Committee (2nd Day)
My Lords, although it seems highly unlikely this afternoon, I am obliged to remind your Lordships that, should there be a Division in the Chamber, we will adjourn immediately the Division bells ring and resume after 10 minutes.
16: After Clause 4, insert the following new Clause—
“Voluntary enrolment and employer contribution
After section 9(2) of the 2008 Act (duties to workers without qualifying earnings) insert—
“(3) The Secretary of State shall by regulations provide that any employer to whom subsection (2) applies shall be under a duty to pay contributions in respect of the jobholder equal to or more than 3% of the amount of the jobholder’s total earnings in the relevant pay reference period.””
My Lords, this amendment is about voluntary earnings. Who do we think NEST is for? It is basically for poorer people, mostly women, who are not able to save in conventional ways and have hitherto had no access to an occupational pension. The other two members of the Paul Johnson review team that produced the report Making Automatic Enrolment Work are very experienced people, but they come from the industry and employment side. Their report recommends that auto-enrolment begins not at the LEL of £5,204 but at the earnings threshold of just under £7,500. This means that 1 million people, mostly women, who would have been automatically enrolled will now not be. The expectation is that ET will rise potentially to £10,000, at which point 2 million people, mostly women, will not be automatically enrolled.
The report runs two arguments in favour of raising the threshold. I think that both of them are fallacious. The first argument that the report runs is that—it is, of course, true—very low earners have high replacement rates in retirement through benefits and so on, so that NEST is not necessary, unlike for higher earners, for whom state benefits by definition represent a lower replacement rate and who might therefore wish to take advantage of NEST. The second argument that the report runs—as you would expect from the industry—is that they do not want to handle such small sums. That is the basis of their argument and the Government have followed their advice.
The first of these is about replacement earnings. It is, of course, true that, if you have a low enough income from earned work, even the basic state pension backed by pension credit will come to much the same level as your wage and therefore you will have a high replacement rate. The statistics and percentages on this are all very well, but these women are still very poor. That is why their state benefits in retirement will perhaps just about equal their wage. They are still very poor, whether in work or in retirement.
A pension, however small, even if it is below the trivial commutation level, which it probably will be, gives the woman, through pension savings, a two for one to match her own—because she attracts the employer’s contribution and, to a minor degree, the tax relief, depending on where she is earning—which, perhaps for the first time, might allow her to retire with a small capital sum below the trigger commutation rate of perhaps £10,000 or £15,000, depending on how long she has saved.
I do not accept this argument. It is right that there are high replacement earnings in retirement, if you have a very low wage. However, that means that—this is the key fact behind it—both in work and in retirement you are likely be very poor indeed. This is why we need an option for NEST.
The industry’s second argument, which I also think is fallacious, although I understand it, is that employers do not want the hassle of handling small sums that, they say, would not be worth much to the employee once the means-tested benefits come into play. However, there is a profound flaw in their argument here, too.
The reason why the sums are small is that, wherever you set the auto-enrolment start line, whether it is LEL at £5,200 or ET at £7,400, the first £1,000 or £2,000 of earnings above any line that you set will by definition produce only a very modest increment in pension. That would be true whether you were on £10,000, £15,000, £20,000 or £22,000. The first £2,000 produces little additional revenue. That is why, while the argument is true that you might as well put it up to £7,500 because the difference between £5,200 and £7,500 is tiny, it is also the case for the first £2,000 of earnings above £7,500. It is true for wherever you set the threshold, so it does not apply to the figure of £5,200 as such; it applies to the fact that you have a threshold at all, which is not based on the first zero pound.
The whole of the report is fallacious, in so far as it hinges on that argument. Otherwise, if the woman is auto-enrolled at £5,200 with earnings of £7,400, her pot over 25 years, I estimate, with a levy on the £2,000 increment, will be about £10,000 greater than if she was enrolled at £7,400. But if she is enrolled at £7,400, and has earnings of £2,000 above that—say £9,400 or £9,500—she will still have the same size pot on the first £2,000 or so of income, give or take £100 or £200.
The additional pot argument, in other words, applies wherever you pitch the threshold—unless, of course, you are up in the £30,000 or £40,000 region, where by definition you have a much higher increment. Therefore, the argument that the pots are too small to be worth bothering about either is valid for wherever you set the threshold for low earners or is not valid at all. The problem is not whether it starts at the LEL of £5,200 or at the ET at £7,400; it is that it does not cover the earnings below the threshold—the first £5,200 or £7,400. Auto-enrolment on those would make the difference that matters. That is what this amendment is about.
I am pleased that the Government have agreed that, following the Johnson report, wherever a woman wishes voluntarily to enrol between the LEL of £5,200 and the ET at £7,500, the employer must contribute. As I have suggested, although that is useful, it is not enough to make a really significant difference unless it is extended to embrace the whole of the earnings from pound zero.
My amendment adduces no new principle. The Government have already agreed—unless they have changed their mind and I have not picked that up—that young people below the age of 22 can voluntarily enrol. I welcome this. The Government have also agreed—I also welcome this as a concession following the report—that low earners earning between LEL and ET can also voluntarily enrol before they hit the auto-enrolment figure of £7,500. This amendment would allow the earner voluntarily to enrol on all her earnings from pound zero, provided that she was at or above the threshold—a threshold that I would like to be the LEL for the sake of consistency.
Therefore, no new principle is involved in this amendment. It would merely bring into NEST those employees who, if they were in a standard occupational pension, would have their earnings covered from pound zero. It would merely align NEST with best practice already in occupational pension schemes—nothing new or novel. Only NEST has the LEL threshold for voluntary entry at £5,200 and ET at £7,500 for auto-entry.
What does all this mean? Take a woman on half average earnings—say £11,000 a year. Only in NEST would a third of her earnings, between £7,500 and £11,000, be automatically pensioned. If she were in an OP, her entire earnings would be automatically pensioned. I emphasise that it would be voluntary for her to make the choice as to whether she welcomes and wants this form of savings going back to pound zero, given her family circumstances.
Why is it necessary? Some 40 per cent of women at retirement may not be married; they may be cohabiting and they may or may not be financially interdependent with their partner. As a result, they need to carry their own pension. I am sure that the Minister and everyone in this Room would agree with me on that. As it stands, only a third of her income would be automatically pensioned. Should ET rise to £10,000 and she is on earnings of £11,000, almost none of her earnings—a paltry £1,000—would be pensioned unless she chose voluntarily to go back down to the LEL. Not surprisingly, this would result in the small sums which the industry finds a hassle and the employee finds disappointing and which trap employees into benefit tapers.
I will repeat the statistics that I offered at Second Reading. Under these proposals, a woman has the right to enrol voluntarily below the LEL, so a woman on £11,000 after 25 years who voluntarily saved on all her earnings could end up with a pension pot of £40,000 over 25 years. If she relied on auto-enrolment and it were to kick in with an ET of £10,000, which is what the Pensions Minister, the honourable Steve Webb, is promising us, she would retire with a pot of virtually nothing. So the difference is between £40,000 or £1,000 or £2,000.
This amendment adduces no new principle. It is about voluntary enrolment in which the employer must contribute. That principle has already been established for young people and for the gap between LEL and ET. There would be no additional small pots. On the contrary, it could well double the pots and more, to the gain of all parties concerned, and make it worth saving, which is what we all want. I beg to move.
My Lords, to my mind there are two reasons why Amendment 16, tabled by my noble friend Lady Hollis, is attractive. First, it would enable people outside the lower limit on the band of earnings who want to save to be able to. Those of us who followed the debate know that a reason for the lower limit on the band of earnings, as distinct from the earnings trigger that is now proposed, was the consideration of the persistently very low-paid workers and whether it was appropriate for them to be nudged. However, as my noble friend said, this amendment is not auto-enrolling. It allows for the active choice of the worker—an active decision of someone on low earnings for a particular job. If they choose positively to make that decision, there seems to be a good and fair reason for the employer to make a matching contribution of 3 per cent, particularly because their incomes are low. The individual would still be a worker and the 3 per cent employer contribution would also assist with the arguments about de minimis levels of contribution and the consequential impact on costs and charges.
My second reason for finding this amendment attractive is that it extends the principle that the reforms should work for women because, although women are most likely to have earnings below the qualifying band, their household income may be such that they still want to make a pension contribution. That is very important. I declare an interest because of my involvement with NEST. NEST is designed to allow someone voluntarily to contribute once they have a NEST account, although I acknowledge that there are de minimis requirements because of the need to keep costs and charges low. However, I am sure that in most instances the combination of the employer contribution and the employee contribution would go above those de minimis requirements. It could also start to address the multi-job problem where women have several mini-jobs, because individual contributions per job look low but in aggregate could be much greater. Although I fear that many women in such mini-jobs will not have the confidence to overcome the barriers of inertia and voluntarily opt in—their needs will require more systemic change, as we discussed yesterday—none the less there will be women who will want to make the active choice and who will be in circumstances where that makes economic sense and where it will assist the asset accumulation for a pension in their own name. So the proposal certainly has attractions.
My Lords, I thank the noble Baroness for her amendment. I have listened to the debate with great interest. Workers on low earnings do not qualify for automatic enrolment. They have the right to opt into pension saving but do not qualify by right to an employer contribution. The amendment seeks to ensure that these low earners receive a contribution to workplace pension saving from their employer if they choose to opt into pension saving.
I believe that the noble Baroness, Lady Hollis, may have intended us to focus on NEST, but it is worth being aware that other schemes may have earnings thresholds in their rules. Therefore, we have looked at the issue from the perspective of low earners and contributions from pound one, irrespective of which scheme their employers choose.
Persistent low earners get a high replacement rate from the state without private pension saving, so for these individuals it is questionable whether it is beneficial to redirect money into private saving. For some very low earners who are not accruing a state pension, it may be beneficial to opt into pension saving. The noble Baroness, Lady Hollis, gave an example of women in households where there were other earnings. This was an important point brought out in the Johnson review.
During our previous deliberations, the noble Baroness, Lady Drake, also brought to your Lordships’ attention the importance of adding to household saving. However, in practice, it is very hard to distinguish a clearly identifiable group of workers without qualifying earnings who would benefit from opting into pension saving. An employer contribution is an incentive to save, so it follows that for very low earners an employer contribution may be an incentive to opt in. We do not believe that it is right to encourage opting in for the very few low earners who may benefit from saving at the risk of penalising the many low earners who will not benefit from opting in. We also need to be conscious of the potential impact on employers.
I shall come to that question. There are around 1 million workers with annual earnings below £5,715. If these people were brought into pension saving, it could result in further employer contribution costs of up to £125 million.
There is another issue that makes me urge caution on this amendment, although I appreciate that its intention is laudable. We cannot legislate to discriminate unreasonably between different groups. This proposal could well involve such discrimination because those who earn less than £5,000 would have an employer contribution on their full earnings if they opted in. However, those who earn £8,000 would have a contribution on only £3,000 of their earnings and not on the full £8,000—I am rounding up these figures. If we did it for the lowest paid, we would have to do it for everyone, which would mean extending the requirement on employers to pay a contribution on the first £5,715 to everyone in pension saving. In effect, that would be the equivalent of removing the lower limit of the qualifying earnings band, which would be unaffordable.
I am grateful to the Minister for giving way. I obviously did not make myself clear. I said that there would need to be a threshold so that the ability to cover the first pound would apply only to those who are already over the threshold of, I hope, LEL and could even be at ET. In other words, if you are earning only £4,000 there is no suggestion that that would bring you into NEST, as the Minister appeared to think the amendment suggested. If that is what the words say, I apologise because that is due to my drafting. However, I had hoped that I had made the position clear in my opening speech.
No. I apologise. It says that at the moment you are automatically enrolled at £7,500 and can opt in from £5,200 if your earnings are between those two figures. I suggest that the same opt-in right should apply to pound zero, but only if you are already at the threshold. In other words, if you are on £4,000 or £3,000, you would have no right to make a pension contribution, but if you are on anything above £5,200—certainly above £7,500—you can make contributions voluntarily not only on the band between £5,200 and £7,500 but on the band £0 to £7,500.
I thank the noble Baroness for that explanation. My point of concern remains unchanged: if we allow that to happen for this particular group, we must expand it and allow everyone to make a pound one contribution. I therefore do not think that it changes the argument and the concern about the extra costs implied, which could be around £900 million of additional contributions—around one-quarter of the total cost—and represent an unacceptable burden on employers. It would also skew the structure of the reforms that are designed to enable a median earner with solid state entitlement to achieve a retirement income of around 45 per cent in line with the pension commission’s recommendation. The Johnson review endorsed that original recommendation. As the noble Baroness said, I am not putting any weight on the small sums argument—that is not part of this argument. On her point about the move of the threshold up to £10,000, we will debate that later. Clearly, I am sympathetic to the drive behind this proposal. The Government are always willing to consider ideas that will allow us to keep the appropriate balance and maintain our key policy intentions. However, we are unable to accept this amendment and I ask the noble Baroness to withdraw it.
I am grateful for the support of my noble friend Lady Drake on this and for the thoughtfulness of the Minister’s answer. I suspect that, possibly because of my drafting, there is a misunderstanding. I had hoped that I had made it clear in my opening speech—obviously I failed to do so—that we were talking about the situation where, if someone was required to enrol through auto-enrolment but had the voluntary right to go back to £5,200, they would also have the voluntary right to go back to pound zero. It is as simple as that. At that point, it seems to me, the Minister’s statistics of £900 million apply to the very different scenario of someone earning £2,000, £3,000 or £4,000 who could voluntarily enrol. That never was, and never has been, my argument. It has always been that those already in the system should be able to cover the first pound.
I want to make this absolutely clear. Our concern here is about the discrimination that would otherwise come up. We cannot just leave pound one for one group; we would have to extend it to everyone. That is why the costs would balloon from this. It is not possible to maintain a narrow right for one group; we would have to extend it. That is one of the reasons for our concern.
I am simply not persuaded by this. Is the Minister saying that because the very poorest—those earning less than, say, £5,000 a year—could not come within the system, those above the LEL should not be able to go back to zero? I think it likely that the poorest might have a couple of mini-jobs or whatever and might well not qualify because they are below the LEL. The Minister would not dream of applying that argument to the national insurance system, the whole of which is based on a lower earnings limit. You are automatically brought into the NI system, building up your entitlement to the basic state pension, but you do not start to pay your NICs until you hit the £7,500 ET. That argument is the basis of the basic state pension. I have not heard the Minister say that this is unfair because someone earning £3,000 or £4,000, who is therefore below the LEL, cannot earn their way into the national insurance system. I would welcome the Minister’s comments on this.
What the Minister is saying is impossible here, because it is unfair, is at the very basis of the national insurance system for the whole of our population. If it is good enough for NICs, it is certainly good enough for NEST. I am sorry, but I do not accept the noble Lord’s argument. In practical reality, I doubt that someone on £3,000 or £4,000 would want to save, although I suppose that it is possible, as my noble friend said, because of her household circumstances rather than her own. What I am trying to do is to make available to those people in NEST the best practice for most pension schemes. That is, you can save from pound zero once you are over the earnings threshold—the LEL. Once that happens, you then end up, by choice, with a pot that is worth having. To say that it is unfair cannot be the case unless the Minister also accepts that the whole of the national insurance system is unfair. I am sure that he would not wish to go on record as saying that. I beg leave to withdraw the amendment.
Amendment 16 withdrawn.
17: After Clause 4, insert the following new Clause—
“Right to apply for amalgamation of earnings from multiple sources of employment for purposes of the earnings trigger
(1) A jobholder who in any week in a tax year is employed in more than one employment and—
(a) whose earnings do not exceed the weekly earnings trigger in any individual employment or self-employment in that week; and(b) whose earnings in aggregate reach or exceed the earnings trigger in any week,shall be deemed to have earnings equivalent to or exceeding the earnings trigger for the purposes of requesting voluntary enrolment into national employee savings trusts.”
I will be brief. As the noble Lord, Lord Stoneham, noticed, very perceptively, this is a shadow repeat of the arguments on mini-jobs for the basic state pension. I do not adduce new arguments for it; it is basically a duplicate of Amendment 13. Multiple mini-jobs that, bundled together, take a woman over the LEL should be eligible not just for entry into the basic state pension, as we argued on Amendment 13. We had some encouraging but cautious—I think that was the word we agreed to use—comments from the Minister on that, which were also in the reply to NEST. The same arguments run. The DWP or HMRC will, for universal credit purposes, need the relevant information from all the employers of a woman who has mini-jobs. Just as they will deduct any or no NICs, or a proportion thereof, they could—in exactly the same way—deduct for NEST.
I accept that it will be more complicated for contributions to the state pension, since women will be credited into the BSP between the LEL and the ET. Whether her portfolio of mini-jobs took her above the LEL, or even above the ET, she would herself have to contribute finance. In a sense, this puts down a marker. It is important that we do so if we can at this stage. NEST is due to be reviewed in 2017—five and a half years from now. I accept the cautious arguments that were advanced by the noble Lord, Lord Freud, on Tuesday that any such changes—even for the BSP, which is a simpler proposition—would have to await the introduction of universal credit in 2013. It would also be a possibility with no guarantee until the stability of the ICT system is secured and real-time information can flow in from employers.
As I say, I want to put down a marker on this for 2017, by which time both UC and NEST should be secure. We will know, I hope, that we have done this successfully with BSP by then—indeed, I hope that it will apply to BSP by 2017. I believe that, on the basis of that, we could build a similar proposition in relation to NEST. If we are serious about bringing as many women as possible into the pensions system, we should review this, certainly by 2017 at the latest. I seek the Minister’s views on this, even at this early stage. I beg to move.
My Lords, I speak to Amendments 20 and 21 in this group, which concern the trigger. Their thrust is not dissimilar to that of the amendment moved by my noble friend, although they are perhaps less ambitious. We will shortly discuss changes to or, indeed, the deletion of the trigger, but these amendments are predicated on the trigger remaining at its current level.
Amendment 21 would give an opportunity for jobholders to bring to the attention of employers the fact that by including earnings from other employments the trigger is reached or exceeded. Therefore, if the other conditions for auto-enrolment were present, the employer would have a duty to act accordingly. I underline how modest this provision is, as it is effectively an alternative to opting in. The employer would have no auto-enrolment duty unless, among other things, the employee had qualifying earnings in respect of that particular employment. It would be of advantage only where, in respect of any particular employer, the trigger had not been reached but qualifying earnings with that employer had. As has been expressed—my noble friend Lady Drake will develop this when we discuss a subsequent group of amendments—we have concerns about the potential widening gap between the trigger and the start of the band of qualifying earnings. If that is right, being able to access contributions on that band, even though the trigger has not been met in respect of any employment, becomes more important.
Like the amendment moved by my noble friend, this amendment is in part about putting down a marker for the ambition that, at some stage in the future, the various thresholds—the trigger and the qualifying earnings—might be amalgamated with payments allocated among two or more employers, but this amendment does not seek that. However, we would be interested in the Minister’s view on the extent to which HMRC might routinely have a role in identifying where the trigger is reached for multiple earnings. In a sense, it is like the allocation of personal allowances across various notices of coding. Could that be done on a more systematic basis? The noble Lord’s work on the universal credit seems predicated on amalgamating on a real-time basis income from a range of sources, so we wonder whether there is a read-across to auto-enrolment. If there were, it would address the inertia issue that is present in the formulation of this amendment and the equivalent opt-in route.
The amendment in the name of my noble friend Lady Hollis is, as I said, pretty much on the same page, although I understand that it is not necessary for the earnings trigger to be reached for a jobholder to opt in. The right exists if the employee has qualifying earnings, but it would not allow the employee to specify a particular scheme, be it NEST or any other scheme. I think that that would be the employer’s choice, although the Minister may be able to enlarge on that. By and large, however, we are seeking to achieve the same thing. The prize for and the challenge to the Minister is to see, consistent with confidentiality of information, whether the systems that enable some more automatic notifications in some circumstances can be deployed where the trigger is in aggregate reached but not in any one employment.
My Lords, on Tuesday we discussed the possible aggregation of many jobs for credit towards the basic state pension. I admit to being indebted to the ever persuasive arguments of the noble Baroness, Lady Hollis, about the effect of portfolios of many jobs, especially in rural communities, and her concern that as many low earners as possible should be able to qualify for auto-enrolment and an employer contribution.
I also note the wise cautions of the noble Lord, Lord Boswell, on Tuesday about the potential effect on employers—where aggregation is mooted—and on the labour market. As I said on Tuesday, I am sympathetic to the principle of aggregation for basic state pension purposes. I am cautious but optimistic that this could be possible in the new world of the universal credit. This is because, if Government systems can track information for universal credit, it may not be a huge leap from there to having national insurance contributions or making credits on a state pension record. However, we are now about to discuss a somewhat different issue—that of the aggregation of earnings from many jobs in relation to auto-enrolment into workplace pensions. I need to emphasise again that it is important to encourage part-time jobs and to look for a way of aggregation. However, there are greater barriers in this area than there are in the area of the state pension in terms of aggregation. That it is more complicated was stated by the noble Baroness, Lady Hollis, in her speech.
The main and unique barrier is a need not only to aggregate earnings across employers but also to apportion pension contributions between those different employers. This is quite a problem in terms of employer burden cost and complexity, which we would need to find a way to resolve. The automatic enrolment duty falls on each employer for the people they employ. There is no sharing of the duty between employers. If a person has two jobs, each of their employers is responsible for enrolling them as the legislation is presently set up. Workers who do not earn enough to qualify for automatic enrolment clearly may opt in. Those who have the qualifying earnings have the right to employer contributions, which is ground we went over just now.
The first amendment raised by the noble Baroness, Lady Hollis, seeks to increase voluntary pensions saving for people who do not earn enough to be automatically enrolled by enabling the aggregation of the many jobs and any earnings from self-employment for a person who also works on their own account. This would allow people who earn under the automatic enrolment earnings trigger, and opt in, to have their earnings for more than one job taken into account for calculating pension contributions. This looks like a straightforward proposal. However, there are considerable practical problems that would, in practice, increase employer administration burden.
Let me turn to the two amendments from the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, which seek to enable aggregation by solving one of these practical difficulties about information sharing between employers. These amendments enable earnings from separate jobs for separate employers to be added together where the person can demonstrate to the employer that they have another job with other earnings in that week or month and that they are therefore entitled to be auto-enrolled. This is a very neat amendment that shifts the burden of proof from the employer. However, it is not quite as modest as the noble Lord suggested because it does not entirely solve the issue of the employer administration burden.
It is not immediately obvious how the employer contribution could be easily calculated or divided up. No mechanism currently exists to do that. Would multi-employers share the cost of the employer contribution? If so, how would that be done? Which employer takes responsibility for paying contributions to the pension scheme? If they share the cost, how would one employer recover the cost from the other employer? If they do not share the cost, is it fair that one employer bears the entire cost and the other none of it? Overall, we cannot see how it could be done without placing a significant and unfair burden on employers. I sympathise with the intention behind these amendments in terms of those with multiple jobs, and it is certainly an issue to keep an eye on as we go forward. It clearly—and noble Lords all acknowledge this—is not feasible with our present technology; but even if it became feasible, which it very well may, moving the burden of proof on to the worker is not the way to do it.
Standing back just a little, our first priority at this point must be to ensure that employers understand, and are able successfully to implement, their duties under automatic enrolment. That is the priority. This is not the right point to contemplate introducing significant changes to those duties, and I think noble Lords today recognise that. Introducing new and significant burdens would disrupt that process. However, noble Lords have successfully put down a marker for 2017. On that basis, we do not accept the amendment and invite noble Lords to withdraw it.
My Lords, I wonder whether I might make my contribution before the Opposition spokesman. First, I apologise to the Committee for having been late; my excuse is probably the best I have ever been able to tender, because I have just been attending a meeting of pension trustees.
Well, they are, and it is the Conservative Party agents’ superannuation scheme, but I promise not to detain the Committee on that. I hope I would have given the same attention to anyone else with whom I was in a trustee relationship.
May I just make two points? I fully understand that the Minister was kind enough to quote my slight reservation in our earlier exchanges on related matters. The first is a note of concern: it would certainly be unfortunate if one employer were somehow to be delinquent because of the failure of another employer to declare, which had created excess over the qualifying limit. I just make that point; I am sure my noble friend will have it in mind.
The second point is intended to be more positive and it might help to inform trains of thought. One always has to be careful about these sorts of things, not least for data protection reasons. I happened yesterday to have gone to a completely unrelated meeting in this building about occupational health, which is an interest of mine. We were looking at the new construction workers’ smart card scheme. Of course, once there is something that is able to identify the individual with known characteristics—dates of birth, for example, or presumably one could incorporate an NI number—and that is portable, it is possible for that to be tendered, or even required to be tendered, through various places of work. It might be possible to aggregate electronically in that way. I just offer that to my noble friend as a way forward. I am pleased to see the noble Baroness, Lady Hollis, also nodding; at least it is a thought. We always have to be careful with these things, because there will be some people on manual, some people who do not understand and minority interests and industries. But if we can possibly start working toward some sensible protocols people could use, it would be generally beneficial.
I wonder whether the Minister would allow me to intervene, because he challenged the description I gave of my amendment as being modest. He may have misunderstood the intent of part of it. All it was seeking to do initially was to say that if someone had qualifying earnings, with a particular employer, but not earnings that reached the trigger, and if there were a process of the employer being made aware that the trigger had been reached, the employer would automatically enrol and be responsible for contributions in respect of the earnings in that employment between the start of the qualifying earnings band and whatever that band reached. That would in a sense be stand alone for an employer. That gives exactly the same result as employees now have in being able to opt in, because if you have earnings above the threshold, but not at the trigger, you can simply opt in and get the employer contribution.
Along the way, the hope would be that, rather than relying on the activity of the employee—because we are always trying to deal with the inertia problem—you could somehow make it more automatic. It would be automatic, though, only in the sense of the employer being aware that the trigger had been reached. It would not require any aggregation of earnings by any employer. I instance how HMRC deals with notices of coding. If people have two or more jobs, on one basis or another the personal allowance is divvied up across their notices of coding—don’t ask me how. In a sense, an employer would be aware that other earnings may be involved. That sort of process could be a trigger for automatically alerting the employer that the trigger had been reached and simply then requiring them to deal with auto-enrolment on the earnings that the employee is being paid by that employer. My amendment would do no more than that.
We are in danger of sitting here devising IT systems, which is great fun but rather time-consuming. The word “awareness” is more than modest, because making people aware in the present IT environment is a substantial requirement due to the privacy around the data concerned. It would not be possible. I come back to my earlier point: in the new world of universal credit, the way in which that information is used will change quite dramatically and things may become possible. However, this is not the way to do it. In the present context, it is practical neither technologically nor politically.
Before I decide what to do with the amendment, which will be fairly predictable, perhaps I may ask the Minister a further question—again, it may reflect my failure to understand either the briefing papers or their import. Let me give him the example of a woman in a job where she earns more than £7,500—let us say £7,600—and is automatically enrolled. What would be her situation if she had a second job which gave her £6,000 a year, taking her above the LEL but below the ET, and she might or might not wish to enrol? Alternatively, she might have a second job which paid £4,000; that is, below the LEL. Could the Minister help me on that?
The £7,600 would take her through the threshold. The additional incomes would be treated separately, because we do not aggregate. The £4,000 falls to a level at which she can make a contribution, although she would not get an employer contribution on top. That is how that would work. A thousand examples could be cited, but the basic rules remain.
To be clear—again, I am very happy for the noble Lord to write to me, because I realise that I have sprung this on him—I think that he is saying that, if a woman was earning £7,600, she would be automatically enrolled in NEST by her employer. If she had a second job which brought her in £6,000 and she chose to enrol, the employer would match it. So she would be running two NEST pots simultaneously.
If it was NEST, it would not be two pots; it would all go into one NEST account. But if the employer choice in each instance was a different pension scheme, by definition there would be two pots. To clarify on the previous debate, my understanding was that those earnings that came within the band—forget all other triggers—attracted an employer contribution. That is the critical thing. To get the employer contribution, the earnings must be in the band. If your earnings are below that band, you can opt in but you cannot trigger the employer contribution.
I think that where that takes us is that the woman in question would be getting information and contributions from two employers, in much the same way as would be the case if she were in mini-jobs which, if put together, would take her above the threshold. I accept the Minister’s point that at this moment in time this is a step too far for NEST to carry out. I genuinely understand that. As I say, we are putting down a marker. However, I am not sure that the size of the further step to take is as great as he originally suggested in the light of the exploration that we have had on having two streams of money going into possibly two separate NEST pots, according to whether one is default and the other is not. In order to handle that, we will need the IT on which one could build the push of my original amendment. None the less, this has been an extremely useful debate and I am grateful to the Minister, my noble friend Lady Drake and the noble Lord, Lord Boswell, for helping to clarify this issue. I beg leave to withdraw the amendment.
Amendment 17 withdrawn.
Clause 5 : Earnings trigger for automatic enrolment and re-enrolment
18: Clause 5, page 4, line 30, leave out “£7,475” and insert “£5,715”
My Lords, my noble friend Lady Turner is not here but as my amendments, which are grouped with this, would effectively achieve the same thing, perhaps the Committee might allow me to formally move on her behalf, if that is in order. I will also speak to Amendment 19 in this group, which should strictly have had attached to it a current year date of 2010-11, because without that it obviously has other ramifications. All these amendments are, to all intents and purposes, identical, although they have to be considered in the context of the review provisions of Clause 8, which my noble friend Lady Drake will deal with shortly. These amendments would reduce the trigger to the current primary threshold for national insurance purposes, so effectively this equates the trigger with the starting point of qualifying earnings. We consider this the right place to be.
The pensions commission originally recommended that individuals would be automatically enrolled when they had earned, in 2006-07 terms, £5,035, which was the national insurance primary threshold at that time. However, it also recommended that this threshold should be uprated by earnings. Indeed, that is what the legislation said. I remember that when we were debating the Bill, we as a Government tried to get a little bit of wriggle room on that uprating, and a combination of Liberal Democrats and Conservatives, led by the noble Baroness, Lady Noakes, pressed an amendment that locked us into what the legislation currently says. They were the early actions of the coalition and I still bear the scars.
One of the lessons learnt is that it is better to insert a figure in the legislation and have rules for reviewing it rather than link the threshold to a particular measure—be it the personal allowance for income tax or the primary threshold for national insurance purposes—the reason being that it can move for policy reasons in a way that does not have any particular regard to the impact on the auto-enrolment analysis. We know that the coalition Government have an ambition to move the personal tax allowance to £10,000. Should a trigger threshold or a qualifying earnings threshold be tied to that, it would have devastating consequences for auto-enrolment. It would leave 1.4 million people, three-quarters of them women, outside auto-enrolment.
Changes to national insurance—part of the coalition Government’s approach to tackling the deficit—mean that the primary threshold increases from April this year, as does the rate, to £7,200, nearly closing the gap with the personal allowance. There have, from time to time, been ambitions to align the personal allowance with the primary threshold. We hold to the view that realigning the start of qualifying earnings with the current primary threshold level, with clear caps on its uprating, is the right place to be. This holds good to the pensions commission analysis that the crucial issue was the level of replacement income in retirement—a point to which the noble Lord referred a moment ago.
In our view, the case for the trigger at £7,475 is not made. On the basis of the Johnson report, it would exclude some 600,000 people from auto-enrolment and would save only some £3 million a year in administration costs for employers. Indeed, one wonders whether it would have some impact on opt-in arrangements, which would be likely to be more costly.
This takes us back to the question of whether people on low earnings benefit from savings, although I believe that the Johnson report dealt with that very clearly. It made the point that earnings are highly dynamic and that relatively few people have low earnings throughout their lives. Also, most of those on low earnings within family units have a working partner with significant earnings and so should benefit from pension savings. There is also the risk of missing out on employer contributions and the favourable interaction with tax credits. Perhaps the noble Lord would comment on that favourable interaction in relation to universal credit.
Given the acceptance of the appropriateness of savings from the start of a band of qualifying earnings, which we can agree for the current year, the argument advanced for a higher trigger is a bit thin. Essentially, it is that it will reduce the number of small pots of pension savings—that is, those that would accrue to people earning between approximately £5,700 and £7,300—because that creates a cliff edge and does not necessarily equate with consistency of savings. In any event, NEST is geared up to deal with just that sort of situation. Therefore, the introduction of a trigger that is different from the start of the qualifying earnings band is something that we strongly oppose.
My Lords, we have had a discussion on some of the main reasons for the move in the threshold. We are understanding of that move. There are a number of reasons for it. The documentation that we have received from a number of organisations questions the rate of return on the savings of people at these levels of earnings.
We have heard mention of the replacement-to-income argument. It is almost certainly true that at these levels of earnings a lot of individuals are less prepared to save. Of course, there is also the burden of administration. I take the noble Lord’s arguments on the threshold being linked to the tax threshold. You would expect us to be committed to raising the tax threshold to £10,000. We want neither a deterrent to doing this nor a deterrent to those who are trying to improve their savings and pensions. I hope therefore that we will have a commitment to look at this each year and that it will not be related necessarily to the raising of the tax threshold, as that would take a lot of people out of the net, which is not what we are trying to do.
I accept that there is an increase in these thresholds, but I want to go back. I apologise for repeating some of the earlier arguments, but I want to make the point that there are a number of things that we need to do—or the Government need to look at—which would be helpful to people who could be vulnerable to these changes. I have mentioned the tax threshold and I hope that we will have a firm commitment on that.
Secondly, we will discuss later the pots of savings and what people will be able to do with them. If they can be brought into NEST, and if we can encourage that process, that would be a most helpful change. It would make the overall change more acceptable.
I was very supportive of the arguments on multiple earnings. It is a big issue that will grow. I am pleased that there was a commitment to 2017. We underestimate the number of women in this position and, even though we may not be able to act now, we could be saying that it is an issue that we will try to address as the new system beds in. We also want to see a degree of commitment to encouraging people to stop opting out. We will address that matter in later amendments. In the context of raising the threshold, these are a number of points that we think are important to make that acceptable. I accept that, ultimately, running through this Bill is a trade-off with the Treasury on all kinds of aspects. We must make sure that we get a good trade-off.
Perhaps I may briefly invite my noble friend to consider one particular point about the raising of the threshold. There is no need for a commitment at this stage, although it has been implied that it will be considered. Can my noble friend give some thought to, and discuss with his Treasury colleagues, the way in which this might be introduced annually into the national consciousness? I hesitate to dangle another red herring before the Committee in the shape of the national minimum wage, on which I have some prior form. However, if we are beginning to look at the impact on labour markets of a number of items, and some of the misguided or inappropriate claims that are made, or the fact that people say, “I don’t think I can afford that anymore and I want to pull out”, it would be useful to have a national economic snapshot. Although this is strictly about the labour market and within the Minister’s remit by definition because he is legislating on it, it is part of a national economic snapshot. Some people may have noticed today in relation to the national minimum wage a suggestion with which I do not agree—that we should announce it and defer it for 12 months. I merely make the point that probably on the occasion of a Budget it would be useful to have an annual appraisal that was keyed in and could be related by the commentators to tax rates, take-home pay and so forth. It would add to clarity and transparency.
My Lords, first, I thank the noble Lord, Lord McKenzie, for leaping into the breach and allowing us to have this debate on the issue about the trigger at which an individual is automatically enrolled being reduced. We are looking at the three amendments, together with the amendment of the noble Baroness, Lady Turner.
The reference to the potential move to the tax threshold is a really important issue that deserves a robust debate in its own right. We have an opportunity to debate it in later amendments. Rather than pre-empting that debate—in which I will make a commitment—I turn to the specific proposals in the amendment. We have committed to alignment with next year’s tax threshold of £7,475. This is the right direction of travel. However, we also need to retain flexibility for the future in order that we continue to target the right groups at the right times. I very much take the point of the noble Lord, Lord Boswell. There are quite a few issues that have to be looked at in the context of that debate. Let me put that to one side because we will be reverting to it. I apologise for the scars that the noble Lord, Lord McKenzie, bears. As a result of the level of uncertainty that exists in the structure of the pension system, we look to have rather more freedom of manoeuvre than he was able to enjoy.
This Government have always supported automatic enrolment into workplace pensions. We believe that it is the step change that will make a critical difference to a boost in retirement savings. However, we also believe that the new automatic enrolment earnings trigger is a significant improvement to the breakthrough in pension reforms that the noble Lord, Lord McKenzie, and so many other members of this and another place work so tirelessly to develop. Automatic enrolment for every individual into pension saving is not always the right thing to do. The key question is, and always has been, whether low earners would benefit from saving, as the noble Lord, Lord Stoneham, pointed out. It makes no sense to require people to sacrifice income during their working life and redirect it into private pension saving, when that saving makes them no better off.
The nub of this issue is about getting the right people saving. We, therefore, commissioned an independent review to ensure that the scope proposed for automatic enrolment by the previous Government was right. We wanted to look again at the point at which people should be auto-enrolled to ensure that we capture the right group.
Can the Minister help me? He said that we should not encourage people to save who would be no better off as a result. That was the line he used. What does he have in mind? If his right honourable friend’s new state pension of £140 comes into play, that problem should not arise, apart from for those tenants who might be on housing benefit—who may or may not be a diminishing minority. Have I misunderstood the Minister?
I thank the noble Baroness for her intervention. Regrettably, she catches me at a time when I am not able to go as far as the Daily Mail, for instance, in saying what may happen as a result of discussions—which are entirely amicable—between the DWP and the Treasury in developing these proposals. Therefore, I cannot deal with her rather pointed query.
The Johnson review recommended that the personal income tax threshold of around £7,400 from this April would be the right starting point to trigger automatic enrolment. The latest announced pension and benefit rates bear this out. Persistent low earners get a higher replacement rate from the state, with means-tested benefits and the state pension, without private pension saving. This is clearly the other leg of the argument about whether it is attractive for low earners to save. From this April, the minimum annual guaranteed retirement income for a single person from the state will be around £7,140, with housing benefit on top of that. It is clear that individuals earning around this level during their working life can receive a similar income in retirement without saving. Therefore, it would be wrong to auto-enrol them. These amendments seek to introduce a lower entry point for automatic enrolment. This would mean encouraging a group to save who may receive more money in retirement from the state pension system than they earn during their working life.
There is an additional advantage to a higher earnings trigger that I would bring to your Lordships’ attention, which we believe will address a concern from pension schemes and employers. One of the persistent problems with the original design of automatic enrolment was to do with very small, low-value contributions on earnings just above the automatic enrolment point. We believe that the separation of the entry point from the contributions threshold creates a buffer against such small contributions. As a bonus, but not a driver, if we can settle on rates that employers already use, it would make the operation of payroll a great deal simpler.
We recognise that the increased automatic enrolment trigger has an impact on low earners at the point of automatic enrolment. However, we do not believe the effect is detrimental. The right people will be auto-enrolled and the lowest earners will not be. That is the right outcome. Critically, we have built in a safeguard. We support an individual’s decision to save where they feel that saving is right for them. Where someone below the threshold feels that they would benefit by saving, they can opt in to a workplace scheme. If they earn more than £5,715, they will get an employer contribution. We have just covered that ground.
I am acutely aware of the passions that the raised threshold has aroused. I am honoured to have taken part in such a robust and challenging debate. However, the automatic enrolment earnings trigger significantly improves the operation and the targeting of automatic enrolment. The new trigger ensures that the right people are encouraged to save. These amendments would encourage saving among a group of individuals, many of whom should not be saving. Therefore, we are unable to accept them and I ask noble Lords to withdraw them.
My Lords, may I ask the Minister a question? He rested much of his argument on this amendment, as with Amendment 16, not so much on the issue of small pots as the fact that people would get a replacement income in retirement sufficient almost to match their wage. Therefore, it is not worth their saving. I raised this in terms of its relevance to the basic state pension and whether it will lift people above pension credit. All the Minister’s assumptions are based on the belief that the household he is dealing with is a single-person household.
Like the Minister, I want women as well as men to carry pensions in their own right, whether or not they are in a relationship, but, as we know, 50 to 60 per cent of women over the next 20 years or so will be married, and many of those who are not will be in cohabiting relationships in which they may or not be financially interdependent but which may very properly affect their right to pension credit. Therefore, something like three-quarters of the women who could be eligible for auto-enrolment if we brought the threshold down to £5,200 from £7,500 would not suffer the withdrawal effect of pension credit by virtue of their partner’s or their husband’s income, which, as we know, conventionally floats them off it. Therefore, they would enjoy every saving; it would be worth while doing; and it would give them a small pot of their own. Therefore, the Minister’s argument probably does not apply to something like three-quarters of the female population we are talking about.
I thank the noble Baroness for that intervention and that question. We have looked closely at this issue. She is absolutely right that many low earners are second earners and have partners. The trouble is that it is very hard to identify them with any precision, which makes it very difficult to encourage them to save, because many of them—we do not know which of them—would not find it beneficial.
The noble Baroness will make an argument, based on the discussions between the DWP and the Treasury, about what a single-tier pension would do to that position.
My Lords, I thank all noble Lords who have contributed to the debate on these amendments. I had intended to say at the start of these deliberations on auto-enrolment, but forgot to do so, that we obviously have a number of challenges in some areas. However, we should make it absolutely clear, as I hope we did at Second Reading, that we thoroughly support the Government’s decision to proceed with auto-enrolment and with NEST. Those are hugely important developments to the pensions landscape. Whatever our challenges might be now, they need to be seen in the context of our fundamental support on that issue.
The debate has almost conflated two issues: the it-pays-to-save issue, which the noble Lords, Lord Stoneham and Lord Boswell, touched on, and the practical issues around having small pots, which the Minister relied on and to which the noble Baroness, Lady Greengross, referred. We need to unpick those. Perhaps I may refer noble Lords to the Johnson report in relation to the “it pays to save” argument. Page 30 states:
“This analysis raises significant questions about the validity of an annual earnings threshold of £5,035. Even at earnings substantially above this level, individuals see very high replacement rates from the State. Based on this analysis alone, we might easily argue that an earnings threshold of over £10,000 would be more appropriate to encourage the right individuals (those who actually need to save) to begin saving into a workplace pension. There are two key reasons to question such a conclusion. Firstly, earnings are not static. For many, earnings could change dramatically over their lifetime. For these people, saving for a pension whilst on relatively low income could be beneficial as it improves persistency of saving and increases income in retirement. Secondly”—
this point has already been made—
“many individuals live in a family unit. It is the circumstances of the wider family that are more important in determining whether it is appropriate for a particular individual to save”.
So on the “it pays to save” argument, the report seems to support the contention that an earnings band starting at the current primary threshold is the right place to be. It is in relation to the practicalities that the report argues the trigger. Separating the earnings threshold and the manner in which contributions are paid will help to reduce the number of small pots of pension savings, which are disproportionately costly. The smallest contribution going into a pension pot will be £130 a year.
The Minister is right: of course you can always argue that someone can opt in, but the whole purpose of auto-enrolment is to challenge the inertia which has undermined our pension system for decades; it does not really help with that pot. In any event, it picks up the point about persistency of savings. There might be small pots to start with but if people save persistently, even in respect of low income for a period, that builds up a pot which might not be insignificant. However, using arguments about practicalities and small pots seems potentially to punish the wrong people, as we are saying that some 600,000 people are not going to benefit from auto-enrolment because we do not want to handle small pots. NEST was created, in part at least, to handle that very issue. There are questions about the profitability of the pension sector and pension providers, and there is a balance to be struck in all of that.
Therefore, I very much hang on to the point that the argument for the trigger seems to be based overwhelmingly on the question of the practicalities of dealing with small pots. It does not fully address “pays to save” and the question of whom we should be encouraging to save.
Perhaps I may respond to the noble Lord on that and make absolutely clear the arguments that we will be taking from the Johnson review. It said that you needed to look at three things: replacement rates, earnings dynamics, and family make-up and characteristics. Looking at all three of those, on balance the recommendation was for a higher threshold of roughly £7,400, the reason being that it got the right people saving. That must be the core argument, along with the practical argument relating to costs. It is very expensive to manage small pots. The economics of running a NEST operation, let alone other operations, where it is important to get costs down, is an important secondary consideration. However, the primary one is to get the right people saving. After all, this is, as I have said previously, the biggest experiment in asymmetric paternalism. Let us get it right first and fine-tune it later.
My Lords, we are all using the Johnson review as a basis. It recommends that higher threshold and we are following that. It is straightforward and has been well argued. It is a review that has been well accepted across the political and industrial spectrum, and that is the basis on which we are making this change.
My Lords, we could go on for ever on this, although it may not be hugely productive to do so for much longer. Of course we accept that these recommendations come from the report, and there are obviously recommendations in the report which, thankfully, the Government did not pursue. However, I would hang on to the point about conflating two issues—“it pays to save” and the question of whom we should be encouraging to save in order to achieve good replacement income in retirement. As the noble Lord acknowledged earlier, the Turner commission—I should call it the pensions commission out of deference to my noble friend, who spent such a large part of her life contributing to that—still holds: a 45 per cent replacement rate, with 30 per cent coming from the state and 15 per cent coming from auto-enrolment. That band of earnings is encouraging people to save. Therefore, that seems to deal with replacement rates and “it pays to save”.
The other issue, which I accept comes from the report about the trigger, is the practical one of dealing with small pots. It is a question of where you make the judgment. We would say that excluding people from the opportunity of auto-enrolment simply because they are below that trigger, even though they are within the band of earnings that the report acknowledges should be building pension pots, is not the right thing to do. Doubtless we will return to this on Report. In the interim, I beg leave to withdraw the amendment.
Amendment 18 withdrawn.
Amendments 19 to 22 not moved.
Clause 5 agreed.
Clause 6 : Postponement or disapplication of automatic enrolment
23: Clause 6, page 6, line 15, leave out “three months” and insert “one month”
My Lords, I will also speak to Amendment 24. These amendments could be degrouped because they are alternatives. The fact that they are grouped together may have given rise to some confusion. Both these amendments touch on proposals for postponement—effectively, the opportunity to defer automatic enrolment for a worker for up to three months.
As the Johnson report recites, there have been strong and consistent calls to introduce waiting periods from employers and from many in the pensions industry. Employer groups have supported the introduction of waiting periods, principally to reduce the administrative cost of enrolling people who are with the employer only for a short period of time and to allow probationary periods to pass. They believe that waiting periods will help employers to adjust to the additional cost of the employer duties and will minimise the need for refunds. The costs associated with deferral or waiting periods have been analysed by the Johnson report and the key features are that a three-month period will involve about 500,000 fewer people being automatically enrolled. Given that, on average, people have 11 different labour-market interactions during their lifetime, that would mean individuals accumulating something like three years’ less savings than would otherwise be the case. Someone whose work pattern is a perpetual cycle of short-term, say, seasonal work could miss out to a much greater extent.
The amendments do two things. Amendment 23 just tests and basically asks why, if there is to be a waiting period, there is the magic period of three months. Why would one month not be sufficient? Perhaps more substantially, Amendment 24 is predicated on the assumption that the three-month waiting period will stay broadly in place, but it seeks to limit the time period, where the starting date of the three choices is the staging date—the date where an employer first comes into the system or where, say, a worker becomes a jobholder on reaching the age of 22. If the fundamental rationale for a waiting period is not to have to auto-enrol somebody who will leave within three months, why defer for longer than three months from when the individual is first employed? Someone reaching the age of 22 may have been employed already for three months, three years or even longer, so why defer in those circumstances? Similarly, at the staging date most employees will have been employed already for three months, and many maybe for years. I do not understand, if the fundamental rationale is to deal with the issues of short-term workers who leave and are likely to opt out, why we would operate a deferment date for people who have been around potentially for a long time.
One effect of Clause 6 seems to be to replace the existing Section 4 of the 2008 Act. From recollection, this was designed to allow some deferral for DC schemes that contributed well in excess of the minimum. This, in a sense, was a reward for being a good scheme. That seems to have disappeared and we have this blanket opportunity for deferral for everyone, whether they are paying at the minimum or are doing better than that. It would be interesting to hear an explanation as to why that particular provision, which was designed to be an incentive, is effectively removed by this Bill. I beg to move.
My Lords, briefly before my noble friend replies and in the spirit of the questions that are being fairly put by the noble Lord, Lord McKenzie of Luton, I wonder whether the Minister could give some thought to the position of people who have not changed what they are doing—they are still doing it at the same place—but whose employment status has changed. Quickly, off the top of my head, I am thinking of two sets of people. One includes those who come in as self-employed and are then taken on by the firm as employees to do substantially the same thing. Clearly, that cannot be backdated and should not be backdated from their time as self-employed persons, but they have been there. The second case, which may be even more difficult but is at least worth rehearsing, is the question of agency workers. The employer may choose to take them on from the agency and pay a take-on fee, but they are, again, doing substantially what they were doing before in the same place as before. It is clear that they are not covered by the existing provisions, but it is not entirely clear why they should not be, at least in terms of equity.
That is a very interesting contribution and I hope that the Minister will follow it up. I want to put to the Minister a very simple but not obvious point. I understand why employers prefer a waiting period—obviously one is glad that it is not two years, as in some conventional schemes—but even with three months we must recognise that, given the figures on job turnover on page 103, with which I am sure the noble Lord is familiar, the median number of jobs that men and women have is 11. My previous research shows that the pattern of job turnover is different for men and women: men have more turnover in their earlier years and settle in their 40s or 50s, while women have a higher job turnover than most men by virtue of being much more frequently in and out of the labour market and more likely to re-enter into a different job. The report makes the point—although it does not back it up with research—that statistically there is not that great a difference between the two. It is worth pointing out that if somebody has 11 job changes, which is the median according to the report, having a three-month waiting period represents three years’ loss of pension contributions. Interestingly, 26 per cent of the population on this model have between 12 and 15 jobs in their working lifetime, which would mean, on average for them—if my sums are right—a loss of five years’ pension contributions. Furthermore, 15 per cent have 16 jobs or more—up to 23—which would be an average of something like eight years’ loss of pension contributions.
This is highly significant. Even reducing that by one month to two months would help; reducing it back to one month, as my noble friend has argued, would make a significant contribution for those who have staying power but none the less a rapid job turnover for whatever reason. It may be because of a cycle between self-employment and employment—take a hairdresser, for example, for whom the conditions of employment are often very obscure, whether you are self-employed or, even if you work in a salon, whether you are employed or not. None the less, the waiting period of three months can represent over your lifetime a significant loss of working contributions matched by the employer into your pension. For that reason, as well as others adduced so far, I hope that the Minister will reflect on whether he could make any movement in this direction.
My Lords, Amendment 23 would reduce the maximum length of the waiting period from three months to one month. Amendment 24 applies an exception so that existing employees have a three-month waiting period. However, based on previous discussions with the noble Lord, our interpretation is that Amendment 24 is intended to apply an exception so that new employees would remain eligible for a three-month waiting period. I know that we are in Committee and so one can refine the intention of an amendment to make it more precise, but that is our understanding of its intention.
Clause 6 introduces the concept of an optional waiting period to the automatic enrolment process. Automatic enrolment has made numerous appearances in this place and another place. A recurring theme has been the extent of the duty placed on employers. I preface my remarks by putting this in context. We are talking about auto-enrolment for pensions—the biggest experiment in asymmetric paternalism that the world has ever seen, I think. We are trying to encourage people to save. We forget that the encouragement comes in the form of automatic enrolment. Let me say in response to both my noble friend Lord Boswell and the noble Baroness, Lady Hollis, that if we overcomplicate this, we will not have a smooth-running system. Auto-enrolment is a means to an end. That end is for the norm to be for people in the country to save more.
The noble Baroness cited the median figure of 11 jobs over a lifetime. If that is the median, the noble Baroness is right: 33 months represents 7 per cent of the provision of a potential pension pot. However, if auto-enrolment has worked and people have started opting into pensions, by the time they are on their second, third or fourth job, they will opt in because it will have become a habit. One must look at what auto-enrolment is, rather than become overly mechanical about it, which these amendments are.
The aim here is to ease the burdens on business. This simplification measure of pulling two systems into one—to get rid of postponement and to have one system of waiting periods—has been widely welcomed by employers. A waiting period will free employers from the administrative burden of enrolling casual staff who are working for them for only a few weeks and wish to maximise their take-home pay, rather than save for a pension. I am thinking of most of Sydney in Australia when I make that remark; I think that most people in Sydney come to work in London for two years.
A waiting period will also allow employers to align automatic enrolment processes with their existing processes and avoid part-period calculations of contributions. In addition, it will allow them to stagger auto-enrolment of large workforces. An employer will be able to apply a waiting period to all employees at their staging date. It will also be possible for an employer to apply a waiting period when a new employee joins the workforce or from the date when an employee becomes an eligible jobholder—for example, when they turn 22.
It is important to note that an employer will be allowed to apply a waiting period only if he gives the worker information about the waiting period within a certain deadline. This will ensure that workers are informed of their right to opt into pension saving during the waiting period. It is only right and fair that those who wish to start saving for retirement earlier are not prevented from doing so.
The waiting period is intended to ease the administrative burden and has been widely welcomed by employers. However, it means that, for those individuals who have frequent job changes, there could be a significant impact on their overall pension savings. This is particularly so, as the noble Baroness, Lady Hollis, pointed out, if they are subject to a waiting period in every post. Allowing individuals to opt in during the waiting period will address this imbalance so that no one is denied the opportunity to save. As I said, if auto-enrolment has the impact that it should have, the psychology of saving should change for many people.
Noble Lords will be pleased to hear that much of the detail is on the face of the Bill. We propose taking regulation-making powers in just two areas. First, we will specify in regulations how quickly the employer must give notice to the individual about the waiting period. Secondly, we will set out what information that notice must contain and any other accompanying information that the employer must provide. For example, workers will need to be provided with information about the right to opt in during the waiting period. It is important that we have the flexibility to set the period and to provide for additional accompanying information in regulations once we have had an in-depth consultation with our stakeholders.
As I said, a key aim of the reforms is to encourage more people to start saving for retirement. However, at the same time, we have been mindful of the costs for employers of implementing the reforms. We believe that a three-month waiting period provides the correct balance between easing employer burden and maximising individuals’ savings. This amendment introduces a variable length of waiting period depending on the circumstances. There are two main issues with such an approach. First, introducing a one-month waiting period for existing employees would remove some of the flexibility afforded to employers through waiting periods; for example, they would not be able to stagger automatic enrolment of large workforces. Secondly, we are keen to ensure that the introduction of waiting periods does not make the automatic enrolment process more complicated. We believe that a simple process is key to employers understanding and preserving their support. A two-tier waiting policy would add complexity and would be difficult for employers to understand or use. It would add to the burden on employers, which is not the intention of waiting periods.
Waiting periods were designed with employers in mind and have been welcomed. We believe that they will provide a real easement for employers, as well as ensuring that individuals’ savings are protected. I urge the noble Lord, Lord McKenzie, to withdraw the amendment.
My Lords, of course I intend to withdraw the amendment. I thank the noble Lord, Lord Boswell, and my noble friend Lady Hollis for their participation. The noble Lord, Lord Boswell, made an interesting point about recyclable employees effectively coming back in one form or another. My noble friend Lady Hollis emphasised the issue of what this could mean in terms of savings for people who are perpetually caught up in this deferral. We accept the point about some flexibility on the alignment of processes. This does not seem unreasonable. I also acknowledge that there may be some amelioration of the lost savings years; if people are perpetually caught up in this, opting in may catch on. However, we know how damaging inertia around pensions has been, so that could not be assured.
With respect to the noble Lord, I do not think that he dealt with the point about the original provision in this clause, which I understood was there to be an incentive for good provision and to give people some extra leeway in their easement. This seems to have gone and, in effect, been replaced by a sort of blanket easement. Although I will not convince the Minister, I also hang on to my point that, if the fundamental easement for employers—and I understand that they would welcome this—is that it helps them with the problem and administrative costs of the coming and going of short-term employees, and if, as I accept, a three-month waiting period is needed to address that, why on earth should it be applied to somebody who has been employed for months or years who reaches the age of 22 and becomes a jobholder? There is no logic to the position. The employer will know the track record of that individual, yet they are being treated exactly the same as somebody who has just walked through the door. If the proposition is that you need a waiting period to deal with short-term employees, I still do not understand why you need to have it for people who have been employed for many years and who simply, by virtue of their age, become a jobholder.
I tried to explain that. There are a few things happening here but the relevant thing is to try to allow people with large workforces to time it so that they can do things in bulk rather than having to individualise. That will allow us to get a single system running through rather than having to have separate systems. Administrative simplicity has been the guiding goal here and it is also the reason why we have abandoned the concept of postponement, which was again a slightly complicated two-tier system. We are trying to get to one tier and a great deal of administrative simplicity.
The Minister has already, and I am glad that he has, sold the pass on that by allowing voluntary enrolment for young people under 22 or for people, mostly women, earning between £5,200 and £7,500. The employer is already going to have to identify and respond to particular individuals rather than to cohorts of a labour force that may be moving tidily through the system. While we welcome the concession of voluntary enrolment, the noble Lord cannot now pray for administrative simplicity in cohorts when he has already sold the pass on voluntary enrolment.
There is a great deal of difference between having a system that allows opt-in at any stage compared to a system that puts an obligation on an employer to do something at one month for some people and three months for others. There is a difference and I would not agree that any pass has been sold on this.
Amendment 23 withdrawn.
Amendment 24 not moved.
25: Clause 6, page 6, line 32, at end insert—
“4A Annual report on implementation and monitoring of section 4
(1) The Secretary of State must publish an annual report about the implementation and monitoring of the postponement provisions of section 4 and must lay a copy of this report before parliament.
(2) The report required under subsection (1) must, in particular, include—
(a) the numbers and categories of jobholders receiving notices that their automatic enrolment is deferred; and(b) the numbers of such jobholders who in respect of that employment do not become automatically enrolled.”
My Lords, this amendment is very straightforward and simply seeks the publication of an annual monitoring report concerning the deferral provisions provided for in Clause 4. Noble Lords will have gathered from our earlier discussion that we have considerable concerns over these provisions and how they will be applied in practice, and whether their application will deter individuals from auto-enrolment. We are not prescriptive about the detail of the report or its timing but we need to be reassured that any provisions are working fairly. As I understand it, there is no requirement for all employees to be treated in the same manner under these provisions and therefore we need information about how this is working in practice. So the intent of this amendment is clear. There needs to be some process of reporting so that we can understand in practice how these provisions are working. I beg to move.
My Lords, I thank the noble Lord, Lord McKenzie, for this amendment. As he has pointed out, it would compel us to publish a report every year on the implementation and impacts of the waiting-period provision under Clause 6. As we have just discussed, Clause 6 introduces the concept of an optional waiting period into the automatic enrolment process. We agree that the effects of the waiting period should be monitored. We have made a commitment to fully evaluate the effects of the reforms and how they are delivered. This will include a proportionate check that the legislation is operating as expected for individuals, employers and the pension industry. As part of this, we intend to monitor employers’ use of waiting periods and the effects on workers’ savings. It is important that we retain the flexibility to design appropriate methods and processes for this evaluation in response to changing circumstances. For example, our decisions about who we survey, how and how often may change over time.
Our plans for monitoring the progress and impacts of the reforms will be set out in a detailed evaluation strategy which we plan to publish this year. We also intend to publish key findings from our evaluation. We therefore feel that there is no need to legislate specifically to ensure monitoring of the waiting period provision, and that to do so may unintentionally constrain us from adopting the most appropriate approach to evaluation in future. I therefore urge the noble Lord, Lord McKenzie, to withdraw this amendment.
I thank the noble Lord for his response. I was reflecting on how many times I have deployed exactly those same arguments in his position. I am not sure that they grow more convincing. However, I understand and am grateful for what the noble Lord said about an evaluation process. I understand that the strategy will be published later this year; we will see what sort of timeframe is attached to that. I am grateful for that and, accordingly, I beg leave to withdraw the amendment.
Amendment 25 withdrawn.
Clause 6 agreed.
26: After Clause 6, insert the following new Clause—
The Secretary of State shall by regulations issue guidance to employers and jobholders explaining the rights of employees during the deferral period, including the right to opt in to the scheme during this period.”
My Lords, I will not keep the Committee long, given that the Minister has, in his response to a previous debate, accepted this amendment in that he has said he will introduce a requirement for the correspondence that is sent to employees to include a statement of the rights of that employee under this provision. Therefore, the only argument that I wish to retain in this discussion is about whether the rights of the employee should appear as an item in the Bill, rather than simply relying on the important statement that the Minister has just made.
At the moment, the protection for this matter in the Bill relies entirely on proposed new Section 4(1)(b) in Clause 6(2), which says that,
“any prescribed requirements in relation to the notice are met”.
That is obviously as broad as you could get. However, the purpose of this amendment is to ensure that those jobholders whose waiting period is being enacted are informed of the rights to which they are entitled, particularly the right to opt in to the scheme as soon as they wish. I understand that this information will be provided by regulation. I am absolutely certain that that will happen, given the Minister’s commitment. However, I have always been of the view that in any Bill, where the rights of an individual are at stake, it is important to uphold those rights in the Bill itself. That means that it should be a very simple statement. It means establishing that those rights will be communicated and that there are rights to be had. It is a very important agreement, which one should have in front of an employee at the time.
I know that we have to ensure that everyone is aware of their rights, and that it is important that what is enshrined in the Bill is communicated properly. However, we must remember that this will all be very new. It will be new for employees and new for employers. The very fact that this will be enshrined from the beginning—from the date that the Bill becomes an Act—means that it is important that a signal is sent to every employer and employee that they have rights in this matter. It is important not just to have it in the Bill but to ensure that we get it right from day one. There is a great expectation that this will happen. It will be difficult for many very small employers to adjust to the changes that are coming. What I am looking for is a form of letter, with a standard set of words, which an employer can hand to their employee and that will remove any extra bureaucratic burden.
There is no additional bureaucratic burden established by this amendment, but it gives a clue as to the preparation that will be essential. If I were a small employer, having heard about this in whatever way in the coming weeks and months, I would want to know fairly quickly what I am going to have to tell my employee If an employee can say to an employer, “What about me?”, I would want to know that there was somewhere where I could download the appropriate piece of information about rights, particularly in this respect. As we wish simply to express in the Bill the rights of the individual, I beg to move this amendment.
This is an important amendment, not just for this but for all the other areas where we are looking at voluntary enrolment. I hope, therefore, that the Minister will reassure us on the employer making sure that the employee in the waiting period can voluntarily enrol into a NEST scheme before it becomes automatic. I hope that he will also reassure us that employees earning above the LEL, but below the automatic enrolment threshold will be made aware of their rights. That could involve quite a considerable number in jobs where, for example, very many women work part time; I am thinking of retail, where women might work two days a week and so on. I hope he can give us some reassurance as to how he is going to operate a nudge, where there is opt-in, as opposed to where there is auto-enrolment.
My Lords, I express my support for the sentiments and views of the noble Lord, Lord German, in moving this amendment. I, too, noted the Minister’s comments on regulation on this matter. As we move nearer to the commencement of auto-enrolment in 2012, I am also conscious that both the Department for Work and Pensions and the pension regulator will need to prepare for a major programme of communication and guidance to workers and employers. Can the Minister assure us that sufficient funds will be made available for this scale of communication and guidance programme? As the Minister said, this is the biggest ever example of asymmetrical paternalism, and, given the constraints on public expenditure, the old phrase about not spoiling the ship for a ha’porth of tar, is extremely important in this instance.
I, too, agree with the noble Lord, Lord German, that, if individuals are to be given the right to opt in during the deferral period, it has to be a meaningful right, understood both by the employer and by the employee. A meaningful right to me means three things: do you know you have it; do you know how to exercise it; and do you not suffer a detriment in exercising it? That is quite important if the three-month waiting period is to have integrity for the reasons given as to why a three-month period is needed and the individuals none the less can opt in. It is quite important that guidance and culture meet those three requirements. I hope there is guidance to both the employer and the employee that makes the opt-in opportunity meaningful.
My Lords, I thank my noble friends for this amendment, which would require us to make sure that guidance is issued to employers and jobholders explaining their rights during the waiting period under Clause 6, including their right to opt in. Let me try to describe what our plans are in this area and explain why putting it in the Bill could potentially be counterproductive. We aim to specify in regulations how quickly the employer must give a notice to the individual about the waiting period. We will also set out in regulations what information that notice must contain, and any other accompanying information the employer must provide. In particular, this will include information about the right to opt in during the waiting period.
We recognise the need to provide certainty as quickly as possible, as my noble friend Lord German pointed out. We intend to put out the draft regulations after what we call a “soft consultation” period in April. We intend in this way to inform employers of the requirements around waiting periods as soon as possible. To use the waiting period provision, employers will have to provide information to individuals about their right to opt in. It is essential that employers understand the operation of the waiting period and their obligation to provide information to affected workers. That will be done through the Pensions Regulator, who is developing clear guidance for employers explaining their duties under the reforms and including information about the waiting period. The Pensions Regulator plans to publish the guidance in the current year.
We agree that jobholders need to understand their right to opt in above the LEL, as the noble Baroness, Lady Hollis, pointed out. That is enshrined in Section 7 of the 2008 Act. The regulations under this Bill set out that employers should provide jobholders with information about this as well.
The noble Baroness, Lady Drake—with her concern, I guess, about the war being lost for want of a nail—asked whether sufficient funds would be made available. I am confident that adequate funds will be available for this very important exercise.
We therefore feel that there is no need to legislate in the Bill for provision of guidance and information on waiting periods, so I urge the noble Lord, Lord German, to withdraw his amendment.
My Lords, my amendment would simply have enabled the guidance to be provided. The Minister has described what will happen, so I shall avoid dancing on the head of a pin. However, anyone here who has been in any way involved in questioning Ministers will be wary of the words “we will bring forward regulations as soon as possible”. I remember “summer” turning into “late summer” and then “early autumn”. The seasons will just vanish. I wonder whether at some stage we might come back to a precise timetable for enacting the guidance. However, on the basis of the very detailed description of what will be provided, I beg leave to withdraw the amendment.
Amendment 26 withdrawn.
Clause 7 agreed.
27: After Clause 7, insert the following new Clause—
“Automatic enrolment date
The automatic enrolment date will be no later than a cumulative period of three months’ earnings above the threshold, whether consecutive or not.”
My Lords, this is a relatively straightforward amendment to provide some certainty in a situation where an employee could have their auto-enrolment deferred more than once because they failed to reach the earnings threshold in one or more months in the three-month waiting period. Perhaps it might be sensible if I gave an example. A jobholder works for two months and their pay is above the threshold, but in month 3 their pay falls below the threshold. Then, when month 4 arrives and their pay perhaps goes back to being above the threshold, it is not clear whether that triggers a new three-month starting period or adds to the two months when it previously happened. Whether the waiting period begins again in month 4 or concludes is the key question here. Should the three months’ earnings be cumulative or consecutive?
This could be the case for many workers in the leisure and tourist industries where work is perhaps seasonal and in the catering trade where it is often related to the number of customers and people are called to work more or fewer hours according to the demand on their services. So a situation where people may not reach the threshold in one month but have reached it in the previous two months is not unlikely. It seems quite unfair if, as soon as they fall below, they have to start again. I remember somebody who formerly worked for me who then went off to train as a barrister and it took him many months to get his final qualification because he could not get to the number of dinners that he had to achieve in the right order. Every time he missed one, he had to start again from dinner number one. It seemed a strange mechanism and we do not want this archaic methodology in this Bill. I beg to move.
My Lords, the noble Lord, Lord German, has raised an interesting point, which I hope the Minister can clarify. I assume that the situation is that, if you have got to month 3 and you do not have qualifying earnings, there is nothing at that point to trigger automatic enrolment. When you next have your qualifying earnings is presumably when you would be automatically enrolled. Certainly, if you had to start again, that would add injustice to something about which we are already not very happy.
My Lords, I thank my noble friend Lord German for this amendment, which would restrict an employer to using one waiting period per worker and would ensure that automatic enrolment would take place once a worker’s earnings had reached the earnings threshold for three months, whether those three months were consecutive or not. Thus the single three-month waiting period could be accrued over a far longer period of time where the individual’s earnings fluctuate. I should take this opportunity to clarify for the noble Lord, Lord McKenzie, how it would actually work. If you had low earnings for the first two months and hit the target at the third month, you would be auto-enrolled. However, if you did not hit it in that third month, you would effectively be back to your dinner problem and have to start again. That is how it would work.
As I explained, Clause 6 introduces the concept of an optional waiting period into the automatic enrolment process. This is central to our commitment in this Bill to rebalance the administrative burdens on employers while ensuring workers’ access to pensions saving. The waiting period is designed to meet employers’ requirements by being simple and easy to understand and use. This is clearly crucial to its success. At the point at which the employer applies a waiting period, they will not be required to undertake a check on whether the worker is eligible for automatic enrolment. The employer must check eligibility at the end of the waiting period and we are keen to avoid them having to check it twice or more.
The waiting period consists of a single block of time, regardless of whether the individual’s eligibility for automatic enrolment fluctuates during that period. If the worker satisfies the automatic enrolment eligibility criteria at the end of the period, they will be enrolled into the employer’s scheme on that date. If not, the employer will monitor the worker’s status until they satisfy the eligibility criteria. At that point, the employer may apply a further waiting period if they wish. It need not be for the full three months.
We recognise my noble friend’s concern that workers with fluctuating earnings could miss out on pension saving due to the use of multiple waiting periods. While it is difficult to estimate the likelihood of this occurrence, our analysis suggests that few people are likely to have fluctuating earnings around the level that they traverse in and out of automatic enrolment eligibility. Are we, therefore, devising something very complicated for a problem that is pretty small, which is what our analysis suggests? It is also the case that, for those on sustained low earnings throughout their working life, state benefits can replace most income in retirement. Common sense suggests that it would not be rational to lever such people into private savings. It is important to remember that they will have the right to opt in at any point during the waiting period.
This amendment would add a substantial additional burden and complexity to the waiting period process and would not be easy for employers to understand and use. It would require the employer to monitor an individual’s automatic enrolment eligibility continuously throughout the waiting period and to keep a record of the period of eligibility accrued during the waiting period.
Employers requested the waiting period as an administrative easement. To make the process so burdensome would negate its value. At this stage, it is crucial that we get the reforms bedded in and that we ensure that employers find it easy to comply with these new duties. It is therefore critical that the processes are simple for employers to understand and use. In the absence of any persuasive evidence of a problem, we feel that it would not be right to introduce greater complexity and a significant burden to a process whose very purpose is to offer administrative easements to employers.
I offer noble Lords my assurance, however, that we are committed to fully evaluating the effects of the reforms and how they are delivered. As part of this, we intend to monitor employers’ use of waiting periods and the effects on workers’ savings. I urge the noble Lord to withdraw this amendment.
My Lords, I am still a little confused over the explanation. I understand fully the point about somebody hitting the relevant target in the third month. However, my question was the other way round—where someone hits the target in months one and two but does not hit it in month three. In seasonal worker terms, this could happen if someone was picked up and employed in May, perhaps worked through May, June and July and found a bad—wet or something—August, for which they could not get the money in. The important issue is simplicity but also understanding. It may be that a three-month period applies, but it was not absolutely clear from the Minister’s reply when, once you have a first waiting period, the second test would occur. What if you fail to meet the criteria that he has just described in that first three-month period? You will then need to have another piece of information made available to the employee to say, “You have not quite done it but this is the way you go next”. It seems to become far more complex if you cannot have it in some way accumulatively worked out. I will obviously withdraw the amendment. However, I hope that the Minister will come back at some stage with some further explanation of the anomaly of the people who are in the position that I have described, in which they pass the threshold in months 1 and 3 but not in month 2, yet wish to maintain their position within the company.
Before the noble Lord withdraws his amendment, I wish to follow up on that point. I was somewhat surprised by the answer that the Minister gave. There is a simpler process. Somebody becomes employed; they have their three-month waiting period and, at the end of the three months, you look to see whether they have qualifying earnings and need to be auto-enrolled. If they do not, presumably they are in the same position as everyone else who has been around for a long while—you continue to monitor them at an appropriate date to see whether they have qualifying earnings or if they have reached the age of 22. It will be the same for everyone. Is that not the simpler way to do it? I do not understand why there is the need to start the cycle again, which is what the Minister said. That seems to be fundamentally wrong and not the simplest route.
My Lords, before the Minister responds, perhaps I may briefly share with the Committee a slight concern that I have, which is very much subsidiary to the powerful point that the Minister has already made about the need to maintain simplicity and make the scheme doable by employers. Behind earlier remarks that I made, which I shall not rehearse, concerning agency work and self-employment, and behind the slight concerns that I have here is an anxiety about employers who are perhaps less well intentioned than those of us who were employers had hoped to be. Therefore, I stress to the Minister that it is extremely important that we monitor any devices that are used, in effect, to subvert these waiting periods. The Minister is absolutely right to introduce them to simplify the scheme but, at the same time, we need to come down very hard on people who use them as an opportunity to avoid their obligations.
My Lords, I thank noble Lords for their observations and repeat how the structure works. The cycle would be starting again. However, I emphasise that we think that the group involved would be extraordinarily narrow. We could overcomplicate this issue, because in practice many employers will probably just enrol those people the following month, which they are quite free to do. They can opt in. As I said, we will be monitoring this very closely. If it becomes a substantive issue and we can see some peculiar games going on, we will have to move in and sort it out, and we will do that.
I should like to reinforce that. I was struck by the point made by the noble Lord, Lord Boswell. When I was doing some pension work on things such as buy-back and so on, I was struck by the number of women in a variety of jobs who told me that their employers very deliberately capped their hours at 15 to avoid national insurance. I am afraid that I can see very small employers—whether they run a launderette, a newsagent or whatever—having people working for them for two months, laying them off for a week and then starting them in work again. They could, for possibly quite a long time, avoid automatic enrolment and therefore avoid paying a pension, which they would be reluctant to pay because they would regard it as a burden on their business. I have no idea how many small employers might abuse the system in that way, if I can put it like that, but I fear that among small employers there will be quite a strong incentive to do that. I wonder how the Minister is going not only to watch that but to remedy it.
My Lords, I thank the noble Baroness, Lady Hollis, for that point. Clearly, in all these areas there is potential for abuse. However, it is very important that we do not overcomplicate the system in case there is abuse, which in this event is likely to be rather small. If, as the noble Baroness fears, it does become an abuse, we will be monitoring it.
I have given a commitment that we are going to monitor how all this works on a regular basis and I feel confident in saying that, if we find that it is a genuine problem, we will have to move in. However, it is pointless to try to pre-empt something that looks as though it is too small an issue to be concerned with.
I do not understand how the Minister can monitor the difference between the two months and the week’s lay-off, be it in the hairdresser’s shop or anywhere else, in order to restart the dinners as it were, and the non-occurrence of voluntary enrolment. I do not understand how the Minister can ensure that the person not joining the pension scheme is in the latter category and not in the first. I do not see how he will monitor it, because he will not keep the records.
We have committed to monitor this situation quite widely, in particular how the waiting periods are working. It is essential to get it right. We have not developed the specification of that monitoring, but we will do so. We will watch closely that and other issues.
The three-month waiting period gives rise to concerns over bad employers. However, on the monitoring point, the Pensions Regulator has an obligation to monitor and look for non-compliance. One of the ways in which they will do so is by looking at the number of employees in a firm who have been auto-enrolled, because they will at least get a sense from the numbers involved whether there is a flashing red light over compliance. The problem is that the Pensions Regulator will focus on where the biggest risks are and look at the bigger employers first. If the compliance hazard is around small employers, there has to be discussion with the Pensions Regulator, because compliance monitoring is resource-intensive. Even if one was running the argument that the problem can be picked up in compliance monitoring, the requirement on the regulator to be risk-focused and therefore to target where they think the greatest non-compliance issues would be, or to get scale of coverage on non-compliance, could be a problem.
I repeat that we are committed to looking at waiting periods and there is a general duty on the Pensions Regulator to look at compliance. If we suspect any kind of systemic abuse, our aim will be to find it in our monitoring. For example, we might look at it from the other end and survey individuals, perhaps those in the low-paid environment, who are at risk. However, this is an issue that we are alive to, and this debate has made us even more so. I therefore need to thank the noble Lord for raising it.
My Lords, I would normally be swayed by the persuasive eloquence of my noble friend the Minister, but the more that I ponder the issue, the more it seems to me that there are routes for escape that do not err on the side of the rights of the employee. My amendment proposes a simple solution: that, in relation to the threshold, the three months of the waiting period should be cumulative. It is as simple as that. It would then be quite easy for a jobholder who believed that they should be enrolled to prove it, because the information would be there in front of them. We are going into a cycle of repetition. On this issue, I am afraid that I am not quite as convinced as I should be by the Minister’s argument—although I am convinced that he will reflect on it further, because the discussion around the Committee has raised more questions than answers.
The whole point of the auto-enrolment process is to challenge inaction, to get people saving and to make it the right thing for everyone to do, both employers and individuals. In withdrawing the amendment, I express the hope that my noble friend will reflect on the words that have been spoken around the Committee today and perhaps give us some sense of security when he comes back with any further changes that he wishes to make to the Bill at the next stage.
Perhaps I could just interrupt. What I have not made adequately clear, for which I apologise, is how big this problem might be. The universe of people who earn between £7,000 and £7,475 is 140,000 people, so we are talking about very small numbers. Moreover, they would have to be fluctuating at the wrong time. We could be setting up a very complicated system to look after a very small number of people. We cannot quantify this exactly but I give an order-of figure to give noble Lords a feel for it. We are talking about between 8 million and 9 million extra people going into pensions, so this may be just too much of a burden relative to the potential number of people whom we are protecting.
Will the Minister just help me on one point? I do not want to prolong this. If the complexity he suggests arises from the need to monitor cumulative earnings over a two-month or three-month period, I can accept that, but we do not need that. If we just had the proposition that somebody waits for three months and if at the end of three months they do not have qualifying earnings and are therefore not auto-enrolled, you simply roll them on to the next point that they do have qualifying earnings. You put them in the pot the same as anyone else. Is that not a simpler system than having an alternative system whereby you have to see who has been previously deferred and had a waiting period and keep the clock running on them individually? I would have thought the simpler system was not to have to take account of cumulative earnings but, once you get past that three-month period, simply to check, as you would have to for everyone, whether they have reached the age of 22 or qualifying earnings, et cetera. There is quite a lot of disquiet around this. We are not trying to be difficult. I urge the Minister to take this away because I see it as something that could be brought back on Report.
My Lords, I can see when I am up against the wall. I am not completely insensitive. I will look to see whether there is some simple fix and, if there is, I will write to noble Lords. However, it would have to be very simple, because the risk/reward in terms of burden versus people who are at risk is just on the wrong side. It does not seem to add up to me.
Amendment 27 withdrawn.
Clause 8 : Review of earnings trigger and qualifying earnings band
28: Clause 8, page 7, line 22, leave out “, 5(1)(a)”
My Lords, I shall also speak to Amendments 29 to 32. Please forgive me if I take a little of your Lordships’ time on this matter, because I feel strongly about it. The policy of auto-enrolment—or asymmetrical paternalism, because we should give the friend of the noble Lord, Lord Freud, his due recognition—has the broad support of all the main political parties and stakeholders. That broad support and consensus are important. However, let me capture our concerns which led to the tabling of this and the associated amendments.
The definition of the workforce who should be auto-enrolled into a workplace pension and benefit from the contingent employer compulsory contribution and the tax relief or credit is the product of both thorough analysis and the iterative process required to deliver such a widespread consensus. The definition of the workers to be covered by the new employer duty to automatically enrol, the band of qualifying earnings and the minimum contributions are all captured in legislation. The intended outcomes include the need to achieve a very wide coverage of the working population, including low-income to moderate-income earners, to facilitate them saving from a relatively early age given the long years of saving needed to achieve an adequate income in retirement, and for the design of the private pension system, as well as the state system, to work for women.
On taking office, the Government commissioned Paul Johnson and his colleagues to review the auto-enrolment policy and its provisions. I commend and thank the Government for holding to the main thrust of the policy that was enshrined in that consensus and captured by the previous Government through the Pensions Act 2008. I am sure that maintaining that position did not come without its challenges, not least, no doubt, in exchanges with the Treasury, so I would be the first to acknowledge my thanks to them for holding to the main thrust of the policy.
Our concern, however, is that Clause 8 gives to a Secretary of State too great a power to significantly change the population of workers who will be the beneficiaries of auto-enrolment—in particular, the power to raise the age requirement for a qualifying worker above the current age of 22 and the power to raise significantly the earnings threshold at which a worker would qualify for automatic enrolment.
The purpose of Amendment 28 and those associated with it—Amendments 29 to 32—is to probe why and in what circumstances the Government would wish to raise the qualifying age. It is also to limit the Secretary of State’s powers on the extent to which he or she can increase the level of the earnings threshold at which the automatic enrolment of a worker would be triggered and to require the Secretary of State to provide an impact assessment to accompany any order to increase or decrease any of the amounts that he is empowered to increase or decrease under this clause.
I turn to the qualifying age for auto-enrolment, which is 22. It is recognised that very young workers and students frequently change jobs. To avoid too many small pots in a concentrated period of time, and to avoid young people getting into a cultural habit of opting out when auto-enrolled, it is reasonable to set an age of around 22, which also has a synergy with the minimum wage provisions. However, one would not want to set the qualifying age too high because an individual would lose valuable early years. We know that people need to save for a very long period to build up a reasonable pension pot, and that an early start allows the pension pot and the value of investments to build up. Furthermore, given that women are more likely to work full-time in their 20s, but that there is a peak of part-time working in the female labour force for those in their 30s and 40s, excluding these earlier years will reduce many women’s pension savings in periods when their earnings will be higher. Given that we need to hold to a private pension settlement that persists over the long term because pension savings are a very long-term project, I ask the Minister why the Government want even to consider raising that age of 22. Reserving powers to make short-sighted or pragmatic adjustments to the qualifying age for auto-enrolment does not appear very desirable.
I turn to the matter of the earnings threshold that has to be reached for a worker to be eligible for automatic enrolment into a pension—the earnings trigger. The Government intend to set this at £7,475 in 2011-12 earnings terms so that it is aligned with the threshold for income tax. However, Clause 8 amends Section 14 of the 2008 Act and explicitly allows the Secretary of State to increase this earnings threshold in line with increases in the income tax threshold. Given the Government’s aspiration for a future income tax threshold of £10,190 in 2011-12 earnings terms, if the threshold were to rise to this level it would exclude a further 800,000 workers in any one year from auto-enrolment, 76 per cent of whom would be women. It would have a disproportionate impact on those working part-time. Consequently, of the group targeted to benefit from workplace pension reform, 66 per cent would be men and only 34 per cent would be women.
One has only to look at the figures on women’s employment. Some 7.63 million women work full-time and 5.87 million work part-time, compared to 13.54 million men working full-time and 1.94 million working part-time. These figures also show two peaks in part-time working by women, one of which straddles the 30s and 40s age group and one which is post-50. The latest labour market figures reveal that some 27 per cent of the workforce is now part-time. So many workers should not be excluded from the benefits of auto-enrolment by the earnings trigger tracking such a high increase in the income tax threshold.
My arguments for not raising the earnings threshold to £10,190 in 2011-12 earnings terms are supported by the Government’s own impact assessment documents and the findings of the Johnson review. Excluding 800,000 people and losing £40 million per annum of employer pension contributions does not support the overarching objective of the reforms to enable low to moderate earners to save. As has been said several times in various debates on amendments, many or most very low earners are women who live in households with others with higher earnings. I repeat the quote from the Johnson report:
“These may well be exactly the people who should be automatically enrolled”.
Rather than excluding large numbers of women from auto-enrolment, the Government should look at innovative ways of increasing their participation. I know my noble friend Lady Hollis has several proposals. To paraphrase my noble friend’s excellent and concise sentence from her Second Reading speech, on a threshold of £10,190 a woman on half of average earnings will not be auto-enrolled into a workplace pension, so a woman on half of average earnings may have no pension pot at all.
The hard-fought-for European part-time workers directive gave many women access to their employers’ workplace pension scheme for the first time. It would be a truly retrograde step if the earnings threshold rose to the level that reintroduced a barrier to so many women participating in workplace pensions. We know that, increasingly, women approaching retirement are not going to be part of an on-going relationship, so many will not be able to rely on their partner’s income. They must and need to save in their own right. A key principle of pension reform, a very important part of the consensus—and one should not underestimate it—is that it should enable women to build up pension benefits in their own right. The higher the threshold of earnings for auto-enrolment, the less the reforms will work for women. But raising the earnings threshold too high, and certainly to £10,190, also affects the persistency of savings for men as well as women. For both, the Johnson review and the Pension Policy Institute confirm that earnings are not static. Relatively few people have persistently low earnings over their lifetime; most low earners go on to earn more.
Saving while on a lower level of income will still be beneficial—first, because of the contribution the pension saving makes over the individual’s working life, and secondly because of the enhanced persistency of saving resulting from someone remaining qualified for auto-enrolment. They remain locked into that culture of auto-enrolment. Persistency of saving is as important as investment returns in achieving a decent pension pot. To put it at its simplest, or even crudest, beta returns on 40 years of saving are better than alpha returns on 10 years of saving. I do not wish to argue against changes to the income tax system that would benefit those on low and modest incomes, but it is not necessary for what may be considered meritorious reforms to the tax system to result in unfairness or inefficiencies in the design of the private pension system. Raising the earnings trigger in line with significantly increased income tax thresholds denies access to incentives to save for men and women. All of an individual’s pension contribution is disregarded from their income when calculating entitlement to tax credit, but tax credits for some can produce an implied rate of tax relief as high as 50 or 60 per cent.
Amendments 28 to 32 in the names of my noble friend Lord McKenzie and myself not only seek to express our concern about the qualifying age; but also seek to restrict the Secretary of State’s ability to raise the earnings threshold trigger for auto-enrolment to no more than either the general level of earnings or the percentage increase in the lower earnings limit for national insurance purposes. The intention is to keep broadly stable the proportion of the population covered by auto-enrolment. I recognise that Amendment 33 tabled by my noble friend Lady Turner is seeking to achieve a similar outcome. Under the provisions of this amendment, the ability of a future Secretary of State to issue an order which carves out a significant section of the workforce from benefiting from automatic enrolment into a workplace pension is constrained.
The noble Lord, Lord Turner, argued that successive post-war Governments had introduced changes to the UK pension system which made it both unfit for purpose and unsustainable. He said there needed to be a broad consensus within society as to the pension settlement, so that it would hold over the long term, across successive Governments, as it needed to be sustainable. People needed confidence and saving for adequate pension provision was long-term. I often used to put it more crudely: death by incremental adjustment that lost sight of any strategic outcome. I am worried that we see signs of repeating that error, because what might be meritorious in a tax system does not necessarily drive what is sound in the design of a private pension system.
It is important that the parameters set for the workplace pension system give the coverage and the confidence to the workforce. It is also important that any fundamental changes to those parameters are driven by the needs of the pension system itself, and that the reasoning for them and the impact of them are transparent and supported by a consensus. That is why we have tabled Amendment 32, which requires a full impact assessment to accompany any order that increases or decreases any of the amounts covered by this clause. I beg to move.
My Amendment 33 is in this group. I was prompted to table an amendment to this clause by the TUC. It wrote to me to point out that the trigger of £7,475 at 2011 is in excess of the national insurance threshold, which at present is £5,715. It points out that that is likely to affect a number of part-time workers, mainly women. They are the majority of those earning between the NIC limit and the personal allowance. The TUC believes that if the Government were to take forward the proposals, which they have voiced, to raise the basic personal tax allowance, the numbers excluded from auto-enrolment will grow. We have all said that we are in favour of auto-enrolment, and that we want to get as many people auto-enrolled as possible because they will then get the benefit of the employer’s contribution. As the gap between the contribution and enrolment thresholds grows, there is a danger of a sort of cliff-edge and that the newly auto-enrolled may decide to opt out as they see a noticeable chunk of their earnings going in pension contributions.
There may be various other ways of dealing with it, but the gap is not a good idea. It tends to make the whole thing less simple. People are caught up in the gap and do not receive what is intended to be of benefit to them, which is auto-enrolment. I hope that the amendment moved by my noble friend Lady Drake receives favourable consideration by the Government because there is a serious point to be made. I shall not press my amendment.
Uprating and revaluation measures, especially for pensions, can be challenging to get right and hotly debated. The uprating arrangements for automatic enrolment are proving no exception. However, before going into those arrangements, I need to make clear to the noble Baroness, Lady Drake, that nothing in the Bill introduces a power to change the age criterion of 22. The flexible uprating power in Clause 8 applies only to the earnings trigger and thresholds. It does not apply to age criterion. We agree with her that 22 is the right age for automatic enrolment to kick in.
I return to uprating and thresholds. As we have discussed, the Johnson review was commissioned to test whether automatic enrolment had been designed to target the right people at the right time. We welcomed the findings of that review and believe that its recommendations are sensible and balanced as a package.
The review concluded that the automatic enrolment earnings trigger should be aligned with the tax threshold, which was then £7,336. We accepted that proposal and have committed to a figure of £7,475, which is an update to Johnson to reflect the personal tax threshold for next year.
The presumption of that review was that the trigger would remain aligned with the tax allowance unless future action by government resulted in a fundamental change in their purpose or in the relationship between them. The Johnson review took a clear view on the right direction of travel. But for reasons that I shall continue to outline, we believe that we need to retain flexibility. We do not want to tie the hands of this or future Governments in this area.
We have listened carefully to employers and pension providers and taken note of their views, both on the most appropriate thresholds and the potential for deregulation. We have retained a core building block from the pensions commission, and taken the views of the trades unions into account, in setting the threshold for qualifying earnings— earnings on which contribution levels are based—at the national insurance primary threshold. The economy has changed since the pensions commission reported. The automatic enrolment threshold of around £5,000 that was set back in 2006 will not be relevant for 2012, so we have changed the entry point.
The amendments seem to be in search of a guarantee: that the trigger for pension saving will be set in complete isolation from prevailing personal tax thresholds. Two of the amendments from the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, go one step further by seeking to limit future rises in the value of the automatic enrolment trigger to rises in the general level of earnings or the percentage increase in the national insurance lower earnings limit. But setting the right trigger is not about a relentless chase towards alignment with a possible £10,000 tax threshold. The rate must be right for the time. Automatic enrolment is about targeting the right group.
For those on sustained low earnings throughout their working life, state benefits can replace most income in retirement. It does not seem logical to force, encourage or—if noble Lords prefer—apply asymmetric paternalism to such people to save in a private pension. As the noble Baroness, Lady Drake, pointed out, beta savings might not be a good thing right now given the state of the markets; I think that I would prefer a few alpha returns at the moment.
It is in practice very hard to distinguish a clearly identifiable group or individual who should definitely not be saving. Therefore, the level at which we set the automatic enrolment trigger must strike a balance. We think that the proposed threshold of around £7,400, the current tax threshold, strikes the right balance between maximising pension saving for those for whom saving is valuable and minimising the number captured for whom it is not worth while to save. The state pension minimum income guarantee already provides an annual income in retirement of around £7,100, with housing benefit on top.
However, an earnings trigger of around £7,400 may not be right in the future. The relationship between prices and earnings is changing. The Government have a commitment to remove the lower-paid from the tax net. Further, the shape of state pensions may change in future, although I cannot discuss that much more.
All this is saying to me that, right now, uprating measures for entry and savings levels need to be flexible. Therefore, we want to maintain flexibility to consider a wide range of economic measures. Pensions cast long shadows. Pension law has to last for the long term. We believe it is prudent to build in maximum flexibility for all eventualities, as regrettably we do not have 20:20 foresight.
I sympathise with the intention behind the amendment and I understand the concerns about any unfettered discretion or an unrestrained dash to a £10,000 trigger. However, the primary aim here is to ensure that we target the people who should be saving, while excluding those who should not. If, at the same time, we can align with a threshold that employers are already familiar with and minimise administration burdens, so much the better.
Automatic enrolment has to be sustainable. My worst fears are that we set rules which scoop up people who cannot afford to take a hit on their pay packet. If we get the trigger wrong—if we set it too low—we risk high levels of opt-out. Once we do that, we turn people off pension saving, even if we have applied asymmetric paternalism to get them to save. To get the trigger right, we need flexibility.
Today’s debate is further ample evidence that the automatic enrolment earnings trigger is a matter of deep interest and concern to this House. For that reason, we want to ensure that the House has an ongoing opportunity to debate this issue. We recognise that including such a flexible power to amend figures that appear in primary legislation represents a very broad power, and that is why the uprating order will be subject to an affirmative resolution procedure. It will mean that this complex issue, and the exact rates set for the launch of automatic enrolment, will be the subject of a full debate to ensure complete transparency.
It would be unusual to commit to an impact assessment in the Bill, as requested by the noble Baroness, Lady Drake. However, I make a commitment to provide an impact assessment for the next five years, up to the 2017 review and shortly afterwards. This will allow time for the reforms to bed in and for us to understand the wider landscape. Therefore, there will be full information on the uprating order as a basis on which the House can conduct the debate.
I hope that I have been able to set out the case for flexibility and the need to future-proof these provisions. I also hope that I have provided the reassurance on transparency that noble Lords are seeking with their request for an impact assessment. However, I regret that I cannot give a guarantee that the trigger for pension saving will in future be set in complete isolation from prevailing personal tax thresholds. I am afraid we are unable to accept the amendments and I ask the noble Baroness to withdraw this amendment.
I thank the Minister for his response but I am not persuaded by his arguments to feel confident. I come back to the point that I made in moving the amendment: the UK has a history of making what it feels are good incremental adjustments to the design of the pension system for short-term considerations. Inevitably, 10, 20 or 30 years downstream, there will be a sub-optimal outcome in the strategic sense, and there will then be a rush around to try to find plasters to deal with that. I worry that the ease with which the earnings threshold could be raised so significantly is a potential example of the same error being made in the future.
The Minister said that the Government wanted to retain flexibility. I do not think that I am arguing about the Government not retaining flexibility; I was seeking to put a limit on the extent of that flexibility that can be addressed through an order, because I think that the threshold for earnings is so significant. The Minister said that he had listened to employers and pension providers. That is good, because employers are very important in this new settlement. However, there are also consumers and citizens whose views and interests in this matter are equally important. These reforms represent a contract with citizens, whereby the Government are expecting them to take greater responsibility for providing for their own income in retirement, and also for removing the state from any responsibility for any earnings-related second-tier provision. It is therefore very important that the employers’ views are engaged because they are part of the tripartite delivery of this. I do not demur from that at all. Equally, the view of the citizens, or those who are able to speak for them, is also to be represented. Something as significant as the trigger for the earnings threshold will be very important for them and for the outcomes of their saving activity.
In the amendment, we were seeking to give the Government the flexibility which at least kept broadly constant the proportion of the population covered by automatic enrolment, with some degree of variation either way. But if there is to be a major change in the threshold, I do not believe that that should be done by an order—even by an affirmative order. It is of such significance to the outcomes to the pension reform programme over time and there should be a high level of awareness of the consequences. People should understand the impact and all interest groups should be involved in that decision.
The Minister referred to a possible change in the state pension system in the future. Speculating, the change will be accelerating the flat-rating of the state second pension and integrating and bringing forward the two into a replacement single state pension. Presumably that would strengthen the argument that raising the earnings trigger, other than by reference to earnings or comparable situations, should not be raised significantly.
I remain concerned because the arguments deployed by the Government for wanting to retain the level of flexibility that will allow them to raise the earnings trigger so high are not very persuasive. I beg leave to withdraw the amendment.
Amendment 29 withdrawn.
Amendments 29 to 33 not moved.
Clause 8 agreed.
34: After Clause 8, insert the following new Clause—
“Transfer to national employment savings trust
In section 16 of the 2008 Act (qualifying schemes) after subsection (2) insert—
“(2A) The Secretary of State must make regulations to enable transfers of qualifying pension schemes into a national employment savings trust.””
This amendment tries to deal with the problem of stranded pension pots. The wording is inadequate and rather than reading,
“transfers of qualifying pension schemes”,
it should read,
“transfer of individual entitlement into the national employment savings trust”.
What the amendment seeks to do is to provide some protection for individuals who have a number of small pension pots. We are aware that NEST is meant to supply a gap in the market for those companies and individuals unable to find pension provision elsewhere. Inevitably, small saving pots will be left in a variety of different schemes which will be a problem, not only for the employees but also for the employers. So in the interest of simplification, every attempt should be made to encourage some consolidation of these pension pots and we would like to see the Secretary of State making regulations to that effect so that these transfers can easily happen. I beg to move.
I must tell your Lordships that there is a printing error in Amendment 34A. After “repayable” it should read “by cash considered” and not “but cash considered”.
Amendment 34A (to Amendment 34)
34A: Line 7, at end insert “or, in cases where the value of an individual fund does not exceed £1,000 and is not otherwise repayable, but cash consideration if the beneficiary opts for this”
My Lords, I rise to move my sub-amendment, to use European parlance, as corrected by the noble Baroness’s perceptive intervention, and to speak to my noble friend Lord Stoneham’s substantive amendment and around the parallel thoughts of the noble Baroness, Lady Hollis of Heigham, on this matter. My amendment is slightly different in character, but all these amendments are about essentially the same problem. I quote, with approval, the words of the Minister only this afternoon, which I jotted down for greater accuracy:
“It is very expensive to manage small pots”.
That is exactly what the problem is about. There are a number of complexities in the consequences of this. It is expensive for employees and employers, or pension administrators. It is extremely expensive for the Inland Revenue and gives rise to lots of often misleading tax codes, which overlap and never seem to get synchronised and sorted out. It causes difficulties for taxpayer compliance and taxpayer understanding when these bits and pieces come in from sources that are probably long forgotten and do not add up to very much.
On Second Reading I quoted examples. I will be a little more pointed than I was then. They were actually my wife’s two pots of about £20 per annum and about £30 per annum. Goodness knows what the administrative cost of carrying that burden is. I am pleased to see the Minister chuckling. As I recall the situation, my wife had already consolidated a number of pension entitlements and had one go at this. She had some entitlement under the teacher pension scheme but no actual pension and she had had that out. You cannot consolidate more than once. I may have got that wrong, such is the complexity of this. In other words, there was nothing that she could really do about them. The proposals, as I understand it from my noble friend and the noble Baroness, are basically that NEST should be an optional repository to handle them. I can understand that the Minister may be a little diffident about taking it all in while he is getting this extremely imaginative scheme under way, but there is at least the potential for a default mechanism to take this over. Were my energies not to have faded, I would have sub-amended my noble friend’s Amendment 34 to read “may make regulations” rather than “must make regulations”, but let us not debate that at this hour. The idea would then be that NEST would be a place where these could be sorted out.
An alternative approach would be to enable people to have a slightly more relaxed view about taking these in cash, which is what my sub-amendment in effect proposes. One always has a whiff that the Inland Revenue has a certain concern here. I am quite sure that some elaborate scheme could be devised of tax avoidance where people could have hundreds of miniature pots and somehow take it all out in cash with the full benefit of the accrued tax reliefs, ending up with a fortune. Perhaps this has never happened, but I am quite sure that the Inland Revenue would be there alert to make sure that it did not.
I also feel, in relation to the suggestion made by the noble Baroness, Lady Hollis, and the thinking behind it, that it is not absolutely essential that this should be done by NEST. It could be that, if the rules were made more flexible, existing administrators could take this on. I am pleased to hear her acknowledging that. I do not wish to create an unnecessary controversy in the Committee, but I have a feeling that the words “any willing provider” might even be considered. If, for example, in a case such as that of my wife, where there was an entirely trivial and ridiculous entitlement that could have been bolted on to her existing private pension arrangements, somebody could say, “This is the value of the scheme; will you take it over?”, and pay it possibly as an agent—I am not concerned with the legal basis of this—I think that we would be making some progress.
I feel strongly about two things. The debate in this Committee has rightly focused on mini-jobs. We are now talking about mini-pensions, which are often, but not always—and it is not contingent on income or anything else—a by-product of mini-jobs, and good luck to people. They may in certain cases, though not in the case of the lady whom I mentioned, be quite central or disproportionately important to the income or the top-up of income of the individuals involved. We should be moving towards a system that is less complicated, more flexible and less obsessed with the possibility of theoretical minor difficulties with tax. We should somehow cut through the legal thickets and deliver something that is cheaper, easier to understand and worth having in the hands of the beneficiaries who have properly earned it.
My Lords, I have high hopes for the thrust behind these amendments, given that all sides of the Committee today share a similar take on the problem. I know that the Minister shares this view and I hope that he can give us some positive indications of ways forward. I am particularly happy to follow the noble Lords, Lord Stoneham and Lord Boswell, on this.
We discussed earlier the question of the number of job changes and we know that, as I said, the median number of job changes is around 11—25 to 26 per cent will have between 11 and 15 job changes and others will have even more than that. That means, depending on the rules of individual schemes and how long people are required to work before they can join a scheme—it could be two years or up to two years, or your contributions could be returned to you and you might decide to hold them in a pot—that it is likely that low-paid employees and some not necessarily low-paid employees, but people who have moved a lot in their first five, 10 or 15 years of earning, will build up some pension entitlement in five of those jobs. At, say, £11,000—half women’s average earnings—with a fairly conventional DC scheme, which I know applies in a lot of the charitable or voluntary world, a five plus five would mean that such a woman would have something between £1,000 and £1,200 a year in her pot for each year in her job. That could mean that she had five or six pots of anywhere between £1,000 and £3,000, depending on the rules of the scheme. The question then is what happens to those pots.
I am cross with myself because I missed a trick and I should have put it down as an amendment, because one way to approach this, obviously, is to follow in a slightly larger form the thrust of the argument of the noble Lord, Lord Boswell, which is to raise the trivial commutation limit, which at the moment is £18,000— 1 per cent of the lifetime savings allowance. A trivial commutation limit of, say, £25,000 or £30,000 would pick up quite a lot of these very small pots without having to hassle about whether they were at or above a certain level. Of course, some providers—some banks and so on—will allow you to bring together five or six small pots and consolidate them, because they are then worth handling.
In addition, the Government propose in due course to remove annuitisation at the age of 75. However, the Treasury—bless it—has insisted on a quite absurd de minimis figure of £20,000 income. That is quite unnecessary; it merely needs to be about £8,000. Of course, if the new state pension comes into play at £140, you will not need any de minimis for failing to annuitise, because it will float you off all public funds, apart from housing benefit. Therefore, with, I hope, the new state pension of £140, not only would NEST be safe but so would all other small savings schemes. You would not then need things such as trivial commutation rules because the choice would be left entirely to the individual. We would be kicking out a lot of silly mess and tangles that have been imposed by the Treasury, which is more concerned to avoid £1 being lost through manipulation of the tax system than it is to encourage £10 being gathered into the savings system. I consider that to be really rather sad. I am sorry that I missed that point, but we will come back to the trivial commutation issue later if it seems worth doing so.
If the person in question cannot trivially commute and she is handling pots of, say, £3,000 each, she will be getting somewhere between £1 and £4 a week from each of those small pots. The Pensions Advisory Service—I should declare an interest as a board member of TPAS—has been very concerned about what noble Lords have called “orphan assets”. At the moment, a poor woman can use these small pots altogether, but she may end up with, say, £20,000 or £25,000 in her NEST pot, have three, four or five other pots of £3,000, £2,000 or £1,000 and lose all those small pots, which are above the trivial commutation figure, are too small to be annuitised and cannot be bundled together. She would effectively lose a third of her lifetime savings, even though she is on a very low income. No one would regard that as decent. Therefore, I think that she should be able to bundle or consolidate her various pots. For this purpose, I am talking about NEST but I am perfectly happy for it to be any willing provider. The important thing is that she can access all her savings.
What would be the advantage of my proposal? It is very simple. First, above all, the person in question retains the full value of all her savings, rather than possibly losing some of them. Secondly, it represents simplicity for her in retirement, as she could be handling just one flow of pension income rather than multiple flows of small pots. Thirdly, there is a sort of best-value option going on here—a version of the open-market option. In this Bill we have not yet talked about disinvestment strategies, but I suspect that she would get a better return on disinvestment were she to purchase an annuity if all these small pots were bundled together and consolidated into one scheme, rather than if she were trying to play around with various small pots to avoid losing them.
In my amendment, I stipulate that the transfer should be able to take place the year before retirement simply to recognise the concerns—they may be exaggerated but they certainly exist—among some pension funds that existing scheme providers will not want a wholesale flood of money from their schemes under management going earlier into NEST, possibly because NEST will appear so much more attractive in terms of the reduced fees that will be charged and therefore the amount that will be available for accumulation. I do not mind that, but they might, and therefore it may be a price that has to be paid.
Given the support around the Committee today, given that I know that the Minister is sympathetic to the issue that has been raised and given that we have produced two or three different ways in which we can approach this problem, I hope that we will get a sympathetic hearing from the Minister.
My Lords, given the hour, I rise briefly to say that we have put our names to the amendment in the name of my noble friend Lady Hollis because we support the thrust of it. We certainly also support the thrust of the amendment in the name of the noble Lord, Lord Stoneham, as amended by that in the name of the noble Lord, Lord Boswell. This issue seems to have been around for a long time. The Minister may well push that back at us and ask why we did not do something about it, and that would be a good question.
If I have any caveat at all in relation to NEST, it is one that the Minister himself may have. That there should be no transfers into NEST was part of the consensus, although the consensus has been a little disturbed by the Bill, so that does not preclude this being opened up. It changes systems and the costs as well, but those are second-order issues in relation to the substantive matter that has been raised. The time is now right to deal with that.
My Lords, I support these amendments but express a caveat about something that could lead to the wrong decisions. It may be wrong for people who have relatively small entitlements from defined benefit schemes to take transfer values and move them into a money purchase pot such as NEST, even though small amounts of money are involved, because transfer values have been getting relatively mean under the changed rules. I have always thought that NEST itself could have a problem. Managing large amounts of money in an optimum manner is quite a difficult thing to do. Therefore, although I am sure that NEST will be run relatively safely and sensibly, it will have to be run on a blue-chip investment basis. Therefore, it is likely to underperform some other funds. However, the principle of allowing consolidation and people to take the cash out if it is peanuts has to be right.
My Lords, I support the notion behind these amendments. At Second Reading I drew attention to the possibility of people arriving at retirement with lots of little pension pots and not knowing what they would be entitled to. That sometimes happens now; people phone up and say, “Am I in your pension scheme? I just don’t know”. They reach retirement and, if they have been working for around 40 years, they do not know what they have. It seems sensible to have some mechanism whereby one’s pension entitlement is, as it were, collected as a cumulative amount of money. People would then know that they have access to this cumulative amount and the pension that is generated from it. In this sort of system we have the opportunity to do something like that. It would be a very good idea and I congratulate my noble friend Lady Hollis on what she has come up with in Amendment 35. The noble Lords, Lord Stoneham and Lord German, certainly had something similar in mind with Amendment 34. The notion is a good one, whichever amendment is acceptable to the Government.
My Lords, I must start by declaring an interest. I think I have one of these infuriating little stranded pensions. It is the most annoying thing. You look at the file, look at the headline and close the file because dealing with it is unendurable. I am far too polite to complain to the noble Lord, Lord McKenzie, for not doing anything about it. If I thought about it I would resent him deeply every time I looked at the file.
I take the opportunity to let the Committee know, through these amendments, what we are doing to consider how transfers across the industry, particularly of small pension pots, can be made easier. The Making Automatic Enrolment Work review, carried out last summer, recognised that facilitating transfers was critical to the success of the workplace pension reforms. It believed, however, that the issues went beyond NEST. When automatic enrolment becomes the norm, there is a much higher risk that pension savings, particularly for lower earners and people who move jobs frequently, will become fragmented in several small pots—a point made so eloquently by the noble Baroness, Lady Hollis, just now.
The Government are already acting on the recommendation of the review to consider how transfers across the industry can be made easier. The DWP is working alongside the Treasury, HMRC, the Financial Services Authority, the Pensions Regulator, employers and pension providers to understand better the burdens employers and schemes face when administering small pots, and to identify any barriers facing members.
In addition, the DWP recently published—on 31 January—a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. We are seeking to address existing rules which could impact on the success of the reforms, such as rules on early scheme leavers and disclosure. The call for evidence is likely to consider actions better to manage small pension pots. This call for evidence closes on 18 April. Our response will be released later this year after we have considered stakeholder views and evidence of burdens and costs.
Her Majesty’s Treasury recently held a call for evidence on early access. This reflects the Government’s commitment to consider ways to boost individual saving and to foster a culture of personal responsibility over financial choices, particularly in encouraging saving for retirement. The document sets out the available evidence on early access to pension savings, some potential models for early access and the potential benefits and risks, and sought further evidence from interested parties. It included a specific question on ways to improve the transfer process and on whether there is a case for introducing further flexibility in the trivial commutation rules. The call for evidence closed on 25 February. HMT is currently considering the responses and will publish its findings in due course. So, across all three of these areas, we are seeking to identify options to improve transfers so that individuals can get the most out of their savings.
I appreciate the interest that noble Lords have indicated in the overall issue of transfers, which is much wider than the restrictions that are currently placed on NEST. The restrictions on transfers into NEST are intended to focus the scheme on its target market, particularly as the reforms are staged in, enabling its administrative processes to be simple, leading to lower running costs and creating safeguards against levelling down. NEST can already accept certain transfers in—for example, where a member with less than two years’ service has the right to a cash transfer. This allows jobholders who move from an employer not using NEST to one offering NEST to transfer their cash transfer sum into NEST. The Pensions Act 2008 commits the Secretary of State to review the effect of NEST transfer restrictions in 2017. But we are doing work now, before 2017, that will bring together evidence and analysis from a broad base.
As I know noble Lords appreciate, there is no straightforward solution and the outcome of any quick fix may not provide the universal remedy for individuals and pension schemes that we might hope for. Aggregating small pots by transferring them into another pension scheme is not necessarily a good thing to do for individuals, as the noble Lord, Lord Flight, just pointed out, as it will depend on the merits—the risk, charges and growth—of the fund they are transferring into compared to those of the fund they are transferring from. It is not necessarily a good thing for pension schemes either, which, though they would no longer need to pay for the maintenance of a potentially smaller pot, would need to pay to transfer the fund out. Hence, the work we are already doing to see what measures we can sensibly take to minimise industry burdens while delivering the best possible protection of individuals’ retirement outcomes. We want to ensure that any solution will stand the test of time and meet the needs of all pension schemes and their members.
I do not want to prejudge the outcome of our considerations, but I can see the merit in a number of your Lordships’ arguments, including that of the noble Lord, Lord Boswell, that we should take into account giving the individual a choice, where they have very small pension funds, to take the cash. It is, of course, the very smallest pots that cause the biggest problems, as even if transfers can be facilitated, the frictional administrative costs have a proportionally higher impact. The noble Lord talked about sums of £20 and £30—I shudder to think of the proportion of administrative costs involved in doing anything with them.
Our ambition is that NEST will complement rather than replace existing good-quality pension provision. Changing the provisions now to allow NEST to accept transfers in during the critical implementation period could undermine that aim. By 2017 the reforms will have been fully implemented. We will have more evidence on the effect of the reforms as a whole, including the impact of NEST on the market. While I appreciate the principle behind these amendments, I urge the Committee to bear with us while we get to the heart of this difficult and complex matter. On that basis, I urge noble Lords not to press their amendments.
That is helpful and I understand the issues associated with it, but can the Minister give us some guidance on the timescale? This is a problem now, as my noble friend said. Women, in particular, are low-income savers and have small pots which they are losing. They are being stolen from them with nobody being a thief but with women certainly being the victims. Given that this Bill is still going through this House and will then go on to the other place, presumably once it has finished the Welfare Reform Bill, the noble Lord has until June or July or some time like that before the Pensions Bill completes its passage through both Houses. Can he come up with some proposal by the summer in which we can corral these small pots so that they are not lost permanently to those who can least afford to lose them?
My Lords, I am pleased to respond to the noble Baroness, Lady Hollis. She will see by the amount of work that we are undertaking and its complexity that getting a comprehensive review is not going to be possible in a matter of months. We are clearly talking about a matter of years to lock this situation down. I refer back in politest possible way to what the noble Lord, Lord McKenzie, said. This has been a problem for a very long time and it is very complicated, involving a lot of different systems and structures of pension provision. We need a holistic solution. We have the work in train. We will get there but it will not be a matter of months, I regret.
My Lords, it would be very simple, at least as an interim stage, to build on what the noble Lord, Lord Boswell, was talking about and either have a cap on the size of individual funds that can be taken as cash or to raise the trivial commutation limit under specified circumstances. That would be very simple and would not get in the way of further more fundamental and wide-reaching reforms, of which I understand some of the bigger complexities—particularly between DB and DC schemes, although obviously DB tends to be confined to the public sector. But the noble Lord could make some interim arrangements which would not preclude an intelligent, sensible and decent wider response in the future. At the moment real people are losing real money who can ill afford to do so.
My Lords, I accept the point that the noble Baroness makes that people lose money because of this. They have been losing money for many years. This problem has not suddenly emerged. Regrettably, because of the amount of work now under way, it would be premature for me to give any time indication about whether one could envisage some certain quick fixes that would go along with an overall strategy. It just depends. Noble Lords will understand that I am simply not in a position to say that we could apply some quick fixes along way. They may be possible but I certainly cannot indicate that that will be the case or the timing of it. I would love to be able to announce a wonderful transformation so that with one bound we broke free. But I can assure noble Lords that there is a major process in train to get a holistic solution to the issues of savings and these pots, and we are moving at a rapid speed to get that done.
My Lords, I never mind saying this, but the Minister has given us an almost entirely satisfactory response. I can understand the noble Baroness’s desire to get on with this, so perhaps I might counsel the Minister to look at two interim approaches in parallel. First, if he could do anything along the lines of my amendment, it would help. Secondly, we should try to avoid these schemes accumulating further. If he can stop the rot and prevent any more of these little pots being created from now on or fairly soon, it would be very helpful. However, I fully understand, not least because of the comments made by my noble friend Lord Flight, that these are complicated matters. I suspect that we will have only one go at this—it probably will not be in the Pensions Bill with which we are now dealing—and we need to get it right. All power to the Minister’s arm on the overall concept, but I hope that he will remember at the same time to look either at whether existing arrangements and payments can be smoothed or at stopping the rot by preventing any additional schemes being created. However, in the spirit of what has been a very constructive debate, I beg leave to withdraw my sub-amendment.
Amendment 34A (to Amendment 34) withdrawn.
My Lords, I am grateful for the generous support that my Amendment 34 has been given and for the very generous response of my noble friend. Two points stood out: first, everybody recognises that facilitating transfers is critical and that it should go beyond NEST; and, secondly, we should look at the principle of early access. In that spirit, I am very pleased to withdraw my amendment.
Amendment 34 withdrawn.
Clause 9 agreed.
Amendment 35 not moved.
36: After Clause 9, insert the following new Clause—
“Voluntary and additional voluntary contributions into NESTs
After section 15A of the 2008 Act (as inserted by section (Transfers-in before decumulation)) insert—“15B Voluntary and additional voluntary contributions into NESTs
(1) The Secretary of State shall by regulations provide that a jobholder who in a preceding tax year or years after the commencement of NESTs has not paid contributions up to the maximum employee contribution limit for the year or years in question may at any time pay voluntary contributions up to the total of the maximum employee contribution limit for each of those years.
(2) The jobholder shall not be entitled to require the employer to pay the employer’s contribution on voluntary contributions paid under subsection (1).
(3) The jobholder may exercise the right to pay additional voluntary contributions equal to the total amount of the contributions which would have been paid by the employer if the contributions in subsection (1) had not been voluntary.
(4) Voluntary contributions shall attract tax relief at the applicable rate.
(5) For the purposes of this section, rounding-up under section 9 above shall apply.””
I think that many of us would like the annual cap of £4,200 on contributions to NEST to be removed. However, I again understand the industry’s worries about losing funds under management from the better-off. I accept that a person would have to be a reasonably high earner to hit that cap of £4,200 each and every year. The amendment would simply allow the making-up of missing years—I am rather keen on making up missing years whether in the basic state pension or in NEST. The person concerned may have enjoyed a small legacy, perhaps on the death of a parent and the sale of the parent’s home. They may have had a small lottery or premium bond win. He or she may have traded down their home to somewhere smaller while in their fifties and have thought that it made very good sense to add some of the modest equity available to their pension fund as a form of saving. They may have divorced and received from it a modest financial settlement of a few thousand pounds or so, some of which they would like to put in their pension to make up for the years that they missed. I make it clear that there is no suggestion of there being any parallel employer contribution; the amendment would simply allow an employee, if they wished, to add to their pension pot. The money would not come from any other savings, nor would it be a transfer. It would be, so to speak, new money. Although I doubt that it would occur very often, being able to add to their pension pot in this way would still offer women in particular, whose financial and, frankly, personal and private lives are highly unpredictable, some extra flexibility in the way in which they build their NEST pension. I beg to move.
My Lords, I want to say a brief word about Amendment 38, which is in the group. Clearly, the Johnson review looked at this issue and having weighed up both sides of the argument, recommended that the Government should proceed to legislate. The words of the recommendation were quite ambiguous. It said:
“We are therefore recommending that the Government legislate for the removal of the contributions cap in 2017”.
One could read that as recommending legislating in 2017 for removal of the contribution cap, or as recommending legislating now. Actually, the text of the Johnson review does use the word “now”—in other words, it should be part of this Bill—but because neither the Minister nor the Government are on record yet as saying why they have not chosen to follow that advice, it would be very helpful if this amendment could be probed in that manner.
My Lords, perhaps I may comment briefly. I can see the thrust of my noble friend’s amendment. I remember that, when we debated the cap, we debated whether there should be an additional lifetime element as well. I think that, at one stage, we debated whether there could be a two or three-year period when one carried forward the unused amount. My recollection is that, other than the annual cap, which is as it now is, all that fell by the wayside, but the Minister may be able to update us on it.
It seems a good idea to me to be able to use the headroom in respect of unused bits, although I do not think there is anything that precludes someone who is, or might become, a member of NEST making a voluntary contribution up to the limit. The limit is not, as I understand it, an employee and an employer limit; there is a limit in respect of contributions for an individual. Certainly, for the reasons that my noble friend advances, if there were opportunities to use some headroom to get more into NEST, that would be good, so far as the removal of the cap supports the thrust of that. Again, given the consensus that was there and the existence of the cap, everything that has the potential to disturb that in the interim makes life a bit more difficult, although it would be good if it could go at the earliest opportunity.
My Lords, I thank the noble Baroness and my noble friends for bringing the important issue of the NEST contribution limit to the attention of the Committee. I shall deal with the amendments in the order they were raised. The noble Baroness, Lady Hollis, has raised, through Amendment 36, a vital point about the ability of NEST members to make contributions to their retirement pots that exceed the minimum contributions required by automatic enrolment. NEST has been designed to provide a low-cost, portable pension scheme for low to moderate earners. We want to encourage people, where possible, to save more than the minimum. The NEST order and rules already allow a member to make contributions up to the annual contribution limit in the financial year in which the contributions are made, as the noble Lord, Lord McKenzie, pointed out.
The current limit is already set at such a level that it enables median earners to contribute as much as twice the minimum contribution requirement in a tax year. Allowing NEST members to make use of unused annual contribution limits in subsequent years would undermine the purpose of the annual contribution limit. This limit was designed to ensure that NEST does not adversely impact on existing good-quality pension provision. While I understand the principle behind this amendment, we should not forget the purpose of NEST. This is to enable millions of people to participate in pension saving from which they are currently excluded because they do not have access to suitable workplace pension provision. Filling this supply gap requires NEST to be both low-cost and as straightforward a scheme as possible. Adding to the complexity of administering NEST through complex arrangements for calculating the maximum annual contribution would undermine those aims.
Moving on to Amendment 37, the noble Baroness raises another important point, about how the annual contribution limit should be calculated. The limit, alongside the transfer restrictions, is designed to focus NEST on its target market of low to moderate earners. This is to ensure that NEST will complement existing good-quality pension provision, not replace it.
The baseline contribution limit was set at £3,600 in 2005 terms, following wide consultation on the proposals in the White Paper, Personal Accounts: A New Way to Save. Responses on the appropriate level for an annual contribution limit were based on analysis of several factors, in particular, the potential impact on existing schemes and the ability of individuals to save flexibly for their retirement. In line with the provisions in the scheme order, NEST Corporation has adjusted the contribution limit for 2011-12, prior to scheme launch, to £4,200. The current method of setting the annual contribution limit strikes the right balance. It ensures that NEST focuses on its target market of those excluded from pension savings as a result of market failure, while providing for a level of contributions that is sufficient to allow employers and individuals to contribute more than the minimum required.
I turn to Amendment 38, tabled by my noble friends Lord Stoneham and Lord German. This puts forward the recommendation from the Making Automatic Enrolment Work review that the Government legislate now to remove NEST’s annual contribution limit from 2017. That review recognised the importance of the NEST contribution limit during the introduction of the reforms. It acknowledged that there was broad consensus behind the reforms, and that NEST’s role was to fill the supply gap that those in the existing industry currently find difficult to serve. The review saw the contribution cap as a key lever in ensuring two things: that NEST remains focused on this target market as the reforms are staged; and that during this important period it does not adversely impact existing good-quality pension provision. However, the review team considered that once the reforms were fully implemented it may be appropriate to remove the cap. This is both to ease the administrative burden on NEST and to avoid any unintended message that there was somehow a maximum appropriate level of pension saving.
Great minds think alike. Section 74 of the Pensions Act 2008 already requires the Secretary of State to appoint a person to review the effect of the annual contribution limit in 2017. By this time, the reforms will have been fully implemented and we will have more evidence on the effect of the reforms as a whole, including the impact of NEST on the marketplace. I am not saying that the review team was wrong. I am saying that, given that it saw 2017 as the right time to remove the cap—by then we will have much more evidence of the impact of NEST in the real world—2017 is also a more sensible time to consider changing or removing the NEST annual contribution limit. Since this can be achieved by secondary legislation, there is no need to legislate now. I understand the principles behind these amendments. However, now is not the time and, given the scope individuals already have to make additional contributions and our intention to review the contribution limit in 2017, I urge the noble Baroness to withdraw this amendment.
I can well understand why pension providers are—let me put it politely—apprehensive about the competition offered by NEST in terms of fees and charges and, therefore, want to protect the funds under their management. I accept the noble Lord’s argument that the bigger issue of getting rid of the cap altogether may have to wait until 2017, although I am disappointed about that. What I do not understand is why there should be any threat to existing alternative providers for people who are in NEST and who, two or three years down the line, find that they have missing contributions, possibly by virtue of maternity leave or whatever. I cannot see how that situation—making good the shortfalls of previous years—is in any sense a threat to any other provider. Because they are in NEST, they will not be in any other provider’s scheme. NEST is not, therefore, in any sense, competition to them.
I support the second of these amendments, although I understand the challenge that it might represent. However, the first amendment would simply make good the headspace in back payments, and I do not see why that would represent a challenge or a problem of any sort. Given that people occasionally get modest sums of money, it would seem to be consistent with our wish to encourage people to think about their retirement and to be able to make that money available for NEST. I do not know whether the Minister has anything further to add; he may feel that he has said all he is going to say on this.
I thank the noble Baroness for giving way and for giving me the opportunity to clarify matters. This is simply about administration, simplicity and cost. As you start to introduce these kinds of rules going backwards and forwards on what people can contribute, it gets very complicated and you start to build in the kind of complexity that we are all complaining about. Stranded pots are just one area generated by the complexity in the system. Therefore, the rationale here is: keep it simple.
My Lords, given the time, I do not think that there is any point in my pursuing this matter further. However, if not during the course of this Bill, perhaps subsequently we will come back to this bundle of issues, because it clearly has to be addressed. I beg leave to withdraw the amendment.
Amendment 36 withdrawn.
Amendments 37 and 38 not moved.
39: After Clause 9, insert the following new Clause—
The Secretary of State shall by regulations provide guidance on the level of deferred pension member charges.”
My Lords, this amendment relates to deferred charges, and it deals with the part of the benchmarking of quality of schemes into which jobholders will be automatically enrolled.
As we have discussed on many occasions, a major segment of the workforce for whom auto-enrolment is aimed are likely to be frequent movers between jobs or, indeed, those holding multiple jobs during the year. One practice that is current in some personal pension schemes is increasing charges when people change jobs. An example of that might be where the current employee who is an active member of a pension scheme is actively contributing to a pension scheme, paying perhaps about 0.5 per cent in management charges. However, a former employee—that is, a deferred member of a scheme—is charged 1.5 per cent, which is much more than NEST will charge. Interestingly, the pension companies operating in this manner describe this as an “active member discount”, but the consumer association Which? describes it, more appropriately, as a “deferred member charge”.
These charges clearly penalise people who regularly switch employers, and it is particularly appropriate for many of the employees for whom auto-enrolment is targeted. Therefore, the concern here is that there should be a set of guidance, instructions or regulations to ensure that, in assessing the quality of schemes which may be alternatives to NEST, these issues are benchmarked appropriately.
Alongside this, there are concerns relating to the FSA proposals to allow employers to negotiate a consultancy charge with their advisers and then deduct those charges from the employee’s pension pot. The general purpose and thrust of the amendment is to guard against excessive charges and to ensure that the Government benchmark the sort of quality that they want in schemes which are to operate alongside NEST in the open market. I beg to move.
My Lords, I share the concerns of the noble Lord, Lord German, and I am pleased that he has tabled this amendment, as it allows us to debate a matter which is of increasing concern to consumer groups, such as Which?.
There is a real issue of how the Secretary of State exercises his powers under the 2008 Act in terms of setting qualifying standards. Here, we are seeing two tensions coming into play. With higher levels of scheme membership, which automatic enrolment will bring, increasingly employers will not want to retain former employees—the leavers—in their trust-based DC schemes. They will prefer to transfer them out or default them into some form of personal pension. That is not necessarily an irrational position for an employer to take but the former employee—the leaver, the deferred member, the not-contributing-to-that-pot member—will move away from the preferential charges structure that their employer may have negotiated into a personal pension scheme with a much higher level of charge.
Where the employer workplace pension is delivered by a contract-based provider, both the employer and the contract provider may have an interest, for different reasons, in defaulting a departing employee or leaver into a personal pension which will very likely have higher charges, the employer motivated by not wanting to be responsible for a former employee and the insurance company because it does not want to maintain the lower charges for a non-contributing former employee. As the noble Lord, Lord German, has said, we have already seen instances of insurance companies offering active-member discounts, which, like Which?, I always say can be described as inactive-member premiums in terms of the charges raised. I know that this is something preoccupying the National Association of Pension Funds because it wants to set a quality mark and it knows that this is a particular problem.
In a world of auto-enrolment with an average of 11 job changes over a lifetime and the prospect not only of the difficulty of achieving a transfer but sometimes the costs involved in transferring and consolidating pension pots, there will over time be an increasing number of individuals who will have pension pots into which they are not actively contributing. It is this status of not actively contributing to the pension pot which leaves people vulnerable to the high or higher charges and the consequent returns on their pension contributions.
Therefore, whether the Secretary of State uses the opportunity of an amendment such as the one tabled by the noble Lord, Lord German, or the powers reserved to him in the 2008 Act, he will need to think about what he chooses to do to control the vulnerability of workers to escalating charges on pension pots where they are not actively contributing because they have changed their employer. I am confident that that problem is not going to go away. Which? is seized of it, as is the NAPF, and it is something that the Secretary of State is going to have to address. It is not just a case of looking at the charges when somebody is actively contributing and accruing; there is the question of what is happening to the charges when people are no longer actively contributing into that pot because they have gone to another employer and may be saving into another scheme. It is a growing and important issue, and certainly consumer bodies are very alert to it.
My Lords, my noble friend Lord German has tabled an amendment to give the Secretary of State powers to make regulations to issue guidance on the level of charges made by defined contribution pension schemes to deferred members. These deferred member charges, as he called them, are called “active member discounts” by the industry. Effectively, they offer lower charges to active members as an incentive, and perhaps a reward, for continuing loyalty.
The DWP has done some robust research on defined contribution schemes sold in the 2008-09 financial year. That showed that—somewhat to our surprise—charges typically do not exceed 1 per cent across the market, including trust-based and contract-based schemes. Where different rates were applied to active and deferred members, this tended to be in the form of even lower rates for active members, which begins to suggest that a true discount is emerging for active members, rather than a penalty for deferred members. It may be that consumer groups are saying that, as the pressure on charging comes down, the gains are taken by active members rather than deferred members. That might be one way in which we would like to look at it.
Even though the evidence that the Minister refers to shows that he is referring to 1 per cent, on a base load contribution of 8 per cent we aspire to charges of the order of 0.3 per cent and 0.4 per cent. A charge of 1 per cent is not a statement of success. We are trying to deal with two things. The inactive or non-contributing member should not suffer a disproportionate penalty, which they would not suffer in NEST. Equally, at the same time, charges should be brought down overall. I would not be very content if we were willing to settle on something of the order of 1 per cent. One would hope that, with mass auto-enrolment, the market generally would move to 0.3 per cent. If not, perhaps the provider should not be in the market providing products.
I thank the noble Baroness, Lady Drake, for her market insight here. I choose my words carefully. It is clear that the capping has had an effect on charges. We are concerned that the pressure on charges should be maintained. That is why we have committed to monitoring levels of charging in the marketplace as automatic enrolment is introduced. We will publish guidance on default investment options in automatic enrolment schemes later in the spring. This sets out guidance for suitable charging structures. The guidance encourages appropriate charges, which match members’ interests, and protects individuals from charges that are excessive in relation to the product they are paying for.
Let us not forget, as the noble Baroness has just pointed out, that we are introducing a major change to the pensions landscape. NEST is being set up to offer low-cost pension provision to individuals on low to moderate earnings. We expect this, as does the noble Baroness, to act as a benchmark across the pensions industry, as well as to help millions of low to moderate earners to save. We are also looking seriously at how transfers can be facilitated across the industry so that savers can shop around for better charge rates more easily. As I described in my response to a previous amendment, HMT recently held a call for evidence on early access, including a specific question on ways to improve the transfer process. The DWP, as I have already described, has recently published a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. In this, we are seeking solutions to address existing rules that could impact on the success of the reforms. Those include rules on early scheme-leavers and disclosure.
We are actively seeking to identify ways to facilitate the best possible deal for savers across the areas of charging and transfers. Therefore, I do not believe that regulations to make guidance are necessary at this time. I urge the noble Lord to withdraw the amendment.
I am grateful for the statement that the Minister has just made. Apart from the actions that he has described, I should be interested to know how in future you can actively promote to the companies and individuals concerned the sort of changes that the Government wish to see. I do not suggest that the DWP should set up its own confused.com-type of operation, but it may well be that we need some form of open process by which both employers and employees can see the benefits of different levels of charging by the different companies and whether there is transparency in the operation. I welcome the Minister’s statement on that and beg leave to withdraw the amendment.
Amendment 39 withdrawn.
40: After Clause 9, insert the following new Clause—
“Continued saving following employment lasting less than two years
The Secretary of State shall by regulations provide support for continuing savings towards a pension for persons with qualified pension schemes relating to periods of employment of less than 2 years.”
In the interests of brevity as time is short, I am very happy to speak to Amendments 40 and 41, which are grouped separately.
Amendment 40 is related to the previous amendment, which concerned small pension pots. We want to ensure that small contributors to pensions over short periods are given due protection. We want to see that individuals do not lose out where they have less than two years’ service, particularly losing the employer’s contribution if withdrawn. We should like to see some ongoing discussion and review of how the position of these savers and pensioners can be protected. However, I accept that the transfer of pension capital is critical to this.
Amendment 41 is a probing amendment. It goes back to the discussion that we had on the past couple of amendments on the whole issue of the costs of pension schemes. We remain concerned that there are still no incentives for employers to be responsible for minimising the costs of the occupational pension schemes in which they are involved. We accept that progress has been made on this but we also accept that the Turner commission originally recommended more action on this point. We would like to make sure that, as the scheme is developed, there is an ongoing commitment to review whether the employer’s contribution should be net of the costs of the schemes. I beg to move.
My Lords, in relation to Amendment 40, from the earlier response that we got from the Minister in relation to small pots and all the activity that is going on there, I presume that the sort of protection that the noble Lord, Lord Stoneham, is looking for will be encompassed within that whole exercise. Accordingly, I should be interested to see the outcome of that in due course. Unless I am misunderstanding this, that is where it would be dealt with.
My Lords, I thank my noble friend Lord Stoneham for these two amendments, which concern the same issue—that of protection. Amendment 40 seeks to give us the powers to make arrangements to support short-term workers to build their pension savings. It is particularly those individuals who will receive a refund when they leave an occupational scheme within two years who will lose that opportunity. Clearly, the refund can be a default action, although they can choose to transfer the whole pension pot to another scheme if that is appropriate. Clearly, there is a very legitimate concern here that the default refund may mean that some individuals do not build up any kind of decent pot over time.
These are the areas that we are considering through the call for evidence on regulatory differences between different types of pension schemes, so I confirm to the noble Lord, Lord McKenzie, that our activity here addresses this issue. It is a very complex area and there are many considerations on both sides that we need to take into account before making a decision or changing legislation. The issues are the trade-offs between helping employers and schemes and increasing pension savings. We cannot, for example, limit short-service refunds without considering appropriate processes to help occupational schemes to manage additional small pension pots. Therefore, everything connects to everything else. As I have already described, we issued a call for evidence on 31 January to initiate a debate on possible solutions. The response will come this summer.
Amendment 41 would ensure that employers take into account pension charges when calculating their employer contributions. I assure noble Lords that we are not complacent on this issue. We fully appreciate the impact that charges can have on an individual’s pension pot, particularly given the beta returns that we are currently seeing. We are taking steps to ensure that such charges do not have a disproportionate impact on members’ savings. We will publish guidance on default investment options on automatic enrolment schemes later in the spring. That will cover suitable charging structures, as I said. The guidance will encourage appropriate charges which, first, match members’ interests, and, secondly, protect individuals from charges that are excessive in relation to the product that they are paying for.
I am conscious of the time and do not want to hold anybody up, so I shall try to be brief. I understand the issues that the Minister is trying to address, but I repeat that low levels of charges—for example, 0.5 per cent or below—are fundamental to the success of this asymmetric paternalist product. Somehow accommodating business models for suppliers whose charges hover around 1 per cent will not deliver the necessary strategic outcomes.
I reassure the noble Baroness, Lady Drake, that if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a charge cap for qualifying schemes and auto-enrolment schemes. NEST will offer low-cost provision to individuals on low to moderate earnings. As the noble Baroness knows better than anyone else in the world, the annual management charge will be 0.3 per cent. If the contribution charge is taken into account, the overall annual charge is the equivalent of about 0.5 per cent. That will provide a clear benchmark for pension providers.
Given the safeguards that will be in place, and in light of the assurances that I have been able to give on Amendment 40, I urge my noble friends Lord Stoneham and Lord German not to press their amendments.
Amendment 40 withdrawn.
Amendment 41 not moved.
Committee adjourned at 6.22 pm.