Considered in Grand Committee
That the Grand Committee do report to the House that it has considered the Personal Accounts Delivery Authority Winding Up Order 2010.
Relevant documents: 5th Report from the Joint Committee on Statutory Instruments and 9th Report from the Merits Committee.
My Lords, the Committee will now consider the draft Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations 2010, laid on 27 January, the draft National Employment Savings Trust Order 2010, and the draft Personal Accounts Delivery Authority Winding Up Order 2010, which were both laid on 12 January. I am satisfied that these instruments are compatible with the European Convention on Human Rights.
This House provides irrefutable evidence that we are all getting older. By that I mean, of course, that life expectancy is increasing and that more and more people are able to lead full lives and make an active contribution at an age when, not so very long ago, they might have expected to have been put out to pasture. But increasing longevity brings its own challenges; millions of people are not saving enough to generate the retirement income they either want or expect. Nearly half of working-age employees are not making any private pension savings at all. That is why the Government embarked on the workplace pension reform programme and why we are debating the secondary legislation that makes detailed provision in support of these landmark reforms.
It is some time since this House discussed the provisions now enshrined in the Pensions Act 2008. Over the past 18 months our policy has developed and been refined, in large part because of extensive engagement with stakeholders. We, alongside our delivery partners—PADA and the Pensions Regulator—have made significant progress and our programme of work has evolved as we focused more on the practicalities of implementation. We have already brought forward two sets of regulations that begin the process of making these reforms a reality: the Employers’ Duties (Registration and Compliance) Regulations, which cover the compliance regime and the employers’ registration obligations to the Pensions Regulator; and the Employers’ Duties (Implementation) Regulations, which prescribe the arrangements for the staged implementation of the employer duty and the phasing of contributions. The latter regulations set the timeframe within which these reforms will be put into operation. We propose bringing employers into the duty by size from October 2012, beginning with the largest employers and ending with the smallest, with all employers brought in by September 2016. This is a longer period than originally envisaged.
We went out to consult on an approach whereby employers would be brought in over three years, reflecting the need to deliver the reforms in an operationally achievable and safe way. Following careful consideration, we made a further adjustment to the implementation plan to ensure support for individuals who are new to saving and provide support to the newest and smallest businesses in adjusting to the costs. That means that employers will now be brought in over four years.
Our implementation plan also phases in minimum contribution requirements over time to help employers and individuals gradually adjust to the additional costs. Employers using defined contribution schemes will be required to pay contributions of 1 per cent until staging is complete, 2 per cent for a further year and 3 per cent thereafter.
Increased access to workplace pension saving is crucial to tackling undersaving. By introducing a new duty on employers automatically to enrol their workers into a workplace pension scheme and to pay a minimum contribution towards their pension saving, we are extending access to workers in every employment sector.
The automatic enrolment regulations set out the practical detail that will make the reforms work. They specify what employers must do and prescribe the information flows between the employer, the pension scheme and the worker. We want these regulations to be as simple and flexible as possible and to minimise burdens on employers. That is why we have consulted extensively throughout the past year. Drawing widely on expertise from the pensions industry, employers, business and consumer representatives, and across the political spectrum, we have tested and refined our proposals. We have listened carefully and responded positively to concerns.
This useful engagement has resulted in a range of changes that will ensure that these regulations will work in practice. Joining arrangements are simpler and should minimise burdens on business, timescales have been extended and information requirements cut back; the refund process has been aligned with payroll cycles; and employers will be able to hold on to contributions until the end of the opt-out period. Stakeholders tell us that these draft regulations now reflect a more straightforward and common-sense approach, which is essential if the new rules are to operate in the real world of pension provision.
The Pensions Act 2008 established who should be automatically enrolled by setting age and earning thresholds. The regulations define pay reference periods. This is the device that will enable employers to identify jobholders with earnings above the threshold which trigger automatic enrolment, and then to calculate pension contributions. We have also provided mechanisms that will help employers manage the process more easily. The regulations enable employers to avoid accidentally enrolling jobholders with annual earnings under the threshold but who occasionally have pay spikes. They provide for the postponement of automatic enrolment, although to protect workers’ interests, especially those on short-term contracts of three months or less, employers may postpone automatically enrolling an individual only once in any one year. Automatic enrolment is compulsory. Pension saving is not, so we have prescribed automatic enrolment joining and opt-out periods—now one month—and opt-out rights.
Importantly, we have also defined the rules and time limits for refunds, so that any contributions paid by, or on behalf of, a jobholder who opts out will be refunded. This process has been designed to align with payroll cycles and existing business practices. In particular, it ensures that money does not need to flow into a scheme only to flow back almost immediately. These processes address concerns expressed about cash flows, in particular by small businesses, and ensure that automatic enrolment works in even the most dynamic employment sectors.
An individual’s decision to opt out may be the right one at that time but circumstances change. We want these reforms to change behaviours and attitudes towards saving for a pension, and to do this well beyond the initial automatic enrolment stages. For this reason, we require employers to run re-enrolment exercises every three years. Further, the regulations also prescribe what an individual must do should they decide voluntarily to opt in, either because they are not eligible for automatic enrolment or because they want to opt in before the employer’s re-enrolment date. These arrangements mirror automatic enrolment to ensure a universal process. We have recognised that the employer is best placed to give key pieces of factual information about automatic enrolment to jobholders—for example, the date of enrolment, the details of the scheme, and the value of contributions to be paid to the scheme. The regulations set out the minimum information jobholders will need to reduce burdens on employers.
When the time comes for employers to start automatically enrolling their workers, they will need a scheme into which to do this. Employers may use only schemes which meet the qualifying criteria to comply with the duty. We have therefore defined the characteristics of a qualifying scheme, and set minimum quality standards for money purchase, defined benefit, hybrid and non-UK pension schemes. To make the joining arrangements simple, we have made them the same, whatever type of pension product the employer uses. However, many employers, particularly those with a smaller workforce, find it difficult to provide a workplace pension for their workers at a reasonable cost.
These reforms aim to correct that situation, and that is why the Government are creating the National Employment Saving Trust, previously known as personal accounts. NEST will be a new low-cost pension scheme which will form one of the options available to employers to enable them to meet their new duty. The scheme has been welcomed by the pension industry, which recognises that the existing market cannot meet the needs of all employers and all workers. The NEST order, which is broadly equivalent to a trust deed, establishes the NEST scheme as if it were set up under trust. This order is supported by the scheme rules. We consulted on the draft order and rules last year and responses were positive. There was broad agreement that the order and rules contain the right measures, and we responded to comments by developing the drafts to increase clarity and understanding.
NEST will be a defined contribution occupational pension scheme, and will be broadly subject to the same statutory and regulatory regime as any other scheme of its type. We have, however, included some specific features that recognise the unique role and scale of NEST. We want NEST to focus on those employers and workers not effectively provided for in the existing market. To achieve this, NEST will operate with an annual limit on contributions and a ban on transfers into the scheme. These measures, which will be subject to review in 2017, will ensure that NEST focuses on complementing existing pension provision.
To ensure that every employer and employee has access to an appropriate low-cost scheme, the NEST corporation will have a public service obligation to accept any employer that wishes to use it, and—once an employer is participating in NEST—to accept any worker enrolled by that employer. In addition, it will not be able to set different charge levels for providing the same service to different members. Workers who move jobs frequently can find it hard to keep up their pension savings. However, membership of NEST will be for the individual’s working life. Members will still be able to save in the scheme if they move jobs, become self-employed or even move out of the labour market altogether.
Occupational pension schemes are normally required to have member-nominated trustees, and usually have trustees nominated by the sponsoring employer. However, NEST will have millions of members and hundreds of thousands of participating employers, making this approach unwieldy and unworkable. Instead, NEST will have two panels, one to represent members and one to represent employers. The job of the panels will be to ensure that the trustees take account of the views of members and their employers in the operation of the scheme. The members’ panel will also allow members to have a say in selecting trustee members who will operate the scheme on their behalf once it is up and running.
All employers will be able to use NEST, and will need information to understand the nature of the scheme in order to decide whether it is right for them and their employees. The NEST corporation will therefore take steps to increase awareness and understanding of the scheme among employers and individuals who wish to use it.
The order gives the Secretary of State the power to set lower or upper limits on charges. This is to ensure that NEST strikes the right balance between the competing policy ambitions of being self-financing over the longer-term and delivering low charges for members. The order also specifies that the NEST corporation must provide information to the Secretary of State. This will enable the Government to assess whether the reform programme is meeting our objectives—for example, by assessing the contribution NEST has made to increasing pension savings among its target membership.
In addition, the order covers areas that you would expect to see in the trust deed of any pension scheme: it provides powers to allow the trustee to make investments on behalf of members, to make rules for the scheme and to charge members for the costs of running the scheme. It also includes provisions relating to the liabilities of the trustee, the payment of benefits to members and pension sharing on divorce. The features set out in the order are fundamental to our policy intentions for NEST. Therefore, the NEST corporation will not be able to change them: the order can be changed only by Parliament.
Setting up NEST is an unprecedented delivery challenge. We estimate that NEST will have between 3 million and 6 million members, and hundreds of thousands of participating employers. To ensure that we get the delivery right, NEST will be launched with a limited number of volunteer employers in spring 2011. This will provide an opportunity to test operations before the automatic enrolment duty comes into force, so that any initial teething problems can be resolved in a controlled environment. To meet this timetable, the NEST corporation will be established on 5 July. This will allow the trustee to finalise the design and operation of the scheme before it comes into being. In particular, only the trustee can decide the investment strategy and set the statement of investment principles. Noble Lords will be aware that we have appointed Lawrence Churchill as chair-designate of the corporation, and are running an exercise to recruit other trustee members. We expect them to be recruited by Easter, enabling them to take up their appointments in July.
With the NEST corporation established and in place, the right course of action is to hand over the remaining implementation and operation of the scheme to the new corporation, and to wind up PADA. The PADA winding-up order makes provision to dissolve PADA on 5 July 2010 and to transfer its property, rights and liabilities to the NEST corporation. This will enable a smooth handover between the two organisations and provide continuity, in order to minimise delivery risks.
Automatic enrolment will create a presumption to save, so that planning for retirement becomes the norm. NEST will ensure that those who do not currently have access to a suitable low-cost pension have the opportunity to save towards a decent income in retirement. These are ambitions, landmark reforms that will help to deal with the demographic change of an ageing society. I am grateful to noble Lords for their forbearance during what has been a lengthy introduction. I commend the order to the Committee.
My Lords, I thank the Minister for his thorough presentation of the three statutory instruments, two orders and an important set of related regulations, and for his explanation of the background. They are derivative of the Pensions Act 2008, which the Minister steered through this House, and enable the implementation of the provisions of the Act.
Taken as a whole, I agree with him that they are not particularly contentious, although I suspect that were they subject to the forensic skills of my noble friend Lady Noakes, the Minister might find himself under some pressure to be light on his feet. As the Grand Committee will appreciate, there is a degree of consensus on the policy; indeed, my honourable friend Mrs Theresa May has today published a pamphlet entitled Providing for Pensions: Principles and Practice for Success. For my own part, I declare an interest as an employer in a family business and as chairman of the trustees of the Conservative Agents’ Superannuation Fund.
We are initially invited to approve the winding up of one acronym, PADA, and the establishment, with its property rights and liability, of NEST. However fond any of us might have become of the Personal Accounts Delivery Authority and its personal accounts, we cannot pretend to be greatly exercised by its passing and reincarnation as the National Employment Savings Trust. We should ensure, though, that the new body is constituted to reflect the concerns expressed during the consultation process. Not all the elements raised in the consultation are reflected in the order. Some will depend on the final version of the rules, which will be a matter for the NEST corporation. Perhaps the Minister could confirm that that is the case.
We agree with the National Association of Pension Funds that the new body needs to remain focused on employees without access to a workplace pension. We also think it is important that NEST is as free as possible from political interference. It would be useful to have the Minister’s assurance that that is an objective. There has been some modest movement in this direction on the power to remove trustees and on the area covering workers without qualifying earnings. The role of NEST in awareness-raising could distract from its central purpose, which is to extend workplace pension savings to low-income groups that do not currently have access to them. Article 14 appears to tighten up the wording, although it would be useful if the Minister could elaborate on that.
I turn to the original proposal that gives the Secretary of State the power to remove trustees. The National Association of Pension Funds rightly argued that the Secretary of State should be able to use the power only in certain specified circumstances. It is encouraging to see that this power has been removed in the final version of the order.
I turn to the creation of the panels. The original proposal said that employers and members panels should be established within one year of the commencement of the scheme. The NAPF argued that they should be in place from the start. There is no change in the final version, so this remains a cause for concern. It is essential that strong governance is in place from scheme launch. Indeed, I would argue that it is perhaps the most critical time to have the panels up and running. I hope that the Minister can reassure the Committee on this point.
A further question concerns default funds and arises from Article 29(7). I note that the final version of the order gives NEST extra powers to limit the number of occasions on which a member may choose where his or her assets are to be invested and the number of investment funds to which the scheme’s assets may be directed. This was not included at all in the original consultation draft. Will the Minister therefore explain the background to its inclusion in the final version?
Article 27 of the order, as the Association of British Insurers has said, provides that:
“The Trustee must make deductions from members’ pension accounts to contribute to the general”—
a key word that does not appear in the original wording—
“costs of the setting up, administration and management of the Scheme”.
What is the significance of the introduction of the word “general”—are there non-general costs that will not be so transferred?
The Minister will be aware of the widespread concern that NEST must not receive government funding that would distort competition. Given that the setup costs for NEST and, for that matter, PADA, are to be reclaimed through scheme charges, how long is the payback period projected to be, and at what point will NEST be self-funding? It would have helped all of us if the Government had published their decision on the charging level and the structure for the personal accounts scheme. Why have they failed to do so to date, and when can we expect it? It is the lack of transparency that disturbs the ABI.
The Minister would acknowledge that spiralling public expenditure on a new national pensions scheme presents a barrier to reinstating responsible fiscal control in the micro-economy. Secondly, a national scheme enjoying taxpayer subsidy and continued funding from the Government for a significant period distorts the market for existing pension provision, and could certainly breach competition law.
I make one final comment on NEST. Its stated policy objective is to provide a scheme for the target market of moderate to low income earners. Accordingly, Article 22(1) of the order provides that the maximum contribution that may be made by, or on behalf of, a member of the scheme in tax is £3,600, to be adjusted by the trustee in accordance with changes in the average earnings index. However, Article 22(5) provides that the trustee may determine that paragraph (1) does not apply to a member or a class of member in relation to a particular tax year. It is not clear to us why the trustees’ discretion in the regulations is unfettered, although the draft scheme rules for NEST seem to indicate that that is possible only in a limited number of circumstances, notably in the year the member dies. However, there are as yet no final scheme rules. The unlimited discretion for the trustee to override the cap seems incompatible with the policy objective for NEST. Can the Minister clarify in exactly what circumstances the trustee can override the contribution? Why were those circumstances drafted in the NEST rules rather than in the regulations?
I turn to the regulations and the issue of auto-enrolment. Conservatives have long believed in auto-enrolment as a way of encouraging pensions savings. However, that does not mean that auto-enrolment is dependent on the launch of personal accounts or NEST. We have a number of concerns about the existing model, most notably the interaction with means-tested benefits. Moreover, given the lengthy delays in implementing NEST, a Conservative Government would bring forward auto-enrolment for existing company pension schemes.
Although the regulations are widely seen as an improvement on the draft regulations, there are still some areas of concern. For example, timescales may prove to be unfeasibly short in some cases—I instance information flows. I am pleased to note that the CBI is happy with the scheme quality requirements, but the success of the 2012 reforms can in part be judged by the rules which enable high-quality defined contribution schemes to continue to operate. Those have not yet been laid—rightly, because they are too complex—but when they are drafted after the election, they must avoid individualised testing at all costs.
The most important part of the regulations is the change to the 19-day rule, the amendment to the Personal Pension Schemes (Payments by Employers) Regulations 2000, and so on. The refunds procedure is now significantly simpler, but the success of the new process depends on the amendment of the 19-day rule. As the Government noted in their response to the first batch of regulations, the effect of this change is that money will not have to be paid by the employer to the scheme until after the opt-out period has passed, minimising the need for refunds. This will give employers and schemes greater flexibility and enable them to avoid some of the costs and red tape of making refunds, primarily by eliminating third parties from the procedure.
Amending the 19-day rule is a necessary adjunct to the extension of the joining-up and opt-out windows and does not undermine the initial policy intent of the current rule, which was introduced in 1993. For the 2012 reforms to be successful, existing rules should be modified in order to work in tandem with the new regulations. With a strong employer and compliance regime, the changes will not bring in any additional risk for employees in the payment of contributions to their pensions. It is this need to fit in comfortably with existing good-quality provision which presents the greatest challenge.
As the NAPF points out, more flexibility would protect employers offering good quality schemes from unnecessary costs and reduce the likelihood of employers levelling down. For example, the NAPF has repeatedly called for employers to be allowed more choice around staging dates. These changes are a considerable challenge to, and could place a burden on, employers. Whatever we require should be as straightforward as possible. For example, it is essential that employers can take a common-sense approach to opting out. These regulations set out a prescriptive framework that seeks to limit who can hold forms, when they can be given out and to whom they can be returned. The real world is complicated: things get lost, forgotten, filled in incorrectly and handed to the wrong person. Employers need to feel that they can deal with these situations in sensible ways.
This lies at the core of the anxiety expressed by the other consultees, the EEF and the ABI, who spoke of the need for the Government to continue to listen to stakeholders and not to overcomplicate matters by insisting on onerous calculations and individualised testing. I am reminded of the other activities that I undertake in your Lordships’ House, and my view that all Ministers should have a sign above their desks saying, “Remember the Rural Payments Agency and the single farm payment scheme”.
In the most exposed position, of course, is the temporary work industry. It is not fashionable to speak in support of temporary and contract work but it has provided the UK economy with much-needed flexibility, and the job opportunities it offers will be very important in the recovery. It is essential that workers in this market are provided for properly but, as the Recruitment & Employment Confederation points out, a common staging date would greatly reduce the bureaucracy and cost of their function and remove confusion from workers engaged in this form of employment. In these regulations there is an old-fashioned view of what constitutes a proper job. It is clear that future work patterns will be more flexible. The regulations, which are designed to give proper protection to all, need to reflect this flexibility and the reality of the modern economy.
I conclude with an observation. Few areas of government can produce more complex issues than those which these orders and regulations seek to address. Whatever the vision we may share on the challenge of providing adequate protection for all in their retirement, we would be wise to keep this provision as simple as possible. It needs to be straightforward for employers to administer if it is not to be a bar to employment. Complexity can confuse and confound the best of intentions and this is too important a development to end up bogged down in bureaucracy.
My Lords, the noble Lord, Lord Taylor, is selling himself short. He did at least as good a forensic job as the noble Baroness, Lady Noakes, would have done in his place and he should not be modest about it. We broadly support these orders. We support the principle of auto-enrolment and we believe there is now a desperate need to rebuild private pensions after the collapse—that is not too strong a word—of provision under this Government. In 1997, a third of private sector employees enjoyed a defined benefit—that is, final salary—public sector-style pension scheme. Today the figure is 12.3 per cent. That is a dramatic collapse by any standards. The latest figure for private sector employees who have no private pension provision at all is 64.6 per cent. We are starting from a desperate position.
On the detailed points, I do not propose to rehearse, as the noble Lord, Lord Taylor, has, the now broadly sensible and supportive comments of the National Association of Pension Funds, the Association of British Insurers and the Confederation of British Industry. Having worked closely on the Bill and with these important interest groups over the last few years, I am pleased to see that the Association of British Insurers in particular is now taking less of what started as a rather “dog in the manger” attitude towards PADA and NEST. I think everyone is now working in the same way to try to make the scheme a success.
Having said that, the task is enormous and this will be a very modest and slow-moving contribution. We on these Benches are concerned about the slow staging of bringing this in. Does the Minister see and share those concerns? It seems that people believe that their pension is being covered when a total 8 per cent contribution to a DC scheme is very much on the fringe of whether, over a lifetime, it will provide a decent pension. Starting off at the lower levels risks sending the wrong message. If people think that a 1 or 2 per cent contribution will be enough, they are making a very big mistake.
The biggest concern is about the investment policy that NEST will now carry out. I should like to press the Minister on this, although he may not have the full answer today. I would be grateful if he could look into it because it is a serious concern on these Benches. I do not want to name the individual because I do not have any objection to him or even know him, but we are particularly concerned about the background of the investment director who has been appointed and comes from the hedge fund Thames River Capital. He has been quoted as saying that hedge funds must certainly be a part of the NEST investment policy. I was horrified to read that, given the tenor of our discussions on the Bill and the Minister’s assurances that there would be a small number of low-cost, simple investment options—probably a bond fund, a mixed fund, a default fund and maybe an ethical fund. I was shocked by the idea that there could be hedge funds or private equity funds with their very high charging structures and costs. I do not know what the recruitment process was, and I wonder if, again, the Minister could look into that and come back. One would have thought that the investment policy and the people running this would come very much from the mainstream of the investment world, such as pension funds or big insurance companies. This causes us serious concerns and I would be grateful if it could be looked into so that we can be reassured about the options on that front. It will be difficult to persuade many people that part of their pension fund should be in even a mainstream equity index product—which, in my view if there is a long-term horizon, it should. I should have declared my interest at the beginning as a pension fund manager for the last 34 years. I speak with some knowledge of these matters. They are very important, and I was concerned to see those remarks.
The Minister will not be surprised to hear that the other key concern on these Benches is the gaping advice gap. It will not pay for people, particularly those aged over 50, to save a small amount in NEST when there is clearly a high risk that many of them will lose it in means-tested benefits and therefore not be any better off. Again, we are concerned that not enough serious attention is being paid to this worry. Having said all that, within the existing framework that the Government are working to, this is a sensible way forward, but we are very concerned about the individual points that I have raised.
My Lords, I thank the noble Lords, Lord Taylor and Lord Oakeshott, for their contributions. I took from each that they were supportive of the broad thrust of what we are trying to achieve, but they enunciated particular concerns, which I shall try to allay. I agree with the noble Lord, Lord Oakeshott, that the noble Lord, Lord Taylor, should not feel outgunned by his noble friend Lady Noakes. I am sure that she would have given me a hard time. The noble Lord did equally well.
He also said that he would not be exercised by the passing of PADA because its activities would be inherited by NEST. That is not completely correct, because PADA’s role was to advise the Government as well as to prepare for the setting up of the scheme. NEST’s role is to run the scheme in the interests of members. That is why the PADA order pushes assets and obligations in two directions, one to NEST and the other to the Secretary of State. The noble Lord asked when the employers and member panels would be up and running. That will happen by the time auto-enrolment starts in October 2012.
The noble Lord said that, should he and his colleagues have the opportunity to implement such reforms, they would look to do so before 2012, with early enrolment into existing schemes to create greatest value—I think that that was the point made by the noble Lord. It is reassuring that others share our view on the critical importance of automatic enrolment; however, it is not possible automatically to enrol workers into personal pensions outside the employer duty, as it would not be consistent with European consumer directives, the distance marketing directive and the unfair commercial practices directive. Our work with our delivery partners confirms that implementation of the employer duty cannot be achieved safely or effectively before 2012. An integral part of the implementation process is the protection offered to individuals through the compliance regime, and we need to make sure that this protection is fully in place for individuals who automatically enrol. That simply will not be possible before 2012. Thereby there are practical difficulties, although the noble Lord would not in any event expect me to concede that he would have the opportunity to test those.
While we are on that point, I think that I heard the noble Lord, Lord Taylor, make an important announcement that the Conservatives sought to bring in auto-enrolment for all private pension schemes, not just PADA. In that case, irrespective of the date, can the Minister say whether that would require separate legislation or whether that would be possible under European legislation? Is there a practical problem there?
Under European legislation there is a practical problem with existing schemes. I am receiving reassurance from the Box on that. I know that from time to time that issue has been the subject of intense discussion, but I am advised that the position is that it is outwith European requirements.
The noble Lord is tempting me. At Question Time he already gave me a good opportunity, for which I thank him. I shall be happy to drop a line to both noble Lords on a matter of fact.
The noble Lord, Lord Taylor, asked who actually determines the rules. It is for the trustees to do that. The first cut of the rules is made by the Secretary of State on the advice of PADA, but going forward it is for the trustees to manage these and to consult on any proposed changes.
The noble Lord asked specifically whether it was intended that this would be free of political interference. Absolutely, yes—that is the cardinal principle that we are dealing with.
Sitting suspended for a Division in the House.
I was part way through responding to the contributions from other noble Lords, so I shall continue. Perhaps I may turn next to the inquiry from the noble Lord, Lord Taylor, asking what Article 14 is about. It is important that employers have access to information about NEST so that they can make an active and informed choice about which pension scheme best meets their needs. The Government believe that the NEST corporation will be in the best position to provide information about the scheme. This sort of activity is not normally undertaken by occupational pension schemes, as they usually have close links to a specific employer, and therefore a group of companies. However, this is not the case for NEST as it has not been established by a particular employer for a particular group of employees. Instead, NEST will simply be one of the many pension schemes that employers can choose to use to enable them to fulfil their new duty. As a consequence, there is a clear need to create awareness of NEST and its features so that employers understand how it differs from other pension schemes available to them.
The noble Lord also asked about Article 27 and what the reference to general costs entails. These are the normal costs of a pension scheme, including the cost of collecting contributions, investing those contributions and managing members’ accounts. The NEST corporation may cover other costs such as excessive fund switches or non-default investment choice through further charges. The NEST corporation will also have some minor costs associated with its role as an NDPB and in advising Government on pension reforms. These will be met through grant-in-aid rather than through members’ charges. We therefore inserted the word “general” to draw an appropriate distinction between the general costs of running a scheme and specific costs where additional charges can be levied, which are set out in Article 27(7) and (8).
The noble Lord went on to ask about the contribution cap: whether in any circumstances the trustee has wide powers to disapply the contribution cap and if this would go against the policy intent. It does not give the trustee a mandate to disapply the contribution limit as it sees fit. The circumstances in which the trustee can exercise discretion are set out in the rules, and if the trustee wished to change the circumstances, it would need to consult. The trustee needs a degree of operational flexibility so that it does not become unnecessarily restrictive to administer the limit, and the rules set out the precise circumstances in which the trustee may exercise this power; namely, where a member dies or the trustee’s liability in respect of a member is discharged in a tax year.
The noble Lord asked about funding. My department continues to work closely with the Personal Accounts Delivery Authority to develop a funding strategy to establish the NEST scheme. However, it remains too early publicly to set out the cost of NEST or the detail of how it will be financed. We have always said that we can make final decisions only once procurement activity is complete—that is, when the “i”s are dotted and the “t”s are crossed—and we must avoid the risk that, by responding to understandable interest in the cost and financing of the scheme, we jeopardise PADA’s commercial negotiations. It is vital that we do all that we can to support PADA in securing the best deal for NEST’s members. We expect to be making announcements in this area shortly.
The noble Lord also referred to state aid. This was part of our debate during the passage of the Pensions Act. We have always been clear that we will not give NEST an unfair advantage compared to other schemes. The structure of NEST as set out in the legislation is explicitly designed to ensure that it complements the good quality provision that already exists. We need to ensure that all employers and employees have access to a low-cost scheme, even those that other providers do not want. That is why the regulations place a public service obligation on NEST to accept all employers and to charge all members on the same basis. Other providers would not do that.
Remember that automatic enrolment cannot operate unless all employers can access a suitable pension scheme, so NEST’s public service obligation will benefit both those currently excluded from pensions saving and the broader pensions industry, because it is necessary to enable auto-enrolment to be introduced, with consequent benefits due to a subsequent expansion in the market. However, this public service obligation, as well as the other limitations being placed on the scheme’s operation, could place unique funding pressures on NEST, and this is something that we will better understand once PADA’s procurement process is more advanced. It seems only right, however, that at this stage we do not rule out compensating the scheme in some way for the burdens being placed on it if the alternative is to undermine its low-cost aims. That concept is recognised in the European state-aid rules, whose purpose is to prevent anti-competitive behaviour.
The noble Lord referred to employment agencies and their significance in the current flexible labour market in the UK. Our estimates represent the aggregate costs of the reforms to business, and they factor in enrolment activity and job churn, and take employment agencies and temporary agency workers into account. The administrative costs are calculated separately by firm size, but cannot be separated into those businesses with high and those with low job churn.
The noble Lord referred to the length of the initial period in respect of the appointments of the NEST corporation. Prior to the corporation being established and during any initial period, all appointments to the corporation are made by the Secretary of State. At the end of the initial period, the corporation must have at least nine members in place. As I said, we have already recruited Lawrence Churchill as the NEST chair-designate, and we are currently focusing on a second recruitment exercise to appoint a deputy chair and about seven other members.
The noble Lord, Lord Oakeshott, referred to someone being appointed to deal with investment matters. I think that that was an appointment to PADA, not to the trustee corporation, but I will come to that point in a moment.
The noble Lord, Lord Taylor, asked about certification and avoiding individualised testing. We are committed to developing a user-friendly certification model for workplace money-purchase schemes. We understand that this is a particular concern for employers with existing pension schemes who calculate contributions based on basic pay. We decided to remove certification from the draft workplace pension reform regulations to allow us more time to work with stakeholders to develop a model that meets the needs of employers and ensures that individuals are protected. We have returned to first principles and are talking to employers, the pensions industry and consumer groups about what will work for them. My officials are already engaged in early discussions with stakeholders, including the ABI, the CBI and the NAPF to discuss possible options. The engagement to date has been very constructive.
The noble Lord, Lord Taylor, talked about restrictions on the times when members can change investment funds. As I say, this is simply a matter of good administration. It avoids the circumstances where a member makes unreasonable demands by changing funds with undue frequency. The trustee must be reasonable in setting the detail of this provision. We consulted on it, and for the sake of clarity it was included in the draft scheme rules to the order.
The noble Lord, Lord Oakeshott, said that the staging was too slow and could have an adverse impact on individuals and their savings. The challenge of implementing these reforms is unprecedented, because they affect more than 1 million employers and more than 10 million people. We are committed to providing the right balance between getting people into pensions saving as quickly as possible, and delivering the reforms safely and fairly. We have done a lot of work with our delivery partners to understand how they will implement the reforms, and we have concluded that staging over four years strikes the right balance to ensure that the effective systems will be in place to support employers in their new duties.
I am grateful to the noble Lord. I am sorry if I did not make it clear what my reservation was. I appreciate that there is an enormous logistical problem with the system, and do not disagree with the timing. However, it is quite wrong and even dangerous to have a scheme come in whenever it can on the basis of much less than a final 8 per cent. That is a snare and a delusion. The systems are the same whether the contribution rate is 1 per cent or 3 per cent. I am sorry if I did not make it clear that my worry is about that and not about timing.
I apologise to the noble Lord: I did not pick up his point correctly. It was always envisaged in the Act that there would be a phasing-in that would interrelate with the staging arrangements. That is partly to help individuals who have not saved in pensions schemes before to adjust to the costs and consequences of doing so; and similarly to help employers who have not previously engaged. On the issue of staging, we recognise that some people will have less time than others to build up savings. We estimate that somebody who enrolled last could have a pension fund 3 per cent lower than if they had enrolled first—but that is because of the staging rather than the phasing-in component.
The noble Lord asked about investment risk. These reforms are intended to enable individuals to make greater financial provision for their retirement by making contributions to a defined-contribution pension scheme that meets defined quality standards. Like any DC scheme—as the noble Lord is well aware, being an expert in these matters—NEST will aim to earn a return on contributions by making appropriate investments. Inevitably, this involves making a judgment on the balance between the anticipated return from investment and exposure to risk. PADA is carrying out the initial work on the investment approach for NEST. It will prepare recommendations for the NEST corporation which will, as the trustee of NEST, make all investment decisions. PADA has consulted extensively with the pension investments industry, unions, employer representatives, consumer groups and academics in order to develop recommendations that best meet the needs of NEST’s likely membership of low to moderate earners. That consultation was widely praised for its analysis and thorough coverage.
PADA’s emerging thinking, following consultation, suggests that the investment approach that many UK DC schemes take, whereby members' contributions are invested predominantly in the stock market, may not be appropriate for the members of the scheme, who are likely to have a low appetite for risk. Certainly one would not imagine the involvement of hedge funds. PADA is likely to recommend to the NEST corporation a strategy that invests members' contributions in a range of asset classes such as government bonds, stocks and shares, cash and alternatives. Such an approach would be designed to reduce volatility, as sharp falls or rises in the fund value would create the risk that some individuals would get back less than their contributions. In any DC scheme there are no guarantees of what an individual's final pension will be. A variety of factors can influence pension income, such as future annuity rates, inflation and interest rates, as well as returns on investment. I hope that that has given the noble Lord a flavour of where the exercise is heading.
Is that the end of the Minister’s answer? I raised a serious question about the appointment of Mark Fawcett, but the Minister does not seem to be aware that he was appointed. He appeared to say that that is for PADA and that he would deal with it later, but he has not dealt with it—so could he please answer the question? As I understand it, Fawcett will continue to be employed by NEST and lead the consultation and advisory processes for it. Can I have a substantive answer to the question? Why was someone appointed from that background in investment? What was the process? Why were mainstream people from pension funds and insurance companies not appointed? I am pleased to hear his assurance that it would not be investing in lots of hedge funds, but would hedge funds or private equity be appropriate at all for NEST? I cannot see how they would be.
I heard the word “alternatives” at the end of what the Minister was talking about. In the investment world, “alternatives” is shorthand for hedge funds, private equity and possibly currency speculation—I do not know. Can we face up to this issue? Will the Minister take this back and look at it seriously? I am horrified, and I believe that all the people who were involved in the discussions that we had on the Pensions Bill will be horrified, that even one penny of the pensions and savings of low-paid people, who are most at risk on a no-charging scheme, will be put into dangerous investments of this kind.
My Lords, this was a public appointment and the noble Lord might be most helped if I write to him setting out the background of the process.
On the issue of assurances about the investment profile of NEST, this is a matter for the trust corporation and its members. It is not for the Government or PADA to dictate how it should proceed, although it is given and will give advice. I hope the noble Lord will have gleaned from what I have just said that it looks as though the thrust of that advice will be towards lower-risk operations. I do not want to say too much because it is not for the Government to determine these matters; it is for the trust corporation to do that.
My Lords, I do not think that that is right. I am sure that the noble Lord will draw to the attention of PADA and NEST the detailed debates we have had about the investment policy and what the principle should be; I remember them well. I hope they are now drawn, fully and properly, to the attention of the people taking these decisions so that they are aware of what Parliament’s intention was. If they look at those debates and the noble Lord revisits them, they will see that there is no way that investment in hedge funds or private equity is appropriate.
I recall that we had a discussion on the PPF with Lawrence Churchill, who initially did not seem to take much notice of what Parliament had said. I am pleased to say that he then very quickly took notice and behaved in a more proper way. I hope that the Minister will focus on this, take the matter away and draw it to the attention of these people, who do not seem to be aware of what was said in Parliament. I am sure that if he looks at what he said and what we said in Committee on the Pensions Bill, he will see why I am concerned.
My Lords, I am happy to take the matter away but the noble Lord should not deduce from anything I have said that the way forward is likely to be other than on the basis we discussed in Parliament. The debate on social and responsible investment did a couple of rounds through the various courses of the Bill and that matter will also be before the trust corporation and its members.
We are setting up the trust corporation as an independent body to run the pension scheme in the best interests of its members. The people appointed to the board of the trust corporation should be experts and have knowledge in these fields. The direction of travel of investment policy that the noble Lord infers is probably wide of the mark. However, I will take the matter away. I am sure that those involved will take the opportunity to read what has been said in these debates and the debates in the other place around this issue so that the noble Lord’s position, and the position we discussed as the Bill was going through Parliament, are clearly understood.
The noble Lord, Lord Oakeshott, also raised the issue of information and advice for individuals. Again, that was a significant issue that, reasonably, preoccupied us for much of our time when we were discussing the Bill in Parliament. We are developing an information service as part of the Planning and Saving for Later Life campaign. People will be able to access the information they need via the “better future” pages on direct.gov or via a dedicated telephone helpline.
We have already launched phase one of the service covering state pensions. We are working closely with other expert organisations and carrying out research to develop the content on auto-enrolment. We will be providing information so that people can identify what options they have. Some individuals may wish to seek further information—for example, those considering paying off large, high-interest debt first. That is the case for any financial decision. We are working with other expert organisations, including TPAS and the FSA, to ensure that people with more complex financial circumstances are provided with the information that they need.
I remind the noble Lord that the analysis done at the time, which I think is the most up-to-date analysis that we have, could not identify any one group of people who would be likely to be worse off from saving in personal accounts—or NEST, as it now is. Sorry, that covered auto-enrolment, not just NEST. The analysis showed that 70 per cent were likely to get back twice what they put in and 95 per cent would get back at least what they put in. That was the analysis done at the time, and I believe that it still holds good.
While the noble Lord is reminding me of that, I am sure that he will also remember and want on the record something that concerned us a great deal. The independent PPI identified that women aged over 50 were definitely a high-risk group. That remains our most serious concern. I am sure that the Minister will accept that they are at higher risk of it not paying to save than other groups
Again, I am speaking from memory, but I believe that that question was considered in the analysis at the time. It did not conclude that we could assume that women aged over 50 were in large measure likely to lose out from the arrangements. I know that we had that debate at the time. Clearly, no one can be certain of an individual's passage through life and what may beset or become of them and therefore, from day one, what their pension profile will mean, but the analysis that we did in aggregate could not identify a particular group of people who would be missing out.
I hope that I have dealt with all the questions raised. If I have not, I would be happy to have another go, but I think that that has covered everything that was raised. If there are no further points, I commend the orders.