My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
Moved accordingly, and, on Question, Motion agreed to.
House in Committee accordingly.
[The DEPUTY CHAIRMAN OF COMMITTEES (Viscount Simon) in the Chair.]
112ZD: After Clause 66, insert the following new Clause—
(1) In carrying out its functions under section 66 in relation to a scheme established under section 58, the trustee corporation must have regard to the principles in subsection (2).
(2) The principles are that—
(a) participation in the scheme should be encouraged and facilitated;(b) the burdens imposed on employers by the scheme should be minimised;(c) any adverse effects on other qualifying pension schemes, and on members and future members of those schemes, should be minimised; (d) the cost of membership of the scheme should be minimised;(e) the returns to members on retirement should be maximised;(f) the preferences of members and future members should, so far as is practicable, be taken into account in making any provision about investment choice in the scheme;(g) diversity among members and future members of such a scheme should be respected.”
The noble Lord said: With this rather drawn-out Committee stage, we tend to forget that Clauses 65 and 66, which in continuous terms we have just finished debating, set up the all-important trustee corporation and give it a very broad remit of functions—so broad, indeed, that, apart from running the pension scheme that the Secretary of State is to set up under Clause 58, its only function is set out in Clause 66(l)(b), which refers to,
“any other functions it is given by or under an enactment in connection with the scheme”.
This, I assume, means yet more pensions Bills are in the pipeline—or is it there because of the Minister’s favourite word, “flexibility”?
We know already that the scheme itself will be prepared by the Personal Accounts Delivery Authority and handed to the trustee corporation on a plate, as it were. Shortly after that—we still do not know how shortly and I suppose that yet again the Minister will say that he does not know—PADA will leave the scene and become otiose. We on these Benches find it mysterious that, while both PADA and the trustee corporation are given functions, only PADA, under Clause 70, on which we will have a large group of questions, is given principles. I do not want to anticipate those debates now, because it is obvious that the trustee corporation needs to have rather different ones from those of PADA.
This brings me to the amendment, which is almost self-explanatory. The seven principles that we have identified most definitely apply to the organisation, the trustee body, which is to run personal accounts for as long as they exist—well into the next century, one hopes, when PADA is long dead and buried. Paragraph (a) of proposed subsection (2) says that it should be the job of the trustees to continue to encourage and facilitate jobholders in the relevant income bracket to first join and then continue with their personal account until retirement. It goes on to say that the trustee corporation should make every effort to minimise the burdens that it will inevitably place on employers, among whom will be new employers in the years to come. It will be up to the trustees, not anyone else, to keep them informed, but not—or it should not be— to harry them. If this is really necessary, it should be the role of the Pensions Regulator.
Proposed subsection (2)(c) underlines the fact that the trustees are running a default pensions scheme. In no way should they see it as their role to poach members from other schemes, especially direct contribution ones, but that thought applies equally to hybrid and final salary schemes, with which they may be seen to be competing. Again, I remind the Committee that I am thinking in particular of life after PADA and the vast amounts of money that the trustees will very quickly end up handling.
This thought continues through into the next principle: continuing to keep down costs. Just because PADA hands on a scheme that was originally going to be paid for by charging the members 0.3 per cent of their pension investment a year, that does not mean that the figure of 0.3 per cent will continue to be possible in, say, 2020 or 2080. Nobody knows what is round the corner as far as the cost of personal accounts is concerned. The ink had hardly dried on the masses of reports and government statements that have surrounded personal accounts before I heard almost everywhere that the 0.3 per cent that the Pensions Commission regarded as ideal would much more likely be 0.5 per cent. I have even heard 0.7 per cent mentioned. Whatever this final figure is, though, care should be taken to keep it to that, and even to reduce it, when the trustees start to handle very large amounts of money.
Next, it seems to be a sine qua non that, unless the jobholders’ investments are seen to be having a reasonable return compared to other investments—ISAs maybe, even direct investment in the stock exchange, or in the currently somewhat unlikely event that lifetime savings accounts come on to the investment scene—jobholders will opt out. I am sure that the Minister will tell me that, because of the employer putting 4 per cent into personal accounts, other investments cannot possibly do better. However, you have only to look at the comparison tables in the weekend papers to see that that ain’t necessarily so. He might also tell me that ISAs are different because they are bought out of taxed income and are tax free only when they are released. That is, of course, correct. However, overall, if they are kept long enough, they can produce a perfectly reasonable return, especially if the full amount allowed is invested. This, of course, is more than twice the maximum allowed under PAs.
I believe that even though the Government expect that the trustees will start with a number of funds—we are currently told between five and l0—they might well decide that more or perhaps fewer are appropriate. Again, we will be discussing that shortly. It should be their job to take the jobholders’ wishes into account. Muslims, for example, are barred by their religion from receiving interest and might refuse to put money into an interest-only fund. Indeed, such a fund would not normally produce a particularly good return anyway. What types of funds are currently envisaged? Clearly there will be a Sharia fund and a default fund, as well as perhaps a stock exchange tracker fund, as the noble Lord, Lord Oakeshott, suggested last week. There may be an ethical fund, which we will debate shortly, and surely there will be others. As the member ages, it might well be sensible for him to move from one fund into another—possibly from a medium-risk one into something safer. Will transfers between funds be possible or even suggested by the trustees?
Up to now, we have been thinking only of the beginning of the personal accounts scheme. What about the end? We assume that, under the current arrangements, when the jobholder retires he will be bought an annuity. As we know, annuities are a gamble; the value depends on the rate on offer when you retire. That can make a difference of hundreds of pounds, especially if you are a smoker or live in an unhealthy part of the United Kingdom, or even have held a personal account from the age of 22. A better rate can often be achieved by group purchases, as the Financial Assistance Scheme has discovered, and would usually result in a better return for the retired PA investor. Will group annuities be the norm? Will they even be contemplated? We do not know and I am sure that the Minister is not in a position to tell me.
That brings me, finally, to diversity, which, as proposed subsection (2)(g) says, the trustees should respect. I would expect that a jobholder in 2040 would have considerably better financial knowledge than one in 2012. One hopes that, with all the information, including money and savings lessons in school, tomorrow’s pensioners will be much more savvy and will be able to understand all the freely available advice. Different groups of investors will have different needs and therefore different requests, not only as to which fund to invest in. For example, they may well realise that fund A is not going nearly as well as fund C. That may be because of the performance of the fund managers or there may be other factors, such as how the fund was set up in the first place. Others may be quite satisfied, especially if they get an annual return showing that their fund has done better than the investment would have earned at interest. There is also the matter of what goes into the annual return and whether there is enough information therein to be really informative. Yet others will doubtless feel the need to opt out for a period, maybe several periods. Yes, there will certainly be different groups.
The trustees need to keep all these things—maximising participation, having minimum burdens on employers, competition with other pension schemes, the cheapness of management charges, the maximisation of returns to members and their preferences, and differences between members’ wants and needs—in the forefront of their minds. To keep these principles there, they should be in the text of the Bill. I beg to move.
Because of the short notice of our debating the Bill today, my noble friend Lord Oakeshott is unable to take his place on the Front Bench; he has a prior commitment elsewhere.
I fear that we on these Benches cannot support the amendment because it is too prescriptive. Our approach is that the scheme must be as simple as possible, with no bells and whistles, as the chairman and chief executive have repeatedly and clearly stated.
I thank each Member of the Committee who has spoken. I say to the noble Baroness, Lady Thomas, that I was aware that the noble Lord, Oakeshott, was unable to make it today. I am sure that she will ably substitute for him.
The noble Lord, Lord Skelmersdale, ranged widely over a number of issues that we shall pick up on in subsequent amendments, so I will not dwell on some of those details in my reply. The proposed new clause would require the trustee corporation to have regard to a set of principles that is essentially a variant on those to which the Personal Accounts Delivery Authority must have regard in exercising its functions. I emphasise that the functions of the trustee corporation are very different from the functions of PADA. PADA is tasked in the Bill with designing the scheme within the framework of the principles set out in Clause 70. These important principles will have a vital part to play in the design of the scheme: they will underpin everything that the authority does. I know that Members will wish to discuss them when we get to that part of the debate in Committee, so I will wait until then for that.
However, we are clear that the principles do not have an explicit part to play in the trustee’s functions, and for very good reasons. The trustee corporation will be charged with running the scheme, as designed by PADA, within the framework of the principles and other requirements of the Bill. The scheme will be set up as a trust-based occupational pension scheme, so the trustee must always act in the best interests of members and beneficiaries. That is the duty of trustees of other trust-based schemes, and will apply here too.
Of course, the principles set out in the amendment appear largely to fall within that overriding duty; most certainly, participation—in proposed new subsection (2)(a)—cost of membership, returns on investment, members’ preferences and diversity do. They are directly related to members and beneficiaries, so will generally come within the duty of the trustee which, as I am sure noble Lords are aware, is embedded in trust law.
That leaves proposed new paragraph (b), which deals with minimising burdens on employers, and proposed new paragraph (c), which covers minimising adverse effects on other qualifying schemes. However, I am afraid that I cannot agree that either is directly relevant to the trustee corporation. PADA is charged with designing a scheme that does not place disproportionate burdens on employers. The trustee will be responsible for running that scheme, as designed by PADA. I see no reason why the trustee corporation, any more than any other set of trustees, should be charged with considering adverse effects on other schemes. The scheme it will be running will have a unique feature making it suitable for its target group and will be designed to complement, not replace, other qualifying schemes. Indeed, both proposed new paragraphs (b) and (c) are in PADA’s principles so will be firmly entrenched in the design of the scheme, as will the others under Clause 70. However, they are precisely about the design of the scheme, not about the running of it, and are therefore not for the trustee corporation. I hope that that distinction is clear.
There are also some serious concerns about the legal and operational implications of requiring the trustee to have regard to these principles, which I shall explain. The job of a trustee is mainly set out in their particular trust instrument, under general duties of trust law applying to all trustees and in additions made by pensions law for all pension scheme trustees. The amendment would impose an extra layer of scheme-specific statutory duties on this trustee, and only this trustee. In substance, this is unnecessary for the reasons I have already explained.
However, we should not assume that such duplication is harmless. The job of legislation is to change the law, and it is therefore always assumed to mean something. Knowingly duplicating duties that already apply, and things which will already be embedded in the scheme, is therefore bad in principle. In this case, the principles would also be legally and operationally undesirable in practice. They would add a unique further layer of prescription, in statute, applying only to this scheme and only to this trustee, which is a body with an already challenging job. Not only would the trustee have to do all that is already required by the scheme trust, by trust law and by pensions law, it would have to consider these new principles and their interaction with each of those other sets of duties, too.
The trustee’s main job is to serve the interests of actual beneficiaries. The balance between those interests and the interests of other people will be set out in the trust scheme. These principles would confuse what that duty is, and could upset that balance in unexpected ways. For instance, they could result in suggestions that issues on which key judgments have already been made are reopened; employers’ interests are mentioned, for example, as are the interests of other schemes. These things are all going to be considered in designing the scheme and, in important respects, will already be built into it: contribution limits, transfers and investment choice.
Putting these principles in legislation would create a new opportunity for someone to challenge the corporation on the design of the scheme, and ultimately to do so in the courts. That is not appropriate. These are, first and foremost, matters for PADA, then consultees and then Parliament in designing the scheme itself.
In summary, not only will adding a new and unique statutory burden fail to add anything to what this Bill already achieves, it also risks confusion and complexity that could be really detrimental. I hope that the noble Lord has therefore been helped by that explanation. It would not be appropriate to impose these principles upon the trustee corporation. I ask him to withdraw the amendment.
So, according to the Minister, the trustees are to have functions but no principles. These functions are to be given to the trustees by the Secretary of State, and we have absolutely no idea what they may be. It is all very well for the Minister to shake his head—
It is absolutely not right to say that trustees will have no principles. As I explained, the role of trustees is embedded in trust law in pensions legislation. The scheme that will be set up will be operated by the trustees in the light of those principles, policies and obligations. That is what this is about. To translate the principles of PADA, which is designing the scheme, into the trustees’ obligations is wholly inappropriate.
Surely to goodness, the noble Lord is still thinking of the original operation of the trustees. I was thinking much further ahead. I have no doubt that the needs of the trustees will change over the next century or so. Principles and functions are two very different things, as I was about to say when he interrupted me.
Of course, I readily understand that the trustees will operate under existing trust law and, indeed, any other trust law that happens to come about over the next X years, but the Bill does not give them any principles by which to work. I shall not press the amendment today, but I will think very carefully about it before the next stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
112ZDA: After Clause 66, insert the following new Clause—
“Pension investments: crimes against humanity, genocide and war crimes
The trustee corporation, and anyone appointed by the trustee corporation to manage the investment of pension money, may disinvest or sell, or not purchase or invest in, securities issued by persons whom the trustee corporation determines on reasonable grounds conducts, or has investments in, business operations that are associated with the commission of crimes against humanity, war crimes or genocide, the content of which is defined in the Rome Statue of the International Criminal Court and adopted into English law by the International Criminal Court Act 2001 (c. 17).”
The noble Lord said: I hope it will be for the convenience of the Committee if I speak also to Amendment No. 112ZDB. I do so in the context of my strong support for the Bill and its purposes. At the outset I pay tribute to the Aegis Trust and other organisations that do much effective work in this sphere of public policy.
The Bill is designed to respond to the needs of the vulnerable in our society. It clearly should not do so on the backs of vulnerable, exploited or oppressed people elsewhere in the world. Either the Bill is about equality, dignity and fairness or it is not. Such principles have universal application or they are not principles at all.
The door to the principles of the amendments was opened by the noble Lord, Lord Skelmersdale, on the previous amendment. Indeed, it is ajar in Clause 70(2)(e). The first amendment in this group would confirm that trustee corporations are allowed to disinvest pension money from companies associated with crimes against humanity, war crimes or genocide. The second would require the trustee corporation to have a written policy on ethical investment, covering such issues as environmental, social, human rights and good governance practices. This would be more than is currently required under the statement of investment principles in the Pensions Act 2004, which simply requires investors to state whether they have an ethical investment policy.
Let me be clear. I am not talking about mandatory principles which investors must take into account. The amendments require investors only to have an independent written policy covering the ethical considerations which motivate their investment decisions. There are three reasons for these amendments. The first, and in some ways the most important, is legal. At present, trustees and institutional investors are not sure beyond doubt that they are permitted to take into account a company’s human rights or environmental record when deciding whether to invest in a corporation. This uncertainty stems in part from a trend in the case law which has tended to underpin the requirement that institutional investors are bound by their fiduciary duties always to act, first, in the best interests of the beneficiaries and, secondly, to be prudent in their financial evaluation of investments, always taking into account the highest rate of return at the lowest risk. Where that leaves ethical matters in the spectrum of considerations is far from clear.
The Pensions Act 2004 allows investors to indicate in their statements of investment principles what, if any, ethical considerations are being taken into account, but this is entirely voluntary. It suggests that investors may take these issues into account but does not clarify whether they may move beyond profit maximisation to take such ethical considerations into account in addition, unless the trust’s mandate specifically mandates such a policy.
Many investors and trustees still believe that they are required to maximise financial returns on an investment-by-investment basis to the exclusion of all other considerations. Read carefully, however, the law seems to require trustees to act for the proper purpose of the trust and not for extraneous purposes. As long as the best interests of the beneficiaries are not compromised, trustees may take ESG considerations into account.
The amendments, while confirming and clarifying the situation would, I hope, encourage investors to engage with companies in which they hold shares. Recommendations from major shareholders will certainly turn a corporation’s thinking towards ethical standards. Investors themselves also need a safe harbour in the event that they do not invest or decide to disinvest because a corporation is involved with the commission of crimes against humanity, war crimes or genocide. As long as the investor acts prudently, and in the best interests of the beneficiaries, and as long as returns can still otherwise be maximised and risk minimised, disinvestment from such corporations should surely represent a safe and responsible investment decision. Investors should not have any lingering doubts and fears that they may face civil, criminal or administrative action because consideration of ESG issues was part of their decision-making process.
The second reason is policy. The amendments are entirely in keeping with the United Kingdom’s commitments to corporate social responsibility, as evidenced, for example, in the sustainable development strategy of 2005, the White Paper on international development in 2000, the international convention on social and economic rights, the United Nations Convention on the Rights of the Child, the Kyoto protocol and subsequent international undertakings on global warming, not least those at the recent G8 summit in Japan, and the European Union code of conduct on international arms sales.
To be consistent with those commitments, the personal accounts system should surely achieve and exceed worldwide best practice in responsible investment. The amendment would enable ethical investment to be part of the strategy of the United Kingdom’s largest public pension fund; it would be an imaginative lead to society as a whole. There would be a clear mandate to the trustees and appointed fund managers to engage with companies on environmental, social and governance issues. By contrast, without the provision, the fund, and with it the United Kingdom as a whole, will remain a Goliath in the fight for a fairer world.
The third reason is financial. There is much evidence that the effective management of environmental, social, human rights and governance—ESG—issues can have a positive impact on investment reforms and risk management and therefore become a financial benefit rather than a financial cost. It has been demonstrated that ethical good governance and transparent corporate practices can assist in achieving stable returns and long-term profit growth. That has been seen in the sphere of pension funds. A good example is the Co-op ethical fund, which has a more than commendable record among the all-share funds in recent times.
Of course, socially responsible investment is of more and more significance in the value of the reputation of the individual corporations. Indeed, increasing attention is now being given to the alleged negative part played by some corporations and their foreign investment in fuelling human rights abuses across the world. Examples have been the abuse of workers and sweated and child labour in the clothing industry and the representational damage to some of the clothing giants. Another example has been the controversial part played by some of the oil giants in Burma, Sudan, Africa and Latin America. Zimbabwe has given recent grounds for concern in this respect. There is no need to list the corporations by name; they know very well which they are. There is no doubt whatever that the cost to them of such behaviour will be significant. Responsible investors work with corporations to help them to future-proof their profits by, for example, limiting the negative consequences of poor governance, lax safety standards or climate change for their business.
Before concluding, I should identify the limits to my amendments. They do not propose that institutional shareholders should have free rein in making investment decisions. They are a focused guide to investors to evaluate ESG considerations when exercising their fiduciary duties to maximise profit. In the context of the rigid guidelines imposed on investors by that fiduciary duty, they simply underline their legal right to take their preference into account in accordance with the written statement of ethical principles.
The realities of globalisation mean that our choices and decisions affect the lives of people elsewhere in the world more directly than ever before. That is why globalisation makes it imperative that we give our attention to issues that previously too often fell below the moral radar. That is why our investment practices must accordingly change. However, I repeat that both amendments are focused and proportionate to their objectives. They are not mandatory and simply allow investors to take ESG issues into account.
The vital well-being of our pensioners—I take second place to no one in my support for that objective—should never be dependent on the violation of human rights abroad, the degradation of the environment, the acceleration of global warming, irresponsible arms deals and corrupt corporate practices. It would be deplorable if it did. I shall listen very carefully to what my noble friend has to say in response to these amendments. I shall do so in the hope and, dare I say, anticipation that he will endorse the need to move convincingly forward. I beg to move.
My Amendment No. 113H is grouped with the amendments of the noble Lord, Lord Judd, to whom I listened with great interest and considerable sympathy. As my colleagues in another place have indicated, on these Benches we believe in the need for a proper appreciation of the importance and benefits of ethical investment. It is true that ethically minded and socially responsible funds are not only increasingly common in the private sector, but they are likely to be as profitable as more traditional schemes. However, I noted that the Minister said on the previous amendment that trustees in a corporation will be subject to the obligations put upon the trustees of all pensions firms by law; for example, an ethical policy, as the noble Lord, Lord Judd, said.
However, I cannot support his amendments unreservedly. His Amendment No. 112ZDA envisages giving the trustee corporation an indication that, if another situation such as that in Zimbabwe were to occur, the corporation should consider its investments and perhaps sell any offending companies. Some very large companies are being named as continued investors in that area. It is not at all unlikely that, if personal accounts were up and running, these would be exactly the sort of companies that the trustee corporation would be likely to invest in. However, this policy would not be easy to implement. Any decision to sell out would be complicated and subjective. Pension savings will, after all, be made through funds, rather than directly in shares in any company or companies. It would be no easy matter to determine exactly where the invested money had gone.
Additionally, who is to say when the crunch point should come? Many jobholders, if ever they were asked about it, might consider that any investment in Zimbabwe in the past two years or so was unacceptable; whereas for others, that country has only recently gone beyond the pale. These difficulties will be prevalent in every situation. Crimes against humanity are often only clear with the benefit of hindsight, if then. It could thus be too late for an investment decision to have any effect.
Few international companies manufacture and sell one product. For example, the arms companies have in the past 20-odd years diversified into medical equipment. Trustees would have a considerable burden to maintain a detailed knowledge of the ethical implications of their entire portfolio.
The second amendment, Amendment No. 112ZDB, also commands my sympathy. I look forward to the results of the consultation that has been promised on this point. I hope that the Minister can provide more information on when it will be available and when he expects PADA to report on the responses. However, I have concerns about this amendment. What an ethical policy consists of could be endlessly debated. Issues could vary from crimes against humanity, to green issues, to support for international development and so on. There is a clear danger that this amendment could create a single concept of what ethical investment means against which all funds would be measured.
Finally, I turn to my Amendment No. 113H in this group. It summarises my overriding concern with the noble Lord’s amendments. Personal accounts are not meant to be a flagship pension fund setting a good example to other schemes; they are intended to be a vehicle for an acceptable minimum level of pension saving and their costs should reflect that. The primary aim of personal accounts is not to hold corrupt foreign Governments to account but to encourage and enable low earners to save for their retirement. If there is no option for ethical investment, some jobholders, who otherwise would have stayed enrolled, will opt out. I hope that PADA and, subsequently, the trustees, fully appreciate the importance of Clause 70(2)(f), which states that “diversity … should be respected”.
I have already discussed an amendment ensuring that that duty will be extended to the trustees. The noble Lord, Lord Judd, almost accused me of poaching; perhaps I am putting that thought too strongly. Without keeping a watchful eye on the costs of investment, personal accounts will fail. A small increase in the administrative costs will inevitably have a serious impact on the final return that a pensioner will receive. Although the investment funds may be rightly sound in themselves, without a cheap and effective organisation managing scheme they will do pensioners no good.
I conclude that there should be several funds, one of which will be a default fund, another a sharia fund, another an ethical fund that is perhaps—I stress that word—based on UN principles. There may well be more but I would go along with the noble Lord, Lord Judd, in as much as I believe that an ethical fund is a necessity.
I rise briefly, as a former board member of Christian Aid and Anti-Slavery International, to support the amendments, and particularly that on ethical investment. I agree with the thrust of the first amendment but I recognise, as did the noble Lord, Lord Skelmersdale, that disinvestment from countries such as Sudan or Zimbabwe is an extremely difficult proposition. How do you disaggregate the elements of an investment in a large or small company?
I confess that I have always been uneasy in the past when aid givers tread into high finance, but nowadays it is different. Aid organisations and groups such as the Aegis Trust can muster great expertise in ethically and socially responsible investment. That is now becoming mainstream in the City. My former noble friend, the noble Lord, Lord Jopling, whom I hope will speak, is himself a good example because he embodies a combination of those skills.
I sympathise with trustees who are asked to maximise their investments. I have listened to the arguments about fiduciary duties. However, those should not conflict with an ethical policy; the contrary is the case. These days, no one wants to invest in companies that use the most serious forms of child labour; that has been well exposed recently on “Panorama”, “Dispatches” and other programmes. The ESG practices need not now be seen in a category that is far apart from ordinary investment. More effective management of those issues will surely have a positive impact on investment and represent a financial benefit. It is right that the Bill should include an express commitment to those, especially when we are considering such an important public fund. On those grounds, I support the amendment.
In supporting both amendments tabled by my noble friend Lord Judd, I shall be brief because my noble friend has dealt comprehensively with all the issues. I will touch on only three matters.
First, I draw attention to British companies that are operating in Zimbabwe, Sudan and Burma, which have recently been criticised by the Government and across all parties. Despite that, if a pension fund were to disinvest from any of these companies on the grounds of its human rights record, that may be considered to be an unlawful decision of the trustees. Surely UK law should be clarified to allow disinvestment when it is entirely consistent with government policy and when not doing so might be contrary to that policy.
I listened carefully to the concerns of the noble Lord, Lord Skelmersdale, in this regard, and I think it is important to differentiate between a mandatory and an aspirational or voluntary requirement. It is proposed that trustees should be given a right, which they may or may not accept. Of course, one assumes that trustees will be responsible and make decisions carefully, and one can visualise a situation where a company will need to disinvest. As my noble friend pointed out, the reputational cost to some companies of carrying on in certain fields is so high that the value of the equity in the company goes down and disinvestment is in the interests of the beneficiaries of the pension scheme. Therefore, essentially, all that is being asked for in this amendment is that, if trustees want to disinvest for very good reasons, they should have the right to do so without being concerned about whether there are legal considerations or arguments against it.
When I referred to companies operating in Zimbabwe, I should have added that I have just received a letter from Anglo American rejecting the criticisms levelled against it and citing facts that support its contention.
Secondly, I refer the Committee to a report of 7 April by John Ruggie, the UN special representative on business and human rights, entitled Protect, Respect and Remedy: a Framework for Business and Human Rights. Professor Ruggie stresses the importance of Governments taking a wider approach across the parties to business and human rights policies. He points out that many companies take a narrow approach to managing the human rights agenda, which is often segregated within a company’s institutional box and kept away from other policy domains that shape business practice, including investment policy. He concludes that this inadequate domestic policy coherence is replicated internationally.
In the debate on the Pensions Bill in another place, the Government’s response to an opposition amendment seeking to sign up to the United Nations principles on responsible investment demonstrated that incoherence in action. The response was that they would applaud trustees choosing to adhere to these principles but that the Pensions Bill was not the place to address such issues, as the fund should be kept as simple as possible with no bells and whistles. I suggest that the fund would not be unduly complicated as a result of permitting the trustees in the default fund to take human rights, environmental and social issues into account in their decision-making process. There was also government concern about additional costs being incurred. Based on my long experience in the life assurance and pensions industry, I think that the costs of an ethical policy are likely to be insignificant in relation to the total costs of what will become a very large fund.
Finally, in its briefing on the Pensions Bill, the TUC also supports the principle of environmental, social and corporate governance in investment decisions—although not necessarily commitment to the UN principles, because it feels that commitment to a single batch of principles which might change in the future may cause problems. The Pension Protection Fund, set up by the Government, also subscribes to these principles. As my noble friend said, the principles are not prescriptive but voluntary and aspirational, so where better to ensure that ethical investment is part of investment policy than in what is likely to become the UK’s largest pension fund set up by the Government, and when better than at the beginning of the process?
In warmly supporting Amendments Nos. 122ZDA and 112ZDB, I declare an interest as a member of Friends Provident’s committee of reference, which advises it on ethical investment. I support these amendments because they clear up confusion and move the positive provisions of the Pensions Act 2004 on so that socially responsible investment, with all its gains in stable returns and long-term profit growth, quite apart from the ethical considerations so eloquently set out by my noble friends, can have a proper framework and protection.
I shall add briefly to this debate. This is an extremely important subject and has been put very seductively by the noble Lord, Lord Judd, who argued for it passionately. He has done the Committee a service in bringing these amendments to our attention. I know his record; he is passionate about the work of the Aegis Trust. All sides of the Committee would want to recognise and acknowledge the work that it has done. It is exemplary and has been done over many years. The context in which we are discussing these amendments is the better for what it has achieved.
However, this is not the place to start this debate. Ethical investment is a much wider issue than merely trying to attach it to the fund to which the amendments relate. I would be shoulder to shoulder with noble Lords who have argued in favour of the philosophy behind these amendments when it comes to corporate social responsibility and to requiring investors and the people responsible for investment decisions to be tasked with the long-term global consequences of some of their decisions, but I am frightened by the consequences that these amendments would have on the set-up of these funds.
I was more in favour of these amendments until I heard Mr Tim Jones, the chief executive of PADA, who made it clear to me, in a way that I had not properly understood, that his members cannot afford anything more than a core, stripped-down scheme. That is the core function of the Bill. The noble Lord, Lord Skelmersdale, put it well, and I concur with his position. Against a background of 50 per cent more people retiring by 2050 and 7 million people in this country undersaving, that must be at the forefront of our mind as we go through this important Bill clause by clause. Even if we get a low-cost, minimal scheme, it will be hard enough to make it successful without taking it into other dimensions. These are not frivolous or bells and whistles issues. I know that people talk about embellishments, but I do not consider ethical investment to be de minimis or in any way a second-order issue, but I do not think that these amendments would enable Tim Jones and his people to design a default scheme that would be able to stay anywhere within the 0.3 per cent costs that we are aiming for. Without that, it might fail, and that is too big a risk for me.
I hesitate to take issue with colleagues who have spoken, such as the noble Lord, Lord Joffe, who I know knows a lot more about these things than I do, but I feel that including the new clauses in the Bill would be onerous, and not just financially. I give the noble Lord an example of that. My understanding is that if we passed the amendments, we would find it impossible to allow the design of the PADA scheme to include tracker funds. If you go for tracker funds, I cannot see that you could possibly ever guarantee that they were all ethical investments because they are so diverse, by definition—that is their value. If you rule out access to tracker funds, you take a whole raft of initiatives away from the design and build of the new scheme in a way that must be inimical to the long-term objectives for pensions, which we are all trying to get to work.
Also, if I were a member of the trustee corporation and the new clauses were in the parent Bill, in primary legislation, I would have a care about legal challenge. It may well be voluntary, it may be a set of standards that we are asking trustees in the new organisation to aspire to, but people who feel disappointed and think that the new clauses are not being properly respected by the trustees would sue. Ultimately, there would be judicial review and the rest. That is absolutely the last thing that the new set of pension provisions that we are putting together needs.
I am willing to give the Government the benefit of the doubt on the consultation offered. The points made in the other place in the Public Bill Committee were taken seriously by Mr O’Brien, the Minister—
I am very sorry to interrupt the noble Lord, but does he not accept that the provisions are intended to protect the investor from judicial risk? Previously, you could always be summonsed for not putting first the fiduciary responsibility. The provisions allow you to invest ethically.
I understand that perfectly well; the noble Baroness made that clear in her speech. I understand that there is value in that; I absolutely understand that there is value in clarifying the law. She makes a powerful point there that I understand. I am arguing a slightly different point, which is that if you are sitting in the trustees’ chair and have these tests in primary legislation, if you do not measure up to those tests according to the judgment of someone who does not like what you have done, you could find yourself on the wrong side of a court action stating that you were not properly living up to the expectations of legal provisions in primary legislation.
The noble Baroness may be right; I may be right; all I am saying is that that is an extra thing to think about. You would need to get lawyers employed if you were a responsible trustee because trust law requires you to do all that. I think that the risk would be that there will be a bureaucratic legal dimension that would not be necessary if we did not pass the amendments.
My heart is with the noble Lord, Lord Judd, but my head is with the noble Lord, Skelmersdale, and, I suspect, the Minister. The noble Lord, Lord Skelmersdale, was absolutely right to say that we need assurances about the consultation. It must be a properly thought-through discussion about exactly what that will entail. We will want to watch that as the Bill goes through later stages.
I listened to Mr Tim Jones, who has a very difficult and significant policy job to do. His question always is: can his members afford what we are enacting in this House. In respect of the amendments, I do not think that they can.
I support the amendments in principle, and declare an interest as vice-chair of the Ethical Trading Initiative. I, too, have listened carefully to the debate, and I agree with the previous speaker that there is a bit of heart and head operating in the Chamber. However, I think everyone operates from the same premise that we do not want to undermine the scheme. The reality at the moment is that trustees can take only one decision. They have the fiduciary responsibility, and any departure from that, as we know from a number of court cases that have demonstrated this, leaves them liable to action.
In the 21st century, there should be an ethical investment option. Ethical investment is alive and well and has a proven track record, so no one wants to introduce a responsibility that would undermine this scheme. However, there is a need to consider these issues seriously, and I hope that the consultation that is being offered will be in-depth and that some attempt will be made to move towards this and embrace these principles.
I shall pick up a point made by the noble Lord, Lord Kirkwood, to underline the point made by my noble friend Lady Whitaker that the purpose of the amendments is to avoid litigation in the future. By clarifying the law, you automatically ensure that there can be no further legislation.
I thank my noble friend Lord Judd for tabling this set of amendments and for the opportunity to debate the important issue of ethical investment. I am bound to say that it is good to have some passion injected into our pensions debates, which can sometimes be quite technical and turgid.
The wider subject of ethical investment is of course particularly relevant at the moment, and before I talk more specifically about personal accounts and the amendments, I acknowledge the concerns highlighted by my noble friends Lord Judd and Lord Joffe last week about Zimbabwe and will be very clear about the Government’s position on British business there. Although, to our knowledge, no British company has acted illegally, it is absolutely right that the companies and their shareholders look hard at how their activity in Zimbabwe may be benefiting the regime. We will work with them to ensure that the regime cannot benefit from British commercial activity.
We are now in discussions with EU member states with a view to bringing a similar package of concrete proposals for action to the next EU Foreign Ministers meeting on 22 July. These measures might include increasing the number of those on the EU travel ban and assets-freeze lists whose actions are contrary to a political settlement, freezing the EU assets of businesses and firms owned or controlled by those on the list, and preventing or making it harder for regime members to attend international events within the EU.
Against this background of international concern, I also make it clear that we fully recognise the increasing interest in ethical investment both in Parliament and the wider community. As my colleague the Minister for Pensions said recently at the launch of the national ethical investment week, to which he referred at Second Reading:
“If we are to build a more successful, vibrant, modern economy we can no longer afford to view economic success as being in conflict with social and environmental goals. On the contrary these goals must be seen as integral to economic success and the very essence of sustainable development”.
A significant area for ethical investment is pension schemes, and again I assure noble Lords that the Government are sympathetic to the concerns driving these amendments. Increasing numbers of people take an interest in where their money is invested, and it is proper that this should be considered when setting up a new workplace pension scheme on the scale of personal accounts. We should also recognise that ethical investment and sound financial returns are not inevitably in conflict.
However, we must also bear in mind the primacy of the trustee of any pension scheme when it comes to making investment decisions. I appreciate that the scale of personal accounts will be significantly greater than that of other schemes but, as for other trust-based schemes, the trustee must have the freedom to make the investment choices that are right for the members. To attempt to restrict this freedom would be to treat the trustee of personal accounts differently from the trustees of all other schemes. That said, I believe I can give noble Lords an assurance of the real importance being placed on ethical investment.
First, it has been noted that the law already requires the trustees of pension schemes to prepare a statement of investment principles that sets out the guidelines which fund managers must follow in investing members’ funds. This statement must be made available to members and prospective members and must set out the extent to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments. I should add that this law was of course introduced by the Government in recognition of the importance placed on responsible investment.
Secondly, following debate on this issue in the other place, Tim Jones, the chief executive of the Personal Accounts Delivery Authority, confirmed that responsible investment will be explicitly addressed in the investment consultation which the authority will undertake later this year. The consultation will start in the autumn and we hope to respond by next spring. I am sure noble Lords will be aware that Paul Myners, the chair of the delivery authority, only last week stated publicly that PADA,
“will consult [on an SRI fund] and if there is a strong demand, as I anticipate there will be for SRI management, then there will probably be an SRI fund”.
I hope that all interested parties will respond to that consultation, as it will of course be considered by the trustee corporation in the development of its statement of investment principles.
Thirdly, we have tasked PADA with doing some preparatory work on the investment strategy to assist the trustee. In carrying out this work, PADA will draw on research into the investment preferences of the target group, discussions with interested parties and also draw on the expertise of its consumer and trustee advisory committees. As part of that process, and in view of the powerful contributions that have been made today, I am happy to extend an invitation to my noble friend Lord Judd and other noble Lords who have spoken on this issue today to meet Paul Myners and Mike O’Brien for a further discussion of their views on responsible investment. I know that Paul Myners is particularly keen to engage on this issue. I hope that this has clarified for noble Lords the importance that is being placed on responsible investment.
I now turn to the specifics of the amendments. The Work and Pensions Select Committee, Paul Myners, and virtually everyone who has commented on personal accounts have emphasised that to be a success, this must be a simple, low-cost scheme. In its preparatory work on the investment strategy, as in all its work, PADA will be obliged to have regard to the principles in Clause 70, and in particular the principle in Clause 70(2)(d), that the costs of scheme membership should be minimised. Amendment No. 113H tabled by the noble Lord, Lord Skelmersdale, would effectively duplicate this provision, and so I do not believe it is necessary.
Amendment 112ZDB, tabled by my noble friends Lord Judd and Lord Joffe, and the noble Baroness, Lady Northover, would require the scheme to have a written policy on ethical investment. As I have said, it is not for the Government or indeed any other person to put any specific investment requirement on the trustee. In addition, I have already discussed in some detail the role of the statement of investment principles and the current requirements in relation to that statement. Again, I believe that these would largely be duplicated by the amendment.
Amendment No. 112ZDA seeks to give the trustee corporation the right to disinvest from investments associated with,
“crimes against humanity, war crimes or genocide”.
In discussing this I should like to give some assurance on what I understand to be the current operation of the law. Noble Lords are correct that there is no such overriding right on the part of trustees. However, I have been assured that there is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial returns, security and diversification. I have already mentioned that the trustees of a scheme are obliged to cover in the scheme statement of investment principles the extent, if at all, to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments. Given that regulation 2 of the investment regulations refers to the retention and realisation of investments, we would say that those regulations would already oblige a trustee to state to what extent it makes such investments, and implicitly also why. This is an obligation on trustees, not simply a right to choose whether to disinvest or to sell such interests. Furthermore, the SIP must be reviewed at least every three years.
Apart from this statutory duty, case law also gives trustees guidance. There is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial return, security and diversification. Indeed, it has been observed by commentators in the eighth edition of the Pensions Law Handbook that if trustees wish to make an ethically acceptable investment which will produce a financial return at least as good as that produced by any other investment, there is no reason why they cannot do so. While, strictly speaking, there may be no overriding right to divest shares held in such interests, by virtue of existing statute law, common law and the consequent combination of obligations and latitude for trustees, in our view trustees are able to act in a similar way without a specific legal right to do so.
This position applies to all pension scheme trustees, whereas the proposed new clause would apply only to the trustee corporation. It would not be right to impose specific abilities or requirements on that body alone, thereby making its situation unequal to that of other trustees. I therefore hope that, with the offer of further discussions to explore any need to clarify the law on this issue, the noble Lord will feel able to withdraw his amendment.
I hope that I have made our position on investment absolutely clear: we take responsible investment seriously but we also take seriously the primacy of the trustee over investment decisions in any pension scheme. It would not be appropriate for the Government or Parliament to impose any guidelines that might restrict the trustee’s independence in carrying out its overriding duty to members, although government have a role in engendering a climate which fosters ethical investment and in ensuring that legislation does not act as a barrier to those who are committed to this.
I am grateful to noble Lords for their thoughtful participation in the debate. I am sure that the authority, and the trustees in turn, will wish to consider the representations made. On that basis, I hope that my noble friend will feel able to withdraw his investment and that he will participate in the further discussions that we wish to have, particularly with Paul Myners.
Before the noble Lord, Lord Judd, withdraws his “investment”, to use the Minister’s phrase—I think he meant his amendment—I should say that I have no intention of pushing my Amendment No. 113H, especially in view of the very strong hint that the Minister has given that there will be a socially responsible investment fund. I wish to goodness that he could be more forthcoming about the various other funds that we all expect the PADA to arrange.
As I have outlined, there will be consultation on the statement of investment principles. Until it is complete, it is impossible to be clear about the range of funds that may be on offer. It is implicit in all discussions to date that there will, in any event, be a default fund to make sure that the issue of inertia does not operate adversely and is consistent with our approach to auto-enrolment and personal accounts.
I appreciate my noble friend’s considerate and full reply. It was characteristic of his whole approach to his responsibilities, and I welcome that. I hope he will forgive me for saying that the complicated situation, as he honestly described it, is a good reason why we need clarification in the law. It is important that people who carry these heavy responsibilities should be in no doubt about their rights. From that standpoint, clarification is important.
The other point I wish to make is one with which we have to grapple in life all the time. I suggest, in the best possible spirit, that he perhaps wants to have his cake and eat it. Supporting ethical investment and maximising return as a paramount consideration are not always reconcilable aims; there is sometimes a contradiction and you have to make a choice. That is a hard-headed point if ever there was one.
I thank the noble Baroness, Lady Northover, for putting her name to the amendment. She was valiantly here until a very late hour the other night but cannot be here today. I know how much she is behind the amendments. I also thank my noble friend Lord Joffe. He was my long-suffering chair when I was director of Oxfam. The fact that we remain friends says a great deal about his generosity of spirit and patience. He brings a lot of other highly relevant professional experience to these matters. I also thank all those who participated in the debate. All of them have very real experience to offer.
At this point it is always tempting to look at all the points from one’s initial remarks that have not been answered and to go over them again. That is an abuse of the Committee. I simply hope that the Minister and others will look carefully at all the arguments. I shall pick up just a couple of them.
The noble Lord, Lord Skelmersdale, made a point about putting on people new obligations which would be difficult for some of them to fulfil honourably. That was well answered by my noble friend Lord Joffe, who again emphasised that this is not obligatory; it is permissive. Therefore those who want to pursue these matters, and watch and monitor them in more detail, will feel that they have the authority of the law behind them. My noble friend Lady Whitaker supported that, pointing out, in response to the noble Lord, Lord Kirkwood, that the amendments would be a protection for trustees and not an added burden.
I was delighted to know that I have at least the heart of the noble Lord, Lord Kirkwood, even if I do not have his head. I hope he will forgive my saying so, but I think he is mistaken about this being simply a hearts-and-heads argument. In the context of the situations with which we are dealing, there may be very adverse consequences for investors if they pursue exploitation. It may lead to a violent situation in the countries concerned, which will disrupt all that those investors are trying to invest in, achieve and do there. It is misguided and mistaken to say, as people too often do, that one argument is from the heart and the other is from the head. Sometimes it seems that the heart is more hard-headed than the head. That point should be taken more seriously.
The noble Lord, Lord Kirkwood, also referred to the size of the challenge. It is a huge challenge for the future: a declining productive labour force and an increasing number of people dependent in old age. If we are a civilised society, we must struggle to ensure a decent, full life for people, with greater life expectation and the rest. However, I simply cannot accept that, in answering that challenge, we should ever be seen even indirectly to condone the securing of people’s well-being through the exploitation of women, the breakdown of their health at the cost of miscarriages long hours, awful working conditions, child labour, premature death and sweated labour. How could it be acceptable in a civilised society that we achieved our well-being at that price? It has to be tackled.
The Minister refers to our current obligations under various conventions, and I am glad that he takes them seriously. We have obligations under conventions, but it is in new legislation such as this that we have a chance to put some muscle into the rhetorical commitment. If we dodge that, we will bring the whole concept of making conventions into disrepute.
My noble friend was very conciliatory in his reply. He talked about further deliberations and consultations. I think he suggested that he would welcome my coming and talking more about the issues at stake here. If there really is an opportunity to do that before Report, I shall very willingly withdraw my amendment. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 67 agreed to.
[Amendment No. 112ZDB not moved.]
Clause 68 agreed to.
Clause 69 [Functions]:
112ZE: Clause 69, page 34, line 5, leave out “the Secretary of State or”
The noble Baroness said: I shall speak also to the other amendments in this group. They are probing amendments, based partly on a briefing from the Law Society of Scotland, and they focus on the role of PADA. Under Clause 69(1)(b), PADA is to advise and assist both the Secretary of State and the Pensions Regulator in connection with compliance. My Amendment No. 112ZE deletes “the Secretary of State”. It is quite unclear to me why the Pensions Regulator should need PADA to advise it on compliance. The regulator is going to have to devise its own approach to compliance, and I am not at all clear why PADA will know anything more about that than the regulator. However, I am even more unclear about why the Secretary of State should be involved—he is not going to run the compliance regime. This is just a recipe for too many cooks spoiling the broth.
Under Clause 69(1)(a), PADA has the functions of assisting and advising the Secretary of State in connection with setting up the personal accounts pensions scheme, which is what we would expect. However, Clause 69(3) says that the advice given to the Secretary of State can include assistance and so on to the trustees of the scheme. Amendment No. 112ZF deletes that for two reasons. First, it explores why PADA has to advise the Secretary of State in order to advise the trustees. In other words, why can it not do so directly? Secondly, it explores whether this blurs the independence of the trustee corporation whose board alone will be responsible for decisions. The Secretary of State will have no role in those decisions—or at least he should not—and to channel advice through him is to create the murkiest of water.
Amendment No. 112ZG makes it clear that PADA’s functions in relation to financial products are strictly limited to advice to the Secretary of State in connection with establishing the personal accounts scheme. We do not want to see PADA morphing into some kind of all-purpose advisory body getting involved in different kinds of savings and pensions products; it should be focused solely on personal accounts—that is what its title says it is: a personal accounts delivery authority—and nothing else.
Amendment No. 112ZH replaces “corporation’s” with “Authority’s” in Clause 69(7). As far as I can see, the Bill refers to PADA as “the Authority” throughout, while “the corporation” is used in Chapter 4 to refer to the trustee corporation. I think that subsection (7) is supposed to be about PADA rather than the trustee corporation, and that is what my amendment seeks to achieve. I beg to move.
I thank the noble Baroness for tabling this group of amendments because they give me the opportunity to provide the Committee with some detail about the governance arrangements for delivering the reforms set out in the Bill, and to put into context the relationships between the different organisations involved and their roles.
The reform programme, known as the enabling savings retirement programme, is one of the Government’s major programmes. It covers the introduction of automatic enrolment and the mandatory employer contribution, the implementation of personal accounts and the communications to support these reforms.
There are four strands to the programme. My department is responsible for the development of policy and delivery of the necessary legislation, both primary and secondary. The authority is responsible for the delivery of the personal accounts scheme, which it will hand over to the trustees to operate. The Pensions Regulator is responsible for compliance with automatic enrolment and the payment of contributions. Finally, there is joint responsibility across those organisations for the communications strategy for individuals, employers, the industry and intermediaries.
Clear governance structures are essential in managing a programme of this scale. There are interdependencies, and we have established a cross-government programme board with overall responsibility for ensuring that delivery is progressed cohesively by the organisations involved. This includes individuals from the delivery organisations. As part of that governance, it is of course essential to have a senior officer responsible for the delivery of the whole programme. In view of its responsibility for these public policy reforms, this post is held by my department.
Clause 69 sets out the authority’s functions as part of this programme—to advise and assist with the establishment of personal accounts, including advising and assisting the trustees of that scheme; and, as required, to advise and assist with arrangements in connection with automatic enrolment.
I can assure Members of the Committee that the authority’s primary task is the establishment of the personal accounts scheme which it will hand over to the trustee. However, there will be a period during which the authority will need to work alongside the trustee to assist and facilitate the transfer of the infrastructure and processes developed for the scheme. Removing subsection (3), as Amendment No. 112ZF would require, would prevent the authority providing any help to the trustee. I cannot see how this could in any way be desirable. Alongside this, the authority may be required to assist the Pensions Regulator, within the context of the programme, under the overall control of the Secretary of State. That is why subsection (2)(b) is drafted as it is and why I cannot accept Amendment No. 112ZE. We should not close down opportunities for all parties in the work programme to work together, within a clear governance structure, to deliver our ambitions for these reforms.
Amendment No. 112ZG focuses on the authority’s remit. I confirm that the authority will have no legal authority to undertake any wider activity, including providing financial products, beyond the scope of the personal accounts scheme.
I hope that these explanations have been helpful in establishing why Clause 69 is as drafted. I therefore urge the noble Baroness to withdraw the amendment. I note what she said about Amendment No. 112ZH—she is absolutely right and we are happy to support it.
This is a huge project; it is important that we provide opportunities for effective communication and assistance, where it is appropriate, between the key players within a structure. That is what the clause seeks to do. It is that interrelationship which will make a success of the scheme.
The noble Baroness may want me to cover some points that she feels I have not; if so, I will try to do so.
I am still a little unclear about the treatment of the trustee corporation in this clause compared with that of the regulator. When will the trustee corporation be set up? I am not clear when it becomes a player in its own right as part of the process. Secondly, if the trustees of the scheme are to get advice from PADA, why cannot we draft that directly into Clause 69(2)(a) rather than via the Secretary of State in subsection (3), which was what my probing amendment was trying to ascertain?
Will the Minister also consider whether continuing to call the authority “PADA” is right? Its remit has changed since the Pensions Act 2007 to include a significant role in relation to auto-enrolment, which is nothing to do with personal accounts.
The noble Baroness’s second point was about the role of the Secretary of State in communicating with the trustees and why PADA could not do that directly. I am sure that there will be circumstances in which PADA will do that directly, but we must bear it in mind that the Secretary of State is the settlor of the scheme and there will need to be communications in making sure that when the scheme order is brought forth, it covers everything it needs to.
When will the trustee corporation be set up? The trustee corporation will go live in running the scheme at the point when the infrastructure is in place and PADA has done its work in putting together the totality of the scheme. There will be a transfer to the trustee corporation, which, as we have discussed previously, we expect to take place during 2012. The trustee corporation will be in existence prior to that, because it will have to adopt a statement of investment principles, for example, as we have just discussed. The precise timing of its being set up and of the appointments of at least the first trustees has not yet been finally locked in place, but one can see the time frame within which that must take place. We should perhaps refer to it in future as “the authority” rather than PADA, which I hope will deal with the point that the noble Baroness raised. I hope that that is clear.
I will read carefully what the Minister said. I am still in a little fog as to why the trustees cannot be drafted directly into Clause 69(2), notwithstanding the fact that the Secretary of State is the sponsor. I can see that the Secretary of State needs advice from PADA in relation to the scheme—I have no problem about that—but why the trustees are not advised separately, I do not really understand. However, I will read what the Minister has said and consider it between now and Report. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 112ZF and 112ZG not moved.]
112ZH: Clause 69, page 34, line 19, leave out “corporation’s” and insert “Authority’s”
On Question, amendment agreed to.
Clause 69, as amended, agreed to.
Clause 70 [Principles]:
113: Clause 70, page 34, line 23, at end insert “and the Authority must exercise an overriding duty to act in the best interests of future members and, from 2012, members of the scheme”
The noble Baroness said: The amendment is in the names also of the noble Lord, Lord Oakeshott, and the noble Baroness, Lady Greengross, who want very much to be associated with it. It is a simple, probing amendment which would give PADA a clear focus on its core activity. The authority, as the Minister has said we should call it, is given in Clause 70 no fewer than six broad principles under which to work. It is important that it does not lose sight of its main purpose, which surely should be to act in the best interests of members and future members of the scheme. Giving PADA an overriding duty would help ensure that if there was any conflict between the principles outlined in the Bill, it would be clear where PADA’s duty lay. It would also give an important layer of security to scheme members.
When the consumer organisation, Which?, carried out market research into pension provision, people said they would trust most an independent body such as that recommended by the Turner commission. If they knew that such a body was to be set up with a clear, overriding duty, such as that in Amendment No. 13, to look after their interests first and foremost, rather than with at least six different principles and no one overriding principle, I think that I know which they would prefer.
It is stated in the Explanatory Notes to the Bill that the six principles are matters to which the authority will have “express regard”. That may be a term of art—I am very ignorant about terms of art—but what exactly does it mean?
In responding to the amendment, the Minister will probably say that PADA has to get the balance right between employers and other qualifying pension schemes and that an overriding objective for PADA is therefore undesirable. However, that is a matter for debate. It is entirely possible that PADA finds that its plans for personal accounts conflict with the need to encourage participation in qualifying schemes. Minimising the adverse impact on qualifying schemes might dilute the impact of personal accounts on the target group. Others would argue that getting the balance right between the new scheme and the broader pensions industry is the business of the Pensions Regulator and not that of PADA. But whatever reply the Minister gives, it is important that we have this debate now so that we can be clear what PADA’s main objective is. I beg to move.
I support this amendment, although I had assumed that the authority had this duty anyway—to look after the best interests of members. However, as the noble Baroness points out, it does not actually say that in the section of the Bill dealing with principles. I see no reason why it should not be stated in the Bill, as she suggested.
I rather wonder whether the noble Baroness, Lady Thomas of Winchester, regrets the absence of her noble friend Lord Oakeshott. I have to say, with no disrespect to her, that I rather regret it.
Even though this is a probing amendment, I cannot support it. From a narrow point of view, it appears entirely sensible: the trustees will, by trust law, have to consider the best interests of the membership. So why not the authority, as we have to call it now? That ignores an important difference between the two bodies; the trustee corporation is specifically set up to handle personal accounts and only personal accounts. In contrast, the authority is being established not only to set up personal accounts but to give advice and assistance to the Secretary of State on the proper functioning of auto-enrolment in general. On these Benches, we are very much aware that personal accounts, while better than the complete lack of provision currently available for many in the target group, are considerably less generous than the majority of private pensions that we are hoping will qualify for auto-enrolment. It would therefore be in many cases counterproductive and deeply inappropriate for the delivery authority to promote membership of personal accounts ahead of membership in other qualifying schemes—a point that I sought to make a little earlier in our debates this afternoon. Yet that is what this amendment could lead to.
It is cheaper to administer a large scheme than a small scheme. Given the impact that administrative charges will have on the eventual return, it will certainly be in the interests of members with personal accounts for the authority to engage employers to use personal accounts rather than other qualifying schemes. Your Lordships may consider that to be rather a reductio ad absurdum, and perhaps it is, but it highlights effectively my wider point that we should not allow the authority to establish a nationalised pension system. It is to manage the implementation of auto-enrolment. I believe that this amendment would add nothing to that duty and might very well hinder it instead, which we do not want to happen.
I start by saying that I am delighted to see the noble Baroness involved in this, as she has been involved so ably in lots of other pieces of legislation that we have debated recently.
Clause 70 requires the authority to consider a number of guiding principles in carrying out its work; these principles provide the framework within which the authority will undertake its functions and deliver its objectives. I fully agree with noble Lords that the interests of future members are of central importance in the set up of personal accounts. The principles and other measures in this Bill provide a focus for the design of the personal accounts scheme. That focus is on moderate to low earners without access to good-quality workplace pension provision. The principles and other measures in this Bill already ensure that the authority takes account of those core matters which will be important to the prospective members of the scheme—those in the target group. This is why there are principles covering the need to encourage and facilitate participation, minimise costs, take account of members’ preferences in making decisions about investment choice, and respect diversity. All these matters are likely to be of prime concern to potential members of the scheme. However, noble Lords should keep in mind that the authority is designing and setting up the scheme as an integral part of our wider ambitions for these reforms. The personal accounts scheme is being designed to fill a gap in the current pensions market and will complement, rather than replace or undermine, other good-quality pension provision.
While the interests of prospective members of the scheme are important, they are not the only consideration. The authority must also have regard to those other matters that are fundamental to the success of the reforms. Those include, for example, the impact on employers and on the broader pensions industry. I cannot, therefore, agree that the authority should have one overriding duty. It is vital that the authority gets the balance right between the needs of the personal accounts scheme and its future members, the overall impact on employers and the impact on the broader pension industry—including members and prospective members of other qualifying pension schemes.
The authority has established a consumer representative committee and has launched an extensive strategic and targeted customer insight and research programme. These measures will ensure that it has an accurate understanding of the needs of those who are likely to be members of the scheme, and that relevant processes are thoroughly tested.
Finally, on the point about members’ interests after 2012, I remind Members of the Committee that, once the scheme is operating, the trustee corporation, as with any other trust-based scheme, will have a duty to act in members’ best interests. I hope that that has helped the noble Baroness.
It is not simply a matter of the authority complying or not with the principles. Clause 70 requires the authority to have regard to the principles as it carries out its functions under Clause 69. It cannot choose to not comply with one or more of the principles. Its statutory duty will be to have regard to the matters articulated by the principles in everything that it does. Inevitably, in considering the principles, there will at times be competing priorities. However, the authority will need to balance and make judgments across the set of principles to reach conclusions that can provide the best solution in the circumstances. Depending on the matter under consideration, the authority may have good reason to give one particular principle more sway than others, but this is not the same as saying that it has not complied with the principles. I hope that, with that further explanation, the noble Baroness will be satisfied and feel able to withdraw her amendment, and I hope that it also satisfies my noble friend Lady Turner.
I am grateful to the noble Baroness, Lady Turner, for her support and to the Minister for his kind words. As the noble Lord, Lord Skelmersdale, knows, I have my L-plates on for this debate, but I was always going to move this amendment, not my noble friend Lord Oakeshott. I thank the Minister for his words of elucidation. I found them extremely helpful. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
113A: Clause 70, page 34, line 25, after “in” insert “existing”
The noble Lord said: I speak to a larger group of amendments than usual: Amendments Nos. 113B, 113D to 113F, 113HA and 113M. My amendments are reasonably clear. They tweak the principles under which the authority will operate to ensure that it does not inadvertently do more harm than good, or even less good than it otherwise might.
As I said previously, I remain acutely aware that the authority is, despite its name, not limited to the establishment of personal accounts. Although setting up personal accounts is an important part of its duty, it will also have an equally important—even critical—role to play in establishing a landscape where saving for your retirement is more common at low incomes, whether through personal accounts or not.
Amendment No. 113HA sums up the thrust of our concerns quite well, especially in its sub-paragraph (iv). The Government’s and the authority’s overriding aim must be to increase total savings. It must not be considered an acceptable outcome if the existing pot of savings is merely redistributed more widely. If this existing pot does not expand, the Bill will have failed, and failed dismally. To prevent that happening, my amendments seek to ensure that the authority actively seeks to prevent the basic levels of employer and employee contributions becoming in any way the accepted norm across the industry.
As we have said many times, and as Amendments Nos. 113A and 113D highlight, existing pension schemes tend to offer considerably more generous terms than personal accounts will. These schemes need to be fully appreciated by the authority, and membership into them should be encouraged. Amendments Nos. 113B and 113E make a slightly different point. It is likely that some existing schemes will not make the qualifying criteria but would still result in better retirement income than personal accounts. For example, the Tesco pension scheme would fail the qualifying test because workers are auto-enrolled only after a year with the company. It is not beyond the bounds of possibility that a similar company might comply with auto-enrolment into personal accounts, but keep its more generous scheme running in the hope that workers transfer to the better scheme when they become eligible for it. As the Bill is drafted, it will be a breach of employers’ duties for them even to point out the existence of their non-qualifying but more generous scheme. It will also be impossible for employees to port their personal accounts money into a firm’s much better scheme after a year or so in personal accounts. What price, then, the very successful portability arrangements of my noble friend Lord Fowler that even this Government have improved?
The pensions market is a highly complex and frequently innovative place. The authority must have the flexibility to use common sense when weighing up whether workers are being materially harmed by remaining in non-qualifying schemes rather than being shunted willy-nilly into personal accounts. The authority should focus on giving low earners who have no access to a pension scheme the opportunity to start saving. The Minister will no doubt say that there is no intention that it should ever broaden its remit into attempting to break into the pensions market for more affluent customers. Unfortunately, such a Hansard reassurance is in no way comparable to primary legislation. Amendment No. 113F would put the safeguard in the Bill.
Amendment No. 113M seeks to improve public scrutiny of the authority by ensuring that its compliance with the Clause 70 principles is published. It would also throw up any inherent contradictions in the principles—paragraphs (d) and (f) in particular could be mutually exclusive. I beg to move.
Clause 70 goes to the very heart of our ambitions for these reforms. It captures in legislation those matters which have shaped the development of our policy, and which must guide the authority as it moves forward with implementation.
I know that we all support the goal of more people saving for retirement, more people contributing more for longer and, ultimately, higher incomes in retirement. Equally, we know that to achieve these aims we need to address that combination of individual inertia and poor commercial viability which has resulted in large numbers of moderate to low earners not saving enough for their retirement.
Amendment No. 113F would alter the principle at Clause 70(2)(d) to require the personal accounts scheme established under Clause 58 to be aimed at a target group. The Bill is drafted to provide the legislative framework to deliver a scheme focused on the target group of moderate to low earners who do not have access to good quality workplace pension provision. However, the Committee will appreciate the difficulty of achieving a precise legislative definition of a target group that will stand the test of time. Instead, our approach is to achieve the same goal by setting the scheme a clear focus through the unique features of the contribution cap and prohibition on transfers, and the requirement on the authority to design a scheme within the framework of the principles. The authority fully understands this. When Tim Jones gave evidence to the committee of the other place, he made clear the authority’s role, saying:
“It is our job to address that target market”.
Amendments Nos. 113A, 113B, 113D and 113E seek to broaden the scope of the principles requiring the authority to have regard to all existing schemes. I make clear that the personal accounts scheme is not being introduced to replace good quality pensions. Instead, it will be an additional pension scheme focused on the target group of moderate to low earners, which will sit alongside other schemes in the pensions market. That is a core ambition of our reforms.
The amendments would broaden the scope of the principles beyond the pension provision that is defined as “qualifying” in Clauses 15 to 25. They would mean that, in designing personal accounts, the authority would be required to have regard to all existing schemes. That could include schemes that do not meet the minimum standards that we consider important in providing for a reasonable income in retirement. That cannot be right, and that is why it is appropriate to specify qualifying schemes in the principles.
I share the noble Lord’s wish that the private pensions industry, which works well for many millions, should be allowed to flourish. We want to preserve good quality existing workplace pension provision, much of which offers greater member benefits than the minimum standard prescribed by the reforms.
Amendment No. 113HA seeks to include a new principle for the authority about the overarching ambitions of the reforms. Our ambitions for the reforms are clear; more individuals saving and more pension contributions. However, that should not be expressed as a distinct legislative principle for the authority, as Amendment No. 113HA seeks; rather it is part of the rationale behind the Bill and the pension reform programme.
As such, it is for the DWP to monitor the likely impact and evaluate the extent to which our objectives for the reforms have been met. Already, we have an extensive programme of research and data collection to inform this. We are tracking employers’ and individuals’ attitudes and responses to the reforms, we are continuing to develop our evaluation strategy in consultation with external stakeholders and we expect a full evaluation to be undertaken after the reforms have bedded in. Much of the research and evaluation will be publicly available, and will provide opportunities to examine the impact of the reforms on pension saving and the wider pensions market.
Amendment No. 113M would insert a new clause requiring the authority to include in its annual report a report on how it has complied or otherwise with the principles set out in Clause 70. During the debate on the principles in the other place, my honourable friend the Member for Warwick and Leamington explained that the authority’s annual report will provide detail on the delivery and performance of its business, which will include information on how the principles have been considered during the year. Therefore, we do not think that this needs to be enshrined in legislation. I can also confirm that the authority’s forthcoming annual report for the 2007-08 financial year states that future annual reports will include such information.
In closing, we take very seriously our responsibility in ensuring that the reforms achieve our aims. I believe that the measures in the Bill, including the principles as they are drafted, provide both the framework for delivery and a framework against which success will be assessed. I hope that I have been able to reassure the noble Lord that we share the ambitions behind the amendments, but that there is no need to amend the existing drafting of the Bill to achieve those aims. Accordingly, I hope that the noble Lord, Lord Skelmersdale, will feel able to withdraw his amendment.
Before the noble Lord, Lord Skelmersdale, responds and decides what to do with his amendment, perhaps he can help me on a couple of questions. I listened carefully to him and to my noble friend. I am particularly puzzled by the implications of Amendment No. 113F. Like the Minister, I share the objectives expressed by the noble Lord, Lord Skelmersdale, that we are seeking to target lower income people who are currently not in saving schemes to come into a very simple, stripped down scheme and to get people to save who otherwise would not. I do not think that there is any dispute between us on that.
I do not understand why the noble Lord seems to be suggesting, despite the remarks of his noble friend Lady Noakes on previous occasions about how we always assume that employers are “unscrupulous”—on this side we always distance ourselves from such allegations—that unless something like this amendment is in the Bill, employers will close down better, more generous, contributory schemes and focus the conditions of personal accounts on people who are better paid than the lower paid and who are already protected in schemes. In other words, the noble Lord seems to be worried that the employers will use the arrival of personal accounts effectively to dilute their pension promise.
Is that what the noble Lord is worried about? If so, he seems to be confirming the allegations of the noble Baroness, Lady Noakes, that there may or may not be unscrupulous employers. If that is not his allegation, his worry or his concern, why would any employer or employee seek to move to a personal account with a 3 per cent contribution on only half median earnings—half the salary range—compared with the conventional DC scheme of, on average, a 6 per cent contribution on the full salary range?
If we are not to end up with two schemes within a company—one for the higher paid and one for the lower paid—how does the noble Lord overcome the problem of someone who starts on fairly modest earnings, perhaps on the shop floor, and then ascends to office management or supervisor or whatever? Does the noble Lord expect that person to go from one scheme to the other? If so, they will pay a very high cost in terms of what happens to the old personal account scheme that will be frozen when they have to move to a new DC scheme, given the refusal to allow any portability between the two schemes.
What is the noble Lord actually afraid of? Who does he think will warp or manipulate the system? Why would employers who were willing to continue with a decent DC scheme not wish to do so? Why would employees wish to move from one scheme down to the other? What happens to the occupationally mobile?
In response to the final remarks of the noble Baroness, Lady Hollis, I am interested in employees who move up the savings scale, not down it. In other words, as I said in my introductory remarks, I can see absolutely no reason why an employee cannot, as the noble Baroness said, start on the shop floor, work there for perhaps a year or two and be auto-enrolled into personal accounts, because they are too young to join the main scheme. Then, perhaps because they have a quickness of intellect or whatever, they might be promoted to a substantially higher position and move into the firm’s qualifying scheme. At that point, there is a tiny level of investment in the personal account, which essentially is frozen, until, possibly—I repeat, possibly—2017. I have said all along that I should like such amounts to be transferable into the firm’s qualifying scheme. Although the noble Lord said that I am being a little previous, and he does not like my suggestion at the moment, I shall keep making those remarks, because eventually, with a bit of luck, I might get through to him and other Ministers in the Department for Work and Pensions.
I can tell the noble Baroness that I am also worried not only about levelling down—we discussed that on previous amendments—but in Amendment No. 113F I am worried about crowding out, which is a slightly different way of looking at things. I do not want personal accounts to crowd out good schemes, which is a possibility. The Minister’s remarks—
That is a crucial point. The noble Lord says that he does not want personal accounts to crowd out; in the abstract, they cannot crowd out anything—people have to take action. Who does he think will permit a personal account to crowd out a good scheme other than an employer, presumably? He seems to be suggesting that employers will level down—that is what crowding out means.
No, it means two things. Personal accounts can, and perhaps will, crowd out non-qualifying schemes—that is perfectly obvious—unless the schemes can be so tweaked, as I put it earlier, to make them qualifying. The system allows that; by definition they will be crowded out. I do not quite see what the noble Baroness is getting at; perhaps she will take me aside in her inimitable way later if she does not want to pursue the point now.
If I were sitting a university oral, I would, from what the Minister said, get somewhere around half marks: he likes the idea in principle of a lot of what I have been saying but he does not like the actual formulation of the amendment. Fair enough; I will certainly not pursue any of this today. I am slightly surprised by his remarks on Amendment No. 113HA. He said that the four qualifying principles should be the province of the DWP. I will have to think further about that. He also repeated—I was delighted to hear this—what his honourable friend said in another place; that is, that the annual report will include compliance, so that does not need to be in the Bill. It would be an awful shame if we suddenly found that such compliance was not in the annual report or the Bill. However, I am not in the mood to divide the Committee so the Minister can relax.
We have had fascinating exchanges on qualifying schemes. There are provisions in the Bill to enable schemes that are not qualifying to be easily converted into qualifying schemes to permit auto-enrolment. That is the point; we want schemes to be at least as good as the minimum that the Bill provides for. We cannot stop employers having two schemes and different arrangements for individuals but we want to ensure that schemes are qualifying schemes and that they are good quality schemes that provide for contributions that are at least at the level of those identified in the Bill for personal accounts and auto-enrolment.
First, they may not want to do that and, secondly, there is the small matter—in fact, it is rather large—of qualifying earnings. They may never get to be qualifying, however much they tweak. I understand what the Minister said on a previous Committee day—that PADA will bend over backwards to make as many existing schemes as possible qualifying schemes. None the less, some will inevitably fall through the net.
The schemes that will fall through the net are those that are less beneficial to employees than personal accounts. In other words, crowding out is crowding out only where those schemes fall below the level of provision that personal accounts offer, however you assess that—it can involve basic earnings, qualifying earnings and the like.
No, I do not think that that is right. There may be all sorts of reasons why, even with the tweaking that I was talking about earlier, a scheme cannot reach the standard for qualification. I have absolutely no doubt about that. I shall not pursue this argument now, as I do not see that there is any future in it. Therefore, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 113B not moved.]
[Amendment No. 113C had been retabled as Amendment No. 113HA.]
[Amendments Nos. 113D to 113F not moved.]
113G: Clause 70, page 34, line 33, at end insert “and initially based on an annual management charge of no more than 0.3% per annum”
The noble Baroness said: This amendment adds to paragraph (d) of Clause 70(2) a rider designed to ensure that a personal account scheme will be set up with initial costs of not more than 0.3 per cent. This is a probing amendment, moved more in hope than expectation, in order to get the Government to put on the record the current position on costs and charges.
The Pensions Commission, much to the surprise of the financial services industry, said that personal accounts could be delivered for a 0.3 per cent annual charge. The Government, in their 2006 White Paper, Personal Accounts: A New Way to Save, said at paragraph 4.5:
“Our analysis indicates that in the long term it would be possible to run personal accounts at a charge of, or possibly even below, the 0.3 per cent level. In the short term, charges will be comparable with the Commission’s estimate when this is adjusted to take account of the likely need to finance the scheme over a shorter timescale, and the need for a compliance regime”.
What are the Government’s estimates of the cost of a personal accounts scheme when expressed in annual percentage charge terms? The Government clearly had some figures available in December 2006. I assume that they are updating those, so could we have the updated view? In particular, the December White Paper went on to refer to 0.5 per cent as the initial figure. Is that still the figure for charges in the early years or might it go even higher? My noble friend Lord Skelmersdale has already referred to that, as some people are talking about higher figures. As the charge levels have a large impact on the net return in retirement, the Minister will be aware that this is an important area.
Will the Minister say what assumptions will be made about the period over which the scheme needs to be financed? The paragraph from the December 2006 White Paper that I quoted a moment ago referred to the Government adjusting the Pensions Commission’s costs to take account of the likely need to finance over a shorter timescale. Perhaps he will put on the record what that timescale is, what amortisation period the Government are assuming and what interest rate they are using. I shall be looking to the Minister to provide some more detailed analysis of the approach to and quantum of costs.
On our fourth Committee day, we had a brief discussion about the evolution of the personal accounts scheme in the context of whether PADA would deliver the scheme on time. We will be returning to that issue on Report but today I am concentrating on the costs of the scheme in both absolute and relative terms.
I have not been able to trace much information about costs, although the emerging smoke signals are that it is proving to be expensive. PADA is spending £36 million in this financial year, having spent £13 million up to the end of the last financial year. That is £49 million and we are still a long way from 2012. We do not know what that is being spent on, but there are stories of armies of management consultants moving in in large quantities by the day. That fills us with some dread of what the total bill will be.
Mr Tim Jones, the chief executive of PADA, gave evidence to the Work and Pensions Select Committee in another place on 7 July. Almost the only specific thing that he said was that the operational costs of the early years were large. I expect the capital costs will also be pretty huge, but it is possible that those costs will be translated into annual costs by PFI-type service contracts.
A prior information notice was issued last month in connection with a procurement exercise, but I noted that the cost boxes were left blank. Unless the Minister can point me to some information on costs, we might have to conclude that we are in an even worse situation on this Bill than we were when we debated the Identity Cards Bill. The Minister may recall that the paucity of information available then led to a requirement being introduced into that Bill for six-monthly cost reports to Parliament, but we had much more information then about the costs of identity cards than we have been given to date on personal accounts.
I am not yet going to be defeatist on this subject because I hope that the Minister will be able to give us some information on cost levels in absolute terms and in terms of the annualised rate of cost per member. I hope that the Minister will be prepared to share with the Committee, for example, the membership assumptions on which cost percentages are based and say whether there are trigger points at which step changes in costs occur, especially as the number of potential members in the personal accounts scheme has shifted to a lower level since the emphasis of this project shifted towards auto-enrolment and away from personal accounts—well, not away from them, but incorporating a significant auto-enrolment element.
I know that the Minister will be told by his officials to hide behind commercial confidentiality, but I would like him to reflect carefully on whether that is the correct thing for him to do. The evidence given by Mr Tim Jones on the shape of the procurement and what we see from the prior information notice and its accompanying discussion note suggest that there will be multiple contracts for different elements of the scheme of personal accounts, so giving aggregate cost data—and that is all that I am asking for at this stage—cannot possibly compromise individual procurements.
Will the Minister say what role the DWP is playing? It is all very well setting up a quango to do the detailed design and procurement, but if things go wrong the mess will end up on the Government’s doorstep. Do the Government have firm control over what is happening? What oversight processes are in place? For example, how often are progress reports, including costs estimates, submitted to Ministers? The Committee will be concerned that this is not another runaway project in the making, so what can the Minister say to reassure us on that?
Lastly, will the Minister say something about the charging for compliance costs, which clearly have to be taken into account when arriving at the overall cost levels? When we discussed this on an earlier day in Committee, the Minister raised the prospect of the levy being used to cover compliance costs because of the difficulty of separating out work on compliance with this Bill and the other work of the regulator. Can he expand on that? As he will know, the corporate sector, which has to suffer the high levy payments, will be resistant to any suggestion that its levy should be used to cover anything else.
I said earlier that this is a probing amendment, but I should say to the Minister that we regard this as an important topic, so I hope that he will be able to reply with specifics, not simply fine words. I beg to move.
I support this amendment. It is elegantly worded and has been put in a positive way. I am glad that it is a probing amendment because the Committee should be reluctant to put detailed figures—percentages and fractions of percentages—in primary legislation. The annual management cost is at the heart of this scheme and is crucial to its success. I cannot think of another way of signalling the Government’s seriousness about enforcing these levels of charges. I hope that the Minister will say that they will be enforced.
I cite the example of stakeholders, which was in many ways a failure in terms of the number of empty accounts and the rest of it. However, I was persuaded that the stakeholder process forced the industry to get serious about constraining costs and charges. The Government were absolutely right to do that then and they are absolutely right to do that here in this way. I like the fact that the amendment contains the important word “initially”, because circumstances may change; if we were seriously threatening to put this into primary legislation, we would need a little flexibility. Those who are watching the progress of this legislation need to be absolutely clear that there is a target that the Government intend to achieve when it all goes live in due course.
I hear whispers behind hands that, “It will be 0.5, don’t worry”. In the saloon bars after the meetings that I go to, there is a lot of loose talk like that, which is quite worrying. The noble Baroness, Lady Noakes, is absolutely right to bring to the Committee’s attention the importance of this figure. I hope that we will get an appropriate answer so that we can consider further amendments. Can the Minister say a little about the process that he has in hand to ensure that it is being considered seriously? Does the DWP talk to non-executive directors? What contacts or channels are available to the department to say to people who meet in saloon bars in the City, “No, you are wrong; it is not 0.5, it is 0.3; it was 0.3, it is 0.3 and it will be 0.3”?
If this is allowed to drift and the Government get seduced into allowing this to float up, as the noble Baroness said—I commend her for the way in which she introduced the amendment—the people who will be affected by this substantially are the members who take the schemes. This is an important amendment and I am pleased that it has been tabled. I support it and I hope that the Government will take it seriously.
I am not sure whether the amendment should be in the Bill, which is why it is important that my noble friend is able to clarify exactly, as far as he can, what the strictures and structures are of the personal accounts. That this should be the policy intent, objective and outcome that we seek to deliver, I think is absolutely right.
When we were dealing with stakeholders, it was clear that even modest changes in charges, such as a rise in the stakeholders’ initial charge from 1 per cent to 1.5 per cent, could wipe out returns on schemes that are, by definition, not aggressive; they are largely default—75 per cent are likely to go into default schemes—and therefore fairly low risk and modest in the investment returns that can be expected in most economic climates. Over and beyond management performance, what really matters is charge levels.
In conference after conference, my noble friend Lord Turner made that point clear when he was pressed by the industry to raise the charges threshold. He said, “No, you can get it down to this and, for reasons of investment return, you must”. As I said, whether the provision should be in the Bill, I rather doubt, but I hope that my noble friend will today give us the reassurances that we need to address the substantial point made by the noble Baroness, Lady Noakes.
I thank the noble Baroness, Lady Noakes, for moving the amendment and the noble Lord, Lord Kirkwood, and my noble friend Lady Hollis for their contributions.
The provision in Clause 70(2)(d) reflects our commitment to low charges in the personal accounts scheme. It requires the delivery authority to take account of the effect on members’ charges when making decisions relating to the design and implementation of the scheme. The amendment gives me an opportunity to explain more about our intentions and why it would be inappropriate to set a specific charge structure or level at this stage.
As we made clear, low charges will be at the heart of the personal accounts scheme. Charges can have an important effect on people’s pension income—my noble friend Lady Hollis has just expanded on that point—and it is important that this should be reflected in the authority’s work. I know from my meetings with Paul Myners and Tim Jones that they fully agree. However, it is too early to specify both the exact structure of the scheme and the level of the charges. Let me explain why.
While our aim is to create a low-cost pension scheme, we have also made it clear that the personal accounts scheme should be self-financing in the long run. We expect its set-up and operational costs to be recouped from member charges. During the scheme’s early years, before revenue flows from charges mature, costs will inevitably exceed revenues. The funding strategy for the scheme will therefore need to find a way of funding this shortfall until revenue from charges is sufficient to cover costs. PADA will advise on the funding strategy, but the exact funding solution will not and cannot be known until the design of the scheme is finalised and the commercial process is under way.
In making its recommendations, the authority will need to consider how to strike the best balance between repaying this shortfall quickly, which could put an unreasonable charges burden on earlier members of the scheme, and taking too long to do so, which could mean passing the cost of additional interest and charges on to all members of the scheme. A limit on membership charges in the early years could restrict revenues of the scheme in the early years and in turn extend the time it will take for the scheme to become self-financing. This would add to the cost of financing, potentially to the detriment of scheme members.
In addition, a limit on charge revenue could make private sector engagement in the scheme less attractive, as restricted revenue flows in the early years may mean that contractors have to provide more up-front financing and have to wait longer before they are paid back for their services. Aiming to set the charge level in this way might therefore compromise the authority’s ability to drive best value from the market through its commercial and procurement strategies.
Further to this, noble Lords will be aware that the delivery authority has been consulting on the best charging structure for the personal accounts scheme. Previous analysis has shown that there is no easy answer: no structure scores best for members’ outcomes, encouraging participation and the sustainability of the scheme. Instead, trade-offs have to be made. It is not wise to pre-empt these careful deliberations by requiring the authority to have regard to an annual management charge. The authority’s consultation document explains that there could be other more suitable charging structures for the personal accounts scheme. We should give the authority the opportunity to explore these as part of its wider work on funding the scheme. Therefore, while I agree with the spirit behind this amendment, it is important that we give the authority scope to decide how the set-up and early years’ costs of the scheme should best be met.
The noble Baroness asked about the membership figures in the financial model. We are exploring a range of options for the financing of personal account schemes, but it is too early to publish our current assumptions about costs and revenues due to inherent uncertainty and commercial sensitivity at this stage. The department has published a fact-sheet that, with the impact assessment, sets out our assumptions about potential participation, which are that between 4 million and 7 million people are expected to become members of the personal accounts scheme from day one. The authority’s estimates of the costs involved in setting up the scheme are being continually updated to reflect new understanding of the detailed scheme’s design, but actual costs will not be known until later in the procurement process.
The noble Baroness also mentioned the figures of £21 million and £36.1 million. The £21 million figure that was included in the impact assessment that was published with the 2006 Pensions Bill was an early estimate of the funding requirement to support the delivery authority during its advisory stage, and was intended to cover the period from Royal Assent of that Bill, which is now the Pensions Act, up to July 2008. It was our best estimate at the time, but it was made early before the authority even existed and hence before it had a formal budget, a chairman or a chief executive, and at a time when our thinking on the work programme was still developing.
Since PADA was established, spending in connection with the authority up to 31 March 2008 was around £12.5 million. Noble Lords will be aware that until 29 February 2008, the authority’s costs were met using DWP resources, but since 1 March has been grant-in-aid funded and is now responsible for accounting for its own expenditure. This year’s departmental estimates include an initial budget of £36.1 million for the 2008-09 financial year, and is intended to cover the authority’s continuing advisory role and anticipates the funding that PADA may require once the delivery role is extended to allow it to set up the personal accounts scheme. As we have made clear, our intention is that the costs associated with PADA’s role in setting up the personal accounts scheme will be recouped from members’ charges, and the scheme is intended to be self-financing in the long run. The authority will therefore account separately for scheme-related expenditure.
The noble Baroness referred to the number of consultants involved in this project. Given that PADA is going to have a finite life—until 2013 on the basis of amendments in her name, although I note her indication that she does not intend to move them—as she knows full well, it is often better to buy in a range of experience from consultants than to recruit people, particularly if their skills are needed for a relatively short time. There are of course some quite specialist skills involved in all this.
I should say that how personal accounts are funded is an important decision, and the delivery authority is evaluating various options to identify the most appropriate method of financing. But noble Lords must accept that it will not and cannot be known until PADA has completed the scheme’s detailed design and undertaken commercial negotiations to obtain the services that will underpin its delivery. That can begin only once the Bill reaches Royal Assent. At this stage, revealing information about the scheme’s costs or possible funding arrangements could, I believe, prejudice PADA’s ability to secure value for money during commercial negotiations. But I urge both the noble Baroness and the noble Lord, Lord Kirkwood, to take up the opportunity of a meeting with Tim Jones at PADA, who I am sure will be able to brief them as fully as he is able.
The set-up of the compliance regime will be funded by the Government by way of a grant-in-aid funding stream, which will be kept completely separate from the regulator’s current expenditure funded via the general levy and subject to parliamentary scrutiny. In terms of ongoing compliance costs, as I touched on in our debates last week, we are exploring further how these will be funded.
Finally, on the question of whether a 0.3 per cent annual management charge is achievable, we expect that the charge level that will apply in the personal accounts scheme will be in line with Pensions Commission estimates in the long run. But I stress that the charge structure of personal accounts has yet to be decided. The delivery authority is responsible for advising on the charge structure for the scheme and will be consulting on the options. The final decision will be dependent on the end design of the scheme and the commercial procurement process. I am conscious that that will not satisfy the noble Baroness’s demands for ever more information and I understand that because we would be asking the same questions in her position, but I hope she recognises that a lot of work has to be undertaken to get this scheme designed and to organise the funding arrangements. Until that is done, it would be foolhardy to commit to precise figures. For those reasons, I hope that the noble Baroness will withdraw the amendment.
Let me get it straight at the outset that I did not ask the Minister to commit to precise figures, so I have not asked him to be foolhardy. I asked the Minister one simple and straightforward question: when the December 2006 White Paper was put together, the Government clearly had a view on costs and how they would translate into charges. Are the estimates that were produced at the time borne out by later experience or are they more or less than anticipated?
Until the detailed work on the design of the scheme and all that goes with it has been completed, it is impossible to answer that question. We need to do that work to determine what the final costs will be. I do not understand why that is a difficulty for the noble Baroness. It is absolutely plain that, until we have done the work and know the detail involved, how it is going to be put together and what the final and full design is, we cannot give final costings. That is not an unreasonable position.
This is all the other way round. I listened to Mr Jones make a compelling case, in which he used the phrase that he is going to design an Expedia, not a Thomas Cook. It will be internet-based and low cost; it will be all in the sky; there will be no mail and no face-to-face. He is doing that only because he knows that he has a certain amount of money and has to stay within the constraints of 0.3 per cent AMC.
I am pleased that the noble Baroness tabled the amendment because I am getting more sceptical as the debate goes on. If Mr Jones feels that he has more than 0.3 per cent—if he can nudge it up to 0.5 per cent—he will design a different scheme. So, unless he knows the envelope within which he is working, how can he possibly be expected to design a scheme? It is all the other way round.
I do not agree with the noble Lord. The proposition is to design a low-cost scheme targeted on low to medium earners within the parameters that we are debating in the Bill. That is the wraparound of what has to be achieved and the broad remit of Tim Jones and his team in getting the funding strategy in place and the charging that will result from it. Again, this is within the constraint that it has to be self-financing in the long term. Those are the parameters within which he has to act and undertake his work and we should let him get on with it, rather than every single day trying to get an update on where he is on his costings. That seems an entirely reasonable position.
It has been an interesting debate and I thank the noble Lord, Lord Kirkwood, and the noble Baroness, Lady Hollis, for their support. I emphasised that I was not seeking to put 0.3 per cent in the Bill; the important issue was to flush out the position on costs.
The Government are asking us to buy a pig in a poke. We are invited to give the powers and authorities that come with the Bill, but they have not worked out what it will cost. They are going to carry on working on it until some point in the future; there are no parameters within which we can expect outcomes to be achieved; and we are given no information about the emerging costs. Estimates were carried out in December 2006 but the Minister can give me no further information now. He said that it is a matter of commercial confidentiality and that he cannot give me final estimates, for which I have never asked. This is entirely unsatisfactory.
PADA is already spending large amounts of money. By the end of this financial year it will have gone through the best part of £50 million. However, we do not know what the money is being spent on, what we are getting for it and what the total cost is heading towards. When the Identity Cards Bill came through Parliament, to give a similar example, we were at least told that over the first 10 years £5.7 billion would be spent. We did not make much progress on what lay behind that figure, which is why Parliament, in its wisdom, required the Home Office to present cost reports on a six-monthly basis. That £5.7 billion over 10 years is ever such a lot more information than we are getting on this Bill. The Home Office had cost estimates that were examined by accountants and reported on with some bits taken out to ensure commercial confidentiality. We knew ever such a lot more in that case. In this case we know absolutely nothing.
The Minister hides behind a series of abstract words about what is being delivered. Mr Myners and Mr Jones also do that in meetings. There is very little point in having a meeting with them if one has already seen the evidence given to Select Committees and heard the reports from other meetings, because no further information is forthcoming. We are told about internet-enabled things, but no specifics on the cost emerge. It is not reasonable to ask Parliament to proceed with such a Bill unless we have information on the cost and the subsequent effect on charges.
I hope the Minister will reflect on this before Report. It is an important part of the whole picture in deciding whether the design we are being asked to support can fly and whether it is within the scheme that we all agreed was a good one to go forward. We are not being given enough information to know whether we should still support what we signed up to. I hope the Minister will go back to his department and look again at what information can be made available, not at what information cannot be made available. To date, the Minister and PADA seem to have been involved in a process of asking, “How many ways can we say that we will not give you the information?”. We need to move beyond that.
Perhaps I may clarify one point. The noble Baroness suggested that about £50 million will be spent by the end of this year but we do not know what it will be spent on. PADA will produce an annual report and be required to lay its accounts before Parliament, so what is spent will be clear as we go along. I know that that is not the same as forward estimates for the scheme as a whole, but it is not right to say that what is spent will not be accounted for, if that was the implication.
I never suggested that PADA would not account properly for the money that it has spent or that the DWP would not account properly for the first £13 million or so that was spent on its own budget. But information received some time next year, after the event, tells us nothing about the total cost of the scheme. I was merely using that to show how little we know about the emerging cost profile of this scheme.
We will not get any further today. I just want the Minister to know that his response has been profoundly unsatisfactory. We have to make more progress on this at Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 113H and 113HA not moved.]
Clause 70 agreed to.
Clause 71 [Directions and Guidance]:
113J: Clause 71, page 35, line 5, after “directions” insert “and guidance”
The noble Baroness said: I shall speak also to Amendments Nos. 113K, 113L and 113M. Clause 71 deals with directions and guidance, both of which may be given to PADA by the Secretary of State. My amendments pursue a theme of transparency.
Amendment No. 113J amends Clause 71(4) so that guidance as well as directions must be in writing. Under Clause 71(2) PADA must have regard to guidance, so it seems impossibly informal and open to misunderstanding if that guidance is not reduced to writing. If there is no requirement for a formal record of guidance, the Bill will tolerate guidance given by a series of nods and winks or other communications that would lack clarity. There can be no excuse for not properly recording guidance.
Clause 71(5) requires directions to be published, and Amendment No. 113K requires guidance also to be published. Amendment No. 113L requires publication of either guidance or directions to be within one month of the direction or guidance being issued. At present there is no limit at all on publication, hence the issue of directions under the clause—or guidance, if my earlier amendment is accepted—could be in six months or a year, or put in the annual report perhaps 15 months later. Amendment No. 113N would require the directions and guidance to be included in PADA’s annual report.
These are not intended to be nitpicking amendments. What PADA does will have an impact on the world outside Whitehall, and it is vital that the basis on which it operates is, first, completely clear to PADA itself, so guidance should be clear and recorded in writing, and, in turn, clear and transparent to the outside world.
I expect that the Minister will say that directions and, particularly, guidance will cover a lot of detailed matters of no interest to the outside world. The Government should let that world say what interests it, rather than having the Government decide that for it. I hope he will not hide behind some notion that giving guidance to PADA is not the kind of thing that should be exposed because it will raise issues of confidentiality; that is the kind of thing that gives the process of government a bad name. I say: let sunlight into the relationship between the Government and PADA. I beg to move.
The authority has been established as an independent expert body to advise on, and take forward, implementation of the personal accounts scheme. However, it is a non-departmental public body, so accountability to Parliament for the authority’s performance in action rests ultimately with the Secretary of State. Clause 71 sets out provisions allowing the Secretary of State to issue directions and guidance. Such provisions are a common feature of relationships between an executive NDPB and its sponsoring department. These measures provide reassurance to the Government and, importantly, to Parliament that appropriate procedures are in place to ensure that the NDPB works within its scope, does its job properly and manages itself to the standards we expect from a public body.
I shall take this opportunity to outline the clear distinction between guidance and directions. Directions must be complied with. As a rule, they are issued only in exceptional circumstances and are of such significance that it is only right that they should be published, so the Bill will require that. An example of a possible direction would be if the authority clearly disregarded one of the principles in Clause 70. In such an unlikely event, the Secretary of State might issue a direction requiring the authority to take corrective action. The principles are designed to ensure that PADA gives due weight to the public policy underpinning personal accounts, and the power to give directions will ensure that they work as we intend.
Directions should be published promptly. Indeed, during debate in the other place, my honourable friend the Member for Warwick and Leamington said that,
“we intend that the directions would be published as soon as they were made, subject to the necessary practical arrangements”.—[Official Report, Commons, Pensions Bill Committee, 5/2/08; col. 419.]
I will arrange for those to be available in the House Library.
Guidance, as the noble Baroness acknowledged, can be much more routine and a standard part of how departments work with their NDPBs. The provision allows the sponsoring department to clarify its expectations of the work being carried out by the NDPB and give policy steers about the work being led by the NDPB. As a rule, the NDPB must have regard to such guidance but does not have to comply with it, as is the case here. Existing legislation for different NDPBs sets a variety of requirements as to whether directions and guidance should be written and published. That is dependent on the nature of the NDPB and the role it is undertaking.
The noble Baroness’s amendments seek to ensure that, as with directions, all guidance issued to the authority must be in writing and must be published. I sympathise with the intent of these amendments; transparency in the work of NDPBs and their dealings with Government is of great importance. However, requiring all guidance to be put in writing, or indeed published, is not the most effective way of working—in fact, we think it could get in the way. Guidance will not be an exceptional occurrence; rather, it will be part of the continuing dialogue with my department as the authority carries out its functions in delivering the personal accounts scheme, which is, of course, part of a broad pension reform programme.
Guidance covers the full range of activity carried out by both organisations, from the mundane administrative tasks to serious matters of policy formation. As an example of the first, the authority has recently relocated its London office and, while the decision on the suitable location was made by the authority, the department, in its role of steward, provided a great deal of guidance on how such public sector processes are managed. It would obviously be entirely disproportionate to require that sort of guidance to be written down and published.
At the other end of the scale, the department and PADA are working together on the secondary legislation to establish the scheme. While many of its aspects are now in the public domain, such as the contribution limit, the further work on scheme development will throw up detailed questions that will need to be resolved by discussion between the authority and the department and, quite possibly, through guidance of one sort or another—some written, some not. It would plainly not be appropriate for all these discussions to be made public. Information will remain available under the Freedom of Information Act in the usual way, but it is important that commercial confidentiality and the need for candid discussions in relation to the development of proposals in this important area of public policy should be respected here, as in all other relevant cases.
Of course, once proposals have been agreed, they will be set out in a draft order and rules and will be issued for wide consultation. Given the commitment to consultation that has been demonstrated across this programme, I hope that Members of the Committee will accept the need for periods of policy formation to take place, protected from public exposure. This is particularly important for a time-limited body such as the authority, involved closely with other organisations in a broad programme of reform, working to a demanding timetable.
Much of this guidance will, as a matter of good working practice, be made in writing. However, introducing a requirement for all guidance to be put in writing and, further, to be published would impose unnecessary and inappropriate demands on the programme. Of course, the authority and the department will fully adhere to Cabinet Office guidance and to the Freedom of Information Act. I believe that this treatment of directions and guidance strikes the right balance between transparency, effective collaborative working—given the authority’s role in the wider programme—and the need to respect confidentiality in an appropriate manner in a highly commercial context. I hope that that has addressed the noble Baroness’s concerns.
I am rather unconvinced by the point that guidance should not be put in writing. Perhaps the Minister can help me. The authority has to have regard to guidance. The authority will be the board—the directors who are appointed to PADA. How are they to know what guidance they have been given?
It depends on the circumstances in which that guidance is offered. During my time on the child maintenance programme, there was a raft of meetings with officials from the redesign team, who would discuss various options, and various steers were given. Those options were then worked up, documented and put into the system. It also depends on the level of issue that is being dealt with. Often the guidance is not put in writing at the point of delivery; invariably it is in documentation and specific proposals, and sometimes in specific regulations, as I have just outlined. That is the normal process of government.
I hope that the noble Baroness will respect the fact that issues surrounding policy formation are confidential within government and are protected under the Freedom of Information Act. What is important, once guidance has been issued—whether it is ignored or taken on board—is that the resulting policy is properly documented and implemented and that Parliament has the opportunity to see the results.
I shall not take up much of the Committee’s time, but perhaps I may say that the Minister’s response was really a bit silly. Trouble has been taken to write guidance into the legislation—not all NDPB legislation has guidance written into statute—but this is going to proceed on the basis of meetings that officials will attend. It will not even be a matter of the Secretary of State giving the guidance. Officials and possibly junior Ministers sitting together will somehow constitute guidance. The drafting is about as silly as the Minister’s response. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 113K and 113L not moved.]
Clause 71 agreed to.
[Amendments Nos. 113M and 113N not moved.]
Clause 72 [Finance]:
[Amendments Nos. 113P and 113Q not moved.]
Clause 72 agreed to.
Clause 73 agreed to.
Clause 74 [Non-executive committee]:
On Question, Whether Clause 74 shall stand part of the Bill?
I have given notice that I wish to debate the question whether Clause 74 stand part of the Bill because I would like the Minister to explain why, for a limited-life organisation, which as noble Lord reminded us a moment ago PADA is, such an elaborate mechanism as a non-executive committee is being created. The non-executive committee is a new Labour invention. It can be traced to Mr Ed Balls’s ideas of governance, which saw the light of day in the Bank of England Act 1998. It has since been repeated in some legislation, including the Pensions Act 2004, but it is far from universal practice. For example, the Statistics Board, which was created by statute last year, is not encumbered with one.
I shall not today argue against the concept of the non-executive committee. It is true that the Bank of England experiment has worked only because successive courts of the Bank of England have devised workarounds that bypass the strict letter of that Act. The Government’s latest consultation paper on financial stability promises modernisation of the court. It will be interesting to see whether the modernisation of 1998 has stood the test of time. If it has not, and if the draft banking Bill that we are promised by the Summer Recess contains changes, I may want to revisit that issue.
For today, I am asking the Minister to say why the Government are bothering to set up the elaborate non-executive directors committee. PADA will last until 2012 or a bit beyond—we will come to that later. Other bodies manage without the committee, so why cannot PADA? The board comprises largely non-executives in any event. Even if PADA goes up to its maximum of nine members and all remaining spaces are filled by executive directors, there will still be a majority of non-executives on it. PADA already has the power to set up committees under the 2007 Act. If a non-executive committee is a good idea, PADA can perfectly well set one up without taking up the legislative space that the clause involves. I look forward to hearing the Government’s rationale for Clause 74.
The Bill will allow the authority’s remit to be extended to enable it to undertake the detailed implementation work necessary to establish the personal accounts scheme, in particular to take forward work on the specification, design, procurement and build of the personal accounts infrastructure. In carrying out this work, the authority will have operational independence and autonomy. It may enter agreements and, with the Secretary of State’s consent, be permitted to borrow money to cover the costs that it will incur in carrying out its functions. In light of this, the measures in this clause are designed to promote good governance, reflecting practice in corporate governance and providing reassurance to Parliament that the authority is managing its affairs appropriately.
Clause 74 supplements Part 2—“Proceedings etc.”—of Schedule 6 to the Pensions Act 2007 and requires the authority to establish a non-executive committee. It also allows the committee to regulate its own procedures and sets out its functions. The committee will consist solely of the non-executive members of the authority, including the chairman. It will be responsible for reviewing the internal financial controls and for appointing and deciding on the remuneration of executive members.
If the committee wishes, it may establish sub-committees—for example, to provide advice or assistance on matters relating to its functions. Any such sub-committee could include persons who are not employees of the authority. This will enable the non-executives to secure any additional expertise or specialist skills that they might require. To provide transparency, the committee will be required to prepare a report on the discharge of its functions. That will be included in the authority’s annual report.
113QA: After Clause 74, insert the following new Clause—
(1) Schedule 6 to the Pensions Act 2007 (c. 22) is amended as follows.
(2) For the italic cross-heading immediately before paragraph 6, substitute “Executive members and employees”.
(3) For paragraph 6(6) (chief executive and other executive members to be employees) substitute—
“(6) The chief executive is to be an employee of the Authority.
(6A) The Authority may appoint any other executive members as employees.”
(4) In paragraph 7 (terms and conditions of executive members)—
(a) in sub-paragraphs (1) and (2), before “employed by the Authority” insert “, if appointed as employees under paragraph 6(6A), are to be”;(b) in sub-paragraph (3)(a), omit “employees who are”.”
The noble Lord said: I shall speak also to government Amendment No. 139C. These amendments seek to give the authority greater flexibility in the appointment of its executive members. The authority will be establishing an occupational pension scheme, which could be one of the largest pension savings schemes in the world. This is a task of considerable complexity. The authority needs to be in a position to recruit the best people—strong leaders with expertise and specialist skills in a variety of areas. Recruitment is a matter for the authority and we are seeking this adjustment at the request of the chief executive, who has indicated that it would be beneficial for the authority to have greater flexibility to attract and engage the right candidates for executive posts.
We have previously made it clear, in the Government’s response to the consultation on the personal accounts White Paper, that,
“it will be for the chair and the chief executive to make sure that they engage the right people at the right time”.
In reviewing its plans, the authority has also had an opportunity to focus on future resource requirements, including the specialist skills and experience needed to deliver the scheme over a very short timescale. Amendments Nos. 113QA and 139C, which makes a small consequential change to Schedule 9, will remove the requirements for executive members to be employees of the authority. This is to enable the authority to broaden the field of potential candidates to include high-calibre individuals who could be deterred by the requirement to give up long-term employment for a relatively short-term appointment. This could encourage, for example, individuals to apply for appointment on loan or secondment from other organisations.
In closing, let me be clear. The amendments do not alter the requirement that any recruitment process be open and fair. In managing its affairs, the authority will continue to observe best practice guidance set out in Making and Managing Public Appointments and the Office of the Commissioner for Public Appointments code of practice. I beg to move.
I must have misheard the Minister, because I thought that he said that Amendment No. 113QA referred to Schedule 9. Of course, it does not—it refers to Schedule 6. The substantive difference in paragraph 6(6) of Schedule 6 to the Pensions Act 2007 that these two government amendments give us is that now PADA may appoint other executive members as employees. First, is that not putting the cart before the horse? Surely it is employees who might be appointed as executive directors under PADA, not vice versa. In any case, is it not the case that under the Companies Act all executive directors are automatically employees? I do not know the answer to this—perhaps PADA does not fall under that Act. If it does, is this amendment really necessary?
As for Amendment No. 139C, removing the words “employees who are” from paragraph 7(3)(a) seems a little odd, since all employees, including executive members under Amendment No. 113QA, are to be paid pensions allowances or gratuities under paragraph 8(2)(a) of Schedule 6 to the 2007 Act, which these two amendments do nothing to alter. All that seems required is the removal of the word “other” in that paragraph heading, so that it reads “Terms and conditions of employees”. Paragraph 8(3) would then surely become otiose.
I have three little questions on the amendment. Paragraph 1(4) of Schedule 6 to the 2007 Act says:
“Both the Secretary of State and the Authority must aim to ensure that the Authority has neither less than 3”—
which I understand it has at the moment—
“nor more than 9 members at any time”.
How many executive members are intended to be appointed? I hope that the noble Lord, Lord Tunnicliffe, will be able to answer that. Secondly, what skills are still to be required? Thirdly—I assume that the answer is yes—will a finance director be included among the maximum number of nine?
I add a question or two to the reasonable questions asked by the noble Lord, Lord Skelmersdale. In moving the amendment, the Minister suggested that it was Mr Jones’s idea and, in passing, added a sentence or two as to why that was. I did not catch the burden of that. It would affect my view of the amendment if there was a substantial request from those running the authority. I have a deal of confidence in Mr Jones from what I have seen of him; I have not seen him much, but I think that he knows what he is doing. I would give weight to the reasons that he adduced for the Government requiring this change. Otherwise, I do not think that the case that has been made so far is compelling. The noble Lord, Lord Skelmersdale, has some good questions, which require answers.
I am unable to answer any of the questions asked by the noble Lord, Lord Skelmersdale, at this time, and will write to him with the details; at least I am following his advice. He is right that it should be Schedule 6. PADA is not a company and is not subject to company rules. Paragraph 6(6) of Schedule 6 to the 2007 Act says plainly that executives must be employees. The essence of these amendments is to allow people to be seconded under a service contract to PADA, as members, without having to discontinue employment. They may, for instance, be civil servants; they may be accountants, actuaries or other professionals. It seems that we have decided in the gap that there will be four executive members of the team.
I did not ask how many executive members there were; I asked how many members there would be, referring to a maximum of nine under paragraph 1(4) of Schedule 6 to the 2007 Act. However, since we now know that we have four executives, assuming that the seconded people will be non-executive directors, what are they all going to do? I still have not had an answer as to whether there will be a finance director, but I assume that there will be.
My apologies; I thought that the noble Lord had asked how many executive directors there would be. He may not assume that the seconded directors will necessarily be non-executive directors. They may indeed be executives. They will not be employed but will provide their services as part of a service agreement with the company that employs them.
On Question, amendment agreed to.
Clause 75 [Winding up of the Authority]:
113R: Clause 75, page 37, line 7, at end insert “at any time, and must do so no later than the end of 2013”
The noble Baroness said: This amendment would amend Clause 7, which in turn amends Section 23 of the Pensions Act 2007. We are keen to ensure that the public sector landscape does not get littered with time-expired quangos. During the passage of the 2007 Pensions Act we argued that a time limit should be put on PADA’s existence. Clause 75 updates the 2007 Act but still has no time limit. Accordingly, my Amendment No. 113R says that the Secretary of State can exercise his power to wind up PADA at any time, but must do so no later than the end of 2013.
Since PADA's functions should run out broadly when the new personal accounts pension scheme and auto-enrolment are up and running, it should cease to exist at that point. We could have put 2012 as our drop dead date, but we are already aware that 2012 is looking aspirational at best. We debated that earlier. Therefore, we have put a one-year extension in our amendment. If the Minister has any reason for extending the life of PADA beyond 2013—other than his favourite all purpose reason of “flexibility”—we should be very pleased to hear it.
If PADA has not completed its functions by 2013, it will clearly have failed and ought not to be in existence. This deadline in legislation will remind PADA that it needs to get its job done and will also act as a spur to the Secretary of State to ensure that it does so.
Amendment No. 139B is grouped with Amendment No.113R. I shall leave it to the Minister to speak to that amendment, but I hope that he can say why it appears to be positioned in a part of Schedule 9 which deals with safeguarded rights. I beg to move.
Clause 75, alongside Section 23 of the Pensions Act 2007, provides for the winding-up of the authority once it has completed the task of setting up the personal accounts scheme.
Amendment No. 113R would require the Secretary of State to provide for the wind-up of the authority by the end of 2013. As I have already said, and Tim Jones, the chief executive of the authority, has confirmed, we believe that a 2012 launch for personal accounts is achievable. However, we are still four years away from that commencement date and, as the authority has indicated in its report on its plans for delivery, at this early stage there is inevitably a degree of risk and uncertainty associated with a project of this scale, innovation and complexity.
Furthermore, it is also necessary to consider the arrangements for the handover of the personal accounts scheme to the trustee corporation, which will be responsible for the day-to-day operation of the scheme. The authority will develop a plan setting out the legal, commercial and technical steps that will need to be taken for handover to be achieved successfully. As part of that process, there will be a period during which the authority will need to work alongside the trustee corporation to facilitate the transfer of the infrastructure and processes the authority has developed. It is too early to say at this stage exactly how this handover will work. As the report from Tim Jones’s re-plan showed, the focus of the authority at the moment is on the design of the scheme. Of course, the views of the trustee corporation on handover will be extremely important. It would not be wise to pre-empt any decisions on this.
I reiterate that the authority is a time-limited body and there is no intention that it should continue to exist after the trustee corporation has fully taken over the running of the scheme. However, I hope the noble Baroness can appreciate that we do not want to take the risk that the authority could be wound up before this has taken place.
Government Amendment No. 139B is a technical amendment to correct drafting. It simply adds a reference to the subsections that Clause 75 removes from the Pensions Act 2007 in the table of repeals in Schedule 9. Therefore, I am not sure what the noble Baroness was concerned about. If she wants to expand on that, I shall see whether I can help further.
Quite why the amendments are grouped together is an interesting question. I am not sure how that happened. I believe that the place of the amendment is in Schedule 9. It is a repeal of the subsections that Clause 75 removes from the Pensions Act 2007. I am unclear on the reason for the grouping, although I think I am about to be enlightened—no, it is indecipherable.
I wager that the note says that there is an error in the heading of Schedule 9; we shall see. The Minister keeps telling us that PADA is time-limited, but I have never heard of something that is time-limited without a time limit. The body has been created by statute in perpetuity. We invited the Minister to agree with our amendment on 2013. What about 2015? Perhaps the Minister would consider that.
It just seems to me not to be a particularly fruitful exercise to bandy around specific dates. We have indicated that we currently plan and expect the scheme to start in 2012. Given the role that the authority has played in the development of the infrastructure and everything that goes with it, anyone should recognise that for it to continue even after the project has been turned over for running by the trustee—a bit of parallel involvement—must be prudent and sensible. Who knows what issues might arise in terms of the background thinking or policy development that went into the creation of the scheme and infrastructure as it will end up. To try to put some arbitrary date on that is not a particularly fruitful use of our time.
We have made it clear that the authority will be time-limited, and that we want personal accounts to start in 2012. We recognise that there will be some overlap, as the authority will need to be on hand to support the trustee corporation in running the scheme. That seems to me to be clear enough and acceptable to noble Lords.
I am sorry, but the Government keep saying on the one hand that it is time-limited and then refusing to give a time limit. Either the Minister can stop the little white lies about whether it is time-limited, or he can accept my amendment, or a variant of my amendment, which I have generously now extended for an extra two years. I could negotiate for even longer. If we have a time-limited organisation—we are in agreement that we do not want PADA to exist beyond its proper functions—with no time limit, the danger is that it will carry on existing, because it will acquire functions that are within the rather generous description of its functions at the beginning. I will not pursue this now, but we might come back to it on Report. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 75 agreed to.
Clause 76 [Stakeholder pension schemes]:
[Amendment No. 113S had been withdrawn from the Marshalled List.]
113T: Clause 76, page 38, line 24, leave out paragraphs (a) and (b) and insert “, omit subsections (1), (2) and (4).”
The noble Lord said: Clause 76 removes the duty placed on employers under Section 3 of the Welfare Reform and Pensions Act 1999 to designate a stakeholder pension scheme for their employees. It is not appropriate for employers to comply with both the new obligations under the Bill and the current requirement to designate a stakeholder pension scheme. So we are removing the designation requirements, except for a transitional provision, which will allow those employees who are paying into their stakeholder pension through the payroll to continue to do so. That is all in Clause 76.
We also want to take the opportunity to remove some unnecessary provisions that remain in Section 6 of the Welfare Reform and Pensions Act 1999. Amendments Nos. 113T and 139ZE will do exactly that. The Pensions Act 2004 amended the definition of an “occupational pension scheme” in the Pension Schemes Act 1993 and consequently gave employees of trust-based stakeholder schemes the same rights and protection afforded to their counterparts in occupational schemes. We are, therefore, taking this opportunity to remove Sections 6(1) and 6(2), which make specific provisions to protect employees of trust-based stakeholder schemes, as these subsections are now redundant. I beg to move.
As the Minister has said, we return to the Welfare Reform and Pensions Act 1999. That was quite a long time ago. I wondered what the designated scheme under Section 6(2) of that Act, which is now to be ignored, was there for. Under this Bill it was to be a stakeholder scheme, which has now been removed by virtue of this government amendment, because the noble Lord, Lord Tunnicliffe, said it was not appropriate. He may have said why it was not appropriate, but if he did, I missed it. It would be extremely helpful if he would repeat it.
In essence, we considered it inappropriate to have two duties on the same employer. When this scheme comes about, the employer will have a duty to auto-enrol people into an appropriate scheme. There will no longer be a necessity for the duty under the original Act. Therefore, Clause 76 removes that duty, so that employers do not have two duties. The only requirement that is retained is that people who are already enrolled in such schemes will retain their right for contributions to be paid through their payroll.
On Question, amendment agreed to.
Clause 76, as amended, agreed to.
Clause 77 [“Employee”, “worker” and related expressions]:
114: Clause 77, page 38, line 34, leave out subsection (2)
115: Clause 77, page 39, line 11, leave out “an employee or” and insert “a”
116: Clause 77, page 39, line 12, leave out “employee or”
116A: Clause 77, page 39, line 12, at end insert “(subject to sections 33(6) and 34(6))”
117: Clause 77, page 39, line 14, leave out paragraph (a)
118: Clause 77, page 39, line 17, at end insert “, and related expressions are to be read accordingly”
On Question, amendments agreed to.
Clause 77, as amended, agreed to.
Clause 78 [Agency workers]:
118ZA: Clause 78, page 39, line 32, leave out “relevant person under subsection (3)” and insert “agent”
The noble Lord said: I may be exemplifying some of my confusions as to what the Minister said earlier. It seems to be months ago, but it is probably only weeks, that I asked him who was to be responsible for agency workers with regard to auto-enrolment. His answer referred me to Clause 78—that it was the responsibility of the person who actually pays the workers. The noble Lord gave me the impression that he expected that person to be the agent, rather than the person for whom the work was done. My amendments would transfer that responsibility in all cases to the agent handling the worker.
This would have many advantages. First, a defining characteristic of agency workers is that they tend to change jobs frequently and with very little notice. One can imagine an agency worker who wished to opt out of pension provision having to sign a form at each and every new employment—perhaps one should say “sub-employment” in this case—and because of the delay in returning his contribution, he might experience considerable fluctuations and uncertainty regarding his take-home income.
Let me take an example of an agency finding a gang of workers who are to spend three weeks picking apples in a cider orchard. As I understand the matter, although the agency provides the workers, it is the farmer who pays them, so, under the Bill, the Minister says that it will be the responsibility of the farmer to pay 7 per cent to the trustees; in other words, his 4 per cent plus the workers’ 3 per cent. We still do not know the mechanics of this but, for now at least, I shall pass over that fairly vital matter.
The point is that the apple pickers may well have finished their work in the orchard by the time that the monthly payment is due to the trustees. Will there not be a huge temptation for the farmer to hang on to the money and not register the workers? As the latter are probably used by the same agency for agricultural or horticultural work throughout the year, I believe that the agency should always be responsible. That way, the worker would not miss out on pension saving, which is, after all, the Bill’s very proper objective. It would surely be easier for the paperwork on existing pension pots for salary levels and opt-in or opt-out preferences to be handled by the agency. The cost of the pension contributions could be passed on to the hiring company—in this case, the farmer—with ease by being factored into the agent’s commission.
I tabled Amendments Nos. 118ZA to 118ZC to make the agency responsible in every case. Although the noble Lord will not like my drafting—he never does, which is a little odd because it is only rarely that I disagree with his—I hope that, for once, he sees the sense of what I am suggesting. I beg to move.
I have a substantial team to help with my drafting.
In responding to Amendment No. 118ZA, I will speak also to Amendments Nos. 118ZB and 118ZC. These reforms aim to extend the benefit of workplace pension saving to all those who wish to save. Accordingly, this Bill ensures that the reforms cover individuals who obtain work through agencies as a stopgap between permanent employments, a stepping-stone into permanent employment or simply because it suits their lifestyle.
As is the case with most groups of workers, some agency workers will be on moderate to low earnings and are therefore among the target group for this reform. Most workers who find work through agency arrangements are routinely captured by the definition “worker” in Clause 77. In the example that the noble Lord gave of apple pickers, it may well be that the individuals had a contract with the agency or the farmer. Clause 78 provides a safety net for those who do not. Where there is no contract between the agency or client hirer and the agency worker, Clause 78 establishes a link that is equal to a contract for the purposes of Part 1. This is achieved by deeming the business that is responsible for paying the wages of the individual or, if this is unclear, the business that actually pays the individual, to be the employer for the purposes of workplace pension saving. It brings into scope any agency worker who, as a consequence of the nature of their employment relationship, would fall outside the definition of “worker”. It ensures that all temporary workers are on an equal footing for the purposes of workplace pension saving. It also avoids the creation of an unhelpful division in the market for labour or the introduction of a perverse incentive that could influence the way in which businesses recruit labour.
The noble Lord’s amendment seeks to remove any obligation on the employer arising as a result of this Bill in relation to agency workers. I make it clear that in the overwhelming majority of cases, the obligation will arise as a result of a contract. In the common practice whereby an agency supplies a worker’s services to an employer, the contract will routinely be with the agency.
However, in the unlikely scenario that an agency worker is employed without a contract, the fallback position is that the obligation falls to the party that pays the agency worker. This follows the approach used in the National Minimum Wage Act and the Working Time Regulations and provides the necessary protection to ensure full coverage of these reforms for relevant agency workers.
The noble Lord asked about pension contributions. When they are deducted from a worker’s pay, they must be handed over to the pension scheme within 19 days of the month following the month in which the deduction was made.
I hope that that has clarified matters for the noble Lord and that he feels able to withdraw these amendments.
I am sorry; I got slightly sidetracked. I listened with a certain amount of incredulity to what the Minister said—so much so that I think I shall have to read it extremely carefully in Hansard tomorrow. However, the situation that he and I should both be trying to avoid is that of the agency worker falling between two stools. That is what worries me. I hope that we can give this matter serious consideration over the Summer Recess before we reach the next stage of the Bill.
That is precisely what this clause is about: it is intended to stop an agency worker falling between two stools. As I said, routinely we would expect an agency worker to be a worker because there would typically be a contract with the agency, and therefore no extra provisions would be needed as he would be like any other worker. Clause 78 deals with situations where there may not be a contract between the individual worker and either the agency or the client. This is essentially a deeming arrangement so that the provisions of the Bill can operate, and we identify which of those two would be treated as the employer. That is the sort of protection that I think the noble Lord is seeking. Routinely we would expect agency workers to have a contract with the agency and therefore the normal rules of the Bill would apply to the agency in respect of auto-enrolment.
Yes, but when I studied this, which I did quite carefully some weeks ago, I came to the conclusion that, although it works in a legal sense, it does not have the desired effect. However, I shall certainly not pursue this matter now. As I suggested, perhaps the noble Lord and I should reconsider this over the Summer Recess and, if necessary, I will come back to it. At the moment, I confess that I am not totally convinced by what the Minister said, but I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendments Nos. 118ZB and 118ZC not moved.]
Clause 78 agreed to.
Clause 79 agreed to.
Clause 80 [Armed forces]:
[Amendment No. 118ZD not moved.]
Clause 80 agreed to.
Clauses 81 to 83 agreed to.
Clause 84 [Share fishermen]:
On Question, Whether Clause 84 shall stand part of the Bill?
In opposing the Question whether Clause 84 shall stand part of the Bill, I shall speak also to Amendment No. 118ZE and the other amendments in this group.
As currently drafted, Clause 1 automatically includes seafarers of any nationality working on any ship who work or ordinarily work in Great Britain. That includes non-UK nationals on a non-UK ship passing through waters adjacent to Great Britain. This would potentially breach international law and custom. In addition, the clause excludes other key groups—for example, seafarers who are UK nationals working on UK ships outside UK waters.
Although our broad intention is to extend these reforms to seafarers and offshore workers in appropriate cases, we do not want inadvertently to rule in or out any particular group prior to a detailed consultation. Accordingly, to achieve a solid base on which to take forward this work, we propose that Clause 84 in respect of share fishermen does not stand part of the Bill and seafarers are not initially treated as workers for the purpose of these reforms. I should assure noble Lords that the existing Clause 84 is no longer necessary. Share fishermen are persons working on vessels and therefore will be addressed by the new Clause 118ZE. We have removed the existing Clause 84 so that there is no duplication.
Our intention is to work with key stakeholders—for example, the UK shipping and offshore work industries—and the unions carefully to consider these and other groups separately and then to make recommendations available for public consultation. I hope noble Lords will agree that it is important that we consult widely about any potential adverse impacts for individuals and indeed the industries involved that may arise by the extension of these reforms.
These amendments will enable the inclusion of groups of seafarers and offshore workers, but only those to whom the Bill is applied by regulations and as defined by Order in Council. In line with the recommendations made by the Delegated Powers and Regulatory Reform Committee in its 11th report of this Session, both these powers will be subject to affirmative resolution. To achieve this, the original government Amendment No. 118ZF in respect of offshore workers, which was tabled on 23 June, was withdrawn and replaced with Amendment No. 118ZG.
Experience has shown that these areas are complex and raise difficult issues of international and European law, so it is appropriate to allow more detailed consideration on which of the seafarers and offshore workers should be included. If we leave the Bill as it stands, there is a danger that we could infringe on international law and custom and adversely impact the UK shipping industry.
Although these reforms will not come into effect until 2012, other states may take action against UK flag vessels now, once it is understood that our provisions could apply to their nationals and/or on ships flagged to their state. Accordingly, as stated, we plan to introduce powers which will enable us to apply the relevant provisions of the Bill to appropriate categories of seafarers and offshore workers after careful consideration and in full knowledge of the effects that might have.
Amendments Nos. 136B and 136C to Clause 115 and Amendments Nos. 139ZA and 139ZB to Clause 116 are all consequential amendments that ensure that the procedures for making the Order in Council provisions for persons in offshore employment are contained within the new clause—that is, as proposed in Amendment No. 118ZG. These amendments also clarify that Clauses 115 and 116 continue to apply just to regulations and orders made by the Secretary of State. Part of Amendment No. 138A inserts a list of clause references that will fall within the affirmative resolution as set out in Clause 115(4). Amendment No. 118ZA relating to persons working on vessels falls within this. Amendments Nos. 142A and 142B are consequential amendments to ensure that these regulations can extend to Northern Ireland.
I remember that, some 20 years ago, when I was standing where the noble Lord, Lord McKenzie, is now standing, I struggled, manfully, I hope, with the particular and peculiar place of share fishermen in social security legislation. It was a nightmare then, and it is a nightmare now. I am delighted that the Minister has seen fit to remove them from the Bill.
It seems to me that persons working on vessels should be treated in exactly the same way as any other persons working on vessels, and I quite understand why Clause 84 eliminates share fishermen from the Bill. Amendment No. 118ZE widens ship workers from simply meaning share fisherman to any individual who works on a ship. I have no objection to that in principle, but is it not just a tiny bit vague? Is the new clause intended to cover seagoing personnel only? If so, it does not specifically say so. Of course, other people work on ships, even though they are shore-based. The obvious examples are cargo handlers and pilots, whose sole rationale is working on and around ships, although the first do some work on land. I am sure that the Government do not want to exempt them from auto-enrolment, and I hope that the new clause does not do so inadvertently.
It is of particular note that people working on oil rigs under the second new clause in Amendment No. 118ZG are subject, quite rightly, to auto-enrolment. Incidentally, that amendment is identical, as far as I can see, to Amendment No. 118ZF, which has been withdrawn. What is the point of that? Is it to confuse the Committee even more?
I am not sure why Amendment No. 136B is grouped, or why we have it at all. Can the Minister tell us which powers to make orders in the Bill are not conferred on the Secretary of State? Amendments Nos. 136B and 136C, 139ZA and 139B all cover order-making powers and have nothing, as far as I can see, in common with the two substantive amendments in this overly large group. Amendments Nos. 118ZE and 118ZG are, as I said, about ship and oil-rig workers. The only connection between the first set of amendments that I mentioned and them is that they contain order-making powers, but so do several other clauses.
Let me start with share fishermen. The position is that, under the Bill as drafted with Clause 84, they are not treated as workers. We seek to remove Clause 84, but they will be brought back in because they are people who are working on ships, so they will be part of the consultation that needs to be undertaken. The noble Lord is right to say that the provision is not very precise about who is included and who is not. That is because it is a highly complex situation.
In moving the Motion, I described the situation where you have a non-UK resident working on an overseas vessel that happens into our waters on a journey somewhere else. Currently, because they could be treated as workers carrying out work within Great Britain, they could technically be within the scheme; that would not make sense. Equally, as I pointed out, they could be UK residents on UK-flagged vessels operational outside of UK waters. In principle, we expect those people to be included. There are complexities and a lot of work has to be done to consult with industry, trade unions and others to ensure that we set the guidelines appropriately. That is why the provisions are framed on this basis.
The noble Lord asked about Amendment No. 136B. We want here to separate the provisions under which Orders in Council are the route to making regulations. As the noble Lord will be aware from his time in Northern Ireland, issues dealing with territorial matters are dealt with by Orders in Council rather than by the Secretary of State. On dock workers, the understanding is that they would be covered as land-based workers, but if individuals were in categories where it was not clear, the consultation that we would undertake would, we hope, identify them and enable the regulations to cover them.
That is why this rather large group of amendments is constructed as it is, as an attempt to make sure that we can be more precise about who should be in and who should be out of auto-enrolment duties.
Will the consultation be finished by Third Reading, which presumably will be at some time before 3 December, because it may well be that the clause needs to be looked at quite critically again? I am not saying that it will, but the noble Lord will have noted that I have various questions about it; whether it is right or wrong I do not know, but I do not want it to be wrong.
I do not have a timeline for when the consultation would be finished, but the process that will be undertaken as a result of these clauses may well not be completed by Report. I am happy to arrange for a briefing for the noble Lord on the specifics of these provisions, if that would help.
To add to what I have just said, we do not think that this will be ready before Third Reading. We hope to be able to open early discussions with stakeholders later this year to consider who may or may not be included in these provisions. As I have already indicated, this is a complex and difficult area and we need to progress with caution and sensitivity.
The import of these clauses is a regulation-making power to ensure that, through the necessary discussion with stakeholders, we can identify for the purposes of the legislation people whom we believe should be in the legislation and people who should be outside it. The clauses stand as they are because they give the power to do that. We then need discussions with stakeholders so that we can work under the clauses to produce the outcome that we believe is appropriate. Again, if it is helpful, we can get officials to run through this in more detail with the noble Lord.
Clause 84 negatived.
118ZE: After Clause 84, insert the following new Clause—
“Persons working on vessels
(1) Subject to regulations under this section, a person employed or engaged in any capacity on board a ship is not, by virtue of that employment or engagement, a worker for the purposes of this Part.
(2) The Secretary of State may by regulations provide that, to the extent and for the purposes specified in the regulations, the relevant provisions apply, with or without modification, in relation to a person employed or engaged in any capacity on board a ship (whether or not that person is working or ordinarily works in any part of the United Kingdom).
(3) For the purposes of this section, the relevant provisions are—
(a) this Part (and any enactment as amended by this Part), and(b) any provision in force in Northern Ireland corresponding to any provision of this Part (and any enactment as amended by such a provision).(4) Regulations under this section—
(a) may provide for a provision to apply in relation to individuals whether or not they are British subjects;(b) may provide for a provision to apply in relation to bodies corporate whether or not they are incorporated under the law of a part of the United Kingdom;(c) may do so even where the application may affect the individual’s or body’s activities outside the United Kingdom.(5) Regulations under this section—
(a) may provide for a court or tribunal on which jurisdiction is conferred by the relevant provisions to have jurisdiction, in respect of offences or other matters, for the purposes of any provision as it applies by virtue of the regulations;(b) may exclude from the operation of section 3 of the Territorial Waters Jurisdiction Act 1878 (c. 73) (consents required for prosecutions) proceedings for offences under any provision as it applies by virtue of the regulations;(c) may provide that such proceedings may not be brought without such consent as may be required by the regulations. (6) Any jurisdiction conferred on a court or tribunal under this section is without prejudice to jurisdiction exercisable apart from this section by that or any other court or tribunal.
(7) In this section, “ship” includes—
(a) a hovercraft within the meaning of the Hovercraft Act 1968 (c. 59), and(b) every description of vessel used in navigation.”
On Question, amendment agreed to.
[Amendment No. 118ZF had been withdrawn from the Marshalled List.]
118ZG: After Clause 84, insert the following new Clause—
“Persons in offshore employment
(1) Her Majesty may by Order in Council provide that, to the extent and for the purposes specified in the Order, the relevant provisions apply, with or without modification, in relation to a person in offshore employment.
(2) For the purposes of this section, the relevant provisions are—
(a) this Part (and any enactment as amended by this Part), and(b) any provision in force in Northern Ireland corresponding to any provision of this Part (and any enactment as amended by such a provision).(3) In this section, “offshore employment” has the same meaning as in section 201(1) of the Employment Rights Act 1996 (c.18).
(4) An Order in Council under this section—
(a) may provide for a provision to apply in relation to individuals whether or not they are British subjects;(b) may provide for a provision to apply in relation to bodies corporate whether or not they are incorporated under the law of a part of the United Kingdom;(c) may do so even where the application may affect the individual’s or body’s activities outside the United Kingdom.(5) An Order in Council under this section—
(a) may make different provision for different cases;(b) may provide for a court or tribunal on which jurisdiction is conferred by the relevant provisions to have jurisdiction, in respect of offences or other matters, for the purposes of any provision as it applies by virtue of the Order;(c) may (without prejudice to subsection (1) and paragraph (a)) provide for a provision to apply in relation to any person in employment in a part of the areas referred to in section 201(1)(a) and (b) of the Employment Rights Act 1996 (c.18);(d) may exclude from the operation of section 3 of the Territorial Waters Jurisdiction Act 1878 (c.73) (consents required for prosecutions) proceedings for offences under any provision as it applies by virtue of the Order;(e) may provide that such proceedings may not be brought without such consent as may be required by the Order.(6) Any jurisdiction conferred on a court or tribunal under this section is without prejudice to jurisdiction exercisable apart from this section by that or any other court or tribunal.
(7) No Order in Council may be made under this section unless a draft of the Order has been laid before and approved by a resolution of each House of Parliament.”
On Question, amendment agreed to.
Clause 85 agreed to.
Clause 86 [Interpretation of Part]:
118A: Clause 86, page 41, line 39, after “between” insert “the provider of”
119: Clause 86, page 42, line 12, leave out ““employee””
120: Clause 86, page 42, line 12, after ““employment”” insert “and related expressions”
121: Clause 86, page 42, leave out lines 16 to 19 and insert “which is neither a defined benefits scheme nor a money purchase scheme;”
On Question, amendments agreed to.
[Amendment No. 122 not moved.]
123: Clause 86, page 42, line 42, at end insert—
(a) in relation to a personal pension scheme to which section 25 applies, means the person referred to in subsection (1)(b) of that section;(b) in relation to any other personal pension scheme, has the meaning prescribed;”
123A: Clause 86, page 42, line 45, at end insert—
““the Regulator” means the Pensions Regulator;”
On Question, amendments agreed to.
Clause 86, as amended, agreed to.
Clauses 87 and 88 agreed to.
124: After Clause 88, insert the following new Clause—
“Conditional indexed schemes
(1) Schedule (Provision for conditionally indexed arrangements etc) which amends—
(a) section 84 and Schedule 3 to the Pension Schemes Act 1993 (c. 48) (basis of revaluation),(b) section 180 of the Pension Schemes Act 1993 (definition of normal pension age),(c) section 51 of the Pensions Act 1995 (c. 26) (annual increase in rate of pension),(d) section 67 of the Pensions Act 1995 (restriction on powers to alter schemes), and(e) Schedule 7 to the Pensions Act 2004 (c. 35) (pension compensation provisions),has effect.
(2) The amendments made by Schedule 2A do not apply in relation to any scheme or arrangement which was in existence prior to the coming into force of this section.
(3) In this section, “conditional indexation” relates to benefits provided by a conditionally indexed scheme.
(4) For the purposes of this section and any regulations made under it, a “conditionally indexed scheme” is an occupational pension scheme within the meaning of section 1 of the Pension Schemes Act 1993 which—
(a) was established after the coming into force of this section,(b) is not a money purchase scheme as defined by section 181(1) of the Pension Schemes Act 1993,(c) provides that the future indexation of pensions both in deferment and in payment (at least the minimum rate required under section 84 of and Schedule 3 to the Pension Schemes Act 1993 or section 51 of the Pensions Act 1995, as relevant, as if those sections applied to conditionally indexed schemes) is funded in accordance with Part 3 of the Pensions Act 2004, but is not a liability of that scheme such as to create an accrued right or entitlement for or in respect of a member unless and until it is awarded by the trustees or managers in accordance with such terms and conditions as may be prescribed, (d) complies with methods and assumptions prescribed for the setting of normal pension age, and(e) complies with such other requirements as may be prescribed.”
The noble Baroness said: I shall speak also to Amendment No. 130. These amendments provide for conditional indexation, and I am sure that noble Lords will be aware of this concept from the extensive briefing provided on it by the Association of Consulting Actuaries, which has been tirelessly developing it. The background to the amendments is the disastrous decline of private sector pension provision, and in particular private sector defined benefit pension provision. We could, as we have done in the past, spend several hours debating the causes of this decline, but I am going to exercise considerable self-restraint and confine myself to the fact of it. Let me remind the Committee that since 1995, the number of employee members of private sector defined benefit schemes open to new entrants has declined from 5 million to 900,000. The direction of travel is clear: it is not stable, as the Government sometimes like to suggest, but is still going down. Without action from the Government, we can expect to consign defined benefit provision in the private sector to the history books.
The focus of the Bill is on bringing the majority of the workforce into employment-based pension provision, and the personal accounts scheme, which could well be the dominant scheme under auto-enrolment, will be a money purchase scheme. Even on the most favourable assumptions, an employee enrolled into the personal accounts scheme would be likely to have a pension in retirement that is less than that of an employee retiring in a defined benefits scheme. But this Bill does absolutely nothing to encourage private sector employers to continue with their defined benefit schemes, and certainly would not induce a single employer to consider starting one. These amendments are designed as a modest contribution to keeping defined benefit schemes in existence.
Conditional indexation attacks one of the features of the rules for defined benefit schemes which apply in the UK, but practically nowhere else in the world. It is an absolute requirement in the UK that both deferred pensions and pensions in payment have to be uprated in line with inflation. If we look to international experience, some such as Ireland compulsorily index deferred pensions, and some such as Germany compulsorily index pensions in payment, but only the UK does both. This is one of the drivers of the cost problem with defined benefit schemes, and let there be no doubt that there is a cost problem for them in the UK—ask any finance director about that.
Conditional indexation is based on the method of providing pensions in the Netherlands. It is a form of risk sharing, because while the employer is expected to fund the scheme to accommodate the indexation of benefits, the award of indexation would be conditional on the actual level of funding in the scheme. If there was a deficit in the scheme, the indexation would be forgone until there was a surplus, when the first call on that surplus would be the restoration of deferred or lost indexation rights. Employers with a defined benefit scheme often face a funding nightmare. They are struggling to fund ongoing pension accrual, which is tending to increase, as well as funding emerging deficits, which come inter alia from improving longevity. But indexation of benefits is also a major driver of the liabilities of defined pension schemes, and conditional indexation is one way of helping employers to not only control the costs overall but make them more stable and not subject to being ramped up as soon as deficits emerge.
The version of conditional indexation pursued by the Association of Consulting Actuaries is based on career average earnings, which has a further advantage for employers of making the costs more predictable and hence manageable. Some may say that these would be unfair to employees, and certainly compared with existing DB schemes employees would bear some of the risk. But money purchase arrangements, which this Bill will enshrine as the standard form of private sector pension provision, do not share risk at all—all of it is borne by the employee. Conditional indexation provides a middle way between the full rigours of a defined benefit provision as we currently define it in the UK and money purchase, but it is much closer to defined benefit provision in substance, and the employer in particular will still be expected to fund for indexation. Evidence from the Netherlands is that it does work. Where indexation has been passed for some years, it has generally been restored. It is not a charter for unscrupulous employers. Instead, it may encourage more employers to start defined benefit schemes or to keep existing ones going on a conditionally indexed basis.
The possibilities offered by these amendments would be restricted to the future only, and would not affect accrued rights. Employee organisations that fear conditional indexation on the basis that it will become the norm for future benefit accrual really need to balance the possibility against the increasing likelihood that no form of deferred benefit accrual may be available in the future. Rather, I hope that employee organisations will see conditional indexation as a lifeline for the preservation, or possibly even the creation, of some form of defined benefit provision.
The Lewin and Sweeney deregulatory review of private pensions last year floated a lot of ideas about flexibility but the Government did not do anything about it until they started a consultation last month. Those in the pensions industry to whom we have spoken do not expect the Government’s consultation to produce any firm conclusions at an early stage. The Government say that they want to examine the scope for flexibility but there is no commitment in their document to delivering flexibility. Even if the Government decide eventually that they want to pursue flexibility, there is no certainty that any space will be found for a further pensions Bill in the next Session—especially as by the time this Bill is enacted there will have been three pensions Bills in five years—and it would be a shame to lose the opportunity of this Bill.
I understand that to legislate prospectively for a wider range of flexibility may require the creation of delegated legislation powers which go beyond even those which the Government are seeking in relation to the regulator’s powers in Amendment No. 130EW, to which we will come in due course. We do not have the drafting resources available to us to draft flexibility amendments ourselves, but if the Government were minded to go down that route to create a platform for flexibility going forward, we would be prepared to work with them to allow flexible schemes to emerge.
But, if we cannot achieve full flexibility powers in the Bill, it would not be right to let this opportunity pass without including the solution that the Association of Consulting Actuaries has put so much time and effort into. The amendments in this group have, to use the words of the editor of the Evening Standard, been,
“tested … almost to destruction in two years of debate and consultation within the pensions industry”.
They allow only new schemes to use conditional indexation and represent a workable and practical solution going forward.
The CBI supports the amendments. Employers may not be queuing up for the opportunity to introduce conditional indexation, but if it is available and if it saves or creates only one defined benefit scheme, surely it would be worth it. We have learnt throughout the Committee that the Minister favours flexibility. I hope that he is in a mood to put that flexibility to good use on these amendments. I beg to move.
Conditional indexation as proposed by the Association of Consulting Actuaries is an interesting idea. I have been proposing over many years that there is a need to develop more hybrid schemes to share risk because clearly the bifurcation between DB schemes on the one hand and DC schemes on the other is absurd. Organisations such as Barclays, for example, have been looking at not only career averages but accruals at one-hundredth underpinned by a money purchase element.
However, the problem has been that almost every company that has gone down this route—I am aware of only half a dozen or so major hybrid schemes which appear to share risk—has developed its own scheme; there is no common platform. As a result, to take one issue in particular, there is no way of knowing what element of a hybrid scheme is protected by the PPF because it is DB, and what is not protected because it is money purchase. I was hoping that the consultant actuaries would develop two or, at most, three common templates of hybrid schemes which could then be adopted by organisations and companies for the future to risk share. In that sense we are all in the same field. We want to reduce laying onto the employee the total risk of DC schemes but accept the need to give some security to the employer for future capping of costs in a fairly uncertain world. We all share that.
On conditional indexation, however, I wonder whether the noble Baroness can help me. I thought she suggested that accrued rights would be protected, but that an existing employer within an existing DB scheme could switch future accrual of rights for existing members of existing schemes to the new conditional indexation basis. She is nodding. If so, why would not every employer go down that route? For every DB scheme that might be saved from going over to DC, would not 99 other DB schemes worsen the rate of return, which they would not have done otherwise, for their existing members? In other words, can she persuade me that this will not result in a general levelling down that would not have occurred but for this option?
I absolutely accept and respect the fact that this may save the closure of some DB schemes that would have become DC for new members though not necessarily for existing members. But how would the noble Baroness protect members of existing DB schemes from being moved on to conditional indexation at a time when indexation, after a long period of stable inflation rates under this Government, may begin to move as the current recession sweeps in from the United States? That may produce a more volatile environment, causing a greater wish among financial directors to go down that path and a greater exposure to risk for the members.
In a way, I am asking the noble Baroness whether she has any counterfactual evidence. I can see that this may prevent the closure of some DB schemes, but at what cost to members of existing DB schemes who will almost certainly, across the board, see their returns reduced?
I support the amendments, although we will need to ask some technical questions. I have two simple points to add.
I concur with the comments of the noble Baroness, Lady Noakes: there is not enough urgency about the extent of the problem. The noble Baroness, Lady Hollis, says that this might encourage more DB schemes to level down, but a great amount of DB erosion is occurring at the moment. Evidence was produced earlier in the Committee stage which included the PricewaterhouseCoopers survey Does the Exodus Signify Genesis?. The Minister is right that it is a small sample of big companies. However, it shows not only that the schemes are being closed to new members, but that accrual rates are being dramatically affected. The Office for National Statistics survey published on 2 July 2008 confirmed that erosion. The starkest statistic in that report was that, in the three years since 2004, mostly because of defined benefit scheme closures, the number of active members of any private sector pension scheme has reduced by 25 per cent to 3.6 million members.
That is happening in real time. It is happening now and in a very big way. Are the Government really sure that they are on top of it? Do they have a handle on the extent to which the erosion is happening in front of their eyes? The economic circumstances will not get better any time soon, and that will make the situation worse. The noble Baroness, Lady Noakes, is absolutely right that an enormous transfer of risk is taking place. This proposal is a halfway house and a statable and arguable case has been made.
The noble Baroness, Lady Noakes, is right that we could talk about this for an awfully long time, but at 6.55 pm on a Thursday I do not think that that would be the right thing to do. However, what harm can the proposal do? The noble Baroness, Lady Hollis, says that it might increase the temptation to tip some people in that direction. Apart from that—it is an important point which I have not heard before; I will have to think about it—what possible harm or difficulties could be caused by allowing this flexibility? And it is flexibility. I think most employers out there want to help as best they can. This device has been worked on by the ACA, as has been stated, for many years. They are serious people who know what they are doing. For the life of me, I cannot see what harm this would do. Statistics and fine debating points aside, are the Government really on top of the extent of the erosion? What harm could this set of amendments, properly drafted and put into the Bill, possibly do?
The noble Lord would be the first to accept that if you go for a level annuity, as opposed to an index-linked annuity, you have your money up front from that same pot—but over the course of 10 or 12 years with 5 per cent inflation, it will probably halve in value. As I understand the consultant actuaries’ report, what is happening with conditional indexation is that companies would index only where they felt they could afford to do so, given the state of the deficit or surplus in the fund. That would mean that unless the fund were adequately funded—it may partly be a matter for the regulatory regime to ensure that that is so—the value of the pension would be eroded for many years because it was not indexed. I am perfectly willing to be persuaded that that is still preferable to a DC scheme without any indexation at all because people object to the level of annuity, but that is the risk. Although that reduces the cost for the employer, it means that the employee is effectively taking on the vast bulk of the risk of inflation over a period when they are also carrying increased longevity. That may be a risk worth taking, but that is surely where it lies.
The Government have said that we are interested in the concept of risk-sharing, which is why we recently issued a consultation paper on that very topic. That paper has been welcomed in many quarters as a step in the right direction. To be clear: the consultation paper we published on 5 June is very wide-ranging; it does not set out a government policy position but seeks views on a number of different proposals.
On the question of whether the Government are concerned about the decline in private sector defined-benefit provision, there are a variety of estimates of the number of active members in such schemes, but we are not under any illusion that there are serious issues around the decline of defined-benefit provision, which is why we launched a deregulatory review and why we are interested in risk-sharing.
The consultation paper includes material on risk-sharing within the current regulatory framework, including what changes employers are making to their schemes currently, what is possible and why only a few employers are taking advantage of these options. It also outlines proposals for risk-sharing put forward by stakeholders that include conditional indexation but also collective defined-contribution schemes.
The noble Baroness’s amendments seek to modify the application of existing legislation for new schemes that provide conditional indexation. However, it is important to remember that conditional indexation schemes are just one form of risk-sharing, as we set out in the consultation document; I have just mentioned collective defined-contribution schemes, and conditional indexation itself can be based on a career-average approach or it can be included for all schemes, including final salary arrangements.
We need to bear in mind that risk-sharing could have far-reaching consequences for schemes and their members. Making conditional indexation possible would be a significant move away from the current requirements and would remove a valuable protection for members. Given that targeted indexation would not in itself deliver any immediate savings for employers, we need to find out how much real appetite there would be for such a change. Our consultation paper asks for views on whether greater flexibility in the way employers and employees share pension risks would encourage employers to provide good workplace pensions. We also want to find out whether employers who provide defined-benefit pensions today would adopt the conditional indexation or collective defined-contribution approach as a middle ground for continuing to provide some sort of defined-benefit provision.
We do not want to introduce legislative changes that would introduce another layer of legislative complexity if those changes would not be of sufficient benefit to warrant it. That is why we want to hear from employers and others about the likely impact of different risk-sharing approaches. This is an important issue and we do not want to rush into legislating for one form of risk-sharing until we have had the opportunity to consider responses to the consultation. We need to hear views about, and gauge the level of interest in, the other forms of risk-sharing outlined in the paper.
I assure Members of the Committee that we want all types of good employer pension provision to continue and we will explore all means of achieving that. Changing the law to encourage the development of more innovative approaches to risk-sharing may be the way forward, but we want to hear from employers and other stakeholders before we consider what changes, if any, need to be made. We understand concerns that urgent action is needed to slow down the closure of good pension provision, but legislating at this stage for just one particular form of risk-sharing would be premature and could even accelerate closures.
There was one issue that arose regarding the Netherlands and the impact that this can have. I do not want to dwell upon the technicalities of the proposal, but we know from the Dutch experience that where indexation is withheld but subsequently restored, there is an issue regarding fair treatment between those accruing rights or with deferred rights and those already drawing their pension. This is not least because pensioners feel the loss of indexation immediately in their pocket.
We should also bear it in mind that on a recent visit to the Netherlands, a DWP official was told by the Dutch Government and industry representatives that the intricacy of the new conditional indexation system means that schemes are understood by fewer members than ever before. One of our aims throughout this programme of reform has been to encourage people to take personal responsibility for saving for retirement, and adding complexity to the occupational pensions landscape would not sit well with this aim. If they are to take personal responsibility, it is important that people understand the scheme in which they are saving.
I reiterate that we are interested in risk-sharing. We expect to publish the response to the consultation in the autumn, and I will keep the House updated on progress in the mean time. Until we have gone through that detailed consultation, we believe it would be premature to rush into legislation, particularly given that there are fairly broad powers and no great detail about what may be prescribed. Given that there is not just one model of risk-sharing, we need to evaluate them all. However, it is an important issue.
I thank the Minister for that reply. Given the time, I will not prolong the debate too much. The noble Baroness, Lady Hollis, asked for an assurance that there would be no levelling down. She knows that I cannot do that, but she should be under no illusions—defined benefit schemes are going in one direction only, and that is closure. This proposal has been developed as a way of mitigating the impact of closure. I cannot say how many defined benefit schemes would be converted into conditional indexed schemes; I cannot say that it would even stop any vestige of defined benefit remaining. It is just one way of seeing whether we can stop what appears to be an irreversible trend. Even the Pensions Minister, Mr Mike O’Brien, in an interview with the Daily Telegraph earlier this week or late last week, effectively accepted that defined benefit schemes are going in that direction. It is the first time we have heard a Minister say that.
There are clearly concerns that if employers switched on a future basis to conditional indexed schemes, employees would get less than they would under existing defined benefit schemes, but they may just be switched into money purchase schemes. That is the alternative and we have to weigh it up.
I was grateful for the support of the noble Lord, Lord Kirkwood. I agree with him that there does not appear to be enough urgency about this issue. I am afraid to say that while I am grateful for what the Minister said, he rather underlined that. People on the street say that the DWP is not committed to flexibility and that in many ways it is not committed to stopping the rot on defined benefit, because all the attention is now focused on setting up auto-enrolment and money purchase-type arrangements. The Minister shakes his head, but that is what people say. It is perhaps an unfortunate impression, but it exists, because it took a long time for the DWP to produce its document.
The Minister would not expect me to name names because all the people concerned need to deal with the DWP. Therefore, I will not reveal who says what about it. However, it is a fact that it took a long time from the deregulatory review even to put out a consultation document. The document was carefully timed to avoid anything being done in this Bill.
I accept that more work may need to be done on the amendment, but, as I was trying to point out in my opening remarks, it would at least be something that is available to employers to stop them having a simple decision to make: money purchase or carry on with a defined benefit scheme whose cost they cannot bear. I hope that the Minister and his colleagues will reflect on that again during the summer, because it would be a shame to lose the opportunity afforded by the Bill to create something to help defined benefit schemes stay in existence in some form. The Association of Consulting Actuaries remains fully committed to working with the Government if they would like to perfect an amendment that satisfied them. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 125 had been withdrawn from the Marshalled List.]