National Employment Savings Trust (Amendment) Order 2015

Baroness Drake Excerpts

Thursday 29th January 2015 Grand Committee

[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.

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[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.