Baroness Drake
My Lords, I shall also speak to Amendment 21. The new pension arrangements that are to apply from 2012 provide a minimum level of pension contributions, based on a band of qualifying earnings, of 8 per cent, of which at least 3 per cent must be met by the employer and the rest from the employee contribution and tax relief or credit. The required minimum contribution levels are set as a quality requirement for a qualifying pension scheme. Some employers who already operate good workplace pensions base their pension contribution calculations not on earnings but on other definitions of pay such as basic pay. It has been argued that the regulation should be set so as to encourage employers with good-quality schemes to stay with them. Clause 10 seeks to recognise this by introducing an additional provision to the powers in the Pensions Act 2008 that allows the Secretary of State to set an alternative process of certification known as the alternative requirement. That will allow employers to certify that overall their schemes satisfy the quality criterion for pension contributions. This process involves setting a regulatory test which, if met, will allow employers so to certify.
Although the Government have published the test that they intend to set in regulations, the regulations are still subject to consultation, so we do not know what they will finally look like or how they may change over time. The Johnson review asserts that under the regulatory test that is proposed, 92 per cent of workers would still match the statutory quality criterion on contributions under the qualifying band of earnings. This assertion is based on the ONS survey of hours and earnings. The assertion of 92 per cent is based also on the pattern of earnings before auto-enrolment. Our concern is that after the onset of auto-enrolment, an incentive may have been created that will encourage bad employers to arbitrage between the statutory quality criterion of an 8 per cent contribution on a band of earnings and the alternative requirement, to the detriment of some workers. In a nutshell, our concern is that while trying to accommodate good employers, a compliance loophole is created for bad employers.
The purpose of the amendments is to strengthen the protection afforded to jobholders under the alternative requirement. For the purposes of the amendments, I do not seek to debate the detail of the proposed regulatory test for the alternative requirement, or even whether there should be such a requirement. I want to focus on the powers that are enshrined in Clause 10 and what must be satisfied before the Secretary of State can set the alternative requirement.
The Delegated Powers and Regulatory Reform Committee refers to the Secretary of State's power to set an alternative requirement as “significant”, as indeed it is. Clause 10 prescribes the power of the Secretary of State in setting an alternative requirement, but it does not go far enough for the following reasons. In Clause 10, the Secretary of State must, for most schemes, ensure that, for all jobholders or a cohort of the relevant jobholders, the contributions paid into the pension scheme satisfy the quality criterion. However, the clause requires this to be the case only for a majority of the individual relevant jobholders—a majority being 50 per cent plus one. We are concerned that this could lead to a significant number of individual jobholders missing out on what should be their statutory entitlement. In effect, the aggregate requirement could be met by more generous contributions for some jobholders, with less than qualifying amounts, or potentially even none, for others.
The intent of Amendments 20 and 21 is to strengthen Clause 10 such that in all cases—not just most—schemes will be able to satisfy the alternative requirement only if, for no less than 90 per cent of the individual relevant jobholders as distinct from a simple majority, the amount of contributions paid under the pension scheme meets the qualifying amount. As my noble friend Lord McKenzie said in Committee, it is not acceptable that,
“an alternative requirement could allow nearly half of all jobholders”—
with a particular employer—
“to be short-changed”.—[Official Report, 15/3/11; col. GC 2.]
I beg to move.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I thank the noble Baroness, Lady Drake, for introducing this debate. The amendments to Clause 10 would require the Secretary of State, before making regulations on certification, to be satisfied that in every single scheme at least 90 per cent of individuals would receive contributions no less than if the scheme had satisfied the relevant quality requirement.
I fully understand that the noble Baroness still has reservations about the breadth of the Secretary of State's regulation-making power and individuals losing out under the proposed certification arrangements. The whole purpose of the reforms is to transform the savings culture by improving the coverage of and participation in workplace pension saving. To succeed, we need to incentivise employers to retain their good-quality schemes. Certification gives employers an incentive to keep their good-quality schemes by simplifying the automatic enrolment requirement. It protects members by discouraging levelling down. The flexibility provided by certification is an important counterbalance to the burdens being placed on them by automatic enrolment. Getting the balance of protection right is crucial because introducing complexity will encourage employers to level down by abandoning good schemes and individual savers will be short-changed.
To help employers plan for the reforms, I should like to put on record that employers using certification will be able to phase in their contributions gradually. That question has been of some concern to the industry and I am pleased to clear it up. I believe that employers using certification will welcome that easement to help with the administrative and contribution costs of increasing enrolment into their schemes. We recognise the advantage that such an approach would bring and so have already kicked off discussion on how we might operate phasing within the certification model. We propose to set out the detail in regulations and guidance. The plan is to consult on secondary legislation informally over the spring, with a more formal consultation after the Bill receives Royal Assent.
However, I recognise and share the noble Baroness’s concern about some individuals receiving less than the minimum contributions, for whatever reason, under the certification arrangements. In developing the certification model, we have undertaken some detailed analysis of pay and reward systems using data from the annual survey of hours and earnings. Based on that analysis, we believe that the number of people who could potentially lose out is quite marginal. If all employers were to use certification, the data tell us that around 9 per cent of individuals could experience a shortfall resulting in contributions less than if the scheme had satisfied the relevant quality requirements. Those individuals are concentrated in industries where basic pay can be supplemented by overtime and other non-pensionable income.
We are committed to finding a pragmatic solution to certification which protects individuals without alienating employers. I believe that the certification test which I have previously described is that solution. However, to address the concerns raised, particularly in relation to the breadth of the regulation-making power, I take this opportunity to commit to looking at how we can reasonably circumscribe the scope of the Secretary of State's powers without compromising his ability to deliver the certification model welcomed by employers. We will be analysing the available data sets on earnings and contribution rates to see how that can be achieved. If it is possible, I should like to return with an update at Third Reading in the shape of an amendment to be introduced in Committee in another place.
I hope that, based on the assurances I have given, the noble Baroness will feel able to withdraw her amendment.
Baroness Drake
I note what the Minister said about phasing in contributions gradually. I was not anticipating that. He said that there will be consultation about the regulation on that point, so we will have an opportunity to look at that. I note what he said about the regulatory test. I had stayed off the detail of that test because I was focusing on the powers in the Bill.
I am grateful for the Minister's commitment to look at how the powers of the Secretary of State could be reasonably prescribed in order to address the concerns that we expressed and to return to it at Third Reading. I hope that between now and Third Reading it will be possible to sort out a form of words that would reassure us on that point. If it is not possible, I reserve the right to come back to the matter at Third Reading. On the basis of what the Minister has said this evening, I shall not press the amendment.
Lord McKenzie of Luton
My Lords, I thank my noble friend for her amendment. I know that she is very committed to this proposition and she has enunciated it with a particular focus on gender issues, which we understand. However, the noble Lords, Lord Boswell and Lord Flight, both pointed out that it is a wider issue and one that is not just for NEST but for pensions across the board. We support the Government’s call for evidence on allowing early access to pension savings, evidence which would consider benefits to individuals and the impact on aggregate saving levels. As my noble friend pointed out, there are various policy models—loans and withdrawals, permanent withdrawals, feeder funds and early access to lump sums—which I think is the model that my noble friend is particularly focused on. But of course these have different impacts and outcomes in terms of the propensity to increase savings, or indeed in some instances, the propensity to reduce savings.
There are few data on how an early access policy might impact on individual behaviour or the pensions industry. Behaviours in other countries—401(k) has been mentioned in respect of the US—give only a limited guide to the UK. The PPI says that for real conclusions for the UK, further research within the UK context is needed. Is there an appetite for early access? Would it encourage savers to save more? What proportion of people would access savings early? These questions need to be considered in the context of other current developments—auto-enrolment, the removal of the requirement to annuitise at 75, changes to taxation, and so on. Where is the balance between encouraging more saving and reducing pensions in retirement?
We need also to think about the application to DB schemes and how that would fit. If we have something that is attractive to DC, what does that mean in terms of DB schemes? I am quite sure that technically something could be provided to work for DB schemes as well, but I think it would be quite complex.
In terms of its application, the noble Baroness focused on pension pots of £10,000. I do not know what data there are about “running away money” at aged 30 or 40; I am not sure whether I was enthused by the concept or not. How many people would have a pension pot of £10,000? When we were debating annuitisation at 75 I remember data that showed that only 5 per cent of people had pension pots in excess of £100,000. Those data may be a little old, but they are illustrative. How many people at the age of 30 have a pension pot? If you are talking about 25 per cent of £10,000, that would not pay for one year’s worth of university fees. We have to explore what the appetite would be for this and how it would work, but it seems to me that it is not altogether straightforward.
There is an issue about whether it changes the paradigm with employers. If you have something which is seen more as a saving scheme than a pension scheme, that will impact on employers’ willingness to fund. I do not assert that it would, but it is an issue that ought to be explored as part of this journey. We all know the Treasury line—I am sure that the Minister has it in his file that pensions are about long-term savings. That is why there is generous tax relief and any deviation from that should not be contemplated. I do not have to follow that line any more as I am not in the noble Lord’s position, but there is an issue about how it would impact on the tax regime for pensions. We also need to be careful about the risks of tax avoidance by these mechanisms. If someone paying the 50 per cent rate gets half of that paid on the way into the pension pot and you can get 25 per cent of it out tax free straightaway, that would seem to be a pretty good deal. Rather than simplifying the tax system, one can see the complexity of the rules that would need to be put in place to deal with that and the constant challenges there would be to those parameters.
We should thank my noble friend for introducing the amendment. I hope and believe that it is probing in nature because the time is now right for this to be fully examined and it seems that the Government are on a path to do that. However, we need more information on a number of issues before I or my party would officially be able to say that this is something we support. But it is certainly something that deserves examination for the sort of reasons that my noble friend has advanced.
Lord Freud
I thank the noble Baroness, Lady Hollis, for raising this very important issue of allowing individuals early access to their pension saving. I was more or less as disconcerted as the noble Lord, Lord McKenzie, about the concept of it being “running away money”, not least because I thought that if the spouses of Members of this House got to hear of it, they might take advantage as we spent night after night in this place rather than at home with them.
The noble Baroness wishes to allow individuals to access a tax-free lump sum of up to 25 per cent, before the current minimum age of 55, when they have pension savings of at least £10,000. I am conscious that this is an issue to which the noble Baroness has repeatedly drawn our attention, and to which she returned at Second Reading when she asked where the Government's consultation paper on early access to pensions had got to. I can answer that particular question; I can report to my Lords that the Government published their call for evidence on early access to pension saving on 13 December last year. It set out the available evidence around early access and some of the potential benefits and risks, and then sought further evidence from interested parties. That call for evidence closed on 25 February. Drawing on the responses to the call for evidence, we will consider the arguments for and against allowing more flexible access to pension savings, based on firm evidence, before we consider further changes to the pensions tax framework.
It is too early to say what these changes might be. However, we need to bear in mind several principles. First, the purpose of tax-relieved pension saving should be, as the noble Lord would like me to say—I have to say it—primarily to provide an individual with an income in retirement. I think 75 per cent probably makes that point anyway. Secondly, any changes to the pensions tax rules must be affordable and sustainable for the Exchequer, and not, as the noble Lord, Lord McKenzie, pointed out rather vividly, create opportunities for tax avoidance. I was pretty impressed that he was able to knock up a tax avoidance scheme so quickly, but we can see where he is coming from. Thirdly, changes should not create disproportionate complexity or administrative burdens for individuals, pension providers and schemes, or indeed for Her Majesty’s Revenue and Customs.
I am sure the noble Baroness will agree with me that it is right for us to examine the evidence submitted before making changes to legislation. On that basis, I urge the noble Baroness to withdraw this amendment.
Baroness Hollis of Heigham
I am very grateful for the support around the House—equivocal support, perhaps, in some cases—on the significance of this issue. Of course, this is not exclusively a women’s issue by any means, and if it was attractive to anyone who wished to take it up, as far as I am concerned they would be able to do so with the agreement of their trustees. My noble friend Lord McKenzie anticipated the paragraph that we have all had to repeat—I have had to repeat, my noble friend has had to repeat, the noble Lord, Lord Freud, has had to repeat—about how pensions are designed and so on, but I tried to hold up a gender filter because I firmly believe that it is still an HMT model that is based on male working lives. However, let us not go down the route of asking why the Treasury might not understand.
When we are trying to encourage poor women—women earning possibly well below average earnings—into a savings model, I do not mind very much whether it is saving for their current life or their retirement. I do not mind very much whether it is income or capital. We get hung up on divisions that make sense in the click-in click-off world of conventional male work; the noble Lord, Lord Freud, is absolutely right, in the universal credit, to refuse to accept that simple dichotomy of “in work, out of work” and see it as a dial. The same situation applies to women in pensions. They do not have a male life, where they are in work, they contribute to a pension, they retire, they are then poor and where you have to distribute from one to another—that is not the experience of poorer women in and out of the labour market who may face more turmoil and roller-coaster finance in their working lives than they ever will in retirement.
The question is how we best encourage those women to build some protection for themselves against the contingencies in their working lives, as well as to prepare as best they can for savings in retirement. We want to do this in ways that do not either exploit their naivety or get them into oversaving at a risk to their current living expenses. The more research that I and others in this field have done the more I believe we need a simple single product—probably not called a pension, probably called something else—into which you put your money and where a proportion is ring-fenced for retirement and a proportion is available for savings. We happen to have a very easy way of modelling that based on the tax-free lump sum; the other versions that the Treasury have put out to consultation are more elaborate, possibly more adept, models but will not particularly meet the needs of this client group. We need something that is simple, understandable, attractive, affordable and fairly obvious in what it does.
I fully accept that the amendment is probably technically defective. I was of course never intending to do anything other than trying to focus the issue, given that we have the consultation paper. I was hoping to take your Lordships’ views on this so that this might in due course, perhaps, be fed into the Treasury’s response to this White Paper.
The provision is not gender-exclusive. It would not exclusively apply to NEST. I would have it available for all pensions and, again, I would not particularly get hung up about what it was used for. Nor would I worry too much about the issue of moral hazard, providing we cap the amount that people can withdraw, which is why I would not go for the 401(k) models, because too many of them run their schemes right down and that is undesirable.
I fear that too many women may opt out of NEST or—this is more likely—fail to continue in NEST when the first financial crisis of many hits them in their lives and they realise they cannot access the money and they have nothing else. At that point the contributions of those individuals will drop off like a stone. How do we prevent that? We prevent it by running the two alongside each other and produce a package for women where it is attractive to save.
We have discussed it. I am very grateful for the support and encouragement around the House tonight. With your Lordships’ permission, I beg leave to withdraw the amendment.
Lord McKenzie of Luton
My Lords, it is a great pity that the Minister does not have to face the amendments of the noble Baroness, Lady Noakes. Some of us endured that for a couple of years. It seems to me quite outrageous that he does not have the opportunity to do so tonight.
Lord Freud
My Lords, I am very sad that the noble Lord is outraged.
Schedule 4 : Pension Protection Fund
Amendment 28