government wish to take.
I urge the House to disagree with the Lords in their amendment 1.
I shall of course be disagreeing with the Government’s disagreement with Lords amendment 1.
Let me begin by putting the amendment and the labour market issues it pertains to into some context. Since 2008, only one quarter of the jobs created in this country have been permanent. There are hundreds of thousands of short-hours contracts and, according to some figures, approximately 1 million zero-hours contracts, in addition to other non-standard job patterns. Some 40% of all jobs are not the permanent, full-time positions that we traditionally associate with the UK labour market. That context is important to bear in mind: the Minister rightly referred to the need for the pensions system to keep up to date with changes in the labour market, and that is the reality of the labour market we are now all living with and working in.
The labour market structure needs to be seen alongside the structure of the state pension system. The Minister alluded to that, but as things stand, by 2016, under the Government’s state pension reforms, people will need 35 years of contributions to get a full state pension. Alongside that is the system of credits, which has been mentioned and others will doubtless refer to. Someone who is unemployed and on jobseeker’s allowance gets credits for the state pension, as does a working mother who has a child under 12. A grandparent caring for the child of a working mother can get credits for the state pension, as can someone on disability benefits or carer’s allowance. It is important to recognise those points in the context of an ever more complicated labour market.
The amendment is clear that it does not propose a particular solution. It is a permissive amendment and relates clearly to job insecurity issues and the changing nature of our labour market. The House had a very interesting debate on job insecurity at the beginning of February that covered a number of important issues, yet during it the pensions aspect was not raised. That reflects the extent to which we are all trying to catch up with this non-standard labour market—the shift from the full-time permanent employment that has historically characterised work in this country.
The Minister said, I think, that those who support the amendment should be aware that the Department for Business, Innovation and Skills is currently assessing zero-hours contracts. He is absolutely right, but if the Government accepted this permissive amendment, the DWP would be poised to respond swiftly to the BIS zero-hours contract review.
The amendment seeks to future-proof the Bill, to construct a pensions platform underneath the poorly paid—those in deeply insecure, fractured work—and to make it clear that this House believes that they should not lose or be denied a full state pension because of changes in the labour market structure which are not of their doing.
Let me deal with some of the other points the Minister made. I shall begin at the end, so to speak, with the extraordinarily attractive offer that he made. He said that the Government are committed to a literature review and to an analytical stakeholder forum. One can hardly wait. He suggested that there are 17 logical flaws in the amendment. I am sure that Baroness Hollis would be delighted to hear all 17—assuming he has not just come up with that figure spontaneously—and it would be useful to know what they are. After all, we all believe in saying what we mean and meaning what we say.
For the avoidance of doubt, I think the hon. Gentleman will find that the record shows that I did not say there were 17 logical flaws in the amendment. I said that there were 17 logical flaws in leaping from the assertion that there are lots of zero-hours jobs nowadays, to this amendment. My point was that it takes an awful lot of logical assumptions, all of which are false, to get to the amendment.
Of course Hansard will tell this story, but it was a short quote and I think I managed to get it down correctly. If the Minister is saying that it was not that there were 17 flaws in the amendment, I am sure the whole House is delighted to have that clarification.
Let us probe a little further into the Minister’s argument. He says that on the Government’s estimates only about 50,000 people are affected, that there should be no “rush to solutions” and that the amendment is flawed technically for many reasons—but perhaps not 17. He says that the Government need to build their evidence base on the issue. Interestingly, he said that the Office for National Statistics has urged caution about the notion of an upsurge in zero-hours contracts. His point was, and the ONS’s point is, that it might be that individuals are more aware that they are on such a contract than that the upsurge has been so great. If that is the case, it does not negate the point that there are a significant number of these sorts of contracts around, and that has significant implications for a state pension system based on contribution.
I asked the Minister about the 17 logical flaws, but his argument also was that we do not know enough to go forward with an amendment to solve the problem. However, he also said he understands that the average zero-hours contract gives an individual between 15 and 20 hours of work a week. Is that his estimate or is it based on research? In a world where we are not precisely aware of the figures involved, there is a danger of bandying around our own figures without a relevant citation.
What situation are we trying to deal with through this amendment? As I said, we have an increasingly fractured and insecure labour market, and the question is whether individuals in that labour market and the pension system relating to that market are appropriately structured and linked. The amendment, introduced effectively in the other place by Baroness Hollis, seeks to deal with what is, on any measure, a significant problem. We welcome the fact that the Bill brings 4 million self-employed individuals into the state pension without an employer’s contribution, and of course those self-employed people pay £2.70 a week. The amendment’s thrust is that we need a similar approach for short-hours workers. The Minister rightly said that this is not just about zero-hours contracts; it is about the insecurity of short-hours working in the labour market more broadly and matching that up effectively with a universal state pension—the Minister is keen on that.
I have been listening to my hon. Friend and to the Minister, and I was alarmed by the Minister’s statement that people on zero-hours contracts “could” be okay, be that to do with their working arrangements in other areas or the fact that they may work a sufficient number of hours. That implies that they also might not be okay.
As usual, my hon. Friend makes a pertinent intervention.
There is an issue to address and the question is how to do it. The Minister suggested that Baroness Hollis’s amendment, which my colleagues and I agree with, prescribes a specific solution, but of course it does not; it is a permissive amendment. As the Minister, using that fertile mind of his, started to think about different solutions, one could see the point of the amendment even more: to give him and his colleagues in the Department for Work and Pensions the authority to think carefully about how to solve this problem. He gave a number of ideas as to how it might be solved, which was when we particularly saw the function of this amendment. It would bring the best minds in the DWP together to deliver a solution, and it would remove the need for subsequent primary legislation. So, by his own words, the Minister gives succour to the amendment.
The amendment has a clear purpose: it is a permissive amendment to enable the Government more finely to match the state pension reform that the Minister is introducing with the nature of the modern labour market. He talked about estimates of the number of individuals involved. As he will know, Baroness Hollis has come to a different conclusion about the number affected and is very clear that the universal credit, which he mentioned, will not help the largest group—single people—nor, usually, will it help women without younger children or households where the joint income, including the man’s income, floats them off universal credit altogether. She calculates the number of individuals affected as being 250,000, which is a very different figure from the one the Minister gives. Universal credit, which he said would ameliorate the problem, will not help single people, women without younger children or households where the joint income, including the male income, floats them off universal credit. It is important to put that on the record. If a significant number of people are affected by this and if the Minister wants to make the state pension as universal as possible, as the Opposition believe he does, it would seem sensible for him to accept a permissive amendment allowing him to go forward on the basis of his thoughts about the various ways in which this might be taken up by the Government and to get cracking on it. The fundamental point is: why should those who, through no fault of their own, are in short-hours working or zero-hours contracts—those various kinds of flexible employment contracts—be denied the benefits of a full state pension?
The Minister said that the problem is not as significant as Baroness Hollis has suggested and that someone would need only 35 of 50 years in the labour market to qualify, but the issue is that where people spend significant parts of their life on these contracts, what is meant to be a universal state pension does not necessarily become one.
I sense that the hon. Gentleman is concluding. The amendment is flawed in a number of respects. For example, it refers to a lower earnings level, but there is no such thing. Does he not have any qualms about the fact that if his vote were to succeed, he would be putting flawed legislation on to the statute book?
The Opposition’s view is clear: the issue of job insecurity, of short-hours working and of zero-hours contracts is a significant problem for the pensions market and, specifically, for the state pension. In that context, it seems wise to us to allow the Minister to crack on with solving this problem. I have confidence that he will ensure that this amendment, if agreed to by the House, provides the basis for matching up the state pension with people on these insecure and flexible employment contracts. On that basis, we disagree with the Minister’s disagreement, and we intend to support the Lords amendment.
Having been with this Bill from the outset, I remain disappointed, given the answers that the Minister gave to my interventions, that we have not made any substantial progress on resolving this issue. It will be predominantly women, although not necessarily entirely so, who will be disadvantaged. In other aspects of the Pensions Bill, the Minister has said how important it is that people will now build up their own entitlements for their own individual pensions. Being able to get a derived pension from a spouse, a deceased spouse or an ex-spouse will disappear from the system. We discussed that issue at considerable length during the passage of the Bill. Indeed the Minister has majored on this whole issue of people having their own individual entitlement.
I can understand a Minister saying in Committee that an amendment is flawed and could perhaps have been better expressed. However, given that we have been at this for some months and that there has been such interest in the matter, which goes right back to the evidence session and before, it is disappointing that an effort has not been made to reach out and say, “We think this is flawed, but this is what we can do about it to make it real.”
I am not convinced that the time scale suggested by the Minister is sufficiently energetic to allow this matter to proceed. Even if there are only a few people who fall outwith the other categories, they are none the less real. As my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) said, universal credit—even if does emerge in its full form, which is slightly doubtful—is not the complete solution. Those women who, in the past, depended on their husband’s contributions will no longer be able to do that and will not qualify for universal credit if their household income lifts them above the required level. I am disappointed that the Minister has not found a solution to the matter so far, and regret that he has not used this opportunity to do so.
Let me respond briefly to the debate. On the issue about the typical number of hours worked by someone on a zero-hours contract, I said 15 to 20 from memory, but the exact figure is 20 hours. The ONS estimates that the average number of hours worked by people on zero-hours contracts in 2013 was more than 20 hours. There is a danger that when we hear the words “zero hours” we assume that it means there is no money coming in. However, it simply refers to the number of hours guaranteed under the contract. Lots of people with zero-hours contracts are building up full qualifying years.
Yes, I do. The point is that 20 hours on a minimum wage would get someone above the lower earnings limit. If half of everyone on zero-hours contracts are doing more than 20 hours, we can immediately say that they will qualify, and those doing slightly fewer hours will also qualify. The link between zero-hours contracts and multi mini-jobs, which is the subject of the amendment, is, at best, unclear. In extremis, it could be that no one on a zero-hours contract is even covered by this amendment, if they have only one job at a time and no other job. We do not know and nor does the hon. Gentleman. Our sequencing is evidence first and policy next; the Opposition’s is the other way around.
The hon. Gentleman refers to the emerging labour market, and chose 2008 as his base because that enabled him to get a figure that worked for him. However, let me bring him right up to date. In the past year, the number of women working full-time increased by 270,000 while the number of women in two jobs, which is germane to the amendment, decreased by 25,000. The suggestion that there is some sort of inexorable rise might be wrong. If we were to update our figures, we might find that the number has continued to go down. There is a whole raft of statistics I could give the hon. Gentleman, but to assume that this is a vast issue and that the numbers are inexorably rising is far from the case.
The case of the hon. Member for Edinburgh East (Sheila Gilmore) is that even if only one person were in this situation, we should fix it, but there is an issue of proportionality here. To set up the lightest touch crediting regime based on past precedent would probably cost about £1 million and more than £1 million to run. One must always ask the question—as least we do on the Government Benches—about value for money. That is why we need to know how many people are affected, who is affected and the best way to deal with the issue.
Finally, when the hon. Gentleman was asked whether he cared about putting flawed amendments in the Bill, he essentially said that he did not; he simply wanted to make a political point. That is regrettable. As legislators, we are voting today on legislation. This is not an Opposition day debate where he can make a point. This is deciding what goes into the law of the land. I am rather disappointed that he feels that it does not matter if an ambiguous and unclear amendment, which uses terms that have no meaning in reality, should just go in the Bill, so that he has the chance to have a vote and put out a press release. That is obviously where he is coming from. I regret that, and urge the House to disagree with the Lords amendment.
Question put, That this House disagrees with Lords amendment 1.
Abolition of contracting-out for salary related schemes etc
Following that brief moment of disagreement with their lordships, I am pleased to say that we encourage the House to agree with all other Lords amendments to the Bill. Some amendments in this group were initiated by the Government all on their own, while others are constructive amendments that we tabled in response to concerns raised by noble Lords and others. That shows our willingness to improve the Bill when we think that valid arguments have been made.
Lords amendments 19 and 21 will affect the spouses of service personnel. In the context of our motion to disagree with Lords amendment 1, which was tabled by Baroness Hollis, it is appropriate to say that Lords amendments 19 and 21 respond to a concern that she helpfully raised during the Commons Public Bill Committee’s oral evidence sessions about the position, under the single-tier state pension, of wives of service personnel who have served overseas.
Lords amendment 21 places a duty on the Secretary of State to legislate for a new retrospective national insurance credit for spouses and civil partners of armed forces personnel who accompanied their partner on postings outside the UK from 1975-76 onwards. We promised to think about the matter as long ago as last June—have we really been considering the Bill for that long?—after it was raised in our oral evidence sessions. As we know, the single-tier pension is essentially based on one’s own record of national insurance contributions and credits, rather than a derived entitlement from a partner. However, that creates a problem for women who were posted overseas with their husband and, for entirely legitimate reasons—because, say, they did not speak the language of the country they were in—were unable to work, or could not build up national insurance rights because of their role supporting their husband.
It is right that we take action for that group. There is a cross-Government commitment in the armed forces covenant to removing the disadvantages caused by military life, and we recognise the difficulty that spouses and civil partners would have faced in maintaining their national insurance record while on an overseas posting. Their prospects of securing employment during the posting would have been significantly hampered by language barriers, for example, and they may have been unable to accrue UK qualifying years while abroad. Since last June, we have worked closely with colleagues in the Ministry of Defence to devise a workable solution, and we are pleased to offer an approach that addresses this unique difficulty faced by the service community.
Under the Lords amendments and subsequent regulations, credits will be available for people who reach state pension age on or after 2016. Those credits build on the prospective credits in place from 2010-11, and help to ensure that people will not be prevented from gaining a full single-tier pension, even if they are in the now rare situation of having spent their entire working life accompanying their spouse abroad. The detailed design of the scheme, including the application process and information on when applications may start to be made, will be set out in regulations. Although it is difficult to give a precise figure, we estimate that about 20,000 people could benefit from the credits. Lords amendment 19 is a technical measure to accommodate the retrospective credits in the calculation of an individual’s foundation amount.
Lords amendment 2 deals with the issue of a statutory override for protected persons. The single-tier pension means the end of contracting out, so employers will have to pay more national insurance. The Bill provides for a statutory override to allow employers to change future contribution levels or accrual rates in order to recoup that increased national insurance when they would otherwise be prevented from making changes by their scheme rules. During the Bill’s passage through this House, the Government consulted on whether protected persons should be within the scope of the statutory override. We think that a relatively small group of individuals—perhaps 60,000—are affected.
The responses to the consultation were polarised, as employers wanted the flexibility to apply the override, while trade unions and others representing employees did not. We took the balanced judgment that we should honour promises made at the time of privatisation—promises that, in many cases, were subsequently confirmed by Ministers when legislation providing for pension protection was enacted. Lords amendment 2 makes it explicit that the statutory override cannot be used in relation to protected persons. Regulations will specify the details of who is considered to be a protected person, but the intention is to include all the people set out in our consultation response, especially rail workers, including Transport for London employees, and workers in the electricity, coal, and nuclear waste and decommissioning industries.
The group includes several technical amendments. Lords amendments 20 and 22 amend the Social Security Contributions and Benefits Act 1992 to make it clear that funds for paying the single-tier pension are provided by national insurance contributions, and that references to “benefit” include the single-tier pension. Lords amendment 23 repeals redundant provisions in the Marriage (Same Sex Couples) Act 2013, while Lords amendment 24 removes a redundant reference in legislation to the contracting-out compliance standard. Lords amendment 25 deals with the application of the statutory override to shared-cost arrangements. Lords amendment 26 is a response to a recommendation made by the Delegated Powers and Regulatory Reform Committee. It removes the power to create exceptions to the limit on the amount that employers may recoup under the override. The Bill originally allowed regulations to be made to create exemptions to the limit to deal with unconventional funding arrangements, but we are now making provision for such a power in primary legislation under Lords amendment 25.
In response to points made by the Delegated Powers and Regulatory Reform Committee, Lords amendments 12 and 13 provide that several regulations under the Bill will be subject to the affirmative procedure, rather than the negative procedure. Lords amendment 13 specifically provides that frozen-rate regulations should be subject to the affirmative procedure on every use.
Lords amendments 3 and 27 create a new class of voluntary national insurance contributions—class 3A. As the concept of the contributions was introduced in the other place, it is worth my spending a moment explaining more about it, as the House has not yet had the chance to consider it. The new class of contributions will allow pensioners to top up their additional state pension. It will be available to people who reach state pension age before the introduction of the single-tier pension on 6 April 2016. Details of the scheme, including the pricing, the maximum number of units and the administrative processes, will be set out in regulations. We will make details of the prices available shortly, but they will be set on an actuarially fair basis using the latest longevity figures. We envisage that the scheme will open in October 2015 and run for 18 months. It will help groups who have only modest amounts of additional pension, if any, such as women and the self-employed whose social and economic contributions were not captured in the state earnings-related pension scheme and are not fully reflected in the state second pension.
The scheme has just two simple entitlement conditions: first, a person must reach state pension age before 6 April 2016; secondly, they must be entitled to a UK pension. Even if someone has the full 30 qualifying years for a full basic state pension, they will not be debarred from paying class 3A contributions and boosting their state pension because they will be buying additional state pension, not basic state pension. I stress that that distinguishes the contributions from class 3 national insurance contributions, which fill gaps in the basic state pension.
We intend to cap the amount of additional pension payable as a result of class 3A at about £25 a week. As that extra pension will be additional state pension, it will be uprated according to the consumer prices index. The pension will be inheritable and people will be able to defer it in line with existing rules. More details of the scheme will be announced shortly, but the main regulations will be subject to the affirmative procedure, so Members will have the opportunity to debate the detail.
We have undertaken research and polling to gauge interest in the scheme. We expect to publish more information on likely interest and take-up shortly after the Budget, but our first poll suggests that 14% of pensioners might be interested. People’s ability to pay class 3 voluntary national insurance contributions to cover gaps in their contribution record for the basic state pension will be unaffected by the introduction of class 3A. We will put in place administrative arrangements to ensure that individuals who apply to pay class 3A contributions are made aware that they should first check their eligibility to pay class 3 contributions. People will need to consider whether making class 3A contributions is the best option for them. We believe that class 3A will allow some people to boost their state pension income with a secure, inflation-proof income that has the added advantage of survivor benefits.
I hope that the House, like their lordships, will support the Lords amendments. They improve the system for military wives and offer protection for protected workers. They tidy up several technical aspects of the Bill and, for people reaching state pension age before April 2016, introduce a new option of paying voluntary national insurance to top up their additional state pension. I commend the Lords amendments to the House.
I do not intend to detain the House too long on this group. On Lords amendment 2, I welcome the Government’s decision. The issue of individuals with protected status in pension schemes that were nationalised has been significant, both for the House and for the people concerned. Those with protected status are a group of approximately 60,000 individuals employed on the railways, including by Transport for London, and in the electricity, nuclear waste and decommissioning and coal industries. They are protected because they were given guarantees by the Government of the day when the industries were privatised. On Report, the official Opposition made clear their view, and tabled an amendment that aimed to remove these protected schemes from the scope of the provisions on the statutory override as it pertains to the new flat-rate state pension and the end of contracting out.
I welcome the Government’s decision on the continued protection of these schemes. I pay tribute to my hon. Friends, the trade unions, and others with whom Members have worked closely to make the case. It is a good example of how a case properly made, and a Government prepared to listen to the detail and the reality, can produce an outcome that we all welcome.
I thank my hon. Friend for his intervention and for his work on the issue. As he knows, we tabled an amendment to clause 24 in Committee on this issue. We welcome the decision to accept Lords amendment 2, a concessionary Government amendment moved on Report.
Let me say a little about Lords amendment 21, another concessionary Government amendment moved on Report, which will place a duty on the Secretary of State to make regulations to allow service spouses and civil partners who are due to reach state pension age from 6 April 2016 to apply for national insurance credits for periods during which they accompanied their spouse abroad. I agree with the Minister that the amendment will strengthen the armed forces covenant and remove some of the disadvantages that the armed forces community may face in comparison with other citizens. I add to the Minister’s tribute to Baroness Hollis for her work in ensuring that the provision was included in the Bill.
I look forward to the provisions in Lords amendment 3 being taken forward by the Government. I look forward also to the pricing of those provisions. It will be striking to see what take-up there is of the offer to procure more state pension for people who retire before the new flat-rate state pension is brought in. On that note of consensus, we welcome this group of amendments.
I, too, will not detain the House for long, but there are a few points that I wish to place on record. I thank the Minister for meeting the trade unions on a number of occasions, and the Department for its active engagement in the consultation exercise.
I shall not rehearse the arguments about the importance of maintaining trustee consent, which were made by my hon. Friend the Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) from the Front Bench. The workers concerned are those in former nationalised industries, including coal mining; electricity transmission workers; workers in Transport for London and the train operating companies; and workers in the nuclear waste and decommissioning industries. An important principle is at stake, and I am grateful to the Minister for accepting the Lords amendments. As was pointed out, it is important that we have ongoing discussions, and I hope that the Minister will commit to that. If he would engage with the trade unions, which have undisputed expertise in this area and could assist the Department in the drafting of the regulations, that would be much appreciated.
I am grateful to both hon. Gentlemen who have spoken for their constructive responses. The amendments relating to protected persons have been welcomed, and I am grateful for that. I welcomed the opportunity recently to meet the hon. Member for Easington (Grahame M. Morris) and his colleagues from the relevant trade unions. I am pleased to assure him that we will be happy to have that ongoing dialogue when it comes to drafting the regulations that will implement these changes. As he knows, we take the view that a statutory override is not a statutory override if trustees have the power to block it. We differ on this point—I understand that—but we are imposing a substantial cost on employers, and we believe that they need to be able to recoup that. We hope and believe that many will do so in a constructive and collaborative way, with engagement with trustees and others.
The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) mentioned what might loosely be called the army wives provisions. As he says, they are an attempt to do right by our armed forces personnel and their families, and again, the measure seems to have attracted wide support. I am grateful for the support from across the House for these amendments from their lordships, which we accept. I commend Lords amendment 2 to the House.
Lords amendment 2 agreed to.
Lords amendment 3 agreed to, with Commons financial privileges waived.
Automatic Enrolment: powers to create general exceptions
We move to the final group of amendments and, as I mentioned earlier, we urge the House to agree with their lordships in all of them. For reasons that I shall explain, we do not accept Opposition amendment (a) to Lords amendment 9.
I shall run through the categories of amendment before us. I shall deal at the end with the charges and disclosure amendments, where there appears to be the remaining lack of agreement. I apologise in advance for the fact that it might take me a moment or two to work my way through the amendments as some of them are quite technical, but at this stage in our proceedings it is important not simply to nod these measures through. In some cases quite substantive changes were made in another place—welcome changes, we believe, but they are ones to which this House should give proper scrutiny.
I shall begin with amendments 5 and 6 and then 4, which relate to automatic enrolment. It is worth putting it on the record that automatic enrolment is already a huge success story, with 3.2 million people now enrolled. I had the pleasure last week of visiting Upton Park to meet someone who I am told is the three millionth person to be automatically enrolled. I have my doubts, but one never knows. I have to declare in some sort of register somewhere that I was given a West Ham shirt with the squad number 3 million on the back, which may be my transfer fee—I do not know. We have certainly reached an important stage in the process. It is one of the almost unsung success stories of this coalition Government to implement automatic enrolment in an effective way, to see more than 3 million brought in and to have very high levels of staying in—of the order of 90%—which means that getting on for 3 million people are now in workplace pensions who were not in such pensions just a couple of years ago. All the signs are that this will continue to be a success.
But ongoing success is dependent on being able to learn as we go and to make changes where necessary, and amendments 5 and 6 are tabled in that spirit and relate to defined benefit schemes. In general, DB schemes are high-quality pension schemes provided by employers who take pensions seriously, and we would not want employers to feel that they could not use a DB pension scheme for auto-enrolment because of some technicality or because in some way we provided a higher hurdle for a DB pension scheme to be used for automatic enrolment than for a defined contribution scheme. Amendments 5 and 6 allow for simpler alternative quality requirements for employers providing good quality DB schemes.
The amendments will allow DB schemes to meet either the existing test for money purchase schemes, or a test based on the cost of future accruals. More work has to be done on adding the detail in regulations, and we look forward to working with our stakeholders on that. The simpler tests will help those employers providing good schemes to meet their automatic enrolment duties. This is important because of the end of contracting out. Contracting out itself had a set of standards that schemes that wanted to contract out had to meet, and once contracting out has gone and those standards have gone we can use the opportunity to set simpler equality requirements for employers wanting to use DB schemes. I hope that that will be welcomed by the House.
Also in the context of making automatic enrolment work, amendment 4 relates to the power to ensure that employers do not have to enrol individuals for whom it makes no sense. We tabled a clause at the beginning of the process that would give us the power to exclude a small group of people where it would not make any sense for employers to have a legal duty automatically to enrol them. For example, employers said to us that they had employees who were high earners or who had exhausted their lifetime tax limits and had some protected or enhanced status who were asking not to be put into a pension scheme because that could jeopardise their tax status, and having been auto-enrolled they would have to opt out straight away. That would be a waste of employers’ and employees’ time. If they failed to opt out, they could lose valuable tax protection, which would create unnecessary bureaucracy for the employer and hassle for the employee, and we do not want to do any of that when it comes to auto-enrolment.
We always envisaged that we would exclude tightly defined and limited categories of employees from the auto-enrolment duty. Following consultation, we have now indicated specifically which groups of people those are. I have mentioned those with tax protection status and another would be those on the brink of retirement or leaving. Someone might have said that they were about to leave the company, but the legal requirements on automatic enrolment or re-enrolment meant that the firm had to put them in the pension scheme, perhaps days before they left. Clearly, we do not want to bring automatic enrolment into disrepute. We do not want firms to be required to do things that are not common sense, that have a cost to the firm, perhaps create hassle for the individual and are unnecessary, and we always envisaged that the exceptions would be limited in scope.
When we first discussed the provisions, the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont) got very excited about the Beecroft report and he called this the Beecroft clause and thought that we would use it to drive a coach and horses through auto-enrolment, exclude small firms and all the rest of it. We assured him that that was not our intention, but I sense that he did not believe us. In another place, we have chosen to make it clear, through amendment 4, that this power cannot be used to exclude an employer on the basis of size, whether that is the number of employees, turnover, VAT liability or whatever. It was never our intention to exclude these people. Faced with the ongoing, almost universal cynicism of the Opposition, we thought it best, for the avoidance of doubt, to put that in the Bill.
The hon. Gentleman sought such an amendment earlier in our proceedings, but we chose to do this in a cleaner and more precise way, simply so that people can be confident that the Government believe that automatic enrolment is—dare I use the phrase?—for the many, not the few. The process continues right down to firms that employ one person. Just because not many others work with someone, does not mean that they do not need to have a decent pension. We do not think that anyone should be excluded.
We accept that there are costs and burdens to small firms undertaking automatic enrolment, but we believe that the best way to address those is through amelioration measures of the sort that we have taken rather than by excluding them. For example, the National Employment Savings Trust is there to enable small firms to have somewhere to go to that has a public service duty to take their business, that has been designed with smaller firms in mind—obviously it is a significant provider at the larger end of the market—and designed to be easy to engage with for people who do not speak pensions, so it is jargon-free.
We have taken a number of other measures to ameliorate the position for smaller firms. For example, we have changed the phasing of the roll-out of auto enrolment so that those that employ 50 or fewer will, in general, not have to auto-enrol until at least June 2015, or, in some case, a good while after that. We have introduced a waiting period of up to three months, which again will help smaller firms. Crucially—I know the Opposition have objected to this—we have raised the trigger threshold to £10,000 a year from April 2014, which will mean a small firm employing perhaps one person on £7,000, £8,000 or £9,000 a year will not have to go through automatic enrolment. We believe that all of those measures are better ways of helping smaller firms than simply some sort of blanket exclusion. Therefore, amendment 4 makes it clear that that is not the way that we propose to proceed.
I will come back to the amendments on charges, because I think that that is the area of principal difference, and deal now with the other amendments in the group where there might be greater agreement. Amendments 28 and 29 relate to automatic transfers and what happens when somebody leaves a firm, leaving behind a small pension pot. We envisage that any pension pot of less than £10,000 left behind would fit our definition of a small pot. Their lordships debated whether our proposed model of automatic transfers, where the pension pot by default follows people as they change job, was the right model, or whether an alternative aggregator model—a home of lost pots model—would be a better bet. There was a high-quality debate where arguments were carefully made on both sides, and their lordships, by a large margin, with considerable Cross-Bench support, backed the Government’s position on this measure. So we will move ahead with our proposals for pot follows member, but we have to get the framework right to ensure greater consolidation. The Bill will provide that framework. Pot follows member will reduce the number of people with five or more dormant pension pots from one in four under the current system to one in 30. Our focus now is to work with employers, providers and consumer groups to deliver a safe and secure system.
It is clear that we should try to use the existing infrastructure where possible, including the existing PAYE system. As I told the House at oral questions on 24 February, we are working with our colleagues at HMRC on that. In addition to expenditure incurred by the DWP, amendment 29 extends the provision to allow any specific costs incurred by HMRC to be met from the general levy, which is the levy on pension schemes. If we go down that route, which incurs costs—we are finalising it at the moment, so this is an enabling power—HMRC will be able to recover them.
One of the attractions of going down that route is that if HMRC already holds data on the jobs that people have had, for example in the previous 12 months, and could also hold matching data on the pension schemes of which people were a member, it would be ideal to look at existing data sources. However, we have to do a full cost-benefit analysis internally. For example, a new pension scheme might be able to look at the member’s previous employers over the past 12 months and at other pension schemes of which they were a member. The new scheme could then contact those schemes, check for stranded pots and pull them across by default, unless the member objected, and the costs could be recovered from the general levy under Lords amendment 29.
Lords amendment 28 is a technical change designed to clarify that the automatic transfer provisions can apply to those who are not yet in receipt of their pension but are eligible to have access to their benefits—that is, those who are over the age of 55.
The next set of amendments relates to the Pension Protection Fund compensation cap, which we introduced during the course of our proceedings in this House. We said at the time that it would be necessary to complete the primary legislative framework in the House of Lords, and that is what we have done. Lords amendments 32 to 34 provide further detail on how pensionable service, for the purposes of the cap, is to be determined in specific circumstances, such as when a person is a member of two separate but connected schemes.
I will explain why that is important. The change we have made to the Pension Protection Fund cap is designed to help people who have given long service. The cap prevents people from getting very high levels of Pension Protection Fund compensation and is designed to exclude in particular some of the high earners who might have been involved in decisions about the future of a company. It also captures people who are not gratuitously rich, but who have built up a substantial pension, perhaps through working for one employer for their entire working life. We do not think that the cap was ever meant for such people, so we have provided that, beyond 20 years, it should be increased at a rate of 3% per additional year. The definition of the length of pensionable service is important, which is why Lords amendments 32 to 34, which tidy that up, are necessary.
Lords amendments 37 and 38 deal with the application of a cap during the assessment period and wind up. They provide for the valuation of scheme liabilities if the scheme is in assessment when legislation is commenced. The valuation will continue to be based on the current cap, although members of such schemes will be paid using the new cap during the assessment period. The amendments also provide for schemes winding up when the legislation is commenced. They will allocate assets based on the current cap.
Lords amendments 35, 36 and 38 clarify details such as the transitional provision to be made for those who share compensation following divorce. The policy for people with a pension in their own right and a pension based on a pension-sharing order is that each is kept separate and capped separately. This is to the benefit of members. The Pension Protection Fund has been applying the current cap in this way.
Finally on the PPF cap, Lords amendments 10 and 17 deal with the change to the application of the existing cap on compensation from two sources of pension and bring legislation in line with policy and practice. The current legislation assumes that the cap is applied after the amounts are added together. Amendments 10 and 17 amend the legislation so that it reflects current practice, and this will apply retrospectively. As I have said, that is to the benefit of members.
Lords amendments 11, 15, 16 and 18 relate to the Public Service Pensions Act 2013. In layperson’s language, the amendments allow consolidation of schemes without loss of transitional protection. The 2013 Act reforms public service pension schemes and provides for transitional protection from that reform for members of public service pensions who were less than 10 years from their normal retirement age in April 2012. The Act also stipulates that, for the larger public service schemes, the individual needs to have been a member prior to that date in order to be eligible for that protection.
Lords amendments 11, 15, 16 and 18 create exceptions to that rule to allow members of smaller public service schemes to be transferred into a larger scheme without losing their transitional protection. The Government’s intention is to seek to make administrative and management savings by consolidating smaller schemes into larger ones. The amendments mean that that can happen with no impact on members’ benefits.
Finally, the substantive set of amendments are those led by Lords amendment 9 which relate to charging. Obviously, this is a contentious issue. We believe that their lordships have improved the Bill and we will urge the House to accept their amendments.
Making automatic enrolment work is not just about the employer duty; it is about ensuring that people are enrolled into high-quality schemes. I want to be absolutely clear, because no doubt there will be a lot of hand-wringing from the Labour party on this issue. When the previous Government put in place part of the necessary legislative framework for automatic enrolment, they put in place no quality standards at all for auto-enrolment schemes, bar the requirement to have a default fund—just to have one; there was nothing about charges or quality—and a minimum employer and employee combined contribution. It is pretty shocking that the previous Government thought it was good enough to put 10 million people on workplace pension schemes with no consumer protection at all. When hon. Members hear what the Labour shadow spokesman—the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East—has to say about this issue, they will imagine that Labour has somehow been riding to the rescue of the consumer. However, they should remember that when the legislation was first passed it was done with no regard, as far as I can see, for the position of consumers. There was no action on charges, no action on small pots or, to be frank, no action on anything.
The coalition Government are committed to ensuring that schemes provide good value for money and are well governed. Lords amendment 9, therefore, deals with the transparency of costs and charges, which we believe is vital for good scheme governance. We already have powers to require disclosure under the Pension Schemes Act 1993. However, for the avoidance of doubt, amendment 9 places a duty on the Secretary of State and the Financial Conduct Authority—I will come back to that, because it is an important point—to require the disclosure of costs and charges. The charges to be disclosed will be set out in regulations, and rightly so.
On amendment (a), the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East wants to put in primary legislation a shopping list of the charges he can think of. I think the House will immediately see the flaw in that. The hon. Gentleman would be the first to say that the financial services industry has been known to be creative—if we ban something, it will do something else—so what is the point of putting in primary legislation a list of the charges he can think of, saying that they should be disclosed and then adding, “and anything else”, on the end? Clearly, there could be a new category of charge at any point and we do not want to be governed by having to pass a new Act of Parliament every time there is a new charge on which we want to take action. We think that the charges to be disclosed should be set out in regulations because that approach gives the Government maximum flexibility to respond to a fast-moving market. That is why we do not agree with amendment (a).
Under Lords amendment 9, the duty is placed on both the Secretary of State and the FCA, which reflects the dual regulation of pensions and means that the FCA will consult on how and what to disclose, but not if costs should be disclosed. One of the many problems with the Opposition’s amendment (a) is that it would remove that duty from the FCA. I do not know whether that is accidental or deliberate. The amendment would leave the power solely with the Secretary of State, but with none of the sanctions available to the FCA. Just to be clear, amendment (a) would take the duty to consult on how and what to disclose away from the FCA and give it to the Secretary of State, but the Secretary of State does not have the powers that the FCA has. To be frank, that is a muddle. I know the Opposition will vote for their amendment because they tabled it and they want to make a point and tweet about it, but the substance of the amendment, even in terms of what the Opposition want to achieve, is deeply flawed, because it would take a duty away from a body that has a power and give it to the Secretary of State, who does not have that power.
I usually sound grateful to the hon. Gentleman for his interventions, but I am not sure I am for that one. There is a bit of a pattern here. Labour has already called one vote on an amendment that was flawed, but it decided to vote for it anyway in order to make a point. I am explaining why amendment (a) is flawed, even according to the terms of what the Opposition want it to achieve, and it is obvious that the message has hit home, given the tenor of the hon. Gentleman’s response.
On the charges that will be outlined later and the requirement for them to be disclosed, how does the Minister envisage that process being taken forward? Will there be a consultation? Within what sort of time frame does he imagine the charges being outlined?
I am grateful to my hon. Friend who, as chair of the all-party group on pensions, has great knowledge and expertise on these issues. We need to take forward the matter in partnership with the FCA. As he knows, the Pensions Regulator regulates defined benefit and occupational defined contribution schemes, while the FCA works on group personal pensions, for example, but we want to make sure that, as far as possible, parallel regulations apply to both. We will, indeed, consult on exactly what should be included. We certainly want to get a move on with it all, so we will move as fast as we can, but we want to do so in partnership with other regulatory bodies. I hope that that offers him the assurance he seeks.
We are working out how best to publish the information. Some have suggested that we should just bung it on a website. We obviously want meaningful information, not just to have tens of thousands of pension schemes recording vast amounts of data. We think that it is most important to make the information available first to the fiduciaries in any scheme—the people, whether the trustees or the independent governance committees, who act on behalf of scheme members—and that members should have the information in meaningful form, not just pages of gibberish. We have all seen how information that is required by law to be sent to scheme members can turn out to be more or less useless, because nobody ever reads it. We therefore have to think about the right formats in which to supply information to fiduciaries and to scheme members, and the right way to make the information public, and we are thinking that through at the moment. Disclosure on its own is not enough; powers in the Bill will allow the Government to regulate to control charges and to require minimum standards of governance.
A further ambiguity or slight inconsistency in amendment (a) is that it specifically requires the Government to restrict “transaction costs”. The hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East may want to intervene, because the Opposition have previously said that transaction costs should not be part of a cap, certainly at this stage. We therefore assume that it is a drafting error but if their position is now that transaction costs should immediately be part of a cap, perhaps he can explain why he has changed his mind.
Lords amendments 7, 8, 30 and 31 remove references to work-based schemes, which will allow us to extend the powers to closed schemes. That is important, because a legacy scheme review of old, closed and other schemes is currently taking place, and we will need a legislative route if it is necessary, following the voluntary approach of the Association of British Insurers, to review high-cost and legacy schemes. Finally, amendment 14 means that regulations under the powers will be brought forward as soon as practicable, which follows a recommendation from the Delegated Powers and Regulatory Reform Committee, and ensures that the regulations will be affirmative on the first use. Our full response to our consultation on such matters will be published soon.
This is another group on which we urge the House to agree with their lordships in all their amendments. The Lords amendments will make automatic enrolment work better, particularly for defined benefit schemes; ensure that small employers are not excluded; allow HMRC to recover the costs of pot follows member, if we go down that route in relation to involving HMRC; make the PPF compensation cap work; ensure that protections for public service pensioners are properly implemented; and implement the changes made in another place to require the disclosure of information, particularly on transaction costs. All the Lords amendments make the Bill better. I commend Lords amendment 4 to the House.
I rise to speak to amendment (a), but let me start with Lords amendment 4. In Committee, the Opposition argued strongly that clause 37, as drafted, was far too widely drawn and left a possibility that those with an agenda to exempt smaller businesses from auto-enrolment could do so. We therefore welcome the Government’s concession. Among the Minister’s rather curious language, he said that I “got very excited” and that there was “almost universal cynicism” from the Opposition, but within that odd framing he has actually accepted what we said in Committee. That is very welcome, because it makes the Bill better.
Let us think about amendment (a) in the context of the wider debate. The issue of costs and charges for pensions has shot up the political agenda for obvious reasons. If the Government are enrolling millions of people into a pension scheme for the first time, they had better make sure that the schemes are all value for money.
The Minister made that point in his speech, as he has done repeatedly, and he has now put it on the record again. Let me pick him up on something he said. In what has become his quite common style, he suggested that it was rather peculiar to give the Secretary of State powers to ensure that transaction costs are disclosed. However, he must be aware—in fact, he alluded to this—that the FCA already has powers to require transparency of transaction costs, but has never exercised them. Making the Secretary of State responsible does not mean that the Government should not use the FCA’s expertise. Indeed, the Government’s amendment states that the Secretary of State must consult the FCA when setting transaction costs for those pensions over which he wishes to retain responsibility, so why could the same model not be maintained for contract-based pensions? Of course it could be so maintained.
On the Minister’s suggestion that it is somehow peculiar in his world to list the transaction costs that must be disclosed in amendment (a), I have to tell him that we used Lord Lawson’s amendment in the House of Lords, where it was commended by Members on all sides, including by the Government spokesman, Lord Freud. [Interruption.] The Minister is mumbling, but he suggested that the amendment was peculiar, although Lord Lawson’s amendment was along exactly the same lines. I am afraid that the Minister is disagreeing not just with the Opposition, but with Government Members.
Let me say a little about our additions to Lord Lawson’s list. I make it very clear that our list of transaction costs is the same as that tabled by Lord Lawson in the Lords, with two additions—transaction costs in underlying funds; and interest on client cash balances or profits from stock lending retained by the fund manager. The reason for including such additional transaction costs is that it needs to be strongly signalled to the body setting the rule—whether the FCA or the Secretary of State—that those items should be declared.
Let us remember that the Investment Management Association has deliberately failed to include those items in its draft statement of recommended practice. Amendment (a) should be discussed in that context, not the diversionary trail thrown up by the Minister. It is important that transaction costs in underlying schemes are disclosed because a transparency regime can otherwise easily be bypassed by any fund manager that operates multiple funds. The fund receiving moneys can simply use them to purchase units in another house fund. The IMA SORP recognises that the fixed charges in underlying funds should be reported, but it fails to apply the same principle to transaction costs, which is why they are laid down in the amendment.
The House should be aware of the wider context. The Government have previously left it to the fund managers’ trade association to decide what, if any, transaction costs should be declared. The IMA has put forward a draft statement of recommended practice, which would require fund managers to declare some transaction costs in their annual accounts. The SORP must be agreed by a Government quango called the Financial Reporting Council. The concern that the SORP failed to include significant types of transaction costs led a cross-party group of MPs and peers to write to the FRC to say that it would be inappropriate for it to agree to a statement of transaction costs that omits significant types of transaction costs. That was widely reported at the time. It is common knowledge that a number of critical submissions were made to the FRC. Unusually, those submissions were not released at the end of the consultation period, and we still await them.
I am always delighted to hear from the hon. Gentleman, but I must make progress.
It is worth adding that the FCA sits on the working group that reviews the IMA’s SORP.
To put the SORP of the IMA—the fund managers’ trade association—in context, the Government refused to accept Labour amendments in Committee and on Report that specified a non-exhaustive list of transaction costs that needed to be made transparent. The noble Lord Lawson then made it clear that the Government’s position was not acceptable. He said that it was like putting the fox in charge of the hen coop. He added that there is a reason why fund managers meet in Monte Carlo and pension fund trustees meet in Manchester. That was the context in which Lords amendment 9 appeared. Lord Lawson, who sits on the Government Benches, made it clear that he agreed with the Opposition, rather than the Minister, who has failed to get to grips with the disclosure of transaction costs. That is the context in which this debate has been taking place for the past year and a half.
Lords amendment 9 does not state which transaction costs will be included. It gives the Secretary of State the right to include
“some or all of the transaction costs”.
It also allows the Secretary of State to not require full transparency in contract-based defined contribution schemes—those that are provided by insurance companies —if the transparency regime is “equivalent”. Lord Freud, speaking for the Government, emphasised that those words were intended to ensure that no costs were missed and that they were not an attempt to water down the regime for contract-based DC pensions.
Lords amendment 9 removes the responsibility to set transparency rules for workplace DC pension schemes from the Secretary of State and gives that power to the FCA. The FCA does not currently require the publication of transaction costs for workplace pension schemes. Its view is that any transparency requirements should be identical to those for retail investment products.
Is not the key point that is under discussion whether the list of charges to be covered should be included in the Bill? We agree that there are many issues of detail, especially on the transaction side, that should be consulted on. The Minister has said that that will happen. The hon. Gentleman has not answered the central question of why the list should be included in primary legislation.
The answer to the hon. Gentleman’s question is that nobody who looks at this matter reasonably can have confidence that the Government will deliver the disclosure of any transaction costs. The only reason we have the inadequate Lords amendment 9 is that there was a rebellion among Conservatives in the House of Lords that was supported by Cross Benchers. Before that, the Government had no intention of disclosing transaction costs, as far as one could see. To answer his question, amendment (a) is a way of ensuring that the Government deliver what they say they want to deliver.
To sum up, the Government have brought forward in the Bill a hard, fast, rapid wind-up of the state second pension. If that is to be successful for those who can no longer accrue into the state second pension, there must be similarly speedy action to ensure that there is an adequate, meaningful pensions cap as quickly as possible. Alongside that pensions cap, all transaction costs must be disclosed. Before the campaign by the Opposition and, more recently, Lord Lawson, the Government had been very slow to get to grips with the disclosure of transaction costs, never mind the pensions cap. The intervention of Lord Lawson has led the Government some of the way down the necessary path towards ensuring that there is disclosure of transaction costs, but they have got to that stage only because of the threat of a rebellion in the other place.
Amendment (a) would ensure that all transaction costs were disclosed and that the Secretary of State had the authority, power and obligation to ensure that that happened, rather than the FCA, which has shown no interest in disclosing any transaction costs. If we are to have decent workplace pensions to replace the income that is lost through the hard, fast wind-up of the state second pension, all these things must be disclosed. In this day and age, it is simply not good enough to say that those who are involved in pensions should not be aware of all the costs and charges that are extracted by fund managers. For that reason, I commend amendment (a) to the House.
I will respond briefly to the hon. Gentleman. However, I suspect that he decided to press for a vote on amendment (a) a good deal earlier this afternoon, so I do not think that anything that I say will have the power to change his view.
For the record, the hon. Gentleman seems to be confusing a power and a duty. He says that the FCA has the power to require transparency, but it has not done so. If he reads Lords amendment 9, which I encourage him to do, he will see that it states in subsection (2):
“The FCA must make”.
That is the bit that he wants to take out—the bit that requires the FCA to do the thing that he wants it to do—so his amendment (a) is incoherent. Instead, he would give the duty to the Secretary of State, but the Secretary of State does not have the same powers as the FCA over the schemes that it regulates. The hon. Gentleman wants to take the duty away from the body that has the sanctions and give it to somebody who does not have the sanctions. That would not achieve what he wants to achieve.
The text of Lords amendment 9 is before the House. The whole point is that we want all sorts of pension schemes—those that are regulated by the Pensions Regulator and those that are regulated by the FCA—to ensure that there is effective disclosure. His amendment (a) is defective because it would take the duty away from the FCA, which regulates one category of schemes, and give it to the Secretary of State, who does not have the sanctions to enforce the very thing that he wants to happen. I know that he does not care that his amendment is flawed, because he wants to make a point, rather than to pass good law, but for the record, his amendment would fail to achieve what he says he wants.
The hon. Gentleman said that the noble Lord Lawson, who has made a valuable contribution to this debate, came up with a list and that we should therefore have a list. Of course, the noble Lord Lawson did not pursue his amendment because he accepted that we did not need all the detail in primary legislation. If the hon. Gentleman lists the name of a charge in primary legislation, all it would take is for the ever-inventive investment industry to give it another name and we would need regulations anyway. Including a list would achieve nothing.
The hon. Gentleman asked about the words “some or all”. To clarify, the intention is to require full disclosure of all costs and charges. The reason for that wording is that it will future-proof the legislation—something that he has called for—by providing the flexibility to deal with new costs as they arise. That is all that we are trying to do by using that wording.
The hon. Gentleman will know that the FCA is regulated by Ministers from the Treasury, rather than the Department for Work and Pensions. However, I have met the FCA on a number of occasions, as have my Treasury colleagues, and we have corresponded on these matters. We are agreed that there should be full disclosure, as under the terms of the Bill, of all categories of pension scheme that are covered by the legislation.
The hon. Gentleman avoided the question I asked on an intervention. His amendment (a) appears to contradict what he has said in the past, and it brings transaction costs into the scope of any potential charge cap. That was not his policy this morning, but it appears to be his policy this afternoon. Quite how he would set such a cap when we do not have the data on transparency is beyond me. Clearly, amendment (a) is not about how the law of the land should be written; it is simply about making a political point and doing so rather badly. On that basis, I urge the House to reject amendment (a), and to agree with Lords amendment 9.
Lords amendment 4 agreed to.
Lords amendments 5 to 8 agreed to.
Amendment (a) proposed to Lords amendment 9.—(Gregg McClymont.)
Question put, That the amendment be made.
Lords amendments 9 to 38 agreed to, with Commons financial privileges waived in respect of Lords amendments 9 to 13, 15 to 23, 27, 29, and 32 to 38.
Ordered, That a Committee be appointed to draw up Reasons to be assigned to the Lords for disagreeing to their amendment 1;
That Tom Blenkinsop, Gregg McClymont, James Morris, Claire Perry and Steve Webb be members of the Committee;
That Steve Webb be the Chair of the Committee;
That three be the quorum of the Committee.
That the Committee do withdraw immediately.— (Mr Gyimah.)
Committee to withdraw immediately; reasons to be reported and communicated to the Lords.