moved Amendment No. 67:

I thank the noble Lord for his amendment, which I understand is a probing one. Clause 21 sets out the quality requirements for defined benefit schemes with members in employment that is not contracted out of the state second pension scheme—commonly known as non-contracted-out schemes. This test operates in a similar way to the reference scheme test, which is an existing test of overall scheme quality for schemes with members whose employment is contracted out of the state second pension scheme.

We recognise that many employers make generous pension provision through their defined benefit schemes and we want to encourage them to retain these schemes. That is why, when developing the quality test for non-contracted-out DB schemes, as well as ensuring that they deliver the additional private pension saving required under the reforms, we sought to minimise any burdens on business by introducing a simple scheme-wide test. Amendment No. 67 would prevent the test scheme standard from being a scheme-wide assessment. I know that that is not the intention but the amendment could make the application more complex and increase the burdens on business. Undertaking an assessment of the projected benefits for each member of a DB scheme would be more time-consuming and complex for employers.

Amendment No. 68 would remove an important power in Clause 21 allowing the Secretary of State to make secondary legislation relating to the test. Without the regulation-making power in Clause 21(4), the Government’s ability to set the criteria for determining whether the pensions provided by a scheme were equivalent to, or better than, those provided by the test scheme would be severely curtailed. We would also effectively lose the power to specify the detailed application of the test scheme standard in technical guidance, as our ability to issue guidance is, by virtue of subsection (5), dependent on the ability to make regulations. This guidance will be particularly important where actuarial comparisons are being made.

The power in subsection (4) is there to enable us to provide employers with the right assistance. Without it, employers, possibly with advice from their actuary, would have to determine how the test scheme would operate in order to assess whether their own scheme met the standard. The test would no longer be standardised across schemes, because employers and/or their advisers might have to rely on their discretion in making an assessment in relation to their scheme. This is something that they might not feel comfortable doing. We will use the regulation-making power as necessary to prescribe the method of determining whether the test scheme standard has been met, which will ensure that it targets the additional pension saving required under the reforms and is a relevant and effective measure of scheme quality.

I hope that my response has clarified the purpose and importance of this regulation-making power sufficiently for the noble Lord to feel able to withdraw his amendment. How many individuals must fail the test is not relevant to how defined benefit schemes are tested, because it is done on a scheme-wide basis, whereas with defined contribution schemes one is looking at inputs on an individual basis.

I flatter myself that I am a fairly mild man, because nobody else will. However, even my patience snaps sometimes. The noble Lord said that we will give employers the right assistance. What assistance?

I am talking about assistance in determining that they have met the test scheme standard. Broad equivalence has to be determined by reference to the test scheme set out in Clause 22. A whole host of issues might need to be taken into account. Setting them down in guidance will assist employers in making the determination. It is a little like the reference scheme test, which determines whether schemes can be contracted out of the state second pension scheme. It is detailed guidance about a whole range of issues that are likely to be relevant in making that determination.

These debates are starting to become rather repetitive. It is quite extraordinary how little detail the Minister can give us on so many matters. Many people have commented on how the success of auto-enrolment in personal accounts will depend on the detail of the implementation, yet we are discovering that reams of this detail have not in any way been firmed up. Not only is Parliament being asked to sign into law a Bill that makes radical changes to pension provision in this country, but we are being asked to do it with only the haziest outline of what the future holds. To a great extent, we are being asked to buy a pig in a poke. This vagueness goes beyond good parliamentary practice, as important as that is. It means that employers are equally unable to predict the changes in costs that might be imposed on them only a few years hence. Unless the Minister can give me a bit more information, I shall have to seek the opinion of the Committee.

Perhaps I may try to describe what “broadly equivalent” might mean. We use the term to ensure that the widest-possible range of scheme types can be directed to the test scheme standard, because the test scheme does not replicate the benefit structure of all defined benefit schemes. We need to be able to gauge the standard of any scheme in the most appropriate manner to ensure that the wider reform’s objective will be met. Nor do we want to interfere with the benefit structures by requiring them to align with the test scheme.

By requiring that pensions are broadly equivalent, we enable schemes offering pensions on a different basis—for example, on a career-average basis—to be compared with the test scheme. Therefore, the regulations and guidance that will follow under Clauses 21 and 22 will set out how an employer should assess whether they meet the broad equivalence test. This is exactly the approach used under the reference scheme test for contracting out for the same reasons.

I do not understand why the noble Lord is so vexed by this. We know of no defined benefit scheme that we expect to fail the test, but the noble Lord will understand that a whole range of different benefits and calculations is provided in defined benefit schemes—they are not all the same. Therefore, guidance that helps employers in assessing whether any individual scheme meets the test will be needed. I do not see why the noble Lord is so concerned about that.

These are highly technical issues. Sometimes an actuary will need to be involved. As I think I said, we broadly expect this test to be looked at once up front and then for employers to keep an eye on any changes occurring to the scheme, but it is fundamentally a one-off calculation. We are not aware of any defined benefit scheme that would fail that test. It seems to me a pretty straightforward issue.

I shall seek to reinforce the point for the noble Lord. If we are looking at defined contribution schemes, we are looking at inputs on an individual basis, as we discussed earlier. When we are evaluating defined benefit schemes, we are broadly looking at outcomes for those schemes and trying to evaluate whether those outcomes are equivalent to what the test scheme would produce. It is a different approach because of the different nature of defined benefit and defined contribution schemes.

I hope that that is sufficient for the noble Lord. It is not really a case of saying that we do not know and will have to fill in these things in due course. Of course, the detailed rules will need to be worked out and new detailed rules will undoubtedly need to be introduced if new defined benefit schemes come along. The whole purpose of this is to help employers to be clearer about how they make their judgment on whether the scheme satisfies the standard.

Clearly, we shall get no further with this tonight. The object of the exercise is to test any scheme, to quote the Minister,

“in the most appropriate manner”.

However, we have no idea what the most appropriate manner might be. As I say, we shall get no further on this tonight. I suppose that this was a semi-probing amendment. Therefore, at this point, I shall withdraw it, but in so doing I suggest that he comes up with very much better answers before Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 68 not moved.]

Clause 21 agreed to.

Clause 22 [Test scheme]:

moved Amendment No. 69:

My Amendment No. 71 is an amendment to government Amendment No. 70. I listened with interest to the Minister’s explanation. The government amendments are, of course, very sensible. With the state pension age rising to 68 over a long period, it would be wrong to insist that qualifying DB schemes should maintain their retirement age at 65. However, the Minister’s amendment only allows the Government to ensure that the test scheme benchmark is kept up to date; it does not ensure that it will be done.

My amendment would make certain that no qualifying DB scheme is held to a lower age than the state counts from. Such a situation is, I am sure, not one that the Minister would consider beneficial. DB schemes are already fighting numerous disadvantages compared with money purchase schemes, as the ever falling number remaining open to new members makes clear. My amendment would not prevent a scheme from choosing to allow retirement at an earlier age if it should wish to. It would merely make annual regulations adjusting the prescribed age unnecessary, which I hope the Minister would approve of.

I make it clear that we on these Benches are happy with the government amendments.

I have already spoken to Amendments Nos. 69 and 70. Amendment No. 71 in the name of the noble Lord, Lord Skelmersdale, would require the pension age in the test scheme automatically to track increases in state pension age once they are equalised for men and women. However, linking the pensionable age in the test scheme directly to changes in state pension age could lead to complexity. Over a transitional period, state pension age will increase in gradual steps, until it is 68 for both men and women.

It is unlikely that the pension age of an employer’s pension scheme will exactly match the transitional arrangements for increasing state pension age and we would like to be able to take account of changes to defined benefit pension provision in adjusting the pension age of the test scheme. We believe that simply linking to state pension age could have the unintended consequence of making the qualifying test more complex. That is why we have taken a flexible power enabling us, following consultation, to make changes to the test scheme so that it reflects increases in state pension age without imposing additional burdens on employers. I hope that my explanation of why we have drafted this change in this way has reassured the noble Lord.

As I said, the amendments only allow the Government to ensure it; they do not make provision for it to happen as and when necessary, which is what we need in this situation. I accept that the noble Lord is probably right that state pension age will not be matched exactly but, none the less, there ought to be a provision to do it, not just to enable the Government to do it.

I am not sure that I can add much to what I have said. We want to make sure that the test scheme is relevant to what is happening to defined benefit schemes generally. We expect that there is likely to be an upward movement in retirement dates in those schemes as state pension age increases. It is very unlikely that in aggregate that will mirror the timetable of the state pension age changes. Therefore, if we were to have that equivalence in the test scheme, it would lead to complexity in evaluating whether the test scheme is met in all circumstances.

This should not be a matter of huge controversy. We recognise that the test scheme is likely to need adjustment over time as pension ages change, but to lock it into step in accordance with what is happening with state pension age would be to add unnecessary complexity. We would need to consult stakeholders in any event about how we should pitch the test scheme going forward, in the light of what is happening to state pension ages. I do not see why this should be a matter of controversy.

We believe that the two pension ages should be in step. Again, at this time of night, it is extremely unlikely that we will get anything further from the Minister.

On Question, amendment agreed to.

moved Amendment No. 70:

moved Amendment No. 72:

As the Minister said, Amendment No. 75, which is tabled in my name, is grouped with Amendments Nos. 72, 73, 74 and 121. I put it down to discover, if I could, how the rules to define a hybrid scheme will be decided. I understand that the arrangement to have rules is to have flexibility as we go along, but rules mean different things in different bits of legislation, so I would like to know what legal effect they will have if they are not made by regulations. Secondly, I do not want to sound racialist or anything like that, but where does a foreign-managed scheme fit into all this and will it have to obey these rules however they are made?

A foreign scheme, or one not administered in the UK or registered under the Finance Act 2004, to be a qualifying scheme, would need to be encompassed within regulations. I believe that is right.

The noble Lord has just said that he does not like the idea of regulations.

I think the noble Lord is confusing two things. I was trying to explain the starting proposition for whether any scheme is a qualifying scheme and an auto-enrolment scheme. There are tests to be met for that. We discussed earlier that special provision would need to be made for non-UK schemes to see whether they are administered and provided in such a way that they can be brought within the ambit of the provisions of the Bill. It would be the same for hybrid schemes as for defined benefit or defined contributions schemes. I hope that deals with that point.

On the impact of rules, they are rules under the hierarchy of arrangements that I explained. Primary legislation sets out the fundamentals for how the test applies to hybrids, then regulations enable them to be fleshed out. More detailed rules are provided within those regulations. I am not sure that that is such an unusual hierarchy of arrangements in pension or other provisions. I believe it would be right that if those rules come out of the regulations or primary legislation, they would have the same legal standing. I think I might take some advice on that, and if I need to qualify it, I will. I hope that sets in context how we are proceeding to deal with hybrid schemes. I am happy to share with the noble Lord a range of different hybrid schemes just to emphasise their complexity and multiplicity. It is only 22 minutes past nine, and I am sure that he could stomach a few of them.

Spare us!

I shall spare noble Lords. It is because of complexity. Hybrid schemes are likely to develop further in future. It is a way of risk sharing, so they are likely to be part of the changing pensions landscape, which is why we cannot set everything in primary legislation.

The letter count today is surely mounting quite significantly. I shall look forward to the letter with great interest, but I am still not entirely sure that my brief questions on Clause 23 have been properly answered. I shall look very carefully at what the Minister said when I get Hansard tomorrow. I await his letter with some eagerness. I should say that like the noble Lord, Lord Oakeshott, I do not require a vast list of the sorts of hybrid schemes that exist. I am sorry to disappoint the Minister.

On Question, amendment agreed to.

moved Amendments Nos. 73 and 74:

moved Amendments Nos. 76 and 77:

moved Amendments Nos. 79 to 80A:

moved Amendment No. 81:

I wish to raise the issue of the burdens that this Bill will impose on employers, in particular on SME employers. The contents of Clause 26 are welcome as far as they go. They allow employer and employee contributions to be phased in over a period of at least three years and possibly longer. I am sure that employee phasing will help to minimise the amount of opting out in the early phase, and will thus give inertia a better chance of succeeding. Employer phasing is an essential part of letting employers adjust slowly to the additional cost burden that this Bill will inevitably impose.

The latest regulatory impact assessment estimates that, once the transitional period has been completed, the central estimate of the extra direct cost will be £2.5 billion each year. However, the cost will fall disproportionately on small and micro-firms, which will bear £1.2 billion of the total, adding around 1 per cent to their labour bill. The relative impact for medium and large firms is much smaller, at around 0.5 per cent of labour cost. Of course, these are averages. Businesses of all sizes vary in their labour intensity. Those that use more staff will bear a higher relative cost burden.

There is also the indirect cost burden. The Government apparently set up a cross-government group of so-called experts to look at administrative costs. I should be interested to hear from the Minister why the Government thought that a group of civil servants alone, with no business representatives, was the right body to carry out this exercise. This group found that the costs were now predicted to be higher than estimated for the December 2006 White Paper; and, in particular, that year one costs had increased by more than 20 per cent to £350 million, while ongoing costs had shaded up to £101 million. The important part of the analysis is that it starts to reflect more accurately the impact on the smaller end of the business community. All of the increase in start-up costs is focused on the small and micro-firms, which now account for £280 million out of the total of £350 million.

These cost estimates produced by the department are not uncontroversial. The British Chambers of Commerce estimates that the ongoing annual cost is more than £300 million, not £101 million as shown in the regulatory impact assessment. Of course, there is a rather weary scepticism among businesses about government estimates of the burdens being placed on them. Real businesses have rarely been able to identify any reality behind the calculations that appear in regulatory impact assessments. That is part of the broader picture of the Government not fully reflecting the reality of regulatory burdens on business.

I have a couple of questions. I absolutely support the case that has been made, for the reasons that I explained when I spoke to an earlier group of amendments. I have real concerns about the impact that the provisions will have on micro-businesses, and nothing that the Minister said earlier about looking at them as an industry-wide group of employers assuaged my fear. As the noble Baroness, Lady Noakes, who so ably opened the debate, said, the economic context has certainly changed. The report carried in the Guardian financial pages suggests very clearly that things are shifting again after a period of relative stability. It would be foolish for us to set up these changes without having some pause for thought about the much less benign economic climate that we are moving to. She is absolutely right to think clearly about that now.

Do the Government have a timetable in mind for these transitional provisions? Obviously the provisions are triggered to some extent by the enactment of Clause 19, but the Government must have a calendar of events which will unfold year by year as the transitional periods are triggered. Can the Minister say more about the cost-sharing scheme? Such a scheme makes perfect sense. A tiny firm may be able to show that the provision it is trying to make will be facilitated by extra time and that it is trying in good faith to work with the grain of government policy, but that two years is not enough. It is not clear exactly where in the clause small businesses are provided with the opportunity to opt in over a transitional period.

Somewhere in the regulations that flow from this primary legislation there should be flexibility that gives scope and room for manoeuvre to tiny family businesses that are acting in good faith, trying to do what they are required to do and willing to deploy their facilities for their job holders and employees, but which will find the costs too high when they implement the provisions in this clause simply because they do not have the time to make adjustments. If the economic circumstances are to be much tougher for small businesses to cope with then it is entirely right that we should think now about those circumstances. It is entirely reasonable to anticipate that that is exactly what might happen in future.

I suppose that I ought to thank noble Lords for the questions they have just pitched at me, but the number is such that I can only do my best to answer some of them.

The first issue is what the staging and phasing will do. The two ideas get, in a sense, mixed up. The phasing will consist of two phases: phase 1, specifically in the defined contributions scheme, will be a 1 per cent year for employer contributions; and phase 2 will be a 2 per cent year. The Bill itself specifies that both will have to be a minimum of a year. There have been conversations about the total of the two, and much of those conversations suggests that the two added together may be three years, but that is to be defined after further conversation with stakeholders.

How does the staging and phasing fit together? Staging will be a process whereby all employers will not be required to meet their duty on day one of phase 1. The staging will divide employers into groups. The Bill is not precise about what those groups are; that will once again be the subject of consultation. The only groupings that have been used so far—they have been used by HMRC and the former DTI to introduce complex regulations, changes of regulations or changes of charging—have essentially been based on size of firm. So the most probable grouping—it does not mean that it will happen; it will be decided after consultation—is by size of firm. Large firms will come in early, some on day one to make the whole process sensible, and smaller and smaller firms will be staged in. This will give special relief to small firms. While small firms will participate in, say, the 1 per cent period for only a short time, in the early part of that period there will be no burden on small firms.

The burden of the questions from the noble Baroness, Lady Noakes, was how we got our sums and who we involved. In the December 2006 impact assessment our estimate of employer administrative costs were £291 million for the first year and £96 million per year in the steady state. In the December 2007 impact assessment, those estimates were revised upwards to £310 million and £101 million. That is an increase of around 20 per cent for the first-year costs and 5 per cent for the ongoing costs. The impact assessment published alongside the Bill included a detailed explanation of the changes to our estimates since 2006. They reflect changes in our methodology rather than additional requirements on employers. In the December 2006 White Paper, the Government announced that they were setting up a cross-government group of experts to improve understanding of the cost impact of the reforms on employers.

As the noble Baroness, Lady Noakes, said, the composition of that group was internal. It included the DWP, the then DTI, the Better Regulation Executive, HMRC and the Small Business Service. The group carried out a robust challenge of DWP assumptions, bearing in mind all the available evidence. It gathered and applied evidence from colleagues at HMRC and from commissioned research by Durham University and Middlesex University’s business schools that sought views directly from employers and payroll providers on likely administrative costs. Some of the changes that resulted from the detailed scrutiny carried out by the group were: updated wage estimates and the inclusion of a 30 per cent non-wage cost of employment; increased estimate of the value of the time of owners and managers for microfirms using new analysis of dividend payment; more robust estimates of the cost of collecting monthly contributions validated by commissioned research; inclusion of the opportunity cost of employees’ time as a cost to the employer; inclusion of extra processes that employers are likely to carry out, such as time spent deciding how to fulfil the employer duty and communicating the change to staff; reflection of the new evidence on the scheme that employers will choose to use; and cost variations between employers using personal accounts and those using other things.

We think that those estimates are now robust. However, there will inevitably be uncertainty this far from the introduction of the reform, and the estimates will be updated as new databases are received. I have given our estimates of administrative costs. For a microfirm—I believe that we have defined that as five or fewer employees, but I will correct that in a letter if I am wrong—there will be costs of £200 for the first year and £70 thereafter, with some £300 and £80 thereafter for small firms, and rather more for the medium and larger firms but in proportion a good deal less, as noble Lords have pointed out.

On the issue of financial help, we recognise that the reforms should impose the fewest possible burdens on employers of all sizes, and small employers in particular. In developing the policy framework for the reforms, we have engaged with employers and their representatives to ensure that we balance our objective of increasing access to pension savings with minimising employer burdens. As I have explained, the phasing policy is explicitly designed to smooth the increased costs for employers as a result of the reform. Our expectation is that it will be of most benefit to those employers who do not currently offer workplace pension contributions. The majority of small employers will fall into this group, so will benefit disproportionately from phasing. In that sense the phasing policy is targeted on the smallest employers and has a cost-reducing effect. Introducing a further support payment would duplicate that effect.

Looking beyond the phasing policy, we recognise that the operational approach taken by the Personal Accounts Delivery Authority and the Pensions Regulator is crucial in minimising burdens. Clause 62 requires the Personal Accounts Delivery Authority to have regard to minimising burdens on employers in implementing the reforms. The delivery authority has already established an employer panel for ongoing consultation on the design of the scheme. That is evidence of how seriously the Personal Accounts Delivery Authority takes that principle.

Of course, we have already produced working estimates of the administrative costs to employers in the cost-benefit analysis in the impact assessment. Those are based on the cost of the activities that we believe employers will undertake and, as I have said, on robust methodology. As is normal with major reforms, they were scrutinised by the Better Regulation Executive and Small Business Service within government.

I asked the Minister what he thought of the EEF scheme. Will he express an opinion?

During the Committee sessions in the other place, employer organisations representing both large and small employers—the EEF—called for a package of financial support. To be fair, we share their concern, but we certainly do not reach a view that there is sufficient evidence for a support package. We will continue to work constructively with these groups to design the system with small employers in mind.

I was disappointed in the Minister’s responses. He gave me quite a lot of information on how the department’s working party, or inter-departmental group, looked at costs and what information it used. But he did not really answer the point about why there were no business representatives on that group. It is one thing to carry out surveys of businesses, but it is another thing to invite business into your deliberations as a part of it. The Minister should not be surprised that the result is disputed by business. He can tell me all he likes that it will cost £70 in administration costs on an ongoing basis. Those figures simply are not recognised by business. That is a big problem because the gap in ongoing costs, as I said earlier, is a three-fold difference. Businesses think that it costs three times as much as the Government suggest. Potentially, this is a very big problem.

Let us put the quantum to one side. The Minister talked about phasing and staging. The burden of what he was saying is that he is not going to tell us how phasing or staging will work in practice because the Government have not made up their mind. The Minister did not even say that the Government would use staging for smaller enterprises. He just said that, in the past, it has been done by size of company, but he did not say that smaller businesses would be the beneficiaries of this scheme.

The totality of what he has said did not satisfy me and I am sure that it does not satisfy the noble Lord, Lord Kirkwood, to whom I am grateful for his support. Between now and Report, we will want to go away and look again at whether this Bill correctly reflects the desire to ensure that the small and medium-sized business community is adequately covered and protected by what are potentially very disruptive changes that could be introduced when personal accounts are first brought forward. We do not want them to be disruptive and I am sure that the Government do not want that either, but I do not think that they can yet give us any confidence that they see the problem and know that it has to be dealt with.

Clause 26 agreed to.

Clause 27 [Transitional period for defined benefits and hybrid schemes]:

[Amendment No. 82 not moved.]

Clause 27 agreed to.

moved Amendment No. 83:

I am always extremely suspicious of Governments who put such a new clause into Bills when we have not had much of a chance in this House to discuss the subject line by line, for which we are well known and very often credited. On this occasion, however, I fully understand why it has been necessary to table a new clause on the effect of a freezing order. The new clause, however, which I have read very carefully several times, applies only to freezing orders and what happens during that period. Although the relevant provision in paragraph (b) refers to “an assessment period”, it is not terribly helpful. Before the next stage of the Bill, will the Minister perhaps think about expanding this as it does not appear to me to be particularly clear, despite what he said just now? As I said, I have no complaint as such to the introduction of this new clause, but I do rather wonder about the reason for the assessment period.

I am very sorry to disappoint the noble Lord, Lord Skelmersdale, but I cannot share his suspicion on this amendment.

I am grateful for the support of one noble Lord on an unequivocal basis and on a semi-equivocal basis in the case of the noble Lord, Lord Skelmersdale. I am happy to set up a meeting with officials, if it would help to take the noble Lord through some of the detail. I do not believe it needs amendment; I believe it does the job. I am very happy to spend time, however, to seek to convince him of that.

On Question, amendment agreed to.

I beg to move that the House do now resume.

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

House resumed.

House adjourned at 9.55 pm.