National Employment Savings Trust (Amendment) Order 2015
Lord Bourne of Aberystwyth
That the Grand Committee do consider the National Employment Savings Trust (Amendment) Order 2015.
Relevant document: 17th Report from the Joint Committee on Statutory Instruments
Lord Bourne of Aberystwyth (Con)
My Lords, I am pleased to be introducing this instrument, which was laid before the House on 16 December 2014. Subject to the approval of this instrument, the Government also intend to lay before Parliament the Transfer Values (Disapplication) (Revocation) Regulations 2015, which follow the negative procedure. From 1 April 2017, these instruments together will remove the annual contribution limit and the transfer restrictions on the National Employment Savings Trust, commonly known as NEST. I am satisfied that the order is compatible with the European Convention on Human Rights.
As noble Lords know, NEST was established to support automatic enrolment, which ensures that all employers have access to a low-cost workplace pension scheme with which to meet their duties. NEST was specifically designed for, and targeted at, low to moderate earners and smaller employers that the pensions market failed to serve adequately. So far, only large and medium-sized employers—those with over 50 workers—have implemented automatic enrolment, and NEST already has in excess of 1.8 million members and more than 10,500 participating employers. As is acknowledged by us all, I think, this has been a tremendous success. However, we must not be complacent. Around 1.2 million small and micro employers will start to enrol automatically around 4 million workers from June 2015. It is this segment of the market where there is most likely to be a supply gap. This underlies the rationale for establishing NEST and is one of the reasons why NEST is afforded state aid approved by the European Commission. Between 45% and 70% of small and micro employers are expected to use NEST during the period June 2015 to February 2018. For automatic enrolment to be successfully implemented, NEST must focus on ensuring that supply gaps have been addressed for this large number of small and micro employers. As the Government set out in the Command Paper, evidence shows that the constraints are not preventing NEST delivering its public service obligation for its target market during the rollout of automatic enrolment, although there is a perception that this is the case.
The annual contribution limit is £4,600 for 2014-15 and is uprated annually in line with average earnings. The evidence showed that 70% of small and medium-sized employers expect to contribute no more than the legal minimum contributions. Until October 2017 minimum contributions are 2% on a band of qualifying earnings—between £5,772 and £41,865 for 2014-15—and 84% of workers in the target group for automatic enrolment earn under £30,000. Based on contributions above the lower limit of qualifying earnings a low to median earner—that is, a worker earning between £15,000 and £26,000 per annum—would need contribution levels of between 48% and 22% to breach NEST’s annual contribution limit. A median earner on £26,000 whose employer makes a minimum total contribution level of 2% would contribute £405 per annum. This leaves a substantial amount of headroom for individuals to make voluntary contributions before breaching the annual contribution limit.
I turn now to transfers. The restrictions on transfers limit the circumstances in which transfers into and out of NEST can take place. But even where they can do so, individuals in other schemes rarely make transfers. More than 80% of workers fail to transfer pension funds when they change employer. This is why the Government intend to introduce automatic transfers to facilitate the consolidation of small pots. Further, the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 only allow what are commonly known as “bulk” transfers; that is, transfers without a member’s consent in certain limited circumstances. Evidence shows that only around 14,000 of small and medium-sized employers are currently providing trust-based, workplace pension schemes that could be transferred to another scheme. Of these, around 5,000 would consider a transfer to NEST—less than 1% of all firms.
I shall explain what the order actually does. Together with the Transfer Values (Disapplication) (Revocation) Regulations 2015, which as I said earlier are subject to the negative resolution procedure, the main changes this order makes from 1 April 2017 are as follows: removal of the annual contribution limit, allowing NEST members to contribute at the same levels as other schemes; provision of discretion for the trustee of NEST to allow individuals to initiate a transfer of their accrued pension rights into NEST; reinstatement of the right of a member of NEST to transfer their accrued pension rights out of NEST and into another pension scheme, replacing the limited circumstances in which a member of NEST can transfer their rights in and out of NEST at the moment; and, lastly, provision of discretion for the trustee of NEST to bulk transfer a member’s accrued rights into or out of NEST without the member’s consent in the same way as other occupational pension schemes.
I turn now to why we consider the date of 1 April 2017 to be the right time. Even though the evidence demonstrated that these two constraints were not in practice a barrier for NEST’s target market, there was, as I mentioned at the outset, a perception that these constraints might complicate scheme choice for small and micro employers. However, removing these two constraints as the result of a perception and the potential consequences flowing from this would not, in the Government’s view, be a proportionate response. Conversely, leaving the constraints in place beyond 2017 would not be consistent with the Government’s long-term policy objectives of encouraging increased saving and the consolidation of pension pots.
At the start of this Government’s term, we commissioned an independent review of automatic enrolment and NEST, the Making Automatic Enrolment Work review. The review recommended the following: that NEST should go ahead as planned to support the successful implementation of automatic enrolment; removal of the contribution limit once staging of employers is complete and legislating for this at the earliest opportunity; and lastly, that by 2017 the general issue of pension transfers should have been addressed and NEST able to receive transfers in and pay transfers out. This order does what that independent review recommended, and therefore legislating now to remove these two constraints in 2017 is a balanced approach. It will ensure that NEST can focus on its mission of successfully supporting the introduction of automatic enrolment while reassuring employers and signalling now that NEST will be put on a similar footing to other providers in just over two years’ time.
I know that noble Lords are interested in the implications for the state aid provided to NEST. This issue came up during our consideration of the Pension Schemes Bill. It has been suggested that the subsidy provided to NEST no longer qualifies as state aid because NEST now meets all four of the Altmark criteria. I believe that this point was made on Report on the Pension Schemes Bill. The Commission considered whether the Altmark criteria were met in its original decision in 2010 approving the state aid for NEST. In its decision, the Commission indicated that NEST did not meet all the criteria.
The second Altmark criterion requires that the undertaking receives no economic advantage which may favour the recipient over competing undertakings. The Government’s view is that we would be unlikely to meet this criterion, and the Commission’s decision said that there was an advantage because NEST would not exist without government support. In any event, we would need to make the case to the Commission that the Altmark conditions are met, as we have an existing state aid case and decision. This process is likely to take considerable time and would require persuasive evidence. The annual contribution limit and transfer restrictions were clearly cited by the European Commission in its approval of state aid afforded to NEST as important to reducing market distortion.
The department’s call for evidence suggested that the constraints were working to focus NEST on its target market during the rollout of automatic enrolment. Following just over a year of negotiations, the Commission confirmed that removing these constraints from 1 April 2017 would be compatible with the state aid provided to NEST. The Commission also confirmed that the restrictions on individuals initiating transfers could be lifted earlier to align with the introduction of automatic transfers. Again, that is a point that we discussed at some length on Report on the Pension Schemes Bill.
If we wanted to lift these constraints sooner, we would need to refer back to the Commission because this would be outside the terms of the Commission’s decision. Without the Commission’s agreement, there is a risk that the state aid provided to NEST would be unlawful. I commend this instrument to the Committee.
Baroness Drake (Lab)
My Lords, while all progress towards allowing transfers into NEST and removing the contribution limit is to be welcomed—and it is—and even if some of us would prefer a greater speed of progress, I rise not to make a political point but to raise my concerns about inefficiencies that will remain in the private pension system because of the rules around transfer into NEST.
This statutory instrument will allow bulk transfers of members’ assets only where the employer is a participating employer in NEST for the purpose of contributing to employees’ contributions. This excludes bulk transfers where the employer is not a NEST participating employer; that is, it is discharging its new employer duties through another scheme. This restriction produces two inefficiencies. The first is that employers will increasingly have closed DC schemes. As companies merge or take over, they will close DC schemes, or they may set up less generous new DC schemes in the light of the coverage of the workforce that flows from auto-enrolment, or they may set up new trusts that set the rules giving the employer more powers. Whatever the reason, there will be some employers who will look to bulk transfer out a DB scheme that is closed to new members. I do not make these up as hypothetical examples; I have experience of all these issues, and I think that they are a growing phenomenon.
Employers may transfer out the assets in these closed schemes into a product proposition that is not covered by the charges and quality standards set for auto-enrolment schemes because, of course, they are no longer being used for auto-enrolment purposes. Such employers will be denied access to NEST, so what could have been an efficient, quality-controlled means of bulk transferring the assets of closed DC schemes is denied because of the way in which the transfer rules are set.
Lord German (LD)
My Lords, as always, the noble Baroness, Lady Drake, raises interesting issues in great detail which are always worthy of further examination. I hope that my noble friend will reflect on them. This is a bit of replay from the debate that we have had in the Chamber on the Pension Schemes Bill on an amendment that was simply about the date. It is the date issue that I want to say a few words about. The two arguments evinced to support an earlier date are that it will affect transfers in and that we do not have to worry too much about the European Commission and state aid rules. I am not a lawyer but I know my noble friend is a lawyer and I hope he will be able to rebut that argument.
However, the debate around the European Commission issue relates to the Altmark judgment, which my noble friend has just mentioned, and the second criterion, which is that NEST receives no economic advantage that may favour the recipient undertaking over competing undertakings. It is my understanding that NEST received quite a substantial degree of financial assistance from the Government. If it had not been for that financial assistance, NEST would not have existed. Therefore, the role played by that financial assistance is still important for the task set out, which is yet incomplete. My noble friend mentioned it: 1.2 million of what we call small and micro companies to be auto-enrolled by 2018 is a substantial task. That is one of the tasks for which NEST was set up. Many of the small companies that I have spoken to—this may be anecdotal—have in the past paid no consideration whatever to a pension scheme for their employees. This will be the first time that they are doing it. That is probably the case for nearly the whole lot. If so, the exceptions—the people already enrolled who may want to transfer in—will be an almost invisible statistic. If that is the case, surely the challenge facing NEST is to deal with that huge array of small companies that are going to need more help from NEST in order to undertake the work.
Noble Lords who have talked to NEST will know that their advisers go out and talk to companies, and it is more difficult to talk about these issues to companies with only three or four employees. They do not necessarily have the time to slot it in, and it is much more difficult for smaller companies to work towards a solution. For most of these employers NEST will be the easiest, most competent, most reliable and most appropriate source for their pension scheme. Surely, therefore, that task is one of the tasks set in train by this application to the European Commission. If the reason for providing state aid was to give a financial inducement that would allow it to undertake that job, and that job is not complete and a huge number of companies are still to be engaged with, that, surely, is the challenge that NEST has.
In relation to the European issue and the year, perhaps my noble friend could indicate in his response whether, if it took more than a year to make an application—based on the information provided by the previous Labour Government on the date at which the restrictions on NEST would be lifted—will it be more difficult to do it in advance of that date? Would it be any easier than the more than a year that it has taken so far to get approval for 2017? If it is going to be the same period or longer, we are not talking about this year whatever happens. Even if the Government were to go back right now and start this process all over again, even if they thought that they had a strong case and that no economic advantage was being provided, it would still take until 2016—some way into 2016—and then until the appropriate start date for this. So, even if that were the case, we would probably be talking about, I guess, a gap of 10 or 11 months. It is my understanding, however, from the criteria that my noble friend read out in his opening remarks, that NEST has been given economic advantage, which is continuing, because they are the doing the same job as the one described to the European Commission at the start.
In conclusion, it might be interesting to ask whether the timetable for this activity of NEST in the original submission to the European Commission is roughly the same as the curent activity—in other words whether it was anticipated that this range of companies would be coming in towards this final period of the original application to the European Commission. If the timetable was right then, surely it is right now.
Baroness Sherlock (Lab)
My Lords, I thank the Minister for his explanation of this order, and the noble Lord, Lord German, and my noble friend Lady Drake for their contributions.
As the Minister indicated, and the noble Lord, Lord German, reminded us, we had a fairly good canter around this issue on Tuesday, on Report stage of the Pension Schemes Bill. Therefore, noble Lords may be relieved to hear that I will not rehearse all the arguments at the level of detail we went into on that occasion. That said, we cannot allow this order to go through without challenging the core point we made then. I want to look at two things in particular. I would like to push the Minister a bit further as to whether he really believes that there is no problem caused for NEST by the restrictions on transfers remaining until 2017. He suggested that there would not be a problem; he will be unsurprised to know that we disagree. We are concerned that NEST would be unable to sign up employers if any of their employees already have pensions, given that most will not want to use two pension providers or more. Of course, if the company cannot bring everybody in the company into NEST—those already in the workplace pension scheme and those coming in under auto-enrolment—that is a huge deterrent to go in with NEST at all. The DWP’s research suggested that 80% of employers will want one pension provider. Does this not mean inevitably that the ban on transfers in will hold NEST back? The argument against is that DWP research in 2013 that found that 84% of employers with fewer than 250 employees do not provide a workplace pension and would not be affected—a point indicated by the noble Lord, Lord German.
When this order was debated in another place my honourable friend Gregg McClymont pointed out that recording based on employers is not a good proxy for the number of employees who cannot access NEST on that basis. He made a powerful case that the number of employees potentially excluded from going into NEST because of the ban on transfers in is in fact closer to 11.5 million. Will the Minister not accept now that the ban on transfers in is a significant drag on NEST? Also, can the Minister clarify if lifting the ban on transfers will apply to pots accumulated before auto-enrolment or only to auto-enrolment pots?
We are delighted that the Government have continued Labour’s policy of auto-enrolment. We want it to be as successful as possible and it is clear to us that lifting restrictions as rapidly as possible is the best way to achieve that. It would ensure that millions more employees could access NEST, a body we all regard as a success and which is leading the way in driving the cost of pensions down while driving up quality. Why can it not happen now? I am not going to open up a lengthy debate about the degree to which the Altmark criteria will apply. As the Minister will know, in a debate in another place my honourable friend Gregg McClymont said that in practice the Altmark judgment makes clear that once NEST is up and operational its target market no longer counts as state aid, in any case. He is welcome to come back to that but we will not resolve it today.
I want to know more clearly what efforts the Government have made to find out if they could have brought in these restrictions earlier. Whether or not they wish to do it now, they still need to account for their decision to go only in 2017 and not earlier. The Government blame the EU and pray in aid state aid rules and say they are waiting until 2017 because otherwise there would be a legal challenge. Surely the Government have not been told by the European Commission not to lift restrictions until 2017. Rather they asked not to lift them until 2017 and were told they could do so. This was a point I did not feel came out adequately on Report. There is a difference between being told you can do X and claiming that you have been told that you cannot do Y. The Minister indicated that it was the Government’s own judgment that they would be unlikely to get permission for an earlier date. Can the Minister tell the Grand Committee whether the Government went to the European Commission and asked for the restrictions to be lifted before 2017, and if not, why not?
In terms of legal challenge, can the Minister clarify that if the Government amend the Pensions Schemes Bill that is still going before Parliament to lift the restrictions it would not be open to a UK court to challenge that? That is another argument that has been made against doing so. Surely any speculative attempt to mount such a case would be struck out. I would be interested in his reply.
Finally, can the Minister tell the Committee when he responds to the noble Baroness, Lady Drake, whether the Government have addressed these points in the past? She raised a very interesting point about the position of employers with closed schemes or, of course, ex-employees. Is that something the Government have addressed in their deliberations or reviews and what evidence do they have on that point? I will be interested to hear his response to the noble Baroness’s questions, and the points made by the noble Lord, Lord German and me.
Lord German
My Lords, it was remiss of me not to declare an interest in this matter in that my wife is a pension saver with NEST.
Baroness Sherlock
I am not sure it is relevant but, in case it is, I remind the Grand Committee of my interest as the senior independent director of the Financial Ombudsman Service.
Lord Bourne of Aberystwyth
I was just waiting in case the noble Baroness, Lady Drake, had anything to declare, but I am sure all her interests are in the register.
I thank noble Lords for participating in the debate on this order. I shall try to deal with the points made. I shall try to address them in the order in which they were made. I thank the noble Baroness, Lady Drake, who has massive, almost unparalleled experience in our House on pensions, and therefore I take seriously anything that she raises. She was a member of the Turner commission. I accept the point she made in a non-party-political way. We are keen to look at the two specifics that she raised—she referred to them as inefficiencies, but we reserve judgment on that, although they are certainly challenges—and I will get a detailed response to her on the question of the bulk transfer of closed DC schemes and the default of employees into personal schemes by employers.
As things go forward, the aim of all this legislation, which is shared across the House, is to get as many people as possible enrolled in pension schemes. As people live longer, pensions clearly become a more important part of the legislative landscape, and that is one reason for NEST. We want NEST to fulfil its core function. We are very much focused on that task, and that remains very much the name of the game, as it were.
I turn to the points made by my noble friend Lord German in relation to what was the key issue when we looked at this on Report on the Pension Schemes Bill: the 2107 date and the Altmark case. The noble Baroness, Lady Sherlock, also raised points on this, and I will try not to cover it twice, so some of this will be in relation to her points.
My noble friend Lord German was right that the smaller the company, the greater the challenge in terms of auto-enrolment, so that remains our key focus. In relation to the date, it is true that because we were given permission for a particular date, that does not mean that we cannot seek another date, but it means that if we were to seek another date, we would have to go back to the Commission to get clearance. The noble Baroness, Lady Sherlock, rather than my noble friend Lord German, put forward the hypothesis that it could not be struck down by a UK court. I am not sure about that. I am not expert in EU law, and I will write to the noble Baroness if I am wrong on this, but I think EU law is very much a part of domestic law, so I think it would stand a chance of being referred, at least, to the European court by a domestic court. While we are a member of the European Union, we are obliged to follow its law. I will write if I am wrong on that point, but I appreciate it was not the core point that she was making.
I come back to a point that I made on Report, which is that we have two key concerns about an earlier date. One is that we want NEST to focus on its core mission, which it is fulfilling brilliantly. I accept that there is support for NEST from around the House, as there is in another place. I appreciate there is no difference between the three major parties on this issue. We are all very pleased with what NEST is doing, we applaud it and we want it to do more of it, but at the same time we do not want to distract it from that. That is why when we had a call for evidence, which was initiated by the Department for Work and Pensions in 2012-13, the subsequent Command Paper in June 2013 found that there was no compelling evidence that the key constraints were distracting NEST from its functions, but there was a perception that they were. Faced with that, we had to decide what to do. We thought that 2017 was the date to go for to ensure that NEST had fulfilled its core function and then to seek to list the constraints, believing, as was borne out by the finding of the Commission, that that constituted state aid.
There is no doubt that the Commission found that it did then and that we did not satisfy the Altmark conditions of not being state aid. We as a department remain of the view—as does BIS, it is not just DWP—that this still does constitute state aid. We could of course go back to the Commission to seek clarification on the issue, but again that would take a long time. As my noble friend Lord German has said, the initial process took more than a year and it could take as long again. Given the timings that we are up against, and given that we will publish a timetable on the transfer which would allow us some room for manoeuvre earlier than 2017—although I hasten to add that we have not as yet published a timetable on that—in our view, it simply distracts from the key focus of NEST, which is that of continuing to do what it has been doing absolutely brilliantly so far.
That, I hope, deals with the particular points, but if I have missed any details, I shall be happy to write to the noble Baroness.
Baroness Sherlock
I thank the Minister for his courtesy in giving way. I have just a small point to raise. I accept that the Government could go back and ask for an earlier date, but obviously they could have done that some time ago. I did ask specifically whether they ever did approach the Commission, and if not, why not? It is obviously because they did not want to, but did they ever do so?
Lord Bourne of Aberystwyth
I am not aware that we have gone back to the Commission about that. Clearly, I do not think that there is a difference between us for there to be a need to go back in some shape or form to the Commission for an earlier date. I do not believe that we have done that because, as I say, we believe that the key focus of NEST should be on auto-enrolment. So there are, as it were, two strands to the Government’s position, and the first of those is that we should focus on the key function of NEST.
If I have missed anything in relation to the three helpful contributions from noble Lords, I will ensure that of course they receive full responses.
Baroness Drake
Perhaps I may take advantage of the noble Lord’s kind reminder to declare my interests. I made a full confession at the start of the Pension Schemes Bill, but I realise that it does not travel over to the statutory instrument. I am a trustee of the Santander pension scheme and the Telefónica O2 pension scheme. I sit on the board of the Pensions Advisory Service and that of the Pension Quality Mark.
Lord Bourne of Aberystwyth
That underlines the great experience that the noble Baroness has in this area. I commend the order to the Committee.