Skip to main content

Pensions Bill

Volume 702: debated on Monday 23 June 2008

House again in Committee on Clause 13.

Before calling the first amendment, I have to announce an amendment to the figures announced for the Division earlier today. The number of noble Lords voting Content was 53, not 55.

44: Clause 13, page 7, line 8, at end insert “or any other changes warrant a review”

The noble Baroness said: I shall speak also to Amendments Nos. 46 and 49, which are also in this group and cover much the same point.

Clause 13, which Amendment No. 44 seeks to amend, provides for a review of the qualifying earnings band. It is right that the band is reviewed, but the clause appears to restrict revaluation to considerations of whether the bands have kept their value. I would like to see a wider power to vary the bands that would allow changes to be made for any reason. This would allow other issues to be considered, such as whether the new system band was properly serving the low paid or those with higher pay. There also needs to be periodic reviews of whether the proposed contribution levels are good enough to provide an adequate pension. Experts consider a lifetime 15 per cent contribution as necessary for most people to meet their preferred retirement income. While the proposed contribution levels have been carefully struck as a compromise between different interest groups in the debate, it should not be forgotten that the objective must always be to provide a decent retirement income. Pension provision is about the future. It is about provision for our children, our grandchildren and even our great-grandchildren. Nobody knows what the future may hold. It therefore seems right and proper that there should be a degree of flexibility to cope with unforeseen events.

Perhaps I should declare an interest. As noble Lords will know, I am a former member of the TUC General Council. This amendment was suggested to me by the TUC. As my noble friend the Minister knows, the TUC supports the Bill and wants to see it on the statute book as soon as possible. Nevertheless, as far as this clause is concerned, it is felt that there is a case for rather more flexibility. I therefore beg to move.

I shall make just a couple of brief comments. It is important to recognise that the band of earnings represents part of the compromise and the consensus on the whole pensions settlement and that any radical departure from that may undermine the consensus. The limits, particularly the upper limit, have the effect of controlling employers’ costs as well as ensuring that the personal accounts scheme stays on the target market and does not compete unduly with alternative pension provisions. We completely understand that the band may need to be changed occasionally, but I am not sure that the noble Baroness’s amendment, which does not even have the affirmative procedure attached to it, is the right way of going about things. As such changes could be quite significant, we see primary legislation as perhaps the right way of realigning the scheme.

We are probably a little more sympathetic to the noble Baroness’s amendment, but I would like to hear the Minister’s reply before committing myself any more firmly.

I thank my noble friend for this amendment. The reforms that we have discussed have been structured to set a median earner with a solid state entitlement on course to achieve an income in retirement of around 45 per cent of their working life earnings, in line with the recommendation of the Pensions Commission. The qualifying earnings band establishes the link between working life earnings and pension saving. As the noble Baroness, Lady Noakes, said, this is part of the consensus that was reached. Having made this important link, we need to maintain it. We will do this by reviewing the limits of the band every year to see whether they have maintained their value. Depending on the outcome of that review, we expect to uprate the limits in line with changes to average earnings.

Ensuring that the limits of the qualifying earnings band keep pace with changes to average earnings will ensure that the contributions of jobholders also keep pace. This is important if we are to maintain the balance between working life income and income in retirement. Uprating the lower limit of the qualifying earnings band in line with changes to average earnings will also avoid enrolling increasing numbers of workers on very low earnings, for whom state provision already offers high income-replacement rates. It is crucial that we retain the flexibility necessary to ensure that the earnings band is uprated appropriately. As my noble friend said, pensions are a long-term issue. However, the clause as drafted already provides that flexibility. I do not believe that these amendments would provide any additional flexibility when it comes to reviewing and uprating the limits of the qualifying earnings band. Accordingly, I ask my noble friend to withdraw her amendment.

I thank my noble friend the Minister for that response and I note his reference to flexibility, which is what the amendment is all about. I am also appreciative of the fact that this is part of the general consensus—something that the TUC also understands. Consensus is necessary if we want the new legislation to have viability for the future, with everybody agreed that this is what should happen. However, in view of what he says, I do not intend to press the amendment to a vote this evening. I shall look carefully at what he said in Hansard to see whether it should be pursued further, but I am grateful for the assurance that flexibility is within the sights of the Government so far as this is concerned. On that basis, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

45: Clause 13, page 7, line 9, leave out subsection (2)

The noble Baroness said: In moving Amendment No. 45, I shall also speak to Amendments Nos. 47 and 48. The previous group of amendments in the name of the noble Baroness, Lady Turner, sought to give the Secretary of State power to amend at will the thresholds around the earnings band. My amendments are much more modest and are designed to ensure that the Secretary of State does not let the value of the earnings threshold fall behind any increases in the level of earnings.

The Minister has explained that it is the Government’s policy to uprate the earnings band in line with earnings; he said it on a previous day in Committee and he said it a moment ago. It would have been fairly easy to have provided that in the Bill, but the Bill does not do that; it gives the Secretary of State carte blanche to decide how to revalue the band, whether or not in line with earnings.

Amendment No. 45 would delete subsection (2), which allows the Secretary of State to use whatever value assessment procedure he likes. He does not need this power; he has the procedure referred to in subsection (3) under the Social Security Administration Act 1992. Amendment No. 47, which is one of our usual “‘may’ to ‘shall’” amendments, would therefore mandate the use of the procedure in the 1992 Act.

Lastly, Amendment No. 48 is another “‘may’ to ‘must’” amendment—this time to subsection (4)—so that if the Secretary of State is determined that the qualifying earnings band has not maintained its value, he must lay an order substituting the revalued amounts.

We always worry when the Government translate what appears to be a straightforward policy, such as earnings uprating, into legislation that allows the Secretary of State to do pretty much what he wants. We shall therefore take some persuading that the amendments should not be made. I beg to move.

I just explained in response to the amendments from my noble friend Lady Turner our approach to uprating the earnings bands, and in particular the importance of maintaining flexibility. However, these amendments would do away with that flexibility by removing the possibility of uprating by any method other than earnings bands. We must remember that these reforms are for the long term. While we fully expect to uprate the limits of the earnings band in line with changes to average earnings, we do not have 20/20 foresight. The clause avoids tying the hands of future Governments when it comes to ensuring that the earnings bands maintain their value. It is crucial that this remains the case.

We always have this dilemma where we have a clear policy and objective and believe that uprating by earnings is the right way forward. However, given that we are setting down reforms for decades to come, there must be a strong argument in favour of flexibility. That is why the clause is structured as it is, as I explained in response to the previous amendments. I hope that, on that basis, the noble Baroness will feel able not to press her amendment to a vote.

I am not quite sure what this flexibility is all about. We have earnings bands, and we have to ensure at least that they maintain their value over time. We accept that they might have to be realigned, which was the purport of the amendment of the noble Baroness, Lady Turner, although there should be a special procedure if that is to be the case. However, the flexibility that the Minister wants is merely to say what kind of revaluation it is, because Clause 13 talks only of the Secretary of State determining whether the earnings band has maintained its value. As this is in essence about earnings leading to replacement income in retirement, I cannot see any other logical basis on which to determine value, and I struggle to see what kind of flexibility the Government seek.

It is by definition almost impossible to be specific when providing flexibility that might be needed over the long term. The noble Baroness may recall our debates during consideration of the Pensions Act 2007 on upratings and the factors that would be taken into account, such as which earnings index would be the appropriate one and whether the current indices would still be in place in 20 or 30 years in their current format. We are simply creating a little space to have flexibility. It is not unreasonable for government to ask for that. I know that the noble Baroness always sees the most horrendous plots when the Government seek flexibility, but it is not that. We have made very clear our intention to maintain the link between lifetime earnings and replacement income and the proposition that the bands are set to get that replacement rate of 45 per cent at the start. We expect to uprate them by earnings, and we hope and believe that this regime will remain in place for 20, 30 or 40 years with the consensus that has been built, but we cannot be absolutely certain. That is the reason.

Will the Minister make it quite clear that he is asking for flexibility only in the definition of the word “earnings” over a long period, or is he asking for something else?

The Bill is not specific. Again, we simply do not have 20/20 foresight over the long term, and we cannot predict quite what will crop up over the long term. Therefore we need to have a little space rather than to have to come back with primary legislation again. That is an entirely reasonable proposition, and I do not see why it is creating so much difficulty.

No one has 20/20 foresight. I was simply asking which way it is looking. Is it looking at the definition of earnings or at something else?

The clause is entitled “Review of qualifying earnings band”. That is the thrust of the provision and how we go about it. That is the subject of the detail.

I thank the noble Lord, Lord Oakeshott, for attempting to get a little more clarity. We received none; all we got was one of the Minister’s favourite mantras for the Bill—he wants flexibility. This is when the Government either do not know the answer or do not want to tell us what they are going to do with the Bill. It has been relatively clear from the outset. The Pensions Commission recommended that the bands be uprated in line with earnings. The Government, in their White Paper, accepted that recommendation. The Minister has said that he accepts it on more than one occasion at the Dispatch Box. However, when we seek to get that reflected in the Bill we are confronted with complete obduracy for reasons that have not been articulated, except to say that it is for flexibility. That is not satisfactory, and I seek to test the opinion of the Committee.

[Amendment No. 46 not moved.]

47: Clause 13, page 7, line 11, leave out “may” and insert “shall”

48: Clause 13, page 7, line 17, leave out “may” and insert “must”

On Question, amendments agreed to.

[Amendment No. 49 not moved.]

Clause 13, as amended, agreed to.

Clause 14 agreed to.

Clause 15 [Qualifying schemes]:

50: Clause 15, page 7, line 36, at end insert—

“(1A) The Secretary of State may by regulations provide that subsection (1)(b) does not apply in relation to a scheme to which section 24 or (Quality requirement: other personal pension schemes) applies, if prescribed requirements are satisfied.”

The noble Lord said: I shall also speak to the other amendments in this group. Clause 15 is the first in a series of clauses setting out the minimum requirements for pension schemes that can be used to comply with the new employer duties. As it stands, the clause requires qualifying schemes to be UK tax registered, so as to enable scheme members and their employers to benefit from UK tax relief on their contributions. For scheme members, this is equivalent to a contribution from the Government, through a lower tax deduction, to their retirement savings.

However, we recognise that individuals may be seconded to the UK from abroad for short periods of employment and that, prior to their arrival, some would have joined a pension scheme set up in their home countries, outside the UK tax registration regime. Government Amendment No. 50 will enable us to accommodate individuals in such circumstances. It contains a regulation-making power to allow the Secretary of State to specify in legislation that non-UK schemes can be qualifying schemes under the employer duty where they are not UK tax registered in prescribed circumstances, which are likely to be those in which their members are able to receive UK tax relief on their contributions made from UK earnings, as is permitted in certain circumstances by HMRC.

The amendment and others in the group are concerned with ensuring that we support and encourage existing good-quality pension provision. We want to encourage employers to retain their existing pension arrangements, where those arrangements satisfy our minimum standards, by providing as much flexibility as possible for multinational employers with a multinational workforce.

We also want to ensure that the widest range of schemes can be offered as qualifying schemes, but with the necessary safeguards to protect members’ interests. Schemes operated outside the UK could provide high-quality benefits and we do not want to prevent employers from offering them. However, such schemes are not subject to FSA regulation of their operations. Therefore, it is important to ensure a robust regulatory regime for non-UK-based schemes if they are to be used under the employer duty.

With that in mind, Amendment No. 76 limits the application of the quality requirements set out in Clause 25 to UK-operated personal pension schemes whose operation is regulated by the Financial Services Authority. Amendment No. 81, meanwhile, brings in a new clause containing the power to prescribe in regulations the quality requirements for personal pension schemes whose operation falls outside the FSA’s regulatory remit. That is the case for non-UK-operated personal pensions.

Taken together, Amendments Nos. 76 and 81 seek to future-proof our policy by being clear what the quality criteria are for schemes whose operations are regulated by the FSA, while enabling us to cater for schemes subject to a regulatory regime outside the UK or schemes with features not common to UK schemes where that might be appropriate. That will allow the Secretary of State to respond flexibly to the widest range of schemes and enable employers to retain diverse, high-quality pension provision.

As a consequence of Amendments Nos. 50, 76 and 81, we are introducing a number of technical amendments to Clauses 18, 25 and 86, which make up the remaining amendments in the group. I hope that the Committee is in agreement with the proposals to support and encourage good-quality existing provision. I beg to move.

Not being a tax expert like the Minister or my noble friend Lady Noakes, I am afraid that I have a few questions. I readily understand that there should be minimum requirements for pension schemes to be tax registered where they are indeed tax registered, but he said towards the end of our proceedings last week that the Government were interested in the total amount of money going into the schemes as a primary test. I think that that was at col. 1018; I am speaking from memory. I shall go into that in a bit more detail in a minute or two. Given that, it does not particularly matter whether you have a tax-registered scheme, so long as the total amount of money is at least equal to the minimum that the Government have set out in the Bill.

Another point occurred to me in listening to the noble Lord. I understand that the schemes that he is interested in under the amendments are not regulated by the Financial Services Authority. However, the regulatory part of the Bill is all about the Pensions Regulator. To what extent, if any, might they be regulated by the Pensions Regulator?

The noble Lord raises two points about whether it matters if tax relief is available to a scheme. The starting point for having qualifying schemes is that they are registered under the Finance Act 2004. The getting of tax relief is not the only important thing, obviously; that tax relief is available only if the structure of the scheme fits certain criteria. That is why the provision is there.

When we are talking about satisfying the quality requirements of money purchase schemes, the noble Lord is right in one respect. We are interested in the amount that goes in, not the basis on which it is calculated. However, that is a separate point. We are providing for schemes that expats might routinely be signed up to when they come into the UK. They are not registrable under the Finance Act 2004. Typically, there might be arrangements if there are corresponding schemes under which UK tax relief can still be available on contributions, but the provision that a qualifying scheme should be registered under Part 4 of the Finance Act 2004 is an important building block in the definition of qualifying schemes generally.

We are simply taking out and enabling a further qualifying arrangement by taking the power to look at circumstances of specific schemes that would not fit the criteria. If we do not do that, we could end up with a situation in which, when an expat was seconded into the UK to work and remained a member of their home-country scheme but that scheme could not be a qualifying scheme, there would be an auto-enrolment duty on the employer. That would not make much sense if the scheme that they were in were good quality. We are carving out an opportunity through regulation to be able to bring forward other criteria to facilitate that. It is no more or less than that.

The noble Lord also asked what, if the schemes were FSA registered or came within the FSA’s ambit, the powers of the Pensions Regulator would be. The new clause is wide enough if necessary to safeguard members’ interests by including regulatory requirements as part of the qualifying requirements. Those might include requirements relating to the regulatory jurisdiction that a scheme falls under. It is a process by which one can seek to ensure effective regulation, even if it is not regulation under FSA and UK arrangements. That is the purpose. I hope that that deals with matters satisfactorily for him.

I am grateful to the noble Lord for answering questions that I sprung on him. I confess that I sprung them on myself, because I thought of them as he was speaking.

On Question, amendment agreed to.

[Amendments Nos. 51 and 52 not moved.]

Clause 15, as amended, agreed to.

53: After Clause 15, insert the following new Clause—

“Right to access tax free lump sums

The Secretary of State shall by regulations provide that a qualifying scheme or an automatic enrolment scheme shall allow a jobholder or worker to withdraw a tax free lump sum or sums during his or her working life.”

The noble Baroness said: Obviously this is a probing amendment; almost equally certainly it is a technically deficient amendment. I would like to restart the debate launched by the party opposite—by Mr Willetts and Mr Rifkind in the other place—for a lifetime savings account. I was persuaded by their arguments, if not the technicalities. The point of raising it today is that it is appropriate to see whether there is any support among the political parties, business and industry for such a scheme, because unless there is it is obviously not going to go anywhere.

Why might such a scheme be necessary? As they grow older, men on above median earnings will usually have some savings beyond their pensions. As mortgage pressures, for example, ease, they may have an ISA or two. Those people on below median earnings, especially women who may be well below, seldom have savings. There is abundant research to show why. Scottish Widows has always flown the flag for women’s pension issues, as did the former EOC, which did good work on this, the DWP and the former DSS. Some of these points are fairly obvious but perhaps bear repeating.

Women will not have rainy-day savings because, clearly, there is not enough disposable money. Their earnings may be part-time, low and intermittent; in some sense, they may be regarded as temporary. What money there is may generate difficulties of management and, more likely, problems of debt, rather than problems of savings. On top of that, for younger women especially, there is still the utopian view that a Prince Charming at best, or husband if not, will see to it that there is almost a financial division of labour within the family. He will do the long-term pension stuff, while she does the short-term household budget stuff. His pension, therefore, is for them both. The idea that the pension was for both of them was one of the reasons why your Lordships time and again were behind pension sharing after divorce.

Despite what we know about family breakdown, the belief that it is for the man to provide for both of them persists. The woman may therefore feel that to save in a pension, rather like having a pre-nuptual agreement, somehow indicates a lack of trust. If money is tight and if the man saves into a pension, the woman, in turn, is more likely to view household spending as her priority. The trainers for the children and school trips are her contribution to family financial circumstances and she will tend to put other people’s financial needs, especially those of the children, ahead of her own.

The woman sees saving in a pension as being selfish—research has shown that women use that word—and women are hard-wired to think that that is the worst of all social sins. Even if she does not think that she is being selfish, she could be put off by complexity, obscurity, worries about mis-selling and concerns about the impact of means-tested benefits whereby, allegedly, Tracey’s mum who saved is no better off than her aunt down the road who did not. Above all, pension savings are locked away for 40 years. Therefore, if there is a crisis around the corner, they are untouchable, even though the need now may be far greater than the need in 20 years’ time because of, for example, divorce, disability, repossession or the husband’s unemployment.

I believe that the policy makers are making a mistake. At retirement, men and women are, for the most part, in similar financial situations with a steady but low income and steady but predictable expenditure. Because men are none the less worse off in retirement than when they are in work, that is projected somehow on to women’s working lives. Because they share a common retirement life, it is almost like a retrospective fallacy. It is presumed that they share a common financial situation in their working lives and that, therefore, the job of pension savings is for men and women alike, primarily to smooth the way from work to non-work worlds.

However, just because the experience in retirement may be broadly similar, that does not mean that there will be a similar experience in work patterns and that, therefore, income should be relocated from working life to pensions in the same way. It does not mean that it makes equally good sense for women as it usually does for men to smooth incomes from working life to non-working life. Whereas men probably will work throughout and build a pension throughout, women face much more of a rollercoaster of risk, to which men are never exposed, which will result in intermittent connection with the labour market.

We need to help women to smooth their incomes during their working lives—something that we do not normally need to do for men—just as we need to smooth for both genders their income from their working lives into retirement. More than most men, a woman will need a rainy-day savings account—£5,000, £10,000 or £15,000 probably—because of the risks that she will face, which will be higher than those of most men, and because, as a low earner, she is much less likely to have any protection against those risks. Her need for a rainy-day account is greater, but her likelihood of having one is less. You would expect her instead to save in a pensions account. I suggest that those poorer women simply cannot afford to have both a rainy-day account and a pension, even if they were minded to. Faced with an impossible choice, women may choose to do neither and will remain at the edge of financial risk.

How do we help such poorer women? We are very good at helping better-off men who need our help least. For example, the movement of ISAs to pensions is permitted, even if the man probably has both and can afford both. The woman needs the reverse—that is, pensions to ISAs. But ISAs alone will not do, as they do not have the tax attraction or the employer’s contribution. As far as I am aware, there is no one simple and affordable product on the market that allows women to combine short-term rainy-day savings and long-term pension savings. Would a LiSA do that?

The Tory proposals originally were probably fiscally too complex, because of the tax relief that comes into a pension pot, which would not normally be available for spending purposes, and because the American example—401(k)—was probably too loose. But we have a ready-made vehicle: the 25 per cent tax-free lump sum is available at the age of 50 now, rising to 55 in April 2010. It is often used to pay off the mortgage, the university costs of children or even to help children on the housing ladder. That lump sum can be drawn ahead of drawing one’s pension by 15 or even 25 years if one chooses to continue to work, provided that the money goes into an income drawdown fund. So you can draw your lump sum at the age of 50, although you may not need to draw your pension until you are 75.

I propose that, subject to a floor and ceiling, individuals—obviously this would be most helpful to women—could access that lump sum over their working life. The floor might be £20,000, so that there has to be something like 10 years of savings already in the pension pot. The ceiling might be £80,000 or £100,000, so that it is not distorted by clever accountants as a wheeze to pay school fees, for example. It would mean that the woman could access £5,000, £20,000 or £25,000 during her working life if she needed to, but it would have to be rebuilt before she could draw any more. For example, if she took £10,000 from a £40,000 pot, she would not be allowed any more until she had rebuilt beyond that £40,000 to, say, £60,000. She could then take 25 per cent of the difference between the £40,000 and £60,000—that is, a further £5,000.

No tax adjustments would be necessary because that sum comes tax free. It is simple. Obviously, depending on when it is drawn down, it would have investment return implications and would need to be tracked in order to consider whether, for example, there should be a limit on the number of times it could be accessed. I believe that such a proposition or something similar would, if the Government and the industry were so minded, overcome what to me is the deepest risk of mis-selling, which is not that you are not better off in retirement than if you had not saved, which is how it is usually presented, but that you are worse off in your working life because you have saved and you cannot rescind that decision or touch those savings when your need in your working life may, especially for some women, be more desperate.

We are hooked on the false assumption that you are always better off under the age of 65 and worse off over the age of 65. That is what pensions are all about. For some women that is simply not true. Yet that assumption is seldom questioned because we still think in gender terms. I certainly advise younger people with non-conventional careers or no employers’ contributions not to think of a pension but instead to go into an ISA. Poorer women do not have that luxury. However, with personal accounts and compulsory employer contributions, it is wise for a woman to go into a pension, but only if she has some rainy-day protection.

To summarise and to conclude, I cannot do, and I do not think that any of us can, the counter-factual as to how many women might save who otherwise would not or, equally important, how many—I feel that there will be a growing number—would continue saving who otherwise would be tempted to give up when it gets difficult. We know that half of all women give up when they have children. When the going gets tough, the women get out. I believe that some women face far harder financial pressure during their working lives than at retirement, but this is seldom mentioned because it is not true for the men and we still continue to model pensions on assumptions about men’s working lives.

I suggest to your Lordships that poorer women cannot afford both rainy-day savings and a pension. We may be giving them bad advice to go for a pension if through financial pressure they need access to that money earlier. That 25 per cent tax-free lump sum could allow us to bridge the risk that they face. As constructed, pensions are not an appropriate vehicle for some women. However, if there was support within government and the industry to provide a simple combined product—a LiSA—I think that that could be a win-win situation for us all. I beg to move.

I shall not detain the Committee for too long in lending my support to what is a probing amendment. As my noble friend was speaking, my mind went back some years to a time when people could draw the whole amount out of their pension funds and pay for it at the end of their lives. They could draw the whole amount out of the occupational funds. It was mainly women who did this simply because of crises during their lives—they drew it out for their children or for whatever purpose. If we want to have a saving culture that covers both men and women, this idea is certainly worth looking at. It is a probing amendment but it is something we need to pause and think about. It may or may not work but I certainly think it is worth examination. That is why I lend my support to the amendment.

I congratulate the noble Baroness, Lady Hollis. This is an interesting idea and potentially a rather valuable one. From memory, in the United States there was a similar scheme a few years back. It had both advantages and disadvantages. It illustrated the scope of what people might require and how they might be helped in this way.

It seems to me that it makes the whole concept more attractive. That is important because if we are going to have more people covered by pension saving we have to make it as obviously attractive as we can. It also means that the tax-free sum could help women in particular at particularly difficult and crucial times of their lives. The noble Baroness, Lady Hollis, said that this does not mean that your pension savings are simply locked away for life. That is a rather important point to hang on to. It recognises that many women are not able both to have a pension and to save in addition to that pension. That is the crucial point. I should have thought that anything that could be done to help in that regard should be done and is obviously of particular importance to women. This is an imaginative idea that deserves study and I hope that the Government will give an assurance that they will at least think about it and examine its potential.

I share the view of the noble Lord, Lord Fowler, that the concept is a good one. The analysis is understood and shared and the objectives are laudable and fine. This may sound like a bureaucratic point of view from the Opposition Benches, but anybody who has listened to Mr Tim Jones of the Personal Accounts Delivery Authority will know that he is absolutely fixed with the notion that this has to be a quintessentially simple scheme without any kind of embellishments—I do not mean that in a derogatory way as I think this is a fundamentally important idea.

The Personal Accounts Delivery Authority is trying to keep the administrative costs to a minimum—I understand that the tax regime would not be that different because the provision for the lump sum is already there—and I cannot help thinking that this idea would make personal accounts more expensive to deliver. If this provision were as seductive as the noble Baroness sets out, lots of people might take advantage of it. Notwithstanding that I agree with the concept, might we not find that it would be so seductive that a lot of people would go for this and we might end up with a level of expenditure and administration behind the personal accounts that would put the whole scheme in jeopardy?

I do not want to base my case on the notion that I am against this idea because I think it would cost too much but I certainly think that, if it is a probing amendment, we should be very careful in looking at the background to the costs if we pursue this idea, as I hope we will, in further proceedings on the Bill.

Having listened to the noble Baroness, I am very attracted by this concept. As a probing amendment, it has that flexibility, which anyhow is reflected throughout the Bill and, indeed, throughout the Turner report, that makes life so much easier, particularly for women, who have this rather different lifestyle. I hope that it will be looked at very sympathetically.

I have a query as to how often this could happen for one person because presumably it would be tax free. If you went out and, if you were lucky enough to be earning enough, came back into the scheme and opted out again for another crisis, how often would this be allowable? If those queries can be answered, and with the support one hopes it would get from industry and commerce, it would indeed be a very interesting concept to float and to try to get some answers for.

In welcoming the opportunity that this amendment has given for a wider ranging debate than just the element of PADA, I once again declare my interest as a partner in the national commercial law firm of Beachcroft. I also have the honour this year to be president of the Chartered Insurance Institute.

I congratulate the noble Baronesses, Lady Hollis of Heigham and Lady Dean of Thornton-le-Fylde, on giving us an opportunity to debate this issue. Pensions have always been a poor fit for the risk and realities that women face. I very much welcome their support for what was an initiative by David Willetts in launching four years ago a consultation on the paper Towards a Lifetime of Saving written by the Conservative Research and Development Policy Unit. LiSA—the lifetime savings and pension account—is a new approach which is extremely simple, clear and flexible and supports both life cycle and retirement saving. It is very much a wrapper not a product in itself and, after the consultation last August, John Redwood’s Economic Competitiveness Policy Group report endorsed the idea of a flexible lifetime savings account.

I agree with my noble friend Lord Fowler that this in an interesting and valuable notion. His reference and the reference by the noble Baroness to the Section 401 scheme in the United States gives us an example of how one can turn the cycle of what has now become a system in which it is very easy to borrow but very difficult to save. That is one of the problems the Government are now facing in bringing forward the Bill. I agree, however, with the noble Lord, Lord Kirkwood of Kirkhope, that although the concept is good, we are a little concerned that it might make the objective of PADA and Mr Tim Jones more complicated. Although it is a very good idea, attaching what one might describe as bells and whistles to the concept might make it a little more difficult to introduce and delay its implementation. However, it is important to know where the Government stand on the idea. There is no doubt that the noble Baroness is right—something needs to be done to meet the particular circumstances faced by women as well as a number of other groups in society. It is easy to regard investment in a home as the opportunity to build up resources for retirement. Indeed, we have seen a shift towards greater emphasis on property investment in the main home rather than in a more flexible savings account.

We shall be dealing with the right to access tax-free lump sums when we come to the amendments on annuities. I do not really want to go down that road although John Redwood said in his Economic Competitiveness Policy Group report that it was essential to abolish the age requirement of 75.

The noble Baroness has given us an excellent opportunity to reflect on how we can ensure that the particular circumstances of certain groups, especially women, are met much more adequately and positively by new concepts and by moving forward in a way that will positively encourage the sort of saving that we would all like to see. I hope that the Minister will come forward with some constructive proposals in response to this most interesting debate.

This has been an interesting debate; the noble Baroness has done us all a service by raising this issue. The more I listen, the more I think about it. When she introduced this probing amendment she, very fairly, asked where the Conservatives stood on this. They are not exactly progressing very fast. I remember the major initiative by David Willetts four years ago—that is quite a long consultation. I was not quite sure, listening to the noble Lord, Lord Hunt, where the Conservatives stand, even though they are keen to hear where the Government stand.

I am a bit sceptical, to be honest. The noble Baroness has rightly highlighted the problem of poorer women in particular, but whether this is the right way to solve it I do not know. It raises the question of whether a revolving pension pot, which is what she is talking about, should enjoy tax relief. In principle, it also raises the question of whether the tax-free lump sum is ultimately defensible and is the best way of dealing with pensioner poverty. It is very interesting that this debate has highlighted that possibility; the noble Baroness might say that as long as you have the tax-free lump sum, you should be able to withdraw it.

The point made by the noble Baroness, Lady Howe, about amounts going in and out and complications arising is important. I agree with my noble friend Lord Kirkwood that anything that would complicate personal accounts or make them more difficult or costly to administer at this stage is not the right way to go. I am sorry to sound a bit ministerial, but I look forward to hearing whether the Minister will be more ministerial than me.

I congratulate the noble Baroness on raising this issue. There is a government interest in this in that the more they can extend the will to save and to provide for the future more widely than at present, the less in the long term will be the cost of supporting people later on.

I am all in favour of this savings initiative that will spread the breadth and practice of saving. The Minister should not be shy about the Government encouraging such things. Long ago, when the poor did not save, a government department, called the Post Office, introduced insurance for the poor and the Post Office Savings Bank. It had a good run and provided a useful service. Regrettably, on insurance, when the private sector showed far more enterprise than the Post Office, and did good work for the poor thereby, the secretary to the Post Office, when encouraged by colleagues to employ salesmen to promote his product, wrote:

“To recruit an army of ingratiating salesmen would not be compatible with the traditions and dignity of the Post Office”.

I say to the Minister, don’t have dignity—do the business.

I thank my noble friend for a typically thought-provoking contribution; I also thank all other noble Lords who have spoken in this short debate. I understand the basis on which the amendment has been moved; it is a probing amendment to get reaction to the concept, and I will seek to set out as clearly as I can the Government’s position.

As my noble friend explained, the amendment proposes to allow individuals to access their pension savings, as a tax-free lump sum, at any point before they retire in order to encourage more individuals to participate in pension saving. I am sympathetic to my noble friend’s concern that some individuals, particularly the low paid and women, may be reluctant to commit to saving in a pension because their money would be “locked away” until their retirement. I was interested in what my noble friend said about less emphasis on smoothing income from women who are in work to retirement, and should like to reflect further on that component of her contribution. However, from a policy perspective and an operational viewpoint, this proposal goes against the underlying principles of reform at a time when it is paramount that we make pensions simpler and clearer.

Pension saving in the UK is privileged through the tax system. Tax relief is worth up to £17.5 billion per annum. The Government provide generous tax relief to support pension saving and are able to do so because pensions are less flexible than other saving products. Tax relief in pension saving is not provided to support pre-retirement income, asset accumulation or inheritance. The trade-off for individuals making pension contributions is that from the age of 50—or 55 from 2010—they can get a tax-free cash lump sum of 25 per cent of their pension fund as well as an income in retirement. That is the deal—saving for retirement is a long-term investment. I acknowledge my noble friend’s point that access to the tax-free lump sum does not have to be accompanied by retirement or indeed by a pension at that time, but I suggest that it is the start of the decumulation process. The age has been changed from 50 to 55 because at age 55 it was increasingly difficult, given longevity, to sustain pensions. Given the demographic pressures facing the UK and a tendency by individuals to underestimate their longevity, increasing retirement incomes is very important. It is the central objective of all our reforms.

Allowing individuals to withdraw some of their funds prematurely could not only undermine the purpose of providing tax relief for pension saving but reduce individuals’ income in retirement. It may also increase the risk of reliance on means-tested benefits in retirement.

In addition to this fundamental objection to the proposal, I am concerned about the practical implications and repeat what others have said. Any pension schemes used under the employer duty would have to absorb the costs of this extra functionality, particularly if access were to be restricted to prescribed circumstances. That might involve costly changes to scheme rules and there would be additional processes around transactions, payback periods, deciding on the reasons for access, verifying those reasons for access, pursuing outstanding funds, and so on. This would lead to greater costs for employers or scheme members depending on how the scheme administration was paid for. This is not just an issue for personal accounts. If you had this facility, you could not just focus it on personal accounts, and how it would work for a defined benefit scheme would be a particular challenge.

Of course we recognise that there are times when people need to access funds for emergencies, but to cope with the complexities of life, individuals have the option of saving for the long term in a pension and of putting something away in a shorter-term tax-free savings product, such as an ISA, for rainy days. I accept the comment that it might be a struggle for everyone to save in two different pots, but from 2010 the savings gateway will provide stronger savings incentives. Through a matched contribution the scheme aims to kick-start a saving habit among people on lower incomes, enabling them to plan for the future and cope with financial pressures. The savings gateway will provide a better way to target those who want to access liquid saving, rather than allowing everyone to have early access to their pensions.

I remind noble Lords of the changes that have been made to help women in particular achieve a decent income in retirement. There have been transformational changes to the basic state pension, which we passed last year. There have been changes to S2P, and there is the whole concept of auto-enrolment and the scheme that we are discussing in this Bill, focused on people with low to medium earnings—the group, regrettably, within which women are overrepresented—to help them into saving.

My noble friend referred to research. We believe that there is little evidence to support the assertion that low-paid individuals are unlikely to commit to pension saving because their money is locked in until retirement. Several sources, including DWP and international evidence, suggest that there is little demand for a facility that allows individuals to access their pension savings before retirement. DWP qualitative research in 2006 found that individuals felt strongly negative about the option of allowing people to access their pension funds for reasons other than their retirement. They felt that it was incongruous with the scheme’s aim of encouraging people to save. I believe that the US experience in the 401(k) accounts is that there was only 18 per cent take-up of the drawback facilities and no strong evidence to suggest an attraction to increased saving through that facility.

Finally, we should not forget that from 2012 all individuals will retain the choice as to whether to save in a qualifying scheme or whether a more liquid product might better suit their needs. There is a range of pension and tax-efficient savings products to suit individuals in all circumstances. Trying to address all of life's potential future complexities in one financial product would make schemes administratively burdensome and costly. There are substantial downsides as well. People who get into financial difficulties and have the facility to access scheme funds earlier could put those funds in the hands of creditors whereas they would otherwise be protected through the pension scheme.

It is paramount that our pension reforms focus on the key goal of increasing pension savings by providing simple and appropriate products. The amendment would undermine that. As I am sure my noble friend is well aware, it would be impossible to have a qualifying scheme if we adopted this proposal as it stands because you could not have a scheme that was registered under the Finance Act 2004 and that had these provisions. I know that she is aware of that. If we were ever to go down this route, the other place would have to change the tax rules to enable lump sums to be withdrawn from a pension scheme earlier. I am sure that she is aware that there is no great appetite for that.

I know that my noble friend will withdraw her amendment, because it is a probing amendment. I have no doubt that she will not see this as the end of the debate and that she will continue to develop and articulate this issue. However, I earnestly say to her that wherever that debate leads, there is no great appetite for this within the industry that we can discern. I have raised it anecdotally with a few people, though other people's experience may be different. But whatever the appetite, I do not believe that this is a matter for this legislation. I do not doubt that my noble friend will continue to develop and campaign around the concept. Nevertheless, I would ask her to withdraw the amendment in the interim.

“Campaign” may be putting things too strongly. First, I thank noble Lords. I am grateful for the range of contributions; they were thoughtful and helpful. Perhaps I may comment on the concerns that people raised over and beyond the support from the noble Lord, Lord Fowler, and my noble friend Lady Dean. The noble Lord, Lord Kirkwood, said that PADA offered essentially a simple product, a point reinforced by my noble friend the Minister, and that this amendment might add bells and whistles that would make it more expensive to deliver. I accept that it would make what is currently a simple product more complicated. My argument is that it would make it more attractive and would produce greater staying power and robustness in the longer term as a result.

Much of my noble friend’s speech seemed to miss the point: “Pensions are for retirement; therefore retirement savings are for retirement”. Yes, we know that. The problem arises when people feel that they cannot afford retirement savings because they may face a higher risk in their pre-retirement age. How do you manage to persuade them not only to auto-enrol, which I think they will do, but to continue to save at points of crisis? The alternative may be to go for high rates of debt, rates of 15 per cent or 20 per cent, when the CAB will say, “Stop making your pension contribution”. My noble friend has not begun to think about how we keep women in auto-enrolled schemes when the first financial crisis begins to hit. They will auto-enrol—inertia will see to that—but they will not necessarily stay in. Currently, half of all women drop out of a pension scheme on the birth of their first child. It will be even higher with auto-enrolment because they did not make a conscious choice to join in the first place, unlike today's schemes.

I heard what the noble Lord, Lord Hunt, said, and I thought that his words were very elegantly phrased. He said that pensions were “a poor fit for the risks and realities that women face”. One of those risks and realities is the rollercoaster of risk through lone parenthood and financial problems. A product such as this would simply add a top slice of liquidity to a pension pot. That is all that it is doing. We have that top slice of liquidity now and it is called the tax-free lump sum. It is already divorced from pensions and payment. You can take it at 50 though you may not take your pension until you are 75. All I am trying to do is to remove the age bar.

I accept that that complicates the product and that PADA would therefore not want it now. I accept that without industry support it will not go anywhere, and I accept this may be an appropriate subject to return to in the 2017 review if, as I hope, industry and Governments of any and all persuasions follow this through. But I think that we will have a problem of staying power with auto-enrolment when women hit their first financial crisis and cannot access their savings. This product might help to keep them in when otherwise they would opt out. As for how often, I would not put a limit on the circumstances in which you could access the funds. That would be unnecessarily intrusive, as my noble friend suggested. You might wish to limit the number of times you could access them in order to keep the tracking mechanism simple, but I would not want to prescribe the circumstances.

As I say, I think that my noble friend missed the point. He talked about how much we have done for women’s income in terms of the changes in pensions in retirement. That is precisely my point. Women will do relatively much better in retirement as a result of all the changes that the Government have made. But we have not helped them fully to address the risks pre-retirement. If we do not, that may damage the very agenda that my noble friend has for post-retirement issues. There is still a failure of mindset to engage in the risks and realities for women which the noble Lord, Lord Hunt, described.

This may not be the right solution and I do not expect industry to be enthusiastic. Why would it be? This would be a product sold to very poor women, with poor returns. The Government should realise that, if women have to choose between current rainy-day savings or money in an emergency and longer-term pensions, most women—and there is plenty of DWP research to support this hypothesis—will cut back on pension saving. They, and we, will be the poorer as a result.

I have said enough. I am grateful for noble Lords’ contributions to this short debate. I hope that my noble friend will take this away. I would like to see the department beginning to carry out some research on this, possibly on an all-party basis, to see whether there is a market and a need and whether it is structurally viable. Some time down the road—and I take the point about DC schemes, DB schemes and all the rest, so it is a longer-term haul—if the Government are so minded, when we come to the review in 2017, perhaps such a project could be added to the Bill that will be winding its way through your Lordships’ House. Under those circumstances, and again with gratitude for the contributions, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 16 [Automatic enrolment schemes]:

54: Clause 16, page 8, line 9, leave out “the scheme is an occupational pension scheme which” and insert “it”

55: Clause 16, page 8, line 11, leave out “the scheme” and insert “it”

On Question, amendments agreed to.

56: Clause 16, page 8, line 11, at end insert “, and

(c) it satisfies any further conditions prescribed.”

The noble Lord said: I shall speak also to the amendments grouped with Amendment No. 56. Qualifying schemes used for automatic enrolment will need to meet minimum standards beyond those set by the existing regulatory framework. This is the case for both workplace personal schemes and occupational schemes. The Bill already provides for certain minimum standards for schemes used under the employer duty; for example, the minimum contributions required for money purchase schemes at Clauses 19 and 25. It also contains powers in Clause 15 to prevent qualifying schemes requiring excessive charges or contributions from active members.

We recognise, however, that it may be appropriate to introduce further safeguards specifically for automatically enrolled members. The market will undoubtedly develop up to 2012 and beyond. We therefore need to future-proof our policy, and may need to introduce additional qualifying criteria for schemes used for automatic enrolment. Amendment No. 56 will give the Secretary of State the flexibility to allow additional qualifying criteria for schemes used for automatic enrolment to be specified in secondary legislation if necessary. This power will be subject to the affirmative procedure to allow both Houses an opportunity to scrutinise any such requirements. Amendment No. 57 is a technical amendment to clarify the language in Clause 16 following Amendment No. 56.

The noble Lord, Lord Oakeshott, and the noble Baronesses, Lady Thomas and Lady Greengross, are concerned about the level of charges in qualifying schemes. Our current evidence suggests that most occupational schemes have charges that enable individuals to accrue meaningful savings. The Pensions Commission found that charges in DC occupational schemes tend to be under 0.6 per cent, depending on the size of the employer. Similarly, we do not presently have reason to believe that charges to active members in workplace personal pensions are currently excessive. Although there are no comprehensive data, our understanding is that most large WPPs have charges of around 0.4 to 0.8 per cent annual management charge. Charges in group stakeholder pensions are capped at 1.5 per cent annual management charge for the first 10 years, and 1 per cent thereafter.

We are commissioning research to help us understand more fully some aspects of the overall pensions market, the products within it and practices. As part of this we are exploring current practices in the WPP market, such as charging and the investment options provided. This research will inform our considerations on the need for additional qualifying criteria and our planned consultation with stakeholders. We will, of course, be seeking both the views of the industry around best practice in areas such as charging and approaches to default investments, and those of consumer representatives about what further safeguards, if any, are needed to ensure that individuals have the right level of protection in these schemes. Given these assurances I ask the noble Lord and the noble Baronesses not to press their amendments. I beg to move.

Notwithstanding what the Minister said I should like to speak briefly to Amendment No. 60 in this group in the name of my noble friend Lord Oakeshott and myself and Amendment No. 78 in the name of the noble Baroness, Lady Greengross. As the Minister said, the amendment continues the debate about the quality criteria for workplace pension schemes, both money purchase schemes and personal pension schemes. In particular, it is important that workplace pension schemes should be low-cost, have no transfer penalties and have an appropriate choice of funds, including a good default option. The amendment would ensure that total employee and employer contributions in workplace pension schemes, net of all costs and fees, will be at least equal to the level of default contributions in personal accounts. It is worth noting that the Pensions Commission’s second report recommended that auto-enrolment into an employer DC scheme—I think that the Minister alluded to this—should be permitted if,

“the employer's contribution is at least the same level or greater than the minimum compulsory match in ... Personal Accounts, or if the combined employer and employee contribution exceeds the combined level in the scheme, taking into account the level of charges”.

This amendment is supported by, among other groups, Which? and the Equality and Human Rights Commission. I look forward to further comments from the Minister.

I support this amendment, to which my name is added, and would also like to speak briefly to Amendment No. 78. As we know, the amendments seek to ensure that auto-enrolled pension schemes meet additional quality criteria beyond the 3 per cent. I am pleased that the Minister has brought forward his own amendments on this important issue. Much of what I want to say has been covered in the debate, so I welcome the Government’s recognition that they must take account of the quality of workplace pension schemes if workers are auto-enrolled into them. Now that the European Commission has provided reassurance that auto-enrolment does not break the distance marketing and unfair commercial practices directives, the Bill has already been amended to enable this to happen.

Before I turn to the other amendment, perhaps I may briefly say something about levelling down. We have read quite a lot in the media over the past few days that personal accounts could represent a threat to existing pension provision. I do not think that that will be the case. It would be very serious if it were the case. It is certainly an unfortunate and bad message to be promoted. It could mean that employees—the very people we are trying to help to improve their pension provision—lose confidence in personal accounts before they have begun because of negative media coverage.

It is suggested that employers will level down their contributions to 3 per cent, the minimum required by personal accounts, or, even worse, stop providing pensions for their employees altogether. I am not sure why they would do that as a result of this Bill. I cannot understand that. My view is that the threat of levelling down could be one that we have to face in any event. But the threat is not created by this Bill or personal accounts, because employers can reduce pension benefits. As we know, regrettably, some have done so. It is one of the reasons why my noble friend Lord Turner was asked to chair his review and why he recommended what have become personal accounts. It would be a strange unintended consequence if the very thing that the commission recommended was the cause of declining pension provision. I very much hope that rather than levelling down, employers will increase pension benefits for all the reasons that we are debating the Bill, such as taking into account rising longevity.

Just prior to Second Reading I hosted a briefing session on the Bill on behalf of the People’s Pension Coalition which was attended by all the major stakeholders and many noble Lords, including the Minister. I recall that my noble friend Lord Turner—I send him my congratulations on his new role—argued that personal accounts were carefully targeted at those who make little or no pension saving or have no access to a good employer scheme. We know that this is the group that is currently not well served by the pensions industry. I therefore see personal accounts as an add-on to existing provision, not a threat.

That is relevant to my other amendment because the threat, if any exists at all, may turn out to be to personal accounts rather than to existing schemes. I assume that auto-enrolment into workplace pension schemes will reduce the number of people who would otherwise have become members of personal accounts. That is a debate for another time, but can the Minister tell me what impact it may have on PADA’s planning assumptions? This matters because auto-enrolment into workplace pensions means that the existing non-occupational contract-based providers are likely to get many new members without much, if any, effort at all—probably at zero marketing cost. I support that, as have all the main stakeholders; they all recognise that this should increase pensions saving.

As Members of the Committee will know, the stakeholders wrote to the European Commission to support auto-enrolment and the broad thrust of the Government’s pension settlement following the Turner commission. I have seen a copy of that letter, which said:

“It is important to ensure savers get a fair deal. The legislation currently being discussed by the UK Parliament (the Pensions Bill) gives the UK Government wide powers to establish a quality threshold that can effectively protect consumers. The Government has committed to consult and seek consensus from all the stakeholders, including the Financial Services Authority, about this”.

The amendments with my name to them were tabled to ensure that this happens and that the other schemes into which consumers may be auto-enrolled are at least as good as personal accounts. We do not want employees enrolled into high-charging schemes with poor investment choice and unfair transfer penalties.

The wording of my Amendment No. 80 is carefully chosen. The words are used by the Pensions Commission itself. On page 306 of its second report, it recommended that auto-enrolment into an employer DC scheme should be permitted if,

“the combined employer and employee contribution exceeds the combined level in the scheme, taking into account the level of charges”.

The “scheme” now means “personal accounts”. This was an implicit acknowledgment of the negative impact of charges. Yet the Bill is silent on what additional quality criteria there should be, although I know that the Minister has spoken on that. We do not want to go back to the bad old days of high-charging, poorly performing and ineffectively governed private pensions, especially if workers have not really chosen to join them but have been auto-enrolled.

I know that the Minister will be unable to accept the amendment, but I hope that he will accept the principle. The reassurance that we sought was that a comprehensive survey of existing workplace personal pensions will take place—the Minister has said that there is one—and that they will be monitored by the Government in the run-up to 2012, with the involvement of the FSA and the Pensions Regulator. The Minister has indicated that the Bill will allow the Government to make regulations to set additional quality criteria if that is necessary, as I think it may well be.

I support both Amendments Nos. 60 and 78 and the arguments put forward by my noble friend Lady Thomas and the noble Baroness, Lady Greengross. In confirming the noble Baroness’s fears over some of the levelling down, the important PricewaterhouseCoopers report, reported in the financial pages of today’s Guardian, is significantly worrying to me. Although colleagues across the Committee are accustomed to the trend of closing defined benefit schemes to new employees, the report clearly demonstrates that 16 per cent of participants have closed their DB schemes to future accrual by existing members and that another 11 per cent expect to do so. That is a worrying degree of change in a short time and I hope that the Government are actively considering it. It supports the argument and adds detail to the important points made by the noble Baroness. I hope that the Government have something to say on that trend, which, if sustained, will be extremely worrying.

However, having listened to what the Minister said, I am particularly concerned about the impact of Amendments Nos. 60 and 78 on small—I mean small—enterprises: the kind of businesses that are the mainstay of the economy of my home region of south-east Scotland, in the Borders. If the Government are doing this work—I am glad that they are—can we have some assurance that specific parts of it will address micro-businesses and not just small enterprises in the normal sense of the phrase? The Minister was reassuring in that he said that this work is being done. My worry is that most of his approach addressed much bigger enterprises and companies of a scale that are more realistically able to limit administration costs. I am thinking of family businesses with five or six employees, maybe 12 at most. I hope that, in any work that the department does in investigating these important matters, it has a special section that satisfies itself that the condition applying in those circumstances will be adequately addressed, as well as the conditions for the bigger, more professional schemes with teams of accountants who can more easily deal with these things administratively.

I shall make a brief response. The noble Baroness, Lady Greengross, hopes that levelling down will not occur. We will return to that as we go through our Committee stage. Certainly, some of the evidence that is starting to come from organisations such as the ABI shows that employers are increasingly concerned about how compliance with the personal accounts scheme—we will come to this again, probably later this evening—and how definitions work in the current scheme are pushing them towards levelling down, because it is too much like hard work to comply. We will return to that theme. We cannot regard it as an idle threat. It is a real problem, which we must bear in mind.

The Minister prayed in aid his friend flexibility when he introduced his amendments. I hope that flexibility will not accompany him to the Dispatch Box for every amendment that he moves today, but we shall see.

I have one comment on the amendments on charges that the Liberal Democrat Benches and the noble Baroness, Lady Greengross, have spoken to. When the Pensions Commission report came out, there was a great focus on charges. A criticism of the report was that charges are just one side of the equation and that the report did not look at returns. If we simply concentrate on whether charges are higher or lower than the eventual level in the personal accounts scheme—we do not know what that is, or whether we will achieve the aspiration of 0.3 per cent—and do not look at returns, we will mislead ourselves. Looking only at the charging levels is a narrow approach to comparability. I accept that charging can have a big impact on net returns if gross returns are equal between investment opportunities, but they are not. I therefore hope that that will be taken into account when those who have tabled these amendments consider what to do with them.

The noble Baroness, Lady Noakes, should accept that charges are exceptionally important in the case of personal accounts. Almost by definition, personal accounts will be a simple—I expect an index-tracker—type of product. Uniquely—this applies more for personal accounts than for any other form of investment medium—charges are critical. Returns obviously matter, but charges are particularly important for personal accounts.

I thank all noble Lords who have contributed to the discussion around the amendments. I think that we agree that the level of charges is an important component in making sure that auto-enrolment and personal accounts work. I confirm to the noble Baroness, Lady Greengross, that the power that we are taking in our amendment will provide the flexibility to address that issue if our research shows something untoward or difficult in how charging is undertaken in workplace personal pensions. The issue has not reared its head as a problem thus far, but we need to do the research in relation not only to that but also to how default investments work. We need to address that, which is the purpose of the government amendment.

The noble Lord, Lord Kirkwood, said that he hoped that we would focus particularly on micro-businesses. The research is focused on industry practice around these products and opportunities, although I take the point that the issue of how industry practice relates to different sizes of business should be covered.

The noble Baronesses, Lady Greengross and Lady Noakes, and the noble Lord, Lord Kirkwood, referred to levelling down. That is an important issue. Our reforms are designed to complement and not to replace existing employer provision. A number of key measures will help to focus the personal accounts scheme on those without access to existing pension provision and to discourage levelling down. These will include a ban on transfers between existing pension schemes and personal accounts, as well as an annual contribution limit for the personal accounts scheme, which was set at £3,600 in 2005 earnings terms. Employers with existing good schemes will be encouraged to continue offering them via a straightforward qualification test, which we will discuss shortly. New minimum contribution requirements will be phased in over three years. PADA must have regard to the impact on existing qualifying provision.

Our research shows that most employers with good schemes support our reforms and that the majority, particularly the larger employers, plan to maintain their schemes at current levels. However, we are not complacent and we need to continue to track employer attitudes and likely reactions to the reforms as we move towards 2012. There is a worldwide decline of DB schemes for reasons that we have discussed on a number of occasions. We have taken care to ensure that qualifying tests for DB schemes are workable. We have also put in place phase-in arrangements.

It is too early to say precisely what the charging structure will be for personal accounts and what levels can be achieved. PADA does not yet have the full authority—I hope that it will do as a result of the Bill—to complete its work in designing the scheme to engage with providers of various services. It has launched consultation on how charging might take place, so that is very much work in progress. Personal accounts were predicated on low charges, because over the lifetime of a pension scheme they can make a significant contribution to the end result, as can investment policy. I hope that noble Lords will feel reassured and not press their amendments, because we are taking a power to deal with the issues on which we have focused.

On Question, amendment agreed to.

57: Clause 16, page 8, line 12, after “conditions” insert “mentioned in subsection (1)(b)”

On Question, amendment agreed to.

Clause 16, as amended, agreed to.

Clause 17 agreed to.

Clause 18 [Personal pension schemes]:

58: Clause 18, page 8, line 33, leave out from “scheme” to end of line 35

On Question, amendment agreed to.

Clause 18, as amended, agreed to.

Clause 19 [Quality requirement: UK money purchase schemes]:

59: Clause 19, page 8, line 38, leave out from “scheme” to “satisfies” in line 39

The noble Lord said: We have been told several times that, in order to be deemed a qualifying scheme, a United Kingdom occupational money purchase scheme must have rules that assure an employer contribution of at least 3 per cent of qualifying earnings and total contributions paid by the employer and jobholder of at least 8 per cent, including tax relief. In other words, it must be as good as or better than a personal account.

However, I am confused, because the Pensions Act 2007 legislates for the repeal of contracting-out arrangements for money purchase schemes currently provided for under the Pension Schemes Act 1993. The Explanatory Notes state:

“However, in the event that this has not occurred when the employer duties commence, subsection (2) enables regulations to be made to modify the contributions required for money purchase schemes that are contracted out … It will not be possible to increase the minimum contributions required for money purchase schemes, including the scheme established at Clause 58, without amending these sections”.

Why can this not be done under the procedures in the 2007 Act? There is plenty of time before 2012, when the Government are adamant that personal accounts will roll out.

As I understand it from government amendments, a hybrid scheme, no matter where it is owned, can be a qualifying scheme as long as it is managed in the United Kingdom, but if it is both owned and managed overseas, it cannot qualify except in certain circumstances. Government Amendments Nos. 76, 77, 79 and 80 to Clause 25—I except Amendment No. 78 in the name of the noble Baroness, Lady Greengross—make provision for non-UK-based schemes potentially to qualify if they are properly regulated. My noble friend Lady Noakes will speak about them. What does that mean for schemes that have their being in the European Union or the EEA? I should know the answer to this, but could schemes operating in and under the regulating powers of, for example, France or Germany still qualify? It seems from Clause 17 that they could. However, just because it is an occupational retirement provision within the meaning of the IORP directive does not help me very much. The definition of the IORP directive in Clause 86, while technically correct, is not exactly clear. IORP should be set out in full—“institutions for occupational retirement provision”—and not as an abbreviation, especially as I am told that is so called by practitioners. I hope that these schemes are to be regulated to the standards that we have in the United Kingdom. What, therefore, are the differences, if any, between the IORP regulations and our own Pensions Regulator?

Although I have not put down a specific amendment to this effect, I would also like to probe paragraph (c) of Clause 17, which allows the Secretary of State to prescribe a pension scheme that has its main administration in jurisdictions that are not in an EEA state. Will the Minister give me an undertaking that such schemes will not be prescribed unless their regulation is at least as stringent as ours? After all, by definition, they are not covered by the IORP directive. I beg to move.

Clauses 19 and 20 set out the quality requirements for UK-administered money purchase and defined benefits schemes acting as qualifying and auto-enrolment provision under the employer duty.

Amendments Nos. 59 and 66, spoken to by the noble Lord, Lord Skelmersdale, would extend the scheme quality provisions to include qualifying money purchase and contracted-out defined benefit pension schemes administered anywhere in the world. It is very much our intention to enable employers who wish to use occupational schemes based outside the UK to do so under the duty, provided they meet the necessary regulatory and quality standards.

However, while we are confident that all UK schemes fall within the categories of defined contribution, defined benefit or hybrid schemes, we cannot make the same assumption about schemes based elsewhere. It is possible that overseas schemes will have different benefit structures that will not be assessable against the quality requirements we have put in the Bill. Given the potential diversity of occupational pensions arrangements around the world, it is not possible to set out global standards in the Bill. That is why we have taken regulation-making powers, at Clauses 16 and 24, to set out additional regulatory and quality requirements for overseas schemes and to respond should new types of scheme emerge in the future.

The noble Lord asked about contracting out. The commitment to abolish contracting out is to be introduced by the end of the next Parliament. In the event this did not happen before the duties came into effect, we need to ensure that contributions in contracted-out money schemes are appropriate. However, there is no intention to change contributions through primary legislation. I may need to come back to that point after reading the record. As regards the point the noble Lord raised on Clause 17 and occupational pension schemes, he is right that an occupational pension scheme is defined under paragraphs (a), (b) and (c) of that clause. Paragraphs (b) and (c) concern those administered elsewhere than in the EEA and those that come within the IORP directive. Incidentally, as regards the point about drafting and the terminology, we shall wish to consider whether this is appropriately described.

I direct the noble Lord to Clause 24, which states:

“The Secretary of State may by regulations make provision as to the quality requirement to be satisfied in the case of an occupational pension scheme within section 17(b) or (c)”.

Therefore, we are dealing with occupational schemes here, not personal pensions. Clause 24 picks up the point about schemes that fall within Clause 17(b) and (c).

I should like to reflect on the issue that was raised about contracting out and what that means in terms of contributions and write to the noble Lord as I am not sure that my explanation was particularly coherent. I hope that that enables the noble Lord to withdraw the amendment at this juncture, but if he is not satisfied he can return to it at a later stage.

I am very grateful to the Minister. He will be relieved to hear that this is one occasion when I approve of flexibility. Therefore, I do not intend to seek the Committee’s opinion on the various matters that I set out.

The Minister said that he would write to me. I am very willing to accept a letter, which may result in a little chat with some of his advisers. I have no doubt that as we go through the Bill other matters will arise on which a little chat will be desirable and save a lot of time. He said that the commitment given during the passage of the 2007 Bill, now the Pensions Act 2007, concerned the alterations to be made to contracting out by the end of this Parliament. This Parliament probably has another two years to run. As the Government are determined to do this, I can see no good reason why they should not do it in that time, but perhaps the Minister’s letter will answer that point. I rather hope that it will.

The other matter concerns the regulatory requirements for those schemes registered in jurisdictions that are not in an EEA state. I hope that the Minister’s letter will also respond to that point. I cannot take this matter any further tonight and the Minister is devoid of ideas in that regard. Therefore, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 60 not moved.]

60A: Clause 19, page 9, line 2, leave out “jobholder’s qualifying earnings” and insert “aggregate qualifying earnings of all jobholders in the scheme”

The noble Baroness said: I shall move Amendment No. 60A and speak also to the other eight amendments in this group.

These are, for today's debate, probing amendments, dealing with the difference between qualifying earnings as proposed in the Bill and earnings definitions widely used in existing pensions provision. We had a first canter round the course on this at the very end of our first Committee day when my noble friend Lord Skelmersdale moved Amendment No. 42. The Minister said that this was work-in-progress, but he gave no hint of what the finished product might look like and so I shall use this group of amendments to test him a little further.

I apologise in advance for the length of my remarks but this is an important topic. It raises complex issues for which the solutions that my amendments explore are, in turn, not easy. I have tabled these amendments to the quality requirements for money purchase schemes in Clause 19, but the issues apply equally to personal pension schemes in Clause 25. When we return to these issues on Report—I think it is fairly certain that we shall—our amendments will cover Clause 25 as well.

There is also the issue of whether the definition of qualifying earnings in Clause 12, which is the definition which drives both Clauses 19 and 25, ought also to be amended because of its impact on defined benefit schemes, and I shall be asking the Minister about that as well.

There is a basic question behind these amendments: how much disruption to existing pensions provision are the Government seeking to make and, linked to that, how much levelling down are they prepared to risk? The Committee will be aware that the approach to contributions in this Bill is not in line with pension practice at present. The use of an upper and lower limit, while understandable in the context of the default personal accounts scheme, is not used in private sector money purchase schemes. Typically, they have no such limits or bands. However, the most significant difference is the definition of earnings. The Bill uses a definition which includes commission, bonuses and overtime. Definitions vary in private sector schemes, but the practice now is overwhelmingly to focus on a definition of basic earnings. Sometimes some elements of variable pay are included, but these are increasingly rare.

So the problem is that the way private pensions work at present does not fit easily into the Bill's view of qualifying earnings. Because the private sector schemes do not have lower or upper thresholds, contributions will generally be calculated on a higher amount than the Bill requires, but there will be exceptions, particularly among lower paid employees with a large element of variable pay such as commission.

The problem is exacerbated by the pay reference period which we expect the Government to set in line with the payroll periods used by employers; that is, weekly or monthly. Where an individual has a variable element of pay in one or two pay reference periods, the calculations under the Bill may well produce a spike in required contributions which, in that pay period, and that pay period alone, are higher than the amounts that the employer calculates under his existing pension scheme. Taken over a whole year, the employer's scheme may produce a higher amount of contributions, but it would fail the test set out in Clause 19 because of its focus on the pay reference period.

I am sure that noble Lords will have seen the rather complicated calculations that produced that result, and a number of submissions from outside organisations have exemplified the problem. I hope that the Committee will not ask me to make mathematical proof of the issue. There is a consensus among both employer groups and those associated with pension provision that there is a real problem here. My amendments in this group set out a number of ways of tackling the problem, and I shall spend a few minutes of the Committee’s time explaining the amendments and the solutions that they offer.

Amendments Nos. 61, 62 and 63 are the ideal solution from the employers’ perspective. They allow the quality requirements to be met by reference to the definition of “earnings” as used in the employer’s own scheme. I expect that the Minister’s answer will be along the lines of, “We must not let employers manipulate the definition of earnings in order to evade the obligations that the Bill sets out”. Of course, the vast majority of employers would not even think about doing that. In any event, the compliance regime in Chapter 2 could easily be expanded to cover the case of deliberate manipulation of earnings components to avoid the basic intent of the Bill, if that were the only objection to using the employer’s definitions of earnings.

My other definitions are less than ideal but try to preserve the employer’s ability to operate schemes with different definitions on a modified basis. Amendments Nos. 60A, 61A, 61B and 62A propose that an aggregate test be adopted, so that if the employer could satisfy the tests over the whole of its workforce, the quality requirement would be met. In effect, swings and roundabouts between employees would be tolerated. That might well mean that some employees ended up getting less than others in terms of individual contributions allocated to them, but the employer would at least be meeting the overall 3 per cent limit.

The Minister cannot accuse employers of cheating with this group of amendments, but he may respond to them, as well as to those for basic earnings, that a definition that resulted in less saving for some jobholders would be unacceptable, and that the implementation of the Bill in terms of producing replacement income in retirement must be tested at the most granular level of each employee. It has been put to me that the Government’s approach is nothing like the usual 80-20, where you try to get 80 per cent of the benefit for 20 per cent of the effort or the cost. It is not even based on getting 99 per cent of the benefit, but it seems to be based on an absolute need to avoid disbenefit to some infinitesimally small fraction of employees overall; at least that is what we understand the Government’s position at the moment to be. I warned on Second Reading about the best being the enemy of the good, and I hope that the Minister is mindful of that when he responds.

Amendments Nos. 64 and 65 attempt other ways of solving the problem. Amendment No. 64 says that the Secretary of State could fix the pay reference period for the purposes of the quality requirement in Clause 19 as a different period, so that the quality requirement for the employer schemes could be tested, say, annually, instead of by reference to the individual pay reference period linked to payroll. That is not the same as the aggregate test, as it would still require the test to be met at the level of the individual employee, but it would be established over a longer period, which would allow employers to get the benefit of not having their schemes ruled out because of the spike effect of particular variable pay in certain pay reference periods. Amendment No. 65 is a last-ditch attempt to preserve existing schemes and says that if, when calculated over a longer period, there is still a shortfall in contributions, the employer can make up the difference within three months.

It is far from clear that employer-based schemes will be preserved if we cannot use employer-specific definitions. The NAPF has pointed out that there are big legal and actuarial costs involved in changing scheme rules to meet the Bill’s definitions and that the monthly calculations will add administrative costs. If employers adopt the Bill’s definitions to replace their own, the DWP will have forced employers onto a path that leads inexorably to levelling down. It will not be surprising if employers decide that if they have to change the definition of earnings, they might just as well change the bands as well and, if they go that far, why not just use the minimum percentages or the personal accounts scheme? Levelling down is a big danger and, whatever the DWP’s surveys from last year show, now that employers are confronting the detail, the NAPF and the ABI are reporting that levelling down is now the most likely path. Currently, employers pay an average of 6 per cent into DC schemes, which is double what the Bill requires; that is what is at stake.

The issue is not just one of the complexity and cost of handling pension contributions on a different basis than current practice, though that is certainly important. We also have to add the cost and complexity that will be caused for the compliance regime, especially for small and medium-sized employers. Employers are concerned that the Government have not appreciated the real burdens that build up under the Bill.

I said at the outset that I would be asking the Minister about the definitions of qualifying earnings and defined benefit schemes. My initial thought was that the issue of qualifying earnings had no relevance to defined benefit schemes because, unlike DC schemes, the calculation of contributions does not drive benefits, but Clause 22, which sets out the criteria for a DB test scheme, also defines the accrual rate of pensions by reference to qualifying earnings, which is simply not in line with how DB schemes work in practice. Why on earth is the DB test scheme standard phrased in a way that is alien to the workings of DB schemes currently in existence? Are the Government really set on the destruction of the vestiges of private sector DB provision?

My amendments seek to amend the Bill to give flexibility for both existing and future occupational pension schemes. We on these Benches want employers to own the concept of retirement provision for their employees. There is another route, which is based on protecting existing schemes, but forcing new ones into the Bill’s straitjacket; grandfathering. The Minister expressed concerns at our last Committee day that grandfathering has its own problems for sustainability and complexity over time, but it is another possible route and it should be carefully considered. I hope that the Minister will agree that we need to amend the Bill and that he will have something positive to say in response to my amendments. I beg to move.

I indicated where we stand in general on these amendments in my comments on Amendment No. 42 on the previous Committee day, so I do not propose to say much more at this stage. I reiterate how grateful I have been for the representations and meetings that we have had with people such as the EEF and the NAPF and providers such as Norwich Union, Scottish Widows and Standard Life. They make a fair point. I quote the Norwich Union, saying that accepting fluctuating contributions, including bonuses and overtime,

“is not standard industry practice and would therefore increase the costs of running pension schemes by tens of millions of pounds, reduce returns for savers and add complexity to employers’ decision making and administration”.

The response that we heard at the end of the previous Committee day did not encourage me that the Government were thinking hard enough about how they could deal with these points and ensure that unnecessary costs were not imposed on good quality existing schemes.

I do not share the rather extreme concern of the noble Baroness, Lady Noakes, who asked whether the Government were set on the destruction of the remaining vestiges of defined benefit pension schemes. That is rather alarmist, and if the Government are having that effect it is by not really thinking things through properly. I do not think that it is deliberate. This is a genuinely difficult problem on which we all need to work together to find a solution. Again, I stress that I thought the People’s Pensions Coalition had some good points when it was concerned to maximise the effective employer contribution in schemes, particularly for lower earning employees who are obviously most at risk. If they do not build up their pension enough, they will fall into the means-test trap.

I am sorry if I sound rather on the one hand and then on the other, but these are genuine points. Grandfathering is a possibility but I am afraid—this is where we are lucky that there will be several months between the Committee stage and Report—it is incumbent on the Government to think long and hard, and to come up with some limits themselves. We would much rather that they did that. I do not know the answer but I know that the Government do not have it right yet.

I also share some of the concerns. Like the noble Lord, Lord Oakeshott, I do not want to repeat the comments I made briefly at the end of the previous Committee day. Clearly, there are concerns about investment behaviour, burdens on industry and trying to establish what the appropriate contribution rate would be on short-term payments of earnings when overtime in the retail trade, for example, might fluctuate each week by two or three hours, requiring adjustments to be made.

I do not have a solution, but I understand that the industry and the Government are seeking ways though it. They may need more time. The noble Baroness seemed to suggest that she would come back on Report, which is likely to be in October, and that discussions would take place over the summer. My noble friend should be in no doubt that concern is widespread and that the Government will have to address these issues.

Amendments Nos. 63 or 64, which will allow annual terms of reference so that calculations can be done just once during the year, may be the very least that the Government should be moving towards. We all want to ensure that an individual ends up in the best-buy outcome. We all want to build in checks against perverse behaviour by employers, which can perhaps be seen by regulation by the TPF. We also want to ensure that there are no other hassle inducements for employers to desert their existing schemes. Clearly the advantage is both higher rates of contribution and not having that first £5,000 basic excluded because of the problems of calculating weekly or monthly contributions that both employer and employee have to make.

I hope that my noble friend will bear in mind the serious concern that has been expressed around the Committee and that over the summer he will work towards a more satisfying and satisfactory solution than we currently have on the table.

I rise to support my noble friend. She highlighted a number of problems that have also been mentioned by the noble Lord, Lord Oakeshott, and the noble Baroness, Lady Hollis.

I have been made aware of the research on this issue, which shows that the cost of levelling down in the insurance-based pensions market alone could witness a fall in annual contributions of £900 million. If someone on average earnings of £24,000 a year is switched from a typical DC scheme to personal accounts at the minimum statutory level, they could be £5,000 a year worse off in retirement.

That is why I was very pleased to hear that a group comprising the Association of British Insurers, the National Association of Pension Funds, the Institute of Chartered Accountants in England and Wales and the Society of Pension Consultants has united to seek to provide a workable version of the proposed qualifying earnings definition. I understand that discussions are being held and I strongly urge the Minister to work closely with those important organisations in finding a way through the problem, which has been so ably outlined by my noble friend.

My Lords, I thank all noble Lords who have spoken on this issue, and the noble Baroness, Lady Noakes, for the manner in which she moved the amendment. I fully understand that this is airing issues with a view to getting the right outcome.

Clause 19 confirms that contributions into qualifying occupational money purchase schemes need to be at least 8 per cent on a band of earnings. The minimum contribution is based on the Pension Commission’s recommendations that an overall contribution of 8 per cent of qualifying earnings could set a median earner with solid state entitlement on course to achieve an income in retirement of around 45 per cent.

Amendment No. 60A would alter the basis of this contribution-based test by enabling the scheme to require an average employer contribution of 3 per cent of qualifying earnings. Amendment No. 61B has a similar effect. It would enable a scheme to require an average total contribution of 8 per cent of qualifying earnings. We understand that some of our stakeholders perceive the quality requirements for money purchase schemes to be complex because most existing schemes use basic pay as the definition of pensionable pay rather than qualifying earnings.

However, the amendments tabled do not simplify the quality test. If anything, they potentially complicate it. Employers and schemes would still be required to track the aggregate qualifying earnings for all jobholders to ensure that the correct contribution was deducted in each pay period. Furthermore, if there were a shortfall, it would be unclear to which members a top-up payment was owed. That could lead to greater complexity. What is more, these amendments would expose some jobholders to the risk of consistently saving well below the minimum proposed by the Pensions Commission. The noble Baroness acknowledged that.

We are listening to stakeholders and understand their concerns about the application of the test. We will work with them to explore practical ways to make the test as workable as possible without undermining the minimum level of saving required by the reform. If we are serious about addressing undersaving this must remain sacrosanct.

Amendment No. 61A would ensure that no more than 10 per cent of members receive a contribution below 3 per cent of qualifying earnings. Amendment No. 62A similarly requires that no more than 10 per cent of members receive less than the total contribution of 8 per cent required under the test. Taken alone, these amendments change the basis of the quality test in Clause 19. The test ensures that each individual in the scheme receives at least the default contribution required under the employer duty. A 10 per cent tolerance would mean that certain jobholders would not—or may not—be saving at the minimum level required under the reforms. This could make all the difference, for those at the margins who receive only the default minimum contribution, as they might not be able to save to achieve the income in retirement that these reforms aim to provide.

Taken together, Amendments Nos. 60A, 61A, 61B, and 62A have a different impact. They would ensure that under a scheme-average test no more than 10 per cent of members could fall below the minimum level. While this would provide some protection against significant inequalities between members, it would nevertheless leave vulnerable members exposed to the risks of undersaving I have just outlined.

As I explained during the debate on Clause 12, the definition of qualifying earnings is a core element of the Pension Commission’s proposition to set a median earner with solid state entitlement on course to achieve an income in retirement of around 45 per cent. Any measure that undermined this would put the outcome of the entire reform at risk. Amendments Nos. 61, 62 and 63 together could do exactly that by enabling employers and trustees to define earnings within their scheme rules.

We recognise that many employers already provide generous contributions on basic earnings and would be likely to continue to do so in good faith. However, these amendments would leave members vulnerable to changes in pay structures occurring for perfectly legitimate business reasons, which could reduce the value of the contribution below the level proposed by the Pensions Commission. Even if such an amendment were limited to apply to existing schemes only, under grandfathering arrangements, there would always be a risk that future changes to the scheme or the employer’s pay structures would reduce the value of the contributions. We cannot legislate to leave people vulnerable to saving below the minimum in this way. Not only would it put the outcome of reform in jeopardy, but by permitting the minimum standard for contributions to vary across employers, it could also potentially lead to discrimination against vulnerable groups.

Amendments Nos. 64 and 65 operate in a different way. Taken together, they could provide for an easement to the application of the quality test for occupational schemes. Amendment No. 64 permits a pay period of, for example, 12 months to be set for the purposes of the quality standard. That would mean that a scheme could be assessed over a longer period to allow some smoothing of contributions where they might otherwise fluctuate above and below the minimum level, the spike to which the noble Baroness referred. Amendment No. 65 relaxes the requirement that scheme rules provide for 8 per cent of qualifying earnings over the pay reference period provided the employer makes up any shortfall in contributions himself so that the 8 per cent is met.

We have been engaging with stakeholders on this issue and understand their concerns about the application of the test for existing schemes. We remain of the view that the quality standards laid out in the Bill will work for the majority of schemes on most occasions without the need for scheme rule changes. We expect that payroll software will support employers in monitoring that this is the case. Where it is clear that a scheme will not qualify for all its members, we are proposing an amendment to Clause 28 to assist employers in increasing contributions or the basis on which they are calculated.

Amendments Nos. 64 and 65 do not fully address the issues stakeholders have raised. They would not apply evenly across occupational and personal pension schemes. Furthermore, Amendment No. 64 is already achievable by virtue of the powers in Clauses 14 and 116, which enable us to set a longer pay period for the purposes of assessing money purchase schemes. Amendment No. 65 raises additional questions about how compliance against the employer’s duty to make shortfall payments would be monitored and enforced because it could cause confusion about whether the scheme itself fell below the qualifying standards or whether it was a matter of a failed payment by the employer.

We recognise that employers and schemes still have concerns and that these amendments represent genuine attempts to address them. We are keen to minimise any disruption to current arrangements, which is why the qualifying test must be designed in the simplest way. As noble Lords know, the Government are determined to ensure that all savers receive at least the new minimum level of pension contributions. For this reason, we have not been persuaded that grandfathering is the right answer.

We do not want to disrupt the smooth administration of existing arrangements that offer good pension outcomes for many savers. Therefore, if it were possible to perform the test in a way that reduced employer administration, perhaps by enabling the use of a range of assessment periods, that is something we would seriously want to consider, provided that it also preserved the new minimum level of pension saving.

The noble Baroness asked specific questions in moving the amendment. She asked how much disruption we want. We want minimum disruption to existing schemes. These proposals are designed to achieve that and to do all we can to prevent it. We are mindful of the risks of that, which is why we need to address the issues that she identified.

In all of this, we should be mindful that personal accounts would be a money purchase occupational scheme and the qualifying test will apply. If the qualifying test were to be changed to enable minimum contributions on aggregate earnings where only 10 per cent of individuals could fall below the minimum, that could seriously affect the scheme. First, as drafted, the minimum contributions into personal accounts would be considered across the membership as a whole. Given that the scheme is expected to be used by many thousands of employers, it would be complex to do that, and it would raise problems in identifying where an employer had failed to make sufficient contributions. Secondly, we estimate that 4 to 7 million people will be saving in personal accounts under the reform, and a system that would permit up to 10 per cent of those people to be saving at very low levels below the minimum would expose up to 700,000 people to the risk of undersaving in personal accounts alone.

The noble Baroness also asked about defined benefits schemes and qualifying earnings. Employers with a contracting-out certificate have met the scheme standard and will not have to do anything further. Employers will need to look at a jobholder’s qualifying earnings in assessing the scheme against the test scheme standard. However, given the generosity of existing DB schemes, we expect the vast majority to meet the standards. What is more, we expect that the test will be conducted on a one-off basis for DB schemes and will be reviewed as an exception when circumstances change.

We acknowledge the challenges in making sure we get the right answer to all this. I think the noble Baroness will acknowledge that the specific proposals put forward do not do that, although I do not think there was an expectation that they would be received in those terms. We are determined to work with stakeholders to make sure that we can get through this. There are ways that we might do it. We have some time before we get to Report. On that basis, I hope the noble Baroness will not press her amendment. We acknowledge there is more work to do on this to see whether we can reach a proper outcome. We are aware of concerns in the industry. I am sure there is a way through this.

Before I decide what to do with my amendment, I shall ask the Minister a couple of specific questions. First, are the Government insistent that the new scheme must be satisfied for every employee in the land who comes within its scope? Are they unwilling to accept any form of averaging? Throughout the Bill, I have constantly said that the best is the enemy of the good. We are talking about getting millions of people into pension saving. Is it not good enough to have 99.5 per cent meeting the standard? I keep hearing from the Minister that we have to do this at the level of every single employee.

Secondly, in relation to the possibility that employers might manipulate their earning patterns or their pay structures in order to get some apparent advantage from the rules, does the Minister not accept that the compliance regime could be amended to work perfectly well to deal with that? The compliance regime could underpin, just as it will be able to deal with employers who induce their employees to opt out and things like that. It would be relatively easy to define a test that could be used by the Pensions Regulator in cases of employer actions or omissions for some deliberate purpose. I should be grateful if the Minister could answer those questions.

I shall do my best. On the first question, that is done on a collective basis for defined benefit schemes, not on an individual basis. For money purchase schemes and defined contributions schemes, it has to be on an individual basis. We need to be clear that we are not asking for existing schemes to replicate the earnings band. What matters is that the amount that goes into the scheme at least equals what would go into the scheme if the 8 per cent of the band on the definition of earnings that is adopted were applied. We are not asking for that to be adopted in every scheme, simply that the contribution that goes into the scheme under the existing scheme’s rules produces at least that outcome. If there is a way of doing that on some other basis that protects each individual, the answer may be yes, but we do not see that there is a way.

In relation to manipulation of earnings, I entirely accept that most employers would act honourably in this and seek to do the right thing. Indeed, they would see the benefit of good quality pension provision. However, to rely on the compliance regime to avoid avoidance in this area would be quite difficult because one can envisage circumstances where an employer might quite legitimately restructure the pay structure and have a range of choices. One way of doing it might have the benefit of reduced contributions under these arrangements. There might be a perfectly possible commercial—

Will the Minister explain what is wrong with rearranging pay structures for good commercial reasons?

There is nothing wrong with it. The noble Baroness was advancing the proposition that, if people manipulated their pay structures to reduce their contributions, the compliance regime would pick that up. However, it would be difficult to rely on the compliance regime to distinguish those situations from situations where there was a genuine commercial reason to restructure pay or a dual reason to restructure pay. That is why we do not see that as a route forward. It is a similar situation with grandfathering arrangements. You might identify up-front schemes that were okay, but there might be legitimate commercial reasons for restructuring pay down the line. I stress that I believe that there is a way through this, using mechanisms other than those that the noble Baroness has identified. We need to make sure that we achieve that.

Those were illuminating remarks, which I look forward to reading carefully in Hansard. I made it clear when I moved the amendments that I was not proposing to divide the Committee this evening, because the issue is too important for it not to be clear that we have got the right answer. I hope that the Minister, if he was in any doubt, is now fully apprised of the fact that there is a problem and that the problem needs a solution. I hope that the Government will work hard with the industry during the summer. It is fortunate that the Recess will give everybody time to pause for reflection.

I hope that the Government will also look again at some of the assumptions that they are taking into the negotiating room about what they have to achieve. It seems that the Minister still reflects a dogmatism that will not be helpful in achieving a solution. The solution is one that helps to preserve existing good pension provision and avoids levelling down. That is something that we all want to achieve. I hope that, on Report, the Government will table agreed amendments. However, I say to the Minister that, if that does not look possible, we shall seek the least bad solution—the solution that best meets the concerns of those who have impressed on us the need to get this right. At that stage, I will seek to test the opinion of the House. So I say that it is over to the Minister, and I hope that the Government will find the solution. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 61 to 65 not moved.]

Clause 19 agreed to.

Clause 20 [Quality requirement: UK defined benefits schemes]:

[Amendment No. 66 not moved.]

Clause 20 agreed to.

I beg to move that the House be resumed. In moving this Motion, I suggest that the Committee stage begin again not before 8.53 pm.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.