(14 years, 5 months ago)
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Lord Kirkwood of Kirkhope
To call attention to Her Majesty’s Government’s plans to introduce automatic enrolment in workplace pensions; and to move for Papers.
Lord Kirkwood of Kirkhope
My Lords, it is a pleasure to open this short debate. If I may, I would like to preface the debate by welcoming the Minister to his new and interesting position. He still has that sunny disposition and smile on his face. I hope that it is there until 2015. With a bit of luck, I will try to help him to get there. We will do the best we can.
I have never had the opportunity to thank the noble Lord, Lord McKenzie of Luton, for the professional and collegiate way in which he, as a Minister, allowed me and other Opposition spokesmen to share some of the Government’s thinking. I appreciated that support, and look forward to listening with great interest to what he has to say in future; that is really a way of softening him up, because the full-frontal attack will come any moment now.
It is hard to cover this territory in 15 minutes, but the debate’s purpose is to allow the incoming Government to report progress on automatic enrolment and personal accounts. We should take time at this stage to reflect on some of the continuing concerns identified by the industry, because they are real. Some understanding of the timetable, and the planned next steps, would be extremely helpful. Noble Lords will know that the new NEST—the National Employment Savings Trust—is vested with its powers on 5 July, which is not a long time coming. It is an important reform and an important body. There is a lot of money at stake. The success of this policy programme is fundamental to the future provision of workplace pensions in this country.
The context is well known and understood across the whole House. Not only is the United Kingdom seriously personally indebted at the level of households—we have had some interesting discussions about that in the debate on the Loyal Address—but, looking forward to pension provision in the longer term, it has undersaved as a nation. We obviously face the financial constraints of which everyone is aware. That will become clearer later in the year.
I never tire of making the point that, as a country, we underestimate the impact that demographic trends will have on all of our policy areas. I attended an interesting PPI AGM yesterday where the point was made that the best projections we are all working on are estimates. If they are wrong by even 1 per cent in an upwards direction, there are some serious consequences. The noble Baroness, Lady Greengross, chaired the event, which was an interesting demonstration of how some of these estimates can be wrong. There have been underestimates in the past, and we must make proper provision for long-term saving for some of our citizens, who are just ignorant—in the best sense—of how long they will have to make provision for when it comes to their retirement: some 20 or 30 years. It is perhaps not surprising that some do not think about that because they are working out how to budget through the next week, never mind the next 20 or 30 years.
There is a need to understand the context, and to re-establish the consensus across the party divide if we can. Pension provision is a long-term problem. Of course, there might be tactical differences and different approaches in dealing with the next Comprehensive Spending Review provisions. However, we must not lose sight of the fact that pension provision is a long-term strategy. We must get it right for the long term.
The National Employment Savings Trust is an important element in all of this. I support workplace pensions. I was first introduced to the idea by a man called James Purnell, of whom noble Lords may have heard since he served on the Select Committee that I had the privilege to chair in a previous incarnation. Auto-enrolment is a key new factor in being able to encourage people to save properly.
The Government are new. We have had a period of purdah when everything has been in stasis and no one has been able to take things forward. The mid-2012 introduction date is fast approaching. Some clarification of the Government’s position on the review and its terms of reference would be useful. The scope and membership would obviously be part of that. How long is it going to take? When will we get access to its conclusions? Are we right to assume that it will include the delivery contract, which is quite controversial? By that I mean the contract with TATA to provide the default NEST pensions provision. We have already spent some £60 million on loans for the personal administration—that is, on PADA, which preceded NEST. Is there any further information about how that looks and what the Government propose to do about it? We would also like to hear from the Government about the annual management charges for personal accounts. All of that is simply to clarify the situation, so that the industry, which is interested in engaging with this as positively as it can, can respond as positively as it is able.
There are other, perhaps less obvious, questions about the review. There is a business department review of red tape, which will look at whether and how employers can certify existing schemes to qualify under the new provisions. There is a huge amount of red tape there. We know about this because we spent a long time discussing it in the course of the primary legislation. Will that be a factor? Is the review taking into account the business department’s interest in this important area of policy? It would be helpful to know that. Is it likely to be directly affected by expenditure cuts? We all expect the Comprehensive Spending Review in October to be quite difficult to handle. Will those CSR announcements indirectly or directly affect the proposals for personal accounts and auto-enrolment?
In the longer term, although still important, is there any fresh thinking about how the auto-enrolment personal accounts will impact on and fit with means-testing policy? This is a debate that I know the noble Lord, Lord Freud, is actively and rightly engaged in. He is trying to get some of these incentives changed and made more positive. It is difficult to see how you can be confident about deploying the NEST and personal accounts policy without being careful about how it fits with means-testing in the longer term.
The problems with this debate are very interesting. I recently had the pleasure of sponsoring a lunch here, where the pensions company AXA brought forward its research entitled Public Policy Research Report: Workplace Pensions. The results of this survey are very important. AXA carried out an equivalent piece of work in 2006, at the same time as the White Paper was published. It found some interesting concerns that needed to be addressed. Three years on, in December 2009, AXA repeated the research, covering a group of 300 employers of different sizes and scale and more than 1,000 employees, just to test what they knew and thought about these policy proposals. The conclusion, I think, is that support for this policy is waning. That is the worrying thing and it is my conclusion from reading this research.
Mr Steve Folkard, who is head of pensions and savings policy, reports in his foreword to the research that he expected support to grow between 2006 and 2009, but writes:
“However, in the three years that have passed the findings do not make for the most comfortable reading for policy makers”.
Looking at the detail, I agree with that statement. Mr Folkard concludes his foreword by saying:
“NEST is designed for the low to average wage earners and its success will be judged not just by the extent to which the number of people saving for retirement increases but whether the aggregate amount saved by the population increases too”.
I agree with that.
The survey has five bullet point findings which are worth rehearsing. First, it states:
“Support among employers for the introduction of NEST has dropped to 26%”.
That is a fall of 26 points over the three-year period, which is of serious concern. Secondly, it states:
“There has been a 7 point fall in companies being able to ‘absorb the costs and comply’”.
Thirdly, it states:
“19% of employers say they will reduce employee numbers as a result”—
of this policy’s introduction. That is “up 3 points”, which is bad news. Fourthly, there is a piece of good news. The survey states:
“21% of employers would level down to 3% per cent”—
there is a problem with levelling down—which is,
“5 points lower than in 2006”.
However, I am sure that colleagues will be concerned that 21 per cent of employers are considering levelling down. Fifthly, I was interested to note that the survey stated that,
“matched contributions is the single biggest issue that would encourage employees to raise their contributions followed by better awareness of what they may receive in retirement”.
I hope that the Government will study that survey carefully as it raises concerns that we all share.
I believe that two or three points need to be added to that list. Size of business is an issue. There is clear evidence in AXA’s survey that smaller companies will struggle to deal with all this to a far greater extent than some bigger businesses. We need to consider that further. If we are not careful, low-income workplace savers, particularly early joiners who are close to retiring age when they join, may get no benefit whatever from this system. That also needs to be looked at. Going forward over the next three years, opting out will be even more important for reasons which we all understand; that is, household domestic budgets will be under even more pressure. People will think of this measure as a wage cut if its positive aspects are not explained to them to enable it to be taken forward.
What can we do to help? What should we be looking to do? I look forward to hearing about the review. I understand that that discussion may be premature in that the Government have been in office for only 20 minutes, as it were, and reviews are reviews.
Lord Kirkwood of Kirkhope
I hear cries of “Too long” from a sedentary position. We have been in office longer than 20 minutes, but these are early days. However, I hope that the Minister and the department will understand that we need to take account of the urgency of this matter. The Government should restate their position as energetically and urgently as they can. They must demonstrate enthusiasm and demonstrate that they are up for this fight as it will be a struggle to win hearts and minds to make this policy successful. It is clear to me that we need to provide more flexibility for employers, and soon. We need to be able to access better information systems that explain the long-term benefits of this policy for employees and employers. We need to be able to do that in pretty short order if this policy is to succeed.
In the longer term we need to look at the promise of an evaluation when the “steady state” is reached in 2016. It is a shame that this has slipped back. I understand the reasons why the previous Administration slipped back the timescale slightly. I supported that as the original timescale presented many challenges. However, we will now not have a fully functioning 8 per cent annual saving amount until 2016. That is a long time coming and people will suffer from being undersaved between now and then as a result. We also need new impact assessments of the cost provisions that accompanied the draft regulations. I do not think that the earlier cost assumptions were sufficiently realistic. There should be better information. The department should have done more work since the previous assumptions were published. It would give the industry confidence if the department undertook to set up a working group with it and other interested parties in order to engage with the deployment and implementation of this policy. That is important.
This is a very important piece of legislation that we must get right. There is a case in the even longer term for the Government to think about creating an independent body to formulate strategy for long-term savings. It should be broadly drawn, because it is important to try to develop and enforce a consensus in this important policy area. It is too important to get wrong. I hope that today’s debate will help to shed some light on the Government’s thinking. That was the purpose of tabling the Motion in the first place. I look forward to contributions from colleagues and others. I beg to move.
Lord Fowler
My Lords, I congratulate my noble friend on his speech. We have spent most of our time in the other place and here debating against each other, but it is extremely good that on this, and I suspect many other issues, we are very much on the same side. He made an excellent speech. I also congratulate the Minister on his appointment. He comes with a wealth of knowledge and we wish him the very best of fortune in his new post.
I start in a way which may seem a little away from the detail of automatic enrolment, but I hope that the House will soon see the relevance. Next week is the 40th anniversary of my coming to Westminster in June 1970. I spent 31 years in the House of Commons and nine in this House. I have to say that 1970 was another age. There was no Portcullis House with private offices and research assistants. I shared an all-party office. On one side I had Kenneth Clarke with his smelly cigars and dark brown Hush Puppies—or was it the other way around? Facing me was John Prescott—soon to be of this parish—who visibly scowled as I dictated down the telephone press releases defending the Government of Ted Heath. At the end of the room was our very much non-coalition partner, Cyril Smith, who happily did not come too often to the office. The noble Lord, Lord Pendry, and I tried to find space as best we could. To add to my problems, the first Queen’s Speech of the new Government abolished my then constituency of Nottingham South. It was not altogether a happy beginning at Westminster.
What is the purpose of this example, apart from alerting news editors throughout the country of this significant anniversary next week? My purpose is to make a fundamental point about the history of pensions policy in the 40 years that I have been at Westminster. In this period, we have had one government scheme after another. In my first Parliament, we dealt with the pension plan of Dick Crossman and then that of Keith Joseph. When in opposition I became my party’s spokesman on pensions and social security—to universal surprise, including my own—we had to deal with the Barbara Castle-Brian O’Malley plan and, in particular, the unlovely-named state earnings-related pensions scheme, SERPS. I learnt during that first debate how it is in Westminster that when the subject of pensions goes up on the screen, Chambers—here and in the Commons—miraculously empty, much to the disadvantage of our debates.
I admit that when I got into office, Parliament had to deal with the Fowler plan on personal pensions and the end of discrimination against early leavers. Then we had the plans of Peter Lilley in the Conservative Government, while under the party opposite the ideas of Frank Field were considered—briefly. His ideas were so unthinkable that he was immediately sacked. Later, when plans were subcontracted to the noble Lord, Lord Turner, we made more substantial progress.
In the past 40 years, we had the basic pension which was earnings-related; then it was price-indexed; now it will be earnings-related again. Also, there has been one variation after another of the state second pension. We have had SERPS; we have had modified SERPS; we have had son of SERPS; and now we have an ailing cousin of SERPS called S2P. At the same time, we have seen the decline, and almost fall, of final salary occupational pension schemes in this country, for which, frankly, the party opposite must bear some responsibility. I am trying to put that in the most moderate way by saying “some responsibility”. The noble Lord on the Front Bench shakes his head but I think that the party opposite must bear some responsibility for it, although I certainly accept that it does not have total responsibility. However, we should now be trying to get as much agreement between the parties as we possibly can on the way forward.
Pensions are a long-term investment and require long-term policy-making. In the current economic circumstances, it may not be possible to introduce every part of such an agreement at the same time, but I do not think that that should dissuade us, even at this point, from seeking as much agreement as we can. Indeed, I think it can be argued that in the past we have been too impatient in trying to introduce pension plans—not least in implementing the original Beveridge proposals. Therefore, my first point in this debate is that we should seek to agree on the goal of a pensions policy, getting as much agreement between the parties as we conceivably can and, above all, seeking to avert a pensions crisis whereby many of those in retirement will be living in hardship. That, I believe, is a cause that all parties can embrace.
I suggest that the basis for such an agreement—in a sense, it is what I proposed 25 years ago—is a twin-pillar system. The first pillar is undoubtedly state provision. The second pillar is personal provision, very much including workplace pension schemes of the kind that my noble friend has described. I say in parenthesis that such a twin-pillar system has been in place in Switzerland for many years, and it has worked to the great satisfaction of the public there. However, the important point is that both sides are essential. Without good state provision, you will not sufficiently encourage personal saving. The basis must be as generous a platform state pension as can conceivably be afforded. The structure that we have at present is not particularly generous but it is, without doubt, extremely complex and administratively extremely expensive. It is, above all, ill understood by the public. I remember that when we carried out our own pension review in the 1980s, most people who were members of the state earnings-related pension scheme did not know what the scheme was. I wonder how many today know the detail, or even the outline, of S2P. I would guess not very many. I also wonder how you can plan for old age if you do not know the basis of your pension provision.
Therefore, I think that the basic state pension should now be put together with the state second pension with the aim of lifting the pension level above pension credit. There would then be a decent platform pension. I accept that it may not be possible to do all that at the same time but affordability can come, for example, from adjusting the pension age. Again, it was a quarter of a century ago that I advocated flexible retirement up to the age of 70. As for paying the pension, I propose—it has already been proposed and I think it is very sensible—that you start with the over-75s and then move down the age scale. However, my basic point is that even in the present circumstances we can make some moves towards the goal of better pensions in this country.
I then come to the second pillar—personal provision. Here workplace pension schemes are fundamental and I certainly support everything that my noble friend has said about that, particularly what he said about automatic enrolment. As he said, the policy must be right in the long term. Automatic enrolment is an important step forward. I listened with concern, as I am sure the House did, to the figures of the survey that he quoted. That is not good news for future policy. He made important points about the detail of the automatic assessment. I shall not repeat all those points but they are important.
The essential point is that we know enough about how people put off making a contribution to realise that something of this kind is needed in the public interest. It is also entirely fair that personal pensions should be a combination of personal contribution, employer contribution and tax relief. Again I remember when we were going round this course in the 1980s with the state earnings-related pension scheme. At one stage we were proposing that it should go and considering what we should put in its place. I proposed exactly the kind of workplace pensions now in legislation. I think that we proposed a rather bigger contribution from employers than that being proposed today. The Treasury predictably opposed us on grounds of the tax relief bill and the decisive intervention in that debate came from the Prime Minister, Margaret Thatcher, who supported absolutely our proposal, including employer contribution.
It should be emphasised and underlined that a pension contribution is a very good investment for any company that is intent on trying to keep good staff and employees. We are also trying to make saving as attractive as we possibly can. In that respect I welcome very much the decision of the Government to do away with the absurd restriction that you must take an annuity at the age of 75. We have been fighting about that in the previous Parliament and before. There was never any particular justification for that policy and it is encouraging to see the Government moving so quickly. I am sure that my noble friend needs no instruction here, but I observe that not all pensions policy is made in his department. I am sure that the ex-Pensions Ministers from the previous Government who seem to be around the House today did not have their hearts set entirely on defending compulsory annuities at 75. I note that the noble Lord does not shake his head on this occasion.
However, that is what the Treasury decreed. Let us make no mistake; it is not something exclusive to Labour Governments. I say from personal experience that such interference is not unique. I could write a chapter of a book on how my own review was damaged. In fact, from memory, I think that I have written a chapter of a book on that. Let us hope that the sensible decisions on annuity mark a new era in the intervention of the Treasury.
I always said when carrying out my own review that we were making policy in a cold climate. If it was cold then, it is positively arctic today. Even so, I believe that we can make progress. The Chancellor has already shown that on annuities. As for the parties, we can certainly debate the speed of improvement and the other important improvements that can be made for, say, married women and the details of automatic enrolment. It would be of enormous benefit if the parties, after 40 years of debate, could agree the principles and the structure of what we want to achieve. That would be an enormous step forward and it would also be in the spirit of today when we are all seeking as much common ground as we conceivably can in all areas of policy-making. We are seeking to prevent hardship in old age and pensions policy is a crucial part of that.
Lord Lea of Crondall
Can I be clear that the noble Lord is strongly supporting the automatic enrolment principle? There is all this talk about people not being aware of it, not supporting it, and so on. We have had the big review—the Turner review—and we have a policy to make sure that for the first time everybody has some buy-in through the company for which they work. It includes both employers and employees, and we have heard neither the noble Lord, Lord Kirkwood, whose speech I very much admired, nor the noble Lord, Lord Fowler, saying that we have to sell this harder despite some of the propaganda against it by the private insurance industry.
Lord Fowler
It is marvellous that when one tries to reach agreement the noble Lord immediately looks for disagreement. There is no disagreement with him on that point; there is no disagreement from my noble friend and none from me. We want automatic enrolment. I said that about five times but the noble Lord may not have been listening at the time. Of course we need to promote and sell it, but let us not have a bashing match and go back to the old business at which the noble Lord is rather adept of having a go at the industry or whoever his latest target happens to be. Of course I agree with automatic enrolment and of course it needs to be sold. That is also the view of my noble friend.
Baroness Hollis of Heigham
My Lords, I, too, thank the noble Lord, Lord Kirkwood, for introducing this debate today. There is very little that I would disagree with within what the noble Lord, Lord Fowler, said. The crisis in occupational pensions, which certainly exists, has a deeper base, which is the issue of longevity. A quarter of all women, which I reckon is, or was, about three of us in this Chamber, will live to 95. Fifty years from now, the Lancet estimates that the median life expectancy will be more than 100 years—102—with half above it as well as half below. There are now more 65-year olds and above than there are under-16s. We all live a year for every three.
It was not until about 2005-06 and the report of the noble Lord, Lord Turner, that actuaries started building that in, after five years in which many companies had been taking contribution holidays. The resulting panic of renewed employer contributions at much higher levels accentuated by FRS 1719 and the collapse of the markets since then means that when I last checked, only four of the FTSE top 100 companies still had their DB schemes open to new members. We all know that in DC schemes, the employer’s contribution is 6 per cent, rather than 16 per cent in DB schemes, so the employee gets a smaller pot, together with investment risk, disinvestment risk, inflation and longevity risks, all falling on the shoulders of people who find pensions intimidating. We end up in the DC private sector with only 40 per cent of people covered, compared to 85 per cent in the DB public sector. It is coverage and adequacy as much as pension type that divides private and public sector pensions, which is why I so welcome auto-enrolment, either into an existing pension or into a shell stakeholder—which may be the most important element of all this, where we know that if employers do not contribute, employees will not, and which will therefore have an employers’ content for the first time—and NEST.
Will auto-enrolment work? Yes. When Scottish and Newcastle went from opting in to opting out, it went within a matter of months from 45 per cent contributions to 90 per cent contributions. The only people opting out were student workers. So there is huge potential. As always, I am especially concerned with the implication of auto-enrolment for the low paid, especially women. Should low-paid people be auto-enrolled? Without trying to go over the arguments that some of us raised in debate on the Queen’s Speech, only if it is safe to save and only if it is attractive to save. We must make it safe and attractive. Here, I entirely support the noble Lord, Lord Fowler. Increasingly, there is all-party consensus and full industry support for a new state pension which lifts people off means-tested pension credit.
As Steve Webb, who is now the Minister for Pensions, and I argue in a pamphlet, which can be found at www.soapboxcommunications.co.uk/anewstate pension.pdf, we could fund that pension by putting into one pot BSP, the state second pension capped at 2020 to give the extra headspace, and pension credit. At a stroke, there is a pension floating people off pension credit and thus making it safe to save and pay to save. Without such a platform, too many people will be at risk of mis-selling, and if we do not do it, issues such as annuitisation at 75 will be at risk. If we scrap annuitisation at 75, which I support, then, but only then, if it is underpinned by a safe new state pension, savers would no longer have to annuitise a slice of their pot to keep them off pension credit should they blow it all. A new state pension also sorts out the NEST problem, the removal of annuitisation at 75 problem and the stakeholder problem. That is not bad, and it is all for broadly the same cost as now.
In order to make it attractive to save, we have to allow low-paid people, who often have no other savings, access to a slice of their pension fund, perhaps represented by the 25 per cent tax-free lump sum, otherwise women, in particular, will not save if they have to lock the money away for 40 years when they may face all sorts of financial tumult in their working lives from divorce, disability or the need for running away money. We need to find appropriate low-cost vehicles in which to save. I have great hopes for auto-enrolment and also for employers’ contributions into existing shell stakeholder pensions. For example, we know that where employers do not contribute to a shell stakeholder pension, only 13 per cent of employees contribute, but where employers contribute, something like 80 to 90 per cent of employees contribute. As a result of NEST, people who are lower paid or are working in businesses with fewer than five members of staff—the cut-off point for stakeholder pensions—will have the opportunity to come into auto-enrolment.
I shall raise some detailed issues about NEST, and I hope the Minister will bear with me. I hope they will be considered in the 2017 review. NEST is targeted at the low paid, who are disproportionately women, who are probably earning between £10,000 and £20,000 a year. Given that they are low paid, to start with the NEST pots will be pretty small. I accept that you cannot ask kitchen-table employers to contribute more than 3 per cent at this stage, although I would hope that in time that would rise to at least 5 per cent.
I shall put four propositions to the Minister that would make NEST work and make it safe and attractive, which are the two criteria that dominate the debate. When NEST has rolled out, employers will contribute only 3 per cent, which will be 8 per cent in total, on earnings above the LEL. That means that someone on half average earnings—£10,000 to £11,000—will get a pot built on contributions of only just over half of that—£6,000—unlike other occupational pensions, which take the whole of the earnings range into account. I believe that where an employee wishes to contribute on all her earnings, including those below the LEL, as happens in other OPs, she should be allowed and encouraged to do so, and where she does, so must the employer. To do the full range for somebody on £11,000 a year would cost the employer an additional £4.50 a week, but the employee’s pot would more than double. Paying in only above the LEL for, say, 20 years on £11,000 a year would give her a pot of around £19,000 or an extra pension of around £19 a week, on which she promptly loses 40p in the pound on pension credit, so she ends up only approximately £11 a week better off. Put in the new state pension, and she would keep that £19—as opposed to £11—in full. Allow—indeed, encourage—her to pay on all her earnings, at a cost to her of an extra £5 a week, and her pot doubles to some £35,000 and she gets £35 a week, which brings her off pension credit. She keeps every penny and has a real, decent opportunity of comfort. So she could get £11 a week, £19 a week or £35 a week. By doubling her contribution, she receives three times her pension, and by making a new state pension, she receives double her pension—a huge increase for a modest additional cost, which, as I say, is about £4.50 a week or so for the average employer.
Secondly, I want NEST to offer access to that 25 per cent lump sum to encourage saving. After all, if a financial emergency hits you, it is much cheaper to borrow from yourself than from loan sharks charging 500 per cent APR down the road.
Thirdly, I want NEST to raise its ceiling in due course from £3,000 a year. I know that providers of other pensions were worried at the time that money that goes to them will be diverted, but, frankly, once NEST has settled down, we should permit it. Why is it okay to have a £10,000 cap on ISAs but only a £3,000 cap on pensions—on NEST? That is nonsensical.
Fourthly, NEST and other auto-enrol schemes really must help us with the problem of orphan pots. A hairdresser may have had a couple of periods of self-employment and built up a small pot of £2,000. She has £18,000 in her NEST pot on retirement, which is modest, but she cannot access that £2,000 because it is floating out there in the ether. She cannot trivially commute it into cash, because her NEST pot is above the trivial commutation limit. She cannot annuitise it because it is too small for providers to do so. She cannot import it into her NEST holding to raise it to £20,000 because of the preliminary rules that we have established and which should be reviewed. I know that there is good will in the DWP to attach it, so I hope the Minister can tell us how far it has gone with this when he replies. It would be unfair if someone in that hairdresser’s position had saved £20,000 but cannot touch 10 per cent of it because of completely arbitrary—and, if I may say so, man-made—rules.
Finally, I will go slightly wider than the topic, if I dare, and say a word about public sector pensions. I accept that government will wish to review how sustainable they are in the current climate. I am a new governor of the PPI—a long-established governor of the PPI, the noble Baroness, Lady Greengross, is sitting behind me—which is researching possible options for this. One option, which I really want to float today, is for DB for earnings that attract a standard rate, and then a flip to DC on earnings at a higher rate or at another figure of, say, £35,000 a year or £30,000, so that the broadest shoulders bear the risk and those who are most in need of protection have the security of a DB slice. It is a hybrid scheme, and your Lordships are quite sensitive about hybrid schemes at the moment. I regret that I have not been able to cost the savings, but it would be fair, protect the low paid and be simple. Everyone would know what it means, and it would share risks, allow public sector employers to have a better stab at protecting and predicting future liabilities. It would also discourage the habit of late-life promotion for white men to enhance their pensions.
I very much welcome today’s debate. I hope that the Minister will clearly show his support for NEST today, flag up that we will have a review in 2017, confirm that some of the issues that have been raised today and that could transform the financial outcomes for women in particular will be considered, and that he, like the noble Lord, Lord Fowler, and I, will join in the general consensus that the only way to get the low paid into pension provisions is, first, to make a new state pension safe and, secondly, to make it attractive. Ninety-five per cent of the bits are in place, and it would not take much to have a new picture on the jigsaw box. We would then have a landscape that was built on consensus and that could last us for a couple of generations.
Baroness Greengross
My Lords, I declare an interest as president of the Pensions Policy Institute and head of the UK International Longevity Centre. I, too, congratulate the noble Lord, Lord Kirkwood, on securing a very timely debate. He has raised some important issues and asked some significant questions. I also congratulate the other speakers today, who have been quite exceptional. I know that those who follow me will be the same, so my comments will be brief.
I am supportive of auto-enrolment but above all of the important consensus that has emerged about long-term pensions issues. Personal accounts may not be suitable for all employees due to their interaction with means-tested benefits. This particularly applies to workers over 55 years of age, who will always have insufficient time before retirement to accumulate a significant fund under the scheme. However, they may have just enough pension to reduce any benefit entitlement, including passported benefits, such as council tax relief, pound for pound. As I have said previously, this does not mean that people should not be auto-enrolled, but it implies that people will need, as the noble Lords, Lord Kirkwood and Lord Fowler, said, clear information and generic advice to help them to make informed decisions about whether they should stay in or opt out of personal accounts
The noble Lord, Lord Fowler, pointed to the extraordinarily awful levels of ignorance among the general public. The issues are who pays for the information and who will provide the information and advice, particularly down the line at the decumulation stage when employment has ceased. An important test of the personal accounts policy will be whether it is possible to design information and generic advice in a simple and easy-to-understand way to help people to decide whether they should opt out of personal accounts.
There are policy options that the Government could consider to improve the incentives to save for some groups, particularly those who are heavily at risk. I hope that the Minister will be able to indicate some of the thinking along these lines. Increasing the trivial commutation limit or introducing a limited pension income disregard could improve the returns from personal accounts for some individuals at a cost of increasing government expenditure on means-tested benefits.
I know that these are difficult decisions for the Government to make. I agree with the noble Lord, Lord Kirkwood, that a working group of experts to consider some of the important issues that have been raised today might be helpful in taking things forward. We must get this right in the long term as well as the short term.
Baroness Noakes
My Lords, for the avoidance of doubt, I draw the attention of the House to my interests as shown in the register. I do not believe that any of them constitutes a relevant interest for the purposes of my participation in today’s debate, but in these difficult times it is always better to be safer and certain. I congratulate the noble Lord, Lord Kirkwood, on securing this debate so early in this new Parliament. I also congratulate my noble friend Lord Freud on his appointment as Minister and I look forward to his response.
As my noble friend Lord Fowler pointed out, pensions are one of those topics that attract only a small group of usual suspects, who usually know rather a lot about the subject, and so it has turned out again today. It was certainly the case when we considered the Pensions Act 2008, which I am sure is engraved on the heart of the noble Lord, Lord McKenzie of Luton, who so ably led for the Government on that Bill. I support what the noble Lord, Lord Kirkwood, said about the noble Lord, Lord McKenzie of Luton, and his handling of the Bill—indeed, the whole of his portfolio—as Minister.
When I took part in the debates on the Pensions Act 2008, sitting in the seat now occupied by the noble Lord, Lord McKenzie of Luton, I was grateful for the briefing provided by a number of outside bodies, but in particular that from the Confederation of British Industry and the Association of British Insurers. I am grateful to those bodies for briefing me again today for the purposes of this debate. It is a pity that the noble Lord, Lord Lea of Crondall, is no longer in his place after intervening earlier and implying that the attitudes of industry were inimical to auto-enrolment. I can certainly confirm that the Association of British Insurers and the Confederation of British Industry support auto-enrolment and are trying to work on the practicalities of making it a success.
As has already been said in the debate, there was a broad consensus around the Pensions Commission’s proposals for auto-enrolment as the basis for achieving a significant increase in the number of those saving towards their retirement. My party always registered some caveats about the scheme, in particular in relation to costs, to which I should like to return later. I understand that the coalition’s Pensions Minister in another place, Mr Steve Webb, has said that the Government will go ahead with auto-enrolment but that they will review the specifics of the scheme. Like the noble Lord, Lord Kirkwood, I hope that my noble friend can give some more details today about that review. He must be aware that employers and the pensions industry need to know what this review will entail, who will undertake it, when it is expected to be completed and who will be consulted. If there is any substantial uncertainty about the way ahead, that will inevitably affect the willingness of the business community to devote significant resources to continuing to prepare for something that may change. I hope that we can have more clarity on this today.
In my view, the previous Government’s approach had one fundamental flaw. They built their scheme of auto-enrolment around the proposition that every employee earning above the threshold should be included. I believe that this is an unrealistic approach, which in practice has produced real difficulties. The prize for society as a whole is to get a significant number of people saving for their retirement and saving more than was the case in the past—but not every last one. Policies that try to do too much often run into problems, as we have seen with many grandiose projects in the public sector. In the world from which I come, achieving an 80/20 solution—that is, 80 per cent of the benefits for 20 per cent of the costs—would be regarded as an excellent outcome. However, the former Government pursued the last percentile of benefit regardless of its cost.
Auto-enrolment is due to start in 2012, which does not leave much time to sort out the remaining details. The business community believes that the Government should look again at the draft regulations. The previous Government’s first shot at the draft regulations was pretty dreadful and business bodies and the pensions industry have been working with the department to try to get them into a shape that is acceptable. While this has largely been achieved, there remain aspects that cause disproportionate cost and complexity for employers. Will the new Government’s review be looking again at these regulations in order to see whether greater simplicity and lower costs can be achieved?
The noble Lord, Lord McKenzie, will recall our discussions about qualifying earnings, which have been alluded to. These had a particular impact on employers who already had good pension schemes but who used definitions that, although they are common in the private pensions industry, are quite unlike those used in the Act. The noble Lord was helpful and facilitated some amendments to the Bill, which allowed the regulations to accommodate the different ways in which employers are structured as regards their pensions, but that has simply deferred the problem to the regulations. I understand that the regulations in draft still do not recognise the difficulties for employers. The business sector has developed a self-certification approach that is practical and delivers a high degree of conformity, but that has not yet found favour with the Department for Work and Pensions. I ask my noble friend to ensure that his department will start to operate in a pragmatic way that supports employers who are trying to deliver good workplace pensions rather than penalises them for not guaranteeing the last percentile of benefit.
In addition to the qualifying earnings problems, the timing arrangements for auto-enrolment into personal accounts are also a problem. It is inefficient if, as currently planned, the rules require the enrolment of people who are likely to opt out—short-term workers, for example. Business would like enrolment to be delayed for, say, 30 days, which would avoid most of the unnecessary paperwork. To date this has been resisted, so will my noble friend ensure that the department looks at this again? The Government also need to look again at the impact on very small businesses. Again in their zeal to pursue the last percentile, the previous Government included even the smallest employer, including someone employing one person, such as a nanny or a housekeeper.
The previous Government also rejected using HMRC to administer the scheme alongside PAYE and, in so doing, they created an administrative cost for the scheme and a burden for small employers that are disproportionate. I hope that my noble friend will say that the new Government will look again at taking micro-employers out of the ambit of auto-enrolment.
The previous Government never faced up to the very real threat to workplace pensions of employers levelling down to the personal accounts scheme. Every time the Department for Work and Pensions insists on an employer-unfriendly rule, it makes it harder to maintain an existing workplace pension scheme and increases the likelihood that employers will simply default into the personal accounts scheme. This will hurt employees because most workplace schemes contribute more than is required under the 2008 Act. Our Government need to recognise that encouraging workplace pensions means encouraging employers, not hitting them with administration and regulation. This is part of a bigger theme of government action harming workplace pensions. It started in a big way with the ACT raid of 1997 and has got worse over the past 13 years. I hope that we can return to those broader issues on another day.
I emphasise that there is one area in which the business community does not want change—the timetable for implementation. I know that when my party was in opposition we criticised the previous Government’s draft timetable, which will delay full implementation of the employer contribution until 2017, but I believe that it is a pragmatic approach that allows a reasonable time for employers to plan for the cost implications of auto-enrolment. I hope that my noble friend can confirm today that the new Government will not shorten the timetable.
I turn now to costs. In opposition, my party did not believe that the personal accounts scheme could be delivered for the 0.3 per cent annual charge that the Pensions Commission calculated, and so it has proved. While there will be an annual charge of 0.3 per cent, there will be a whopping 2 per cent upfront charge in order to cover the set-up costs. In addition, according to a Written Answer that I received from the noble Lord, Lord McKenzie of Luton, just before the Dissolution of the previous Parliament, the personal accounts scheme will start this summer with a debt of more than £60 million and over the following five years will borrow another £400 million from the Government. There is no sign that when we get to 2015 the appetite for public money will have run out.
While the 2 per cent upfront charge may be necessary to keep these huge borrowing figures from ballooning even further, no date has been set for its removal. The CBI is concerned that the 2 per cent charge will increase opt-out rates and thereby defeat the purpose of the policy. The perceived returns on saving will simply not be sufficient, particularly for older workers being enrolled. Is my noble friend satisfied that the costs that underpin the need for this upfront charge and the massive borrowing are reasonable and that the scheme has not been overengineered?
Perhaps more worrying is that the previous Government announced in March that they proposed additionally to subsidise the scheme to an unspecified extent on the basis that it would have to accept all comers, which the commission had not thought necessary when it produced its 0.3 per cent costing. Can my noble friend say today what this proposed subsidy will cost? Do the new Government sign up to the subsidy on top of the high lending that has to be provided to the scheme?
Lastly, there will also be costs to the Pensions Regulator for policing auto-enrolment. I understand that those costs, too, will be met by further public money. Will my noble friend say how much that will cost? Why is the cost of regulation not borne by pension savings, as happens with other forms of pension saving?
I do not have to remind my noble friend that we live in an age when public expenditure must be cut and that we cannot afford, as the previous Government planned, to carry on spending regardless of the consequences. That may mean that the scheme for auto-enrolment and personal accounts has to be trimmed in order to fit what can be afforded. We cannot have everything that we want. I support auto-enrolment, but not at any cost. I have major concerns about the cost to employers and the cost to the public purse. I hope that my noble friend will be prepared to take radical action when the Government review their inheritance on auto-enrolment. When they do that, I hope that they will also abandon the notion of chasing every last percentile.
Lord McKenzie of Luton
My Lords, I join other noble Lords in thanking the noble Lord, Lord Kirkwood, for initiating this debate, which gives us a timely opportunity to understand the proposed direction of travel of the coalition Government on this important matter. I thank both him and the noble Baroness, Lady Noakes, for their kind comments.
The debate gives us a chance to test whether the broad consensus around pension reform hitherto still holds. Noble Lords will be aware—it has been referred to today—that this was anchored largely in the work of the Turner commission. It is a particular pleasure to note that another member of that commission, Jeannie Drake, will shortly join your Lordships' House on the Labour Benches.
It has been a very good, if short, debate. The noble Lord, Lord Kirkwood, called on the Government to show some enthusiasm for auto-enrolment—I certainly endorse that. He and others have pressed on the scope of the review, to which I should like to return in my contribution. I congratulate the noble Lord, Lord Fowler, on his upcoming 40th anniversary. I am delighted that he will soon be reunited with John Prescott.
We had a fascinating trip down the memory lane of pensions: graduated pensions, SERPS and S2P. I say to the noble Lord that S2P has been simplified, squeezing out some of the earnings-related component of it. Perhaps we might find another opportunity, together with the noble Baroness, Lady Noakes, to debate what has happened to defined benefit schemes. I might just ask the Minister whether the so-called tax raid on pension funds will be reversed by the coalition Government.
As regards the need to annuitise at 75—or the need not to do so—I have been an agnostic on that because it has nothing to say to those who are likely to benefit for auto-enrolment. Auto-enrolment is to deal with people who undersave, who need their income in retirement and who do not have the opportunity to store it up and pass it on as an inheritance. When the proposals come forward, we will look at the tax treatment of pots that are left and then passed on as an inheritance, and whether that properly takes account of inheritance tax. It would be quite wrong to use it to open up a tax loophole.
My noble friend Lady Hollis, as ever, made a thought-provoking contribution, stressing particularly issues around longevity and the huge potential for auto-enrolment. She spoke of the challenges of small pension pots and the emerging consensus around a new state pension. I take the point exactly that, if that were to be achieved, it would help on issues around the interaction of benefits.
The noble Baroness, Lady Greengross, remains supportive of auto-enrolment, and again stressed the importance of consensus, on this issue of the interaction with the benefit system. Consensus was an issue that the noble Baroness, Lady Noakes, also acknowledged. I am intrigued about proposals on the scope of coverage and all employees not necessarily having to be covered. I accept that issues around self-certification, trying to give administrative easements to employers while still encompassing a broad range of employees, have proved a challenge. I think that there were a couple of goes at it and would acknowledge that it was unfinished work in progress when we left office.
The Turner commission was established to consider the long-term challenges facing the UK pension system, characterised by undersaving for retirement, inequalities and complexity in the state pension system and demographic and social change. Changes to the state pension, making it fairer and more generous, were implemented from April this year, providing a firmer foundation upon which people can build savings for their retirement. Notwithstanding these improvements to the state pension system, including the coalition Government’s announcements about uprating, which I welcome, it will not provide the retirement income to which many people aspire. It is estimated that around 7 million people are currently not saving enough to obtain a reasonable replacement rate of income in retirement. In excess of 40 per cent of working-age employees are not contributing to a private pension.
The reasons for that are complex, but they include issues around low financial literacy, inertia, lack of provision especially for those on low and moderate incomes, as well as declining employer provision away from defined benefit schemes towards contract-based DC schemes—hence a role for government intervention. That government intervention had two key components. One was a system of automatic enrolment requiring employers to make a minimum contribution to their workers’ pension funds and a new national pension scheme designed to provide a simple, low-cost way of saving for low to moderate income earners—originally personal accounts. Put simply, that was our starting consensus, enshrined in primary legislation in the Pensions Act 2008. Like the noble Baroness, Lady Noakes, I remember it well. But the consensus did not just involve political parties; it involved a significant range of stakeholders, including the CBI, the TUC and the ABI. By and large, that consensus has held, which is to be welcomed.
As ever in these matters, the challenges come in the detail of the earnings on which employers’ contributions are to be made; what the mechanics are surrounding the process of auto-enrolment and the right to opt out; what safeguards there are in the system to discourage employers with existing provision from levelling down and what existing provision satisfies the auto-enrolment tests; what information should be provided to employees; whether advice should be provided to all or any groups of individuals being auto-enrolled; and what compliance and anti-avoidance measures are required. On the low-cost national scheme, there are issues around not being favourably treated so as to prejudice private sector providers; the funding and charging arrangements; the sheer operational and governance issues of a trust-based scheme with potentially 1 million employers and several million members; the nature of the investments of the fund; and how lifestyling is to be organised for so many members—indeed, how the scheme administration is to be accomplished.
Much of this, subject to any review which the Government may wish to undertake and advise us of today, is settled. Regulations are in force which prescribe the arrangements which the employer must follow to comply with the employer duties on automatic enrolment. I believe that there was a broad consensus on that; we had two goes at it to try to improve the original draft, and I thought that there was an acceptance that there was a considerable improvement. There were issues around information requirements, opting out, and duties towards voluntary savers. Existing regulations also cover the point in time at which employers will have to start to comply with their duties and the minimum contribution level which employers and employees will have to make.
Arrangements have been made for the national scheme which provide for the winding up of the Personal Accounts Delivery Authority, as it has completed its task of providing its advice and designing and developing the infrastructure of the new low-cost scheme. Statutory instruments have given effect to the scheme order, which will actually create the new scheme—to be called the National Employment Savings Trust or NEST—as a trust-based, occupational pension scheme. This is currently due to inherit property, rights and liabilities from PADA in July 2010 and thereafter to be responsible for implementing and running the scheme.
A lot has been accomplished but there is a lot of work still in hand. Like other noble Lords, I acknowledge the desire of the coalition Government to take stock and review matters, and this obviously raises a number of questions. We have heard some of this from other noble Lords, but I should be grateful if the Minister would deal with the following points, either in responding to this debate or later in writing.
We understand that there is to be a review of aspects of auto-enrolment. Like the noble Lord, Lord Kirkwood, and the noble Baroness, Lady Noakes, I ask the Minister to tell us a little about the scope of the review and what drives its timing. I think that this is a separate review from the 2017 review. I take it that the coalition Government remain committed to the concept of auto-enrolment, and that this is not to be abandoned. I accept that already from the tenor of today’s debate.
Is it envisaged that the scope would remain as currently planned, or are there any proposals to curtail the range of employers subject to the duty or limit the range of income to which the duty applies?
As currently planned, the auto-enrolment process would commence in 2012 and be staged over a four-year period so that all employers would be within the duty by 2016. As for employer and employee contributions, the phasing currently provides for an initial period where minimum employer and employee contributions would commence at 1 per cent each and not reach the full 3 per cent and 5 per cent respectively until October 2017. Is it envisaged that either of these would change, and is it the Government’s desire to accelerate the employer duty obligations, leave them unchanged or introduce them at a slower pace?
Fears of employers with existing provision “levelling down” have been ever present, despite DWP research that shows that this is generally unlikely. Are the Government contemplating any further arrangements to allay any such concerns, which we have heard expressed again today?
On a wider point, one of the commitments in the coalition programme is the undertaking to explore opportunities for people to access part of their pension early, presumably looking at the New Zealand and US experience. I know that this concept is much beloved of my noble friend Lady Hollis, although of course not beloved of the Treasury, but I am interested in the Minister’s view on this and on whether shifting emphasis from something that is overwhelmingly about provision for retirement to an effective lifetime savings account will change the paradigm with regard to employers’ willingness to contribute beyond statutory minimums.
Another concern expressed about auto-enrolment was the risk of mis-selling because individuals would not get full value for their contributions as they would lose benefit—possibly, in some cases, pound for pound for any pension income secured—and this despite detailed analysis demonstrating that overwhelmingly individuals would get positive returns. At the time of the legislation there was much debate about whether people should be able to access advice as well as just receive information. There was a Lib Dem amendment, as I recall, that suggested that anyone of 50 or over should get one hour of free financial advice. In this regard, I note and welcome a commitment of the coalition Government to create a free national advice service, apparently to be funded by a levy on the financial services sector. Is the Minister able to tell us more about this, such as when it is expected to be up and running and the likely structure and level of the levy? Will this overlap with the proposed banking levy?
Whatever else the review is to cover, we understand that it will cover the suitability of NEST as a delivery mechanism for auto-enrolment. We know that NEST is well advanced in its preparations: it takes over from PADA in July, trustees have been appointed, arrangements for the scheme administration are in hand and an impressive team has been assembled to address the full-range challenges of running a scheme of this magnitude.
So what are the concerns? Is the suggestion that NEST has the wrong business model, or is the contention that the existing private sector providers could serve the target market better? The latter would be surprising, as they have lamentably failed to do so in the past. Will the Minister give us an assurance that there is no intention to move away from the universal service obligation envisaged for NEST or indeed that the scheme should be other than a low-cost scheme?
Securing dignity and security for tomorrow's pensioners is the business of Government. The reforms that we initiated were founded on the principles of personal responsibility, fairness, simplicity, affordability and sustainability, which has helped build the consensus. We hope that that consensus will endure. We look forward to hearing what the Minister has to say and seeing the results of the review in due course.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I thank the noble Lord, Lord Kirkwood, for raising this debate and providing the House with an opportunity to discuss this important issue. I also congratulate those taking part and join the noble Baroness, Lady Greengross, in her congratulations to those people on such an extraordinarily high quality of debate, which I personally found extremely valuable as we shape the immediate period ahead.
During the past decade, we have seen a big decline in the level of pension saving in the UK. Overall saving in the private sector workplace in terms of pension provision has fallen, from 46 per cent of employees in 1997 to 37 per cent in 2009. That means that 2.6 million more people are not saving in a workplace pension. In the same period, the availability of defined benefit schemes in the private sector has also declined, as the noble Baroness, Lady Hollis, pointed out, and membership fell by 1 million between 2005 and 2009.
For those in defined contribution schemes, there has been a decade of lost growth in the primary market—the equity market. The average real rate of return between 1999 and 2009 was minus 1.2 per cent per annum, and just last month the typical pension fund performance for balanced managed funds was down 3 per cent.
While those trends have been happening, life expectancy in the UK has reached its highest level on record and will increase further to the point where in 2050 there will be just three working people for each pensioner. The reality is that, if people want to enjoy a decent standard of living in retirement, we all as individuals and as a nation need to be much better prepared. But that, of course, is not the only problem we face. Whatever we do now needs to be seen in the context of the worst recession since the Second World War, and the need to reduce the unprecedented fiscal deficit. As a nation, we simply cannot afford to continue without a step change in our savings culture.
This coalition wants to see the principles of fairness, responsibility and social justice apply to both our welfare and pension agendas. The Government want to encourage individuals to take more personal responsibility for themselves by saving more and saving longer towards a retirement income that will meet their expectations. Already, we are in a position today where 45 per cent of pensioner households are entitled to pension credit, and 50 per cent to council tax benefit. It is not sustainable for the state to continue to meet the challenges of undersaving all on its own.
The state pension needs to provide a fair and solid foundation for people to save for their retirement, so this Government will restore the earnings link with the basic state pension from April next year with a “triple guarantee” so that it will rise by the higher of earnings, prices or 2.5 per cent. However, at the same time, we need to restore confidence in public finances, so we will hold a review to set the date at which the state pension age starts to rise to 66 years.
We also want a more flexible approach to retirement. People need to be able to retire when it is right for them, so we intend to phase out the default retirement age and will be consulting with employers and others on how to do this. However, if we are to have a pension system which is fair and sustainable into the future, we also need to reverse the significant decline in private pension saving that we have witnessed in the past decade. That is why we continue to support automatic enrolment.
We want to encourage employers to provide high quality pensions for their employees, but additionally we want to explore options that will stimulate greater personal saving. We are therefore considering additional ways of reducing the costs of running pension schemes, making pensions more affordable for employers to run, and investigating ways of making saving more attractive to individuals. Changes such as our commitment to abolish compulsory annuitisation at 75—as the noble Lord, Lord Fowler, suggested—will provide greater flexibility for pension savers in planning for their future.
The big prize here is to help people when they are working to save more and save for longer, and to make it easier for them to do so—to take responsibility for their future. We need to encourage and enable participation in pension saving so that it is no longer the preserve of the financially savvy or those who happen to work for particular employers. Quite simply, we need to get people back into the savings habit and ensure that they have access to a good workplace pension scheme.
The Pensions Commission’s solution to this dilemma was automatic enrolment into a pension scheme, with mandatory contributions by employers. We on the Government Benches have long been firm supporters of automatic enrolment. We believe that it will be highly effective at tackling the failures in our pensions system by increasing participation in pension saving.
At this point, I pay tribute to the work of one of the earliest behavioural economists, Dr George Loewenstein, who happens to be my cousin. He created the concept of asymmetric paternalism which was so influential in getting these automatic enrolment features in a range of public provision. The evidence shows that it works, leading to increased participation. Your Lordships have only to look at the United States, where automatic enrolment increased membership of its 401(k) schemes among new employees from around 20 to 40 per cent to nearer 90 per cent. Another example is New Zealand, where the introduction of automatic enrolment is estimated to have doubled pension savings in the KiwiSaver product over a three-year period.
As we made clear in our coalition programme, we remain committed to automatic enrolment, but we need to find the right way to make it work. A lot has changed since the Pensions Commission published its recommendations back in 2005. Given the current economic climate, it is essential that we ensure that automatic enrolment is introduced in a way that strikes the right balance between cost and benefits, and ensures maximum value for money for individuals, for employers and for the public purse.
Our review of these reforms will cover the scope of existing plans for automatic enrolment and NEST. Noble Lords would agree that it is vital that the Government take ownership of this initiative so that we have cross-party agreement on this, which, as my noble friend Lord Kirkwood pointed out, is so essential.
We will reach our conclusions quickly and take a hard look over the summer at the plans that we have inherited. If necessary, we will make changes to ensure that the reforms deliver for individuals, employers and the taxpayer.
Let me deal with the many fascinating points raised in debate; I will aim to get through as many as possible.
Baroness Hollis of Heigham
I was fascinated by the noble Lord’s point about the review. Which areas in particular are the Government concerned about, and will therefore be discussed in the review? I do not mean what will the conclusions be, but what will the territory be?
Lord Freud
I thank the noble Baroness. That is exactly what I was about to get straight on to. I will deal with her particular issues in that context. Before I get into what the review will cover, I start with the speech of the noble Lord, Lord Kirkwood, particularly what he said about employer attitudes and his concerns after meeting the people from AXA and reading their research. Evidence emerging from our research—a large survey of employer attitudes—suggests that 56 per cent of employers believe that these reforms are a good idea. Seventy-seven per cent believe that when they are already contributing 3 per cent or more. There is no doubt that the cost to employers of automatic enrolment is significant. The cost to employers—the smallest employers in particular—concerns me and is something that I want to look at closely in the review.
We are committed to getting the details right. That is why we are carrying out the review—to ensure that the proposals work properly. Several participants in this debate have asked about the details of the review, including the noble Lord, Lord Kirkwood, my noble friend Lady Noakes and the noble Lord, Lord McKenzie. We are finalising the details of the terms of reference, including who will conduct the review, its process, its reporting and so on. We hope to make an announcement encompassing those issues soon. To offer some reassurance, we are concerned about the impact on employers, particularly small employers. We also want to look at the position of older workers. We will review the contract for the NEST administration services, but with an open mind; if it fits with what is needed we will run with it. We aim to reach our conclusions quickly. Again, the detail is yet to be determined, but I expect we will know where we are with this before the House returns after the summer.
The noble Lord, Lord Kirkwood, asked about the NEST charging structure and whether we would keep it. He will infer, from my last answer, that that is a level of detail that we have not yet got to. The first question to ask is: does the scope of auto-enrolment work for both individuals and employers? Scope is key here. Secondly, given that, is NEST, as it is currently configured, the right intervention?
The noble Lord, Lord Kirkwood, asked about the certification process and whether that meshed with the BIS drive to reduce red tape. We are committed to recognising and maintaining existing high-quality pension provision. That means developing a process for employers with good money purchase schemes to show that their scheme meets the minimum requirements for auto-enrolment. This is called the certification process. In the coming months, DWP officials will work with the pensions industry and directly with employers to develop effective processes to support automatic enrolment. This includes straightforward ways for employers to assure themselves that their pension schemes qualify under the law.
The noble Lord, Lord Kirkwood, queried the four-year implementation period. We are fully committed to taking forward the automatic enrolment provisions under the Pensions Act 2008. However, the effects over the medium and long term will be huge. That is why we want to take stock of where things are; that is what the review is about and I do not want to prejudge it.
The noble Lord, Lord Kirkwood, concentrated my mind on wider savings incentives. It is critically important that people have confidence in saving towards their retirement if we are to deliver the step change in savings behaviour that we want. The department’s analysis is that more than 99 per cent of people can expect to be better off in retirement if they have saved than if they have not saved. However, we need to take seriously the possibility of someone facing a loss. The problem is that the people who fall into this category are not like leopards with spots that one can see beforehand; that situation emerges later, so it is a difficult problem. It is important that we allow people to take personal responsibility. However, the noble Lord, Lord Fowler, made the point that people are woefully ignorant in this area. I think that the noble Lord, Lord Kirkwood, said that he used the term “ignorant” in the best way in that regard. There is ignorance in this area, which means that it is very hard for people to take personal responsibility. Clearly, this is a vital area which we will address in our review.
The noble Lord, Lord Kirkwood, mentioned the costs of the Personal Accounts Delivery Authority and the impact of any expenditure cuts. The reduction of the deficit is a number one priority for the Government. Therefore, we will need to look right through the cost base to ensure that the costs are justified and that savings can be made where possible. I reassure my noble friend Lady Noakes that we will take a hard look at those costs and that we will not spend money unnecessarily.
It is vital that individuals have information about opting out. The noble Lord, Lord Kirkwood, is concerned about that. That will be critical to the success of the reforms. We are working closely with the Pensions Regulator to ensure that there is coherent and consistent information.
The noble Lord, Lord Fowler, and the noble Baroness, Lady Hollis, talked about the state of our state provision. The noble Baroness, Lady Hollis, again drew to our attention, as she did in her excellent speech last week, her booklet, A New State Pension. I was touched to think of her running on to the age of 95, and I hope that she does. However, it is slightly invidious to say that, statistically, only three noble Baronesses who were then present in the Chamber would do so, as I count seven who are now present, so it is a case of pot luck. There are clearly attractions in combining various elements of the state pension to introduce a single decent state pension. However, a large number of issues, not least one of them being cost, need to be considered before we introduce such a scheme.
I am very conscious that I am running out of time—unless noble Lords want to give me three more minutes.
Lord Freud
I saw someone else obtain three minutes the other day, but this is not permissible. I will write to noble Lords on other issues that I have not managed to cover. I have a lot to write to noble Lords about; I apologise.
Our goal is straightforward—
Lord Freud
I close by thanking all noble Lords who have taken part in this debate and I will write where I have not responded.
Lord Kirkwood of Kirkhope
My Lords, I am seriously grateful to the Minister. It is perfectly understandable, because he had questions of very high quality thrown at him from all sides, that it was impossible for him to respond in the time allotted, but perhaps he could respond—the noble Lord, Lord McKenzie, said that there were common issues—and take advantage of the useful briefing that is already in his inside pocket. Perhaps he can put copies in envelopes and send them to us in due course. It would be extremely helpful if we could be told the terms of reference for the review before the House rises for the Summer Recess. Obtaining a fuller response by the time that we return after the Recess is an acceptable timetable, if the noble Lord can keep to it. I promise that if he does not keep to it, some of us will remind him of the target date that he set for himself. I am very grateful for his reply, which will repay careful study, and to colleagues for contributing to the debate. I am seriously interested in the fact that the coalition Government are now committed to asymmetric paternalism, in addition to the other matters in the joint agreement.
These are pesky issues with which we will all have to wrestle, but knowing the noble Lord, Lord Fowler, to be a hospitable host with a 40th anniversary approaching, I am sure that we can all console ourselves when he convenes—we all look forward to joining him in the Bishops’ Bar, or wherever, to celebrate his distinguished anniversary. I am very happy to withdraw the Motion.