Considered in Grand Committee
My Lords, I am pleased to introduce this instrument, which was laid before the House on 15 January. I am satisfied that it is compatible with the European Convention on Human Rights.
As noble Lords know, NEST was established to support automatic enrolment. It is a trust-based, occupational pension scheme, and the NEST order and non-statutory rules act in the same way as a trust instrument. The NEST order was set in March 2010 and NEST has been operational since July 2011. Like any other pension scheme, occasionally NEST’s operating framework will need adjusting. Since 2010, there have been a number of changes to automatic enrolment legislation which impact on the order. In addition, live running of NEST has highlighted that some provisions in the order are unclear or do not operate as intended. The changes in this order were requested by the NEST trustee. They will allow NEST to focus on its key remit: to support automatic enrolment and provide clarity to employers and members who use it.
I shall now summarise the changes. To give smaller employers more time to adjust, we have extended the staging period for implementing automatic enrolment. We are therefore extending the period during which NEST has discretion to defer admitting self-enrolling members—for example, the self-employed—until 1 March 2018. This will enable NEST to focus on helping employers to meet their automatic enrolment duty.
We have removed the duty for employers to automatically enrol jobholders who are also qualifying persons as defined by the Occupational Pension Schemes (Cross-border Activities) Regulations 2005. However, NEST is not able to decline contributions from a member who, because of a change in circumstances, later becomes a qualifying person. It could be costly to accept contributions from a qualifying person. This would require NEST to ensure that it met the pension regulations of another EEA state. It is important that NEST remains a low-cost scheme for its target market, so this order allows NEST to decide whether to continue to accept contributions in respect of members who become qualifying persons or qualifying self-employed persons.
In practice, employers may want to cease participating in NEST, for example, when an employer changes pension provider. This order allows employers to terminate their participation in NEST and includes a consequential amendment to the definition of participating employer. Members admitted through employers are not required to sign terms and conditions. NEST is obliged to admit self-employed individuals to membership, but the order requires them to sign terms and conditions. We are therefore removing this requirement to bring the admittance process into line with other members.
The current description in the order of who can contribute to a member’s account is unclear. We are making an adjustment to that description to ensure contributions from third parties—for example, a member’s relative—will be accepted. We do not want to place unnecessary burdens on employers to process refunds of contributions not made through payroll, so this order allows the trustee to refund third parties or members directly.
Regarding minimum contributions, all contributions made by an employer count towards the annual contribution limit. Where a member of NEST has multiple jobs, NEST must accept minimum contributions from each employer. The quality requirement in Section 20 of the Pensions Act 2008 sets minimum contributions, which are currently 8% of earnings between roughly £5,500 and £42,500. Regulations now also allow for an alternative quality requirement, known as certification. The minimum contribution under the alternative requirement is one of 9% of basic pay, 8% of basic pay where basic pay is at least 85% of total earnings taken in aggregate, or 7% of total earnings. This order makes it clear that minimum contributions capture both the Section 20 and alternative quality requirements.
On survivor benefits, I am sure that noble Lords will understand the importance of NEST being able to respond quickly to pay benefits to a deceased member’s closest relations. The order removes the requirement for the trustee to consider next of kin as strictly defined by rules applicable in England and Wales, Northern Ireland or Scotland. Like other schemes, it allows the trustee to decide to whom to distribute benefits where a deceased member’s account has under £5,000.
Finally, the order corrects some minor inaccurate cross-references. I hope that noble Lords will see that a range of different amendments is brought into effect via this order but it is a series of technical changes. I therefore commend the order to the Committee and I beg to move.
My Lords, I have only one question in relation to the changes in this order. I suppose that I should declare an interest in that my wife works for a small charity which is seeking to become a member of NEST for its employees. However, I do not think that I really have an interest in the sense that I am relating my question to the technical change removing the requirement for the trustee to consider next of kin. Therefore, it is a general question rather than being specifically about me.
The Explanatory Memorandum talks about rules, with a small “r”, in England and Wales, Northern Ireland and Scotland, but further on it talks about doing something differently in accordance with Rules with a capital “R”. In terms of next of kin, what is being changed here in respect of those to whom payments should be made? Why is there a £5,000 limit on death benefits being transferred, and what Rules, with a capital “R”, will apply when the trustee looks at the question of those to whom they should pay sums of less than £5,000?
My Lords, I thank the Minister for introducing this order and I say upfront that we will be supporting it. Perhaps I may revert to an item touched upon by the noble Lord, Lord German, which I was going to raise in our previous debate concerning people’s expectations of pensions, the importance of auto-enrolment and certainly the importance of NEST as a key component of that. When the Turner commission looked at the prospect of auto-enrolment and how employer pensions were to be organised in future, I think that the criteria around contribution levels and the band of earnings to which they applied were struck so that over a working lifetime the required level of replacement earnings would be produced. I am bound to say that with what has happened to the band of earnings, contribution levels have not shifted. I have not seen an update of that calculation and I do not know whether there is one—I think that it is an adjunct to this order—but if there is, it would be interesting to see it.
I have one or two questions in respect of some of the detail. We understand why the discretionary period to allow self-enrolling members to be accommodated is necessary, but can the Minister update us on the current elongated process for enrolment? I do not have that fully in my mind. What is the position of new self-enrolling members at the end of that period? Do they have an unfettered right to enrol? Perhaps we can use this occasion, given that NEST has been up and running for a little while now, although with regard to auto-enrolment larger employers are involved first, to find out whether we have any early numbers for the employers and employees who are enrolled.
We support the lifting of the obligation dealing with cross-border obligations and the other essentially technical amendments. I have a small point on terms and conditions. The Minister said that the proposed change would mean that self-enrolment individuals, as others, do not have to agree to members’ terms and conditions, so what is the purpose of those conditions? What relevance do they have? As for multiple jobs, again we support the change that has been outlined, but what is the position on multiple jobs within the same employer group? There is a maximum of 4,400 but, if that can be exceeded and there can be multiple jobs, are there any constraints if those multiple jobs are within the same group, possibly on a specifically organised basis to circumvent the limit?
With those few small inquiries, I say again that we support the order and are pleased to see that NEST is making progress.
My Lords, I am grateful to the noble Lord, Lord McKenzie, for his support for this order and, indeed, for the support from my noble friend Lord German. I will try to respond to a few points, but I must say straight from the start that I will probably have to write to the noble Lord on many of his queries. This being quite a technical order with quite a lot of associated technical questions, I am afraid that I know my own limits. This one might take me beyond them, so forgive me from the start if I have to follow up in writing.
The noble Lord, Lord McKenzie, asked me for the latest figures about membership of NEST. I have those in front of me. It has been operating since July 2011 and automatic enrolment commenced, as we know, in October last year. We estimate that by the end of staging it will have 2 million to 4 million members and 750,000 participating employers. To the end of January, NEST has more than 200 participating employers, around 45,000 members and a little over £2.2 million in assets under management.
The noble Lord, Lord McKenzie, asked, in going back to the last debate that we had on the last order, about the percentage of average earnings that people will accrue as they enter retirement. If there is anything more that I can say on that, I will have to follow up in writing.
The noble Lord, Lord German, asked about next of kin and what is happening there. The requirement for NEST to have to consider next of kin is in line with the Administration of Estates Act 1925. In Scotland, a person is entitled to moveable estate on intestacy. These are very specific; the change allows NEST to determine who to pay survivor benefits to. The rules with a capital “R” are the NEST rules that support the order. On why the trustee’s discretion to pay survivor benefits is applicable to pots only under £5,000, the Administration of Estates Act specifies a limit on the amount of property allowed to be disposed of on death without the necessity for probate or other proof of title. That limit is currently £5,000.
The noble Lord, Lord McKenzie, asked about the position of self-enrolling members after the staging period. They will be able to join NEST, as NEST has an obligation to accept them. He also asked about what he described as the elongated staging profile. Currently, large employers have staged and medium employers will become subject to the duty from April 2014. Smaller employers will become subject to the duty from June 2015, and all employers will be in by February 2018.
The noble Lord, Lord McKenzie, also asked whether there is an update on the calculation of contribution levels. I think I am about to answer something that I promised to write to him about. In the hope that this answer will mean a shorter letter, if not another letter, the qualifying earnings band is from about £5,500 to about £42,500. A revision order has been laid in draft and will be debated shortly. The noble Lord is correct in saying that the contribution rates remain as in the 2008 Act.
That is very helpful. I am specifically interested to see, if it is available, what that would mean if one revisited the original Turner commission’s calculation to see what, over a working life with that earnings band and those contributions levels, that would be likely to give in terms of the level of replacement income for somebody about to retire. There was a specific calculation that drove many of these parameters at that time. If there is no update, it is of no great moment, but if there is, I would be interested in seeing it.
If there is anything available that I am able to provide, I will do so. The noble Lord also asked whether there were any constraints on minimum contributions within the same job. Where there is an upper limit on contributions into a scheme, however expressed, the scheme can still certify as long as the upper limit could not result in contributions that are less than those required by Section 20. I think I am right on that one.
Since I have run out of pieces of paper in order to try to respond to the questions that noble Lords have generously put to me today, I will conclude by saying that I am grateful for those contributions. The changes in this order are consequential, minor and technical. They are deregulatory and will ensure NEST continues to operate efficiently for employers and members who use it. NEST is critical to the success of automatic enrolment. I am grateful to noble Lords for their support today. I commend this order to the Committee.