House again in Committee.
moved Amendment No. 38:
38: After Clause 8, insert the following new Clause—
“Workers without qualifying earnings: employer contributions
Where a jobholder elects to make pension contributions on that proportion of earnings which are £5,035 or less, the employer shall contribute in the same proportion as for earnings above £5,035.”
The noble Baroness said: The amendment standing in my name and that of my noble friend Lady Dean is a probing amendment. I am confident that it is virtuous; I am equally confident that it is technically deficient, but as it is probing, the second problem may matter less than the first.
This amendment is about the £5,000 range of earnings that is not taken into account in personal accounts, which have been mentioned several times today. They will raise 8 per cent— that is, 4 per cent from the employee, 3 per cent from the employer and 1 per cent from tax relief—on all earnings, broadly speaking, within the income bands of the lower earnings limit—LEL—at just over £5,000, and an upper earnings limit, which was originally judged to be aligned with UEL, although that has now become more complicated.
That has the advantage of aligning personal accounts with basic state pension, unlike the standard defined contribution schemes—money purchase schemes—that, as far as I am aware, cover all earnings from the first pound onwards, although they may cap in some cases at the top. We can understand why that de minimis of the LEL was introduced for personal accounts because the main beneficiaries are likely to be low-paid, part-time women often in several microjobs. It did not make sense for them to contribute to a personal account while being disqualified from access to a basic state pension, which would then have meant that their BSP was incomplete, and they could have lost their personal account pound for pound under some scenarios.
With the help of your Lordships on Report, I hope to persuade the Government, if they are not already persuaded, that we must reverse that situation on buying back missing years of BSP. Because of the alignment with BSP, the first £5,000 of earnings in personal accounts are not covered for pension purposes. It makes sense, given BSP rules, for some women where all of their jobs are below the LEL, even though they may find themselves in a hard-luck position. I understand the administrative complexity. Given the 30-year rule, after April 2010 and, I hope with the support of the House, a change in buy-back rules, this would matter less as more women will have a full basic state pension.
Of course, it seldom matters for men, who will have a basic state pension of 30 years, because most of them expect to work for 40 or even 44 years and beyond. That is why the Government sensibly permitted people—particularly women—to make voluntary contributions into personal accounts to cover the first £5,000 of earnings. This is particularly useful for women who have built up a decent pot through working full-time, but who then, because of their caring responsibilities, need to cut their hours and their pay, while wishing, perfectly sensibly, to protect their pension. However, no employers are required to match those voluntary contributions on the first £5,000. Again, this makes sense if a woman has several microjobs, none of which takes her above the LEL. How employers would sort that out, I do not know. This amendment does not seek to help those employees, but applies only to those whose job or jobs take them above the LEL.
When a woman is on half median earnings—£11,000 a year—only half her pay qualifies for pension contributions as of right. Effectively, her employer is not contributing at 3 per cent, but pro rata at 1.5 per cent—unlike the average 7 per cent in a conventional DC workplace pension. Even worse is the situation of a woman with multiple jobs. I gather that 350,000 people have multiple jobs over the LEL and are not in pensions. Who are they? They are highly likely to be women putting together a portfolio around childcare or elder care, with two modest jobs, one of them while the children are at school, the other perhaps later in the evenings or at weekends when their partner is around to help with the children. Equally, they may be younger people—writers, musicians, actors—fitting in shorter-hour jobs around their primary passion. If one of those young people, or a woman with childcare or elder care responsibilities, had two £6,000 jobs, she would get a pension contribution of only £1,000 on each of those jobs—£2,000 in total contributing to her pension fund. If she had one job at £12,000, the employer and she would be contributing on £7,000 in a personal account; or, if she was in a DC scheme, they would both be contributing on £12,000 in a personal account. So, it is £2,000 if you are in two £6,000 jobs; £7,000 if you are in one £12,000 job with a personal account; £12,000 if you are in a DC workplace scheme. This amendment says that where an employee with a personal account over the LEL wishes to contribute a percentage of her pay to cover the first £5,000, the employer must likewise contribute his 3 per cent. The noble Lord, Lord Skelmersdale, was exceedingly helpful earlier when he reminded the House that pensions are deferred pay. However, women on half median income with personal accounts are only going to get half their deferred pay reflected in pension contributions.
Why do I hope that your Lordships will support the principle of this amendment? First, we already accept the principle that the employer, if he has a scheme, must contribute to a pension if the employee is aged between 16 and 22. We have teased that out already. The principle that an employee’s voluntary contribution must be matched by the employer is not new. That is in the Bill and we discussed it earlier. Secondly, the employer already does this in his own DC scheme. He expects to cover the full range of earnings; from £1, not from £5,036. The amendment would establish a more level playing field between the two and might even discourage him from levelling down. After all, in his own workplace pension scheme, he not only covers the full £12,000, but also puts in a higher contribution of 7 per cent on the whole of that £12,000, rather than the 3 per cent on half of that £12,000.
Thirdly, no one is talking about large sums. They will not represent a burden on business or bankrupt small employers. I calculate that it would cost up to £150 a year extra for employers—£3 a week—and £200 a year extra for employees. However, it could make all the difference in terms of outcomes, because it would effectively double the pension pot. For example, with 10 years’ savings in a personal account at 8 per cent and on half median earnings of £11,000, the woman’s pot would be £10,000 and not £5,000 after 10 years. After 20 years, she would have a pot of £27,000 instead of £14,000. After 30 years, she would have a pot of £53,000 and not £27,000. After 40 years, she would have a pot of £93,000 and not £48,000. Even 10 years’ worth of savings produces capital of £10,000 to take into retirement and, at 30 years, an additional weekly income of nearly £80 to add to a full state pension and S2P would mean that someone on half median earnings would go into retirement with a replacement income of 100 per cent of their working life income. Therefore, there would be no problems with IRBs or means-tested benefits, and probably without the pressure of children and possibly with the mortgage sorted, she would be more comfortably off than ever before.
I think that the proposal is a price worth paying. We have established the principle; the cost would be modest; and the long-term investment roll-up for employees, particularly for women in poorer-paid jobs, would be immense. It would not be onerous to employers; they already expect to do that in their own DC schemes at double the contribution rate for the full range of earnings. Therefore, I hope that my noble friend will think seriously about what we are saying to women. One of the biggest risks to women of taking on personal accounts is the fact that very little of their earnings may be covered by pension contributions and, as a result, they will have false expectations of safety and security in retirement. That could be avoided if my noble friend were minded to follow through on the principle of the amendment. I beg to move.
We like the amendment. The principle seems very fair and the noble Baroness made a powerful case. It is essentially an issue of justice for lower-paid people, particularly women. My honourable friend Danny Alexander strongly supported this issue in the other place. We look forward very much to hearing from the Minister, but clearly the question is whether this will lead to considerable extra costs and administrative burdens for PADA or for employers. I hope that the Minister will be able to give us some detail and figures on that if he resists the amendment, and in particular I hope that he will not just say, “This is the bargain we struck”, or, “It was a deal”. If there are problems, I hope that we can hear in detail what they are and why they exist.
I strongly support the amendment. The whole Bill is based on the need for flexibility—above all, to meet the needs of today’s world. I make no pretence of denying that I am concerned, in particular, with how the proposal affects women. It affects them considerably with the range of jobs that they have and so on. With the cost of an extra £150 a year for the employer and the considerable gains that would ensue, there is a completely irrefutable case for the proposal, and I very much hope that there will be no doubt about the Minister accepting the amendment.
I say straight away that I agree with the noble Baroness, Lady Hollis, that those who will be disadvantaged by the lower earnings limit are a key target for personal accounts policy. No one can doubt that. The Government have said that they estimate that around 350,000 individuals have multiple jobs, earn a total annual income of over £5,000 and do not currently contribute to a private pension. Like the noble Lord, Lord Oakeshott, I urge the Government to firm up on those figures because, as I said, they are an estimate. However, it is clear that a significant minority of these people—however many there are—will be women, for exactly the reasons that the noble Baroness, Lady Hollis, has just given us.
It has been put to us that amending the use of the lower earnings limit so that it is retained for auto-enrolment but removed for contributions, will solve both the insubstantial contributions problem and the multiple jobs problem. The lower earnings limit of £5,035, combined with auto-enrolment, will create a scenario, we are told, where inappropriately small amounts will be contributed to personal accounts. Trivial contributions will be of limited use to savers and will be disproportionately expensive to administer.
Secondly, the Bill rightly requires a separate application for each employment. However, the use of the lower earnings limit means that people holding multiple jobs will not receive employer contributions on the first £5,035 of their earnings in each separate employment, even if they were to enrol into a scheme with each employer. That clearly disadvantages those with multiple low-paid jobs. It is suggested to us that the lower earnings limit will remain as the point at which employees become auto-enrolled. However, there will also be the option to opt in to the scheme on earnings less than that and receive employer contributions. That is the whole point of the noble Baroness's amendment. All savers would receive employer contributions from zero, rather than from £5,035. That reduces the potential for inappropriately small balances to arise. The minimum contribution at 8 per cent for auto-enrolled scheme members would, I understand, be about £8 per participant per week.
I mentioned earlier in our discussion my worries about costs of auto-enrolment to small and medium-sized enterprises. I understand that small business groups are beginning to come round to support the proposal, as the small contribution cost would be compensated by the significant reduction in administrative complexity. However, the important thing is that they are not there yet, so I am glad that this is a probing amendment at this stage—especially as small employers who do not currently have schemes are the ones who may very well object, because it will cost them quite a lot of money to create schemes.
There is another problem that the noble Baroness did not mention with those ladies—usually ladies anyway—employed as housekeepers, daily cleaners and what have you, who would fall under the amendment. I am sure that the Minister will correct me if I am wrong, but I think that that would mean that those employers would have to contribute to the personal accounts scheme at the 4 per cent level. I repeat what I said—the noble Baroness, Lady Hollis, approved of me saying it—pensions are deferred wages. Honestly, I believe that the jury is out on the amendment and we will see whether there is general agreement among small and medium-sized enterprises, especially those that do not currently have schemes, that they could come on board. If not, I rather think that this will be a no-no.
I support the amendment, to which my name is attached. As one would expect, my noble friend Lady Hollis has covered the amendment in substantial and correct detail.
This is a probing amendment. It is not ideally worded. The difficulty that both my noble friend and I are working under is that the Minister does not appear to accept that this is an issue and that we should work jointly to find a way through it. We have not crossed that principal point at the moment. If we had, perhaps we could find a way to deal with this in a more equitable and better way than the amendment.
At Second Reading, the Minister said that we know that about 400,000 individuals will be caught by the £5,000 ceiling gap. That is not a static 400,000. I could understand it more if there were a reducing number, but there is not—it will replenish itself as people move out of the marketplace.
Pensions Bills do not come along very often, and this one is a very good attempt by the Government to eliminate some of the inequities that we have had over the years in pensions. That is to be applauded. But the Bill would not be doing its job if it just left 400,000 people without any pension protection. I will be interested to hear what the Minister says. I will listen in particular for an acknowledgement that this problem is difficult to work through and that the Government are prepared to discuss and work through it to a solution which, while it may not be ideal, is a step in the right direction. At the moment, 400,000 people have nothing to hope for while they work in one or more jobs that pay an income of less than £5,000 a year. I support this amendment.
I thank my noble friend for this amendment and as ever, the challenge that comes with it. I say to my noble friend Lady Dean that the Government see this as an issue about how people on low pay, particularly women, can be best supported and how the pension system might be made most relevant to them. Let me also deal upfront with this issue of multiple jobs. Sometimes we conflate a number of issues. Somebody can have multiple jobs because of seasonal work where the jobs are consecutive; you can have jobs that are concurrent or overlapping. They do not necessarily lead to the same result. Somebody who had a job for six months on £4,000 a year and a second job in a second part of the year for £4,000 would have, in broad terms, the same outcome as a person with a job paying £8,000 a year. It depends on pay reference periods; it depends on fluctuating earnings; it depends on whether there are waiting times for any of the schemes involved. We need to unpick that issue as well.
Similarly, somebody might be on low but bunched earnings—they would earn £3,000 a year but would do so over a three or four-month period. Depending on the pay reference period of the employer, they would enter into an auto-enrolment situation. We need to unpick that. My noble friend gave me a particular challenge. My briefing is based on the assumption that those people who opted in, because they did not have qualified earnings, would bring with them an employer contribution. The proposition that I believe is being advanced is that those who have qualifying earnings are in, but choose to pay contributions on the first £5,000 and not just on the band of earnings. That should attract an employer contribution. Will my noble friend clarify that for me? Obviously, different issues arise from that. Is my noble friend saying that those people who do not reach the qualifying earnings threshold, but who have a right to opt in, can also, when they opt in, have a right to bring with them an employer contribution; or is my noble friend saying that if you have qualifying earnings above the threshold, contributions should be payable by the employer, not only in respect of that excess but from £0?
I am sorry if I was less than clear on that. I was trying to exclude people whose earnings in a particular job were below the LEL. For all sorts of reasons, this could end up with someone having half a dozen microjobs as a cleaner. You could not start adding them all up and then try to divvy up an employer contribution between five or six employers. Where somebody has a job that gives them qualifying earnings above £5,035, if they choose to make voluntary contributions on that first £5,000, just like 16 to 22 year-olds, that should automatically attract an employer contribution as well, so that the whole sum of the earnings can be taken into account for pension purposes. Therefore, there is potentially an equal playing field between a person on a job of £12,000 a year and somebody with two jobs of £6,000 a year.
I thought that was the import of the amendment, which means I can probably disregard most of my script; it was written on the basis that the amendment would enable people who opted in because they did not have qualifying earnings to bring with them an employer contribution. I should put our response to that on record in any event. If you were to do that, you would effectively have to lower the starting point right across the piece, which would be incredibly expensive for employers—something like £1.9 billion extra each year in terms of employer contributions.
I accept any faults in drafting, but my amendment states: “Where a jobholder elects” or chooses,
“to make pension contributions on that proportion of earnings which are £5,035 or less”—
not all their earnings, but a proportion—
“the employer shall contribute in the same”,
ratio or,
“proportion as for earnings above”.
I accept that that is what the amendment states. Officials and I thought that its import was different. I thought that there was a drafting error in it as well, but I understand from what the noble Baroness says that it is correct. In that sense, there is a different issue to think through, which would look at somebody in a qualifying scheme where the contribution of the employer was based on a more traditional definition of earnings—basic pay—with that employer contributing from £0. The proposition in respect of personal accounts and auto-enrolment generally is that the earnings figure should be a different definition—a broader band. In making the comparison to qualifying schemes, we say that we are concerned about only the contribution levels, not how the calculation is done.
I apologise for not being able to give a considered response, because we thought that the amendment was heading in a different direction. We need to work through where the balance lies for person A, whose employer currently contributes from £0 but on a different calculation of earnings. We say that that is fine, but the comparison has to be against somebody having contributions calculated on a band and a broader definition of earnings. We need to see the equality between those two situations.
We need to take away and think through the proposition that my noble friend helpfully outlined tonight, which is different from the proposition that we examined. She and my noble friend Lady Dean recognised that trying to aggregate multiple jobs was a nightmare. The Pensions Commission looked at—we have done so too—all the issues about who would contribute what and who would have responsibility for paying into the scheme, particularly when you have two or more employers with different schemes, different pay reference periods and fluctuating earnings. It would be an administrative nightmare and is not something that has been accomplished. I would like to take away and think through the different issues that my noble friend Lady Hollis has raised tonight—without any commitment, of course—as we need to explore some of them.
It is probably the first time that I have been criticised for an amendment that might be correctly as opposed to incorrectly drafted, which seems to be my noble friend’s line. However, as my late husband used to say, what you need to know about people is whether they like their compliments forehand or backhand; I think that probably counts as backhand.
I am grateful for the support all round the Committee and the thoughtful contributions from these Benches that I would expect. I also thank the noble Lord, Lord Skelmersdale, for his thoughtful contribution in trying to weigh up some of the options. He made a point about housekeepers, which went back to the point made by my noble friend about complexity. The amendment increases simplicity. The proposal would apply only if you had earnings that took you above the LEL. You could make voluntary contributions below it, and only that would trigger the employer contribution. If the housekeeper earned less than £5,000, the situation is as now. If the employee was earning £8,000, the employer would have to make pension arrangements that, currently, bring the £5,000 to £8,000 under personal accounts, and for the extra £150 per year, would do it on the first £5,000 as well. In that sense, it is very simple. Employer and employee pay a pension contribution in the same way that tax and national insurance are calculated. Pension contributions are calculated on earnings from £0, even though there may be exemption bands, as there are for taxation or national insurance purposes. There will be simplicity of alignment between what now happens in DC schemes and what happens in personal accounts.
My noble friend rightly made the point that DC schemes have a different basis. They operate according to basic pay, rather than qualifying earnings. Some helpful statistics have come from Standard Life. I have not been able to verify them but have no reason to think that they are incorrect. Only 3 per cent of women’s earnings, and 8 per cent of men’s, are not basic. For most women, particularly, the gap between basic earnings, on which DC schemes are calculated, and qualifying earnings, on which personal accounts are calculated, is minimal, if there is a difference at all. This comes into to the debate on qualifying earnings, which we may have later. Qualifying earnings will obviously include the occasional hour or two of overtime in retail, but most women are not in the commission-heavy territory of, say, car salesmen, as some men are and where a bigger problem arises.
I was heartened by my noble friend’s recognition that this is an issue where we could, with consent—I hope—take the industry forward with us. We are not dealing with big sums, but it could transform outcomes for lower-paid women. This will make a significant difference to the ability, as a result of personal accounts, to float women off the means-testing advice conundrum, which we are all rightly concerned about. I am cheered by my noble friend’s words. I am sorry that my drafting was correct. Next time I will make sure—intentionally, as well as unintentionally—that it is incorrect; that way we will have a level playing field. Under the circumstances, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 9 [Information to be given to jobholders]:
moved Amendment No. 39:
39: Clause 9, page 6, line 3, leave out paragraph (c)
The noble Lord said: This is yet another probing amendment, this time to ascertain who the prescribed person is to be in Clause 9, which covers advice to jobholders. It could, after all, be the Personal Accounts Delivery Authority in the first instance of personal accounts. I hope that it will not be, because the trustee should be up and running by the first enrolment date. I hope the Minister will be able to confirm that, as far as he is currently able, given that PADA has not yet got to grips with the trustee issue, except in the most general terms.
It could be the employer, but given that only in extreme cases will they be registered under the FSA, he can hardly be expected to explain the information to employees and not be criticised when he gives the wrong advice. It could also be the scheme manager, which would apply to personal pension schemes or occupational pension schemes. Who is the registered person in this clause? On reflection—and we have all had plenty of time to reflect, even the Government, as their amendments in the Marshalled List show—I rather wonder if it would not be a good idea to add a new paragraph to subsection (2). That would then read:
“Regulations under this section must state—
(a) what information must be given;
(b) in what circumstances it must be given;
(c) how and when it must be given”—
and the new one would be:
“(d) by whom it must be given”.
Alternatively, if the Government have already decided this, there is no reason that I can see why “by whom” should not be in the Bill.
Another point occurs to me: will the information be sent directly to the employee by the prescribed person or will someone else, such as the employer, be expected to pass on the information to the employee? That is a repeat of the post box scenario I mentioned before dinner, but of course it applies in a totally different context. Further, we have not talked much about agency workers so far. Who does the Minister believe is the employer in that situation? Is it the agency or the temporary employer? Incidentally, I might well have asked that question during our debate just now on the amendment in the name of the noble Baroness, Lady Hollis. It does not matter when the answer is given as long as we get it before Report. I beg to move.
Clause 9 recognises that individuals will need access to relevant and accurate information about the effect of the new employer’s duty in relation to them, and I shall begin by making it clear that the information prescribed under Clause 9 is over and above the information that will come from a scheme as this information is already prescribed in existing legislation. Regulations made under Clause 9 will set out what information must be given, under what circumstances, how and when it should be given, and by whom. We recognise, for instance, that individuals will need to know whether they are eligible for automatic enrolment, the name of the scheme they have been enrolled into, and their right to opt out and how that can be done. The Bill as drafted has been kept quite flexible because many of the decisions regarding who should provide what information have yet to be finalised. I know that this is a constant theme of our discussions and will continue to be so, but that is genuinely where we are.
The Government want to ensure that individuals receive the right information at the right time and in the most appropriate format. We plan to build on existing information provision and complement current sources which include, as we discussed earlier, organisations such as citizens’ advice bureaux, the Pensions Advice Service and the Financial Services Authority. It would be premature to predict how we should best go about this without consulting widely. Under existing legislation, schemes already have to provide a wide range of information to prospective and active members. For example, prospective members will receive information to help them determine whether they might want to join the scheme, and active members are provided with a full annual illustration of benefits at retirement. The personal account scheme will be subject to the same legislation as any other money purchase occupational pension scheme and the Pensions Regulator will be responsible for information about how employers can discharge their new duties. It is expected that PADA will provide information to employers on the scheme.
Employers will have a role in providing information to employees, not least what scheme they have been enrolled into and their right to opt out. However, as I have said previously, we are mindful of burdens on business and will bear this in mind when we make decisions about the most appropriate channels to use when providing information. We want to work with stakeholders to consider in more detail the appropriate person or body to deliver this information and to ensure that its delivery is customer focused and business friendly.
Turning to the amendment tabled by the noble Lord, Lord Skelmersdale, this would remove the ability of the Secretary of State to prescribe who provides this information. Not prescribing who is responsible for providing what information would inevitably create uncertainty. I do not think that that was the intention behind the amendment but there is such a risk. We need to be sure that individuals are clear about the effect of the new employer duties. Let me reiterate that we will determine who is best placed to provide information by consulting stakeholders and expert organisations, along with individuals themselves. In addition, the regulations will be sent out for consultation.
The noble Lord asked specifically who is the employer of an agency worker. It is the person who has responsibility for paying the individual. That is one of the provisions in the Bill.
Yet again I am grateful to the Minister, but he is beginning to become a little repetitive. At least I am asking the same question on different points, but his answers are almost identical. I am beginning to come to the conclusion that much of this Bill is being enacted a year too early. Of course it is quite right to bring forward all the PADA stuff, but no Minister in DWP is able to give answers to many of our questions for the simple reason, which I accept, that they do not know. I have commented on why they do not know several times today.
However, the noble Lord said—I think I got his words down correctly—that there is information from the scheme under existing legislation. Where in the existing legislation? I think—I certainly hope—that the Government see the policy behind the Bill as a see-saw. On one end of the see-saw you have business and its interests; on the other end, you have savers, pension savers particularly, and up until now the see-saw has balanced exactly. I remember when I was first married my wife and I went to St James’s Park and sat on a see-saw—and it did not move, much to my embarrassment and that of my new wife.
What moral did the noble Lord draw from that?
That I needed to put on weight. I still do. I came to that conclusion—not with my wife but with the Minister—when he said that he intended the Bill to be as business friendly as possible.
I am intrigued by his answer to my question about agency workers. He said that it depends on who does the paying, but very often two payments are made. For example, in the agricultural industry, one payment is made to the agency providing the workers, and the other is paid—on a daily or weekly rate—to the workers employed by the farmer or nurseryman or whoever it happens to be. I shall have to look into that.
The Minister said there was provision in the Bill. Does he mean the agency workers Act—if that is what it is called—which we debated a year or two ago, or does he mean the Bill? He indicates that he means the Bill. I shall look at this issue extremely carefully. I am certain that the Minister does not have a clue about how to answer the main thrust of the amendment and so I beg leave to withdraw it.
Before the noble Lord formally withdraws the amendment, perhaps I may pick up on a couple of points he has raised with me. He has described the policy as a see-saw. It has been very important to construct consensus and balance around this. I would describe it as being an equilibrium, and that is where we are. In our deliberations we need to be mindful of the consensus, which has been hard fought for and hard won, and I am sure it will be uppermost in our minds.
The noble Lord asked me where in legislation are the provisions to deal with regulations on pension schemes. I understand they are in the disclosure of information regulations of 1996. Specifically on agency workers, I was referring to Clause 78 of the Bill, where, for the avoidance of doubt, there is a provision to identify who the relevant person is. That person is clearly specified as the person who is responsible for paying the agency worker in respect of the work. It is to avoid some of the confusion that arises in these arrangements that these specific provisions are there.
I am grateful for that further clarification. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 9 agreed to.
moved Amendment No. 40:
40: After Clause 9, insert the following new Clause—
“Protection for employers
(1) An employer shall not be required to give advice to jobholders or workers, either generally or on an individual basis, in respect of their rights under this Chapter.
(2) An employer who provides information in compliance with any regulations issued under section 9 shall not incur any liability to any jobholder or worker to whom the information is given.”
The noble Baroness said: Amendment No. 40 inserts a new clause after Clause 9. The clause is entitled “Protection for employers” and deals with interactions between employers and jobholders in relation to automatic enrolment. I am inevitably dealing with one end of the see-saw to which my noble friend Lord Skelmersdale referred.
The CBI’s submission to your Lordships’ House said quite clearly that employers must not be responsible for providing advice on savings. This has been echoed by other organisations; for example, the Association of Certified Accountants. The CBI says that it is the responsibility of the Government and the Personal Accounts Delivery Authority to provide advice. I am not sure that it is absolutely right since we do not expect PADA to be in existence much beyond the inception of personal accounts, but the Government certainly need to bear the primary responsibility.
The Liberal Democrat Benches led an interesting debate earlier today in connection with Amendment No. 9 relating to the over-50s, a group which may need advice, but the problem is much wider than that. Employers are aware of the risks of being auto-enrolled into schemes from which their employees will gain no or insufficient benefit, but what employers are clear about is that it is not reasonable that they should be in the firing line to bear any risk related to that.
My new clause has two subsections. The first says that employers are not required to give advice to jobholders or workers. They may choose to do so, that is entirely up to them, but they must not be required to. That is a declaratory thing that employers may find helpful. The second subsection says that employers do not incur any liability in respect of information given in accordance with Clause 9. We have just been discussing that clause. It gives the Secretary of State a wide power in relation to the giving of information. The only thing we have established so far is that the Government do not know what that will involve, which raises a lot of concerns for those who might end up on the receiving end of what these regulations may have in store.
The boundary between information and advice is quite a fine one. One of the concerns is that the regulations, in setting information, may stray over that line into advice. Subsection (2) of my amendment effectively provides employers with a safe harbour if they comply with the Clause 9 regulations. The Minister has outlined that the Government will be taking advice from PADA. Generally there is a lack of clarity about what these information requirements will involve, in particular for employers. It is that lack of clarity that raises concerns in the minds of those acting on behalf of the business community. I hope that the Minister will see that my new clause provides needed reassurance to the business community, which will almost certainly have to bear the lion’s share of the burden of implementing personal accounts on auto-enrolment. What they do not want to bear is any of the liability that might go with people ending up inappropriately in automatic enrolment. I beg to move.
We think this is a good amendment. We are very much in favour of clarity where advice is concerned and it is clearly not the role of employers to give advice. We will obviously be even more sympathetic if, over the course of our discussions between now and Report, the Conservatives feel able to support us so we can work something out, making it quite clear that the responsibility for advice does not rest with employers but outside in a proper nationwide generic free service. That is not a joke. It has to be one or the other and it is very important that we have clarity that the responsibility does not rest with employers. It was interesting in our previous debate that the Minister was quite reluctant to cross the line between information and advice. We need to be very clear on that so we support this amendment.
Like others, I think this is a useful amendment, simply for its clarification. The Government intend only that employers will be a conduit for information, not providers of it. That is a useful distinction to draw.
I have not worked the implications through, but we were quite glad to have the “in good faith” clause in at various points of the 2004 Bill. I wonder whether that could apply to an employer who provides information in good faith in compliance with any regulations issued. I say that because one thinks about some of the problems we have had of alleged misunderstanding or leaflets allegedly going astray. “In good faith” then becomes a reasonable defence. I was told on one occasion that it would be a reasonable defence even though it is not in the Bill, but it might give appropriate additional comfort if it were there.
As explained, the proposed new clause seeks reassurance that we will not be asking employers to provide advice and to ensure that employers who provide information in order to comply with a regulatory requirement are protected from any liability should a jobholder bring a claim against them. We agree with the proposition.
I can confirm that employers will not be required to give advice. The distinction between advice and information is important. I was not aware that I was reluctant to accept that distinction earlier; we think it is clear. However, there is no requirement now that people who join a pension scheme should receive advice, and that will not change with the introduction of automatic enrolment. Indeed, I go further: on the whole we do not believe that regulated advice will be necessary. The employer contribution will make the decision to save simple for most people.
Some individuals may wish to seek guidance—for example, those considering paying off large, high-interest debt first—and that is the case for any financial decision. As I have said in response to a previous amendment, we may require employers to provide basic information to workers, such as which scheme they have been enrolled in, but not to provide advice.
On the issue of liability, the proposed new clause aims to protect from any legal claims employers who provide information to jobholders. The employer will only ever be required to provide information of a type that we will prescribe in regulations. They will not be required to comment on the information provided. It is therefore difficult to envisage how an employer could be held liable for an individual’s decision to remain in pension saving, given that the actions they take relate simply to fulfilling a statutory duty. Furthermore, holding an employer liable is particularly unlikely as the individual will receive information from the scheme on an ongoing basis about their savings and will be in a position to opt out at any time.
I hope that offers the reassurances that the noble Baroness requires, but I suspect it does not. I think that she and I are on the same page in what we believe to be the position and what the outcome should be, but it is not necessary to put that in the Bill in the terms of the proposed new clause.
I thank the noble Lord, Lord Oakeshott, and the noble Baroness, Lady Hollis, for their support for the amendment. I am disappointed that the Minister, while professing to be in the same place in respect of the substance of the amendment, did not find it appropriate to say that the Government welcomed the idea of an amendment. The first of the subsections, which is about not requiring advice, was meant to be declaratory so that there could be no misunderstanding of the role of employers and I can see that it might be regarded as otiose.
I am much less clear about the issue of providing information in connection with Clause 9. Subsection (2) of my proposed new clause was designed to give a safe harbour to employers so that they would willingly, without reservations and caveats, take part in their obligations under Clause 9 when the regulations are laid. The Minister said that it was unlikely that they would have liability, but “unlikely” is not quite good enough for employers. I entirely take the point that the noble Baroness, Lady Hollis, raised about qualifying “in good faith”, or words of that nature. It goes without saying that you do not take safe harbour without having those kinds of sentiments that are associated with it, which may or may not be imported as a matter of law.
This is an important issue for employers. Employers have been painted today as being on the whole rather a bad lot. The amendment tries to reflect that employers recognise that they will have to comply with some quite extensive provisions but that their interests should in some way be protected as they come to implement them. I will want to return to the matter on Report, because it is important. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 10 agreed to.
Clause 11 [Introduction of employers’ duties]:
On Question, Whether Clause 11 shall stand part of the Bill?
Clause 11 is about a possible postponement of the employers’ duties. We had an interesting probing debate on Clause 4, which appears to do much the same thing in providing for the possibility of delaying initial automatic enrolment in circumstances described in the regulations, about which we know nothing—nor will we until well after the Bill is enacted. I therefore ask the Minister why the power in Clause 4 is not enough. Why cannot the two clauses—to use a phrase that he has just used—be conflated? To what kind of employer will the power apply? When do the Government envisage using it? I am even more confused by this clause, which is not clarified by the Explanatory Notes, than I am by Clause 4. I hope that the Minister will be able to relieve my mind and perhaps even educate me.
I shall do my best to relieve the mind of the noble Lord, Lord Skelmersdale, but I would not presume to educate him on any matter. Clause 4 deals with a matter that is quite different from that in Clause 11, which relates to a power to stage the introduction of employer duties. It allows the Secretary of State to set regulations that stagger the commencement of the employer duties, including those relating to automatic enrolment. The regulation-making power will enable us to require different groups of employers to start to discharge the duties at different times.
Staging the rollout of the employer duty will facilitate a smooth take-on of employers by the Pensions Regulator and pension schemes, including the personal accounts scheme. Staging will also allow a gradual increase in the volume of employers undertaking the duties, which will in turn assist delivery bodies and schemes in refining business processes in the light of operational experience. These processes will have been carefully considered and pre-tested ahead of launch, but, as with any project of this size, it is only sensible to build in opportunities for ongoing improvement in the rollout plans.
It is crucial that the personal accounts scheme is able to cope with the take-on of potentially large numbers of members in the early days. Latest analysis estimates that 1.3 million employers will be affected by the reforms. The leading option for staging is by business size. The clause also gives the Secretary of State the flexibility to choose staging by reference to one criterion or a combination of different criteria. While business size is our preferred option, we would be able to use the regulation-making power flexibly to ensure that the staged introduction of the duty was done in the most sensible way. We will work closely with key stakeholders to help us to determine the best option.
It has always been our intention to introduce the reforms from 2012. That is still the case. I am aware that it was suggested in the other place that, because Tim Jones wanted to be satisfied that plans were deliverable, he must have had reason to believe that they would not be achievable. That was not the case. It was quite natural that he wanted to be assured that the plans that he inherited were deliverable by carrying out a review. I hope that I have been able to explain the purpose of Clause 11 and I urge that noble Lords agree that it stand part of the Bill.
When the Minister gave me the opportunity the other day to quiz the chairman of the Personal Accounts Delivery Authority, that was most certainly one of the questions that I asked him—whether he believed that this scheme would indeed come into operation, as the Government fully intend, in 2012. His answer was in the affirmative. The Minister has just repeated that message.
I thought that we were going to start with a big bang; I had not appreciated that the Government intend a rollout of employer duties, whereby, by definition, there will be different categories of worker enrolled in the scheme at different periods. The Minister has now told me that this is to help the 1.3 million employers that the Government believe to exist. They intend, therefore, to stage by business size. It might also be staged by the type of existing scheme, if any. I can think of various possibilities. That is extremely helpful and clears up what was obviously a misunderstanding in my mind. I am grateful to the Minister.
Clause 11 agreed to.
Clause 12 [Qualifying earnings]:
moved Amendment No. 40A:
40A: Clause 12, page 6, line 32, leave out paragraph (a)
The noble Lord said: We have already had reference to the lower earnings limit at £5,035. By setting the start contribution facility of personal accounts, as it were, the Government are excluding those jobholders who have several part-time jobs, to whom the noble Baroness, Lady Hollis, just referred. This group is largely composed of those workers whose saving habits the Government claim to be most concerned about: women, low earners and those with a lack of job stability.
In spite of the Minister’s answers to the noble Baroness, Lady Dean, who is no longer in her place, and the noble Baroness, Lady Hollis, I fail to understand why the Government have decided to exclude this group. I also do not understand why the lower earnings limit was the appropriate level at which to start paying pensions contributions. How many people whose total earning is above £5,035 do they estimate will be excluded? We have had some figures, but I am not sure that they are appropriate on this occasion.
The other point is about administrative complexity. By calculating only qualifying earnings from £5,035, the Government are imposing a great deal of administrative complexity on employers who already provide a pension but currently count all the earnings. I shall not repeat what we said on the amendment tabled by the noble Baroness, Lady Hollis. I beg to move.
This really does seem to be déjà vu, does it not? I look forward to hearing the Minister read out what he half read out in response to the noble Baroness, Lady Hollis—and clearly really wanted to read out. I am sceptical about this amendment, to be honest, for reasons that the noble Baroness gave when she explained why it was not her amendment.
I thank the noble Lord, Lord Skelmersdale, for the amendment. Qualifying earnings will be calculated on earnings between £5,035 and £33,540, in 2006-07 earnings terms. The limits of the earnings band will be up-rated from its 2006-07 base, in line with changes in average earnings, to ensure the value of pension contributions keeps pace with individuals’ earnings. We shall have the opportunity to discuss that under a later amendment.
The qualifying earnings band has two functions: first, the lower limit determines whether a worker qualifies to be automatically enrolled; and secondly, to establish the minimum necessary contribution to be made for each pay period thereafter, for those workers who participate, in the case of money purchase schemes.
The issue of pension saving for those on very low earnings is clearly a difficult and complex area. Our decision to use an earnings band is based on research done by the Pensions Commission. In designing the reforms, the commission focused on the importance of replacement rates. For those on low earnings, the state system is designed to provide them with high replacement rates, which calls into question the appropriateness of workplace pension savings for this group. This is why, in designing this reform, we have ensured that those on very low incomes will not be automatically enrolled into a pension and are not incentivised to save by the presence of an employer contribution.
In 2006-07, £5,035 was the threshold at which most workers became liable for statutory deductions—that is, national insurance contributions and so on. Removing the lower earnings limit would have the effect of making the employer contribution payable on earnings from pound one. This has an estimated cost of around £1.9 billion a year, increasing total employer contributions from £2.9 billion to £4.8 billion a year, a cost which I would hope that the noble Lord recognises makes such a proposal prohibitive. The earnings band for both employer and worker contributions is a key plank of the Pensions Commission’s recommendations. Removing the lower limit would unpick the core policy and the consensus on which we touched earlier, on which the reform is predicated. This, combined with the additional employer burden, leads me to ask the noble Lord not to press this amendment.
When I get to read Hansard, I shall have to compare that answer to the one given to the noble Baroness, Lady Hollis, because the answers were not quite the same, as I recall.
In what respect would the noble Lord say that the response conflicts with my response to my noble friend?
Perhaps I can help my noble friend and the noble Lord, Lord Skelmersdale. I would love to have run with an amendment that covered as of right all earnings from pound one, irrespective of whether in each individual employment it was capped above or below the LEL. In other words, somebody who has five jobs of, say £2,000 or £3,000 each, which together bring in an income of £15,000 would nonetheless have a pension contribution by an array of employers matched by the employee. I would have loved to have done that. I do not think it is viable as it does not adequately yet reflect the role of the basic state pension.
We do not allow people to sum their hours together if they have multiple jobs below the LEL. We do for tax credits—this is what is batty about the system—but not for the basic state pension. People may have half a dozen micro jobs—perhaps gardening, cleaning and so on—and the implications of trying to track pension contributions through on £1,000 a year or £40 a week, just seems to me too complex, much though I would like to see it happen. That is why in my amendment I went for a less generous amendment than that the noble Lord, Lord Skelmersdale, which is that you have to have earnings of £5,000, but that if they exceed that you could elect and then require maximum contributions from the employer for the first £5K because you would already be in the system. So I went for the administrative simplicity and what I thought was the feasibility of that amendment rather than the more generous amendment moved by the noble Lord. That is why I suspect that my noble friend’s reply is rather different this time.
That was interesting. Of course the difference between the amendment of the noble Baroness, Lady Hollis, and my amendment is that hers was for real and mine was for probing. With which thought, with permission, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
moved Amendment No. 41:
41: Clause 12, page 6, line 32, leave out from “than” to end of line 33 and insert “the annual equivalent of the amount of the primary threshold, and
(b) not more than the annual equivalent of the amount of the upper earnings limit.( ) The primary threshold and the upper earnings limit are the amounts set under section 5 of the Social Security Contributions and Benefits Act 1992 (c. 4) for the tax year in which the pay reference period commences.”
The noble Baroness said: Amendment No. 41, for the avoidance of doubt, is a probing amendment. It is the first of a couple of amendments which seek to find out what the Government's policy is in relation to the band for qualifying earnings. The curious amounts in the Bill are the 2006-07 primary threshold and upper earnings limit for national insurance contributions purposes. We understand those are to be uprated in line with earnings.
The Pensions Commission originally proposed using the national insurance top and bottom limits for the band of earnings, and the Government in their first White Paper said that they agreed with the Pensions Commission that the band proposal was about right. In the December 2006 White Paper, the one which set out more detail about personal accounts, they said—and this is in a footnote to paragraph 6.3:
“When launched, the limits for the personal accounts earnings band will be aligned with the Primary Threshold and Upper Earnings Limit for National Insurance contributions”.
That implies that in 2012 this scheme would be picking up the then primary threshold and upper earnings limit. Since December 2006 we have had the now infamous 2007 Budget—infamous largely because of the ill-judged attempted abolition of the 10 pence tax rate. One way of paying for that particular package is to raise the upper earnings limit of national insurance—as the Minister well knows because we are debating that in the context of another Bill—to the higher rate threshold for income tax purposes. So the upper earnings limit is rising quite a lot.
I ask in these amendments whether the Minister will set out for the House what policy now drives the setting of the qualifying earnings band. At the bottom end will it be linked with a primary threshold? If it is going to be the primary threshold in 2012, that is unlikely to be the same thing as setting the 2006 level uprated in line with earnings, because if the primary threshold remains in line with the personal allowance for income tax purposes the two will have diverged. Similarly at the upper earnings limit level it is likely to be raised to beyond the level that would be achieved by indexing 2006-07. So this is a probing amendment to invite the Minister to set out their policy, if indeed they have one for this. I beg to move.
I thank the noble Baroness for giving me the opportunity to set out the Government’s policy on this matter. As we have already discussed, these reforms have been structured to set a median earner on course to achieve an income in retirement of around 45 per cent of their working-life earnings, in line with the Pensions Commission’s recommendation.
The qualifying earnings band establishes a link between working-life earnings and pension saving. We selected the primary threshold and upper earnings limit for national insurance contributions in 2006-07 as the starting limits for the qualifying earnings band. These limits avoid automatically enrolling people on very low earnings, for whom state pensions already provide high income-replacement rates, cap compulsory employer contributions at the upper end and help focus these reforms at job holders on moderate to low earnings.
Having made this important link between earnings and pension savings, we need to maintain it. That is the key driver. We recognise the administrative simplification that sticking with the national insurance thresholds would provide. However, as we know, not all earnings bands are uprated by changes in average earnings. The upper earnings limit was increased in the 2008 Budget as part of a programme of tax simplification. This change would have widened the qualifying earnings band for pension saving had we at that point retained a link to the national insurance limits and significantly increased the costs to employers.
As the noble Baroness acknowledged in our discussions on the National Insurance Contributions Bill, we have confirmed our aspiration to relink the primary threshold with personal allowances and the upper earnings limit with the point at which higher rate tax is payable. Once aligned, the working assumption is that these are more likely to be uprated by prices than earnings. Indeed, the noble Baroness pressed an amendment on us to that effect in Committee. That would mean there would be a divergence of the increase in those bands by prices and the increase in these bands by earnings; therefore, we would have broken the link with earnings relationship, which is the important component of this measure, to ensure that we reach the 45 per cent replacement rate in retirement.
We recognise that this policy means that employers will have to work with a new earnings band. However, payroll software will be able handle the calculations with ease. I hope that that has explained our policy to the noble Baroness.
Does my noble friend have access to any formal projection of stats on this? I can see why it may happen, but I am not persuaded that the loss in cleanliness of structure is necessarily worth the worries that he suggested. It would be very helpful for my noble friend to provide forward projections on the increasing non-alignment of this cap, as against the alignment of the UEL with the upper tax threshold, so that we can see how they begin to diverge, particularly given that a £3,600 cap on 8 per cent contributions cashes out at about £45k, I think. That should provide plenty of head space for the sort of alignments that the noble Baroness was talking about. Can my noble friend help by writing to us more fully?
I am happy to write and provide any stats we have. However, I reaffirm the principle that if we aligned to the upper earnings limit in the primary threshold—and those are generally uprated by inflation Rooker-wise and by everything that went with it—there would be a potentially growing divergence, on the assumption that earnings are generally ahead of prices. Over time and the longer term, there could be a considerable divergence between those thresholds and the thresholds that we are considering when they are updated by earnings. I do not have data for the top end, but as regards the lower threshold, in 2012—these are in 2006-07 earnings terms—the amount would be £5,035. It would be the same in 2030-40 in current earnings terms. If we uprated that band by prices, by 2040 the £5,035 would have reduced to £2,890 and we would be back with the problem of potentially incentivising people into pensions for whom the state was providing a better replacement rate. That is why we think the link with earnings is particularly important. I am happy to share the data with my noble friend and other noble Lords.
I thank the noble Baroness, Lady Hollis, for her comments and the Minister for his reply. He has confirmed that while the December 2006 White Paper said that when launched the national insurance limits would be picked up, the Government are not planning to do that. They are planning to start in 2006-07 an uprate by earnings.
The Minister says, “Well, payroll software can handle that”. This is a curious policy. The Government have just started on a process that is having a bit of a hiccup this year because they screwed up the 10p tax rate. The policy was to harmonise national insurance and income tax. Here we have a completely different set of rates overlaid on that, which will make it complicated for employees to understand the point at which they start paying tax, national insurance and pension contributions, so the cleanliness referred to by the noble Baroness, Lady Hollis, has been removed.
The complexity is considerable for employees, and it is something that we want employees to relate to and understand. It is too easy to say that payroll software can pick up how it works for employers because this is going to micro-employers who have not in the past come into pension provision. They do not always have payroll software; it is not necessary if you have payroll of only three or four people. You can do it in the old-fashioned way with tables and so on.
The Minister has told me that the Government are putting in a rather complicated scheme with automatic enrolment. It is at a level of complexity that I had not fully thought through until we started to go through this amendment. I said that it was a probing amendment and I shall withdraw it, but I want to reflect further on the kind of complexity that we are introducing and whether it is advisable. I certainly look forward to receiving the information that the Minister has promised to give to his noble friend Lady Hollis because I would like to share in that. For now, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
moved Amendment No. 42:
42: Clause 12, page 6, line 40, leave out paragraph (a)
The noble Lord said: I am afraid that this one is not a quickie.
We now come to the other side of the earnings bands. I emphasise to avoid doubt that this is a probing amendment about the sort of earnings that will count as qualifying, which will be exempt, and the effect that the decision will have on existing employers’ pension schemes of whatever sort.
The issue is that in personal accounts a total contribution of 8 per cent of earnings between £5,035, in other words the LEL, and £33,500 must be paid, of which the employer must pay at least 3 per cent. We all know that. Earnings include additional benefits such as overtime, commission and bonuses. If an employer wants to continue to operate their own scheme, rather than enrol staff in personal accounts they much check each pay period, either monthly or weekly, to ensure that the contribution made to their scheme is at least as great as that which would have been made to personal accounts.
That is a problem because most private pension schemes currently use full basic earnings from £1 upwards rather than ignoring the first £5,035 and using a different sort of qualifying earnings.
Those schemes rarely take into account bonuses, overtime and commission. This adds administrative complexity and additional costs for the employer. Each month the employer needs to check that both the total contribution and the employer contribution made are at least as great as would be made to a personal account. There are also communication problems and potential employer-employee tension. The employer needs to explain this change to employees and may ask employees to pay additional contributions in pay periods where commission and bonus are earned. This is exacerbated by the fact that bonus and commission are often not paid evenly over the year. Employees may have to pay variable contributions, which might influence their decision whether to stay in the scheme or opt out.
I believe that employers have three choices: accept the additional cost, complexity and communication problems caused by these changes; change their schemes to the same earnings definition as personal accounts; or close their schemes and enrol all employees in personal accounts. The Government—indeed, all of us—have made a point of trying to ensure that nothing in this Bill encourages employers to level down their schemes. The third point is therefore particularly important.
How does this affect employees? Employees may need to pay higher contributions in pay periods when bonuses or commission are paid. Contributions could change month to month or week to week. As the first £5,035-worth of earnings are disregarded, employees who earn less than that amount in bonuses, commission and overtime will have less money paid into their pension funds. In addition, it is likely that employers will only have to pay the minimum contribution necessary and so employees may receive a lower employer payment. Employees who receive bonuses, commission or overtime of less than £5,035 are most at risk of losing out—in other words, low earners, the majority of whom are women.
The question of whether bonuses, overtime et cetera should count towards qualifying earnings has a big impact in particular on money purchase schemes, and will be raised by my noble friend Lady Noakes later in her amendments to Clause 19. There are myriad perks that a jobholder can get from his employer that do not fall clearly into the definition given in the Bill. One obvious example is a car provided by the employer for his employee’s use. Some employers give mileage payments for travel in the course of employment; others pay for all petrol used by their employee. I am sure that noble Lords can think of other perks, such as free plants from a nursery. This last example may be a little extreme, but noble Lords who know my background will see why I use it. The same point applies to any product made or sold by a firm and supplied to an employee for free.
What advice will be given to employers to help them decide whether to count a payment? I am afraid that there is, as my noble friend Lady Noakes has just said, another complication. Earnings are calculated in different ways for income tax, where benefits of all kinds are counted, including those that I have just mentioned. However, in the calculation for national insurance, they are not. By using the lower earnings limit as the threshold for minimum earnings that qualify for auto-enrolment, do we not have a recipe for confusion? Subsection (3)(a) talks about what is included in the calculation: salary, wages, bonuses and overtime. As I pointed out at Second Reading, many existing employer pension schemes operate on the basis of any basic earnings, starting at £1. Do the Government really want these employers to restructure their schemes so dramatically before they are given approval as qualifying schemes?
Over the weekend, Joanne Segars, the chief executive of the National Association of Pension Funds, said:
“We support the Government’s 2012 reforms but it is important that they do not add unnecessary costs to existing pension provision. All that is needed is a common sense change to the definition of Qualifying Earnings and we should see a good outcome for everyone. Ministers have underlined that they want the new Personal Accounts scheme to have a minimal impact on existing provision so we are hopeful that they will try to accommodate our concerns”.
I agree with her. That is why I tabled this amendment and why I have spoken rather more lengthily than I normally do. I beg to move.
I am in some difficulty here. I am not sure whether we should be debating the issue of basic versus qualifying earnings and what we see as an appropriate qualifying scheme in relation to this amendment or in relation to later amendments, including Amendment No. 60A. It is probably too late now but I would have found it hugely helpful if the amendments had been grouped because I think that we need to have a full discussion. We all agree that we want people to end up with the best-buy package, whatever that may be, but the question is: how do we provide a simple way of ensuring that they do so with as little alteration as possible to the existing structures of sound schemes, while ensuring that we do not build into the scheme a moral hazard whereby a few employers can pervert the notion of basic pay?
If those are the contours of the debate, it seems to me that they are caught partly by this amendment, which is very interesting, and partly by the later amendments. Given that it is 10 minutes to 10, I am not sure what we do about that. Two companies, Scottish Widows and AEGON—I know the people there a little and respect them greatly—have told me that they are extremely worried about this issue. They feel that we are making problems here that we do not need to have. It may be that the Minister will wish to adduce arguments against that position, but at the moment I am disposed to believe that we have a real issue to address and I do not think that we can do it at 10 to 10—I have a feeling that it will be split between two sets of debates.
I am not sure of the best way forward. Ideally, the later amendments would have been grouped with this one but I see that they are starred and therefore that was not the case. I do not know whether my noble friend can help on this or whether the noble Lord, Lord Skelmersdale, is able to withdraw the amendment and recast it in some way for next Monday so that we can pick up these issues. I think that we will have the same debate twice and I do not think that that will be very fruitful, particularly at this time of the evening.
I have some sympathy with what the noble Baroness has said, although it is probably worth saying a few words about qualifying earnings. There is no particular reason not to discuss it now simply because we will be debating it both now and at our next sitting.
Perhaps I may set out briefly where we stand: “in some difficulty” is probably the best summary. We have had some pretty heavy-duty lobbying. I do not say that in any unkind way; we are very glad that lobbying groups on both sides have taken the trouble to meet us and talk to us as much as they have, and on that I am sure that I speak for other Members around the Committee. On the one side, we have heard from the massed ranks of the NAPF, the CBI and the ABI, and from individual companies such as Norwich Union, Standard Life, AEGON and the Society of Pension Consultants. All, understandably, have made the point that they want to avoid costly changes to existing scheme rules, which have worked quite well and are well established. On the other side, equally persuasively, there is support for the definition in the Bill from organisations such as the Pension Coalition, Which?, the TUC, Help the Aged, Age Concern and the Commission for Equality and Human Rights, which are obviously focusing much more on how it will work for the new people entering the scheme, and they worry that employees will miss out if the definition is changed.
I feel that the right answer—I hope that we can work towards it—is to have a compromise, perhaps based around some sort of grandfathering of existing schemes but with safeguards. However, to be honest—and I believe that there is no harm in at least airing this now—I find myself quite torn.
I listen and talk to one group and think that they have some very good points; then I listen and talk to the other. This should be work in progress for the Government and I hope that they will consider carefully the fact that there are some serious issues and that they will not just ignore or brush aside the serious points made by the people who run the existing schemes.
I find myself in no difficulty, for once. This is genuinely work in progress for the Government. I hope that we will have a chance for a wider debate, but perhaps I may just deal with the script that I have.
Clause 12 establishes both the qualifying earnings band and the range of reckonable pay components making up those earnings. Qualifying earnings underpin the calculation of contributions for money purchase pension arrangements and are also part of the criteria to determine whether a jobholder is to be automatically enrolled.
Establishing a new minimum level of savings is vital if we are to realise our ambition of increasing pension savings, especially among moderate and low earners. Contributions need to be calculated at 8 per cent on a band of earnings as proposed by the Pensions Commission if they are to set a median earner with solid state entitlement on course to achieve an income in retirement of about 45 per cent of those median earnings. The commission proposed savings calculated on gross earnings. Reducing that drastically would affect the premise of the entire reform.
We want to ensure that contributions are calculated on a wide definition of earnings. We are aware that about 65 per cent of those currently saving in defined contribution schemes have their contributions calculated on at least their basic pay. However, a narrower definition than planned would reduce the value of contributions, especially for workers with low or no basic pay—especially people who work in retail, telesales and, as my noble friend referred to earlier, parts of the motor industry, for whom commission payments are a significant proportion of overall income.
Reducing pay components could mean fewer workers reaching the point at which qualifying earnings trigger automatic enrolment. It would also open up a possible loophole that could be used for avoidance by enabling employers to reclassify their workers’ earnings, thereby reducing the level of contributions they are required to pay. I emphasise again that employers do not have to use those components. The requirement is to make contributions that would be equivalent or better than payments predicated on them. In addition, we do not want to include all earnings—for example emoluments such as non-cash benefits. We do not consider that appropriate for the purposes of pension saving.
Following discussion with stakeholders, we are amending Clause 28 to help and we will continue to listen to options which do not reduce the integrity of the policy. I stress that our focus is on the amount of money going into the schemes, not the method of calculation, and we are not asking schemes to change their arrangements. As stakeholders have highlighted, that may cause difficulties for both employers and their schemes. We continue to listen to their concerns and will consider reasonable options about how the test may be applied. We have already proposed an amendment to Clause 28, as I said.
Some stakeholders have suggested transitional protection or grandfathering for existing schemes. However, we do not consider that to be a sustainable solution, as it will become increasingly complex over time and may undermine the new minimum level of saving for some workers. I know that others have suggested that there should be an annual reconciliation.
I end by quoting from a statement by my honourable friend the Minister for Pensions, Mike O'Brien:
“We must minimise any disruption to current pension arrangements, which is why the qualifying test must be designed in as simple a way as possible. I have listened to stakeholders and remain open to reasonable suggestions about how the test may be applied. We must strike a balance—maximising new savers and saving, and supporting existing pension arrangements—that's the key objective”.
I hope that, on that basis, the noble Lord will feel able to withdraw his amendment, but I am sure that we will have another go at this next week, when we meet again.
I am extremely grateful to the Minister. I am sorry if I have caused difficulty for some Members of the Committee, but glad that the Minister had no difficulty. I was really getting at the Minister’s answer to whether the Government are asking schemes to change their arrangements. I am glad to hear that the answer is no and that the Government intend to avoid this outcome.
Clearly, the noble Baroness, Lady Hollis, is quite right. This has a relevance to our future discussion on qualifying schemes, but I was very careful almost to avoid mentioning them in moving this amendment. For both reasons, I am pleased that we had what the noble Lord, Lord Oakeshott, might call a pre-discussion. We have had this little debate and it will be extremely useful for our future consideration and other parts of Part 1. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 43 not moved.]
Clause 12 agreed to.
I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.
House adjourned at 10.01 pm.