The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
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.
Baroness Hollis of Heigham
I do not understand the point that the noble Lord has just made. Why would it penalise other low earners who do not opt in?
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
I am now slightly mystified by the intention of the amendment. I understood that it allowed an opt-in at any level. Perhaps the noble Baroness could clarify the position.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord McKenzie of Luton
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.
Lord Freud
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.
Lord Boswell of Aynho
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.
Lord Freud
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.
Baroness Hollis of Heigham
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?
Lord Freud
I shall try to answer that, but I shall keep an ear open to those behind me.
Lord Freud
As I understand the situation, for the job paying £7,600, she would clearly be auto-enrolled. For the job paying £6,000, she would not, but she could opt in—it would be treated separately. For the job paying £4,000, she could opt in if she wanted to.
Baroness Hollis of Heigham
Even though one or two other employers were involved?
Lord Freud
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.
Baroness Hollis of Heigham
Would she get an employer contribution on the £6,000?
Baroness Hollis of Heigham
I would be very happy for the Minister to write to me; I realise that I am throwing this example at him.
Lord Freud
Just to make it absolutely clear: the contribution is made above that trigger.
Lord Boswell of Aynho
My noble friend the Minister said that she would have nothing from the employer. I suppose, to be pedantic, that that would be so unless the employer chose to make a contribution, but there would be no obligation on the employer.
Lord Freud
Yes, I can confirm that, although we are going to be giving everyone their pension soon if we carry on giving examples.
Baroness Hollis of Heigham
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.
Lord Freud
I do not need to write. I can confirm that. It does not have to be NEST. The pensions may or may not be NEST in each case.
Baroness Drake
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.
Lord Freud
That is exactly what I said, so I thank the noble Baroness, who is an expert in this area, for giving me the relief of not making a horrific solecism.
Baroness Hollis of Heigham
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.
Baroness Greengross
At Second Reading, I stressed the point that one good aspect of the trigger was that it would help prevent employees and employers from making very small contributions. This is still an important point.
Lord Freud
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.
Baroness Hollis of Heigham
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?
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Lord Freud
She would make an argument to that effect, no doubt. However, how that would happen and its timing would be very sensitive, so it is simply not appropriate at this stage to make any presumption which would drive one into this very uncertain territory.
Lord McKenzie of Luton
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.
Lord Freud
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.
Baroness Hollis of Heigham
How can the noble Lord know whether it is right if he cannot establish the family circumstances which, as my noble friend rightly said, determine whether it pays to save?
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Lord Freud
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.
Lord McKenzie of Luton
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.
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Lord McKenzie of Luton
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.
Lord Freud
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.
Lord McKenzie of Luton
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.
Baroness Drake
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.
Lord Freud
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.
Lord McKenzie of Luton
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.
Lord Freud
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.
Lord German
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.
Lord Boswell of Aynho
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.
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Baroness Drake
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.
Lord Freud
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.
Lord German
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.
Lord Freud
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.
Lord McKenzie of Luton
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.
Lord Freud
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.
Baroness Turner of Camden
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.
Lord Freud
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.
Lord Freud
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.
Baroness Drake
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.
Baroness Turner of Camden
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.
Lord Freud
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.
Baroness Hollis of Heigham
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?
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Lord Boswell of Aynho
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.
Lord McKenzie of Luton
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.
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Baroness Hollis of Heigham
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.
Lord Freud
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.
Baroness Drake
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.
Lord Freud
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.
Lord German
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.
Lord McKenzie of Luton
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.
Lord Freud
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.
Baroness Drake
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.
Lord Freud
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.
