Pensions Bill [HL]
Baroness Drake Excerpts(15 years ago)
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Baroness Hollis of Heigham
My Lords, this amendment is about voluntary earnings. Who do we think NEST is for? It is basically for poorer people, mostly women, who are not able to save in conventional ways and have hitherto had no access to an occupational pension. The other two members of the Paul Johnson review team that produced the report Making Automatic Enrolment Work are very experienced people, but they come from the industry and employment side. Their report recommends that auto-enrolment begins not at the LEL of £5,204 but at the earnings threshold of just under £7,500. This means that 1 million people, mostly women, who would have been automatically enrolled will now not be. The expectation is that ET will rise potentially to £10,000, at which point 2 million people, mostly women, will not be automatically enrolled.
The report runs two arguments in favour of raising the threshold. I think that both of them are fallacious. The first argument that the report runs is that—it is, of course, true—very low earners have high replacement rates in retirement through benefits and so on, so that NEST is not necessary, unlike for higher earners, for whom state benefits by definition represent a lower replacement rate and who might therefore wish to take advantage of NEST. The second argument that the report runs—as you would expect from the industry—is that they do not want to handle such small sums. That is the basis of their argument and the Government have followed their advice.
The first of these is about replacement earnings. It is, of course, true that, if you have a low enough income from earned work, even the basic state pension backed by pension credit will come to much the same level as your wage and therefore you will have a high replacement rate. The statistics and percentages on this are all very well, but these women are still very poor. That is why their state benefits in retirement will perhaps just about equal their wage. They are still very poor, whether in work or in retirement.
A pension, however small, even if it is below the trivial commutation level, which it probably will be, gives the woman, through pension savings, a two for one to match her own—because she attracts the employer’s contribution and, to a minor degree, the tax relief, depending on where she is earning—which, perhaps for the first time, might allow her to retire with a small capital sum below the trigger commutation rate of perhaps £10,000 or £15,000, depending on how long she has saved.
I do not accept this argument. It is right that there are high replacement earnings in retirement, if you have a very low wage. However, that means that—this is the key fact behind it—both in work and in retirement you are likely be very poor indeed. This is why we need an option for NEST.
The industry’s second argument, which I also think is fallacious, although I understand it, is that employers do not want the hassle of handling small sums that, they say, would not be worth much to the employee once the means-tested benefits come into play. However, there is a profound flaw in their argument here, too.
The reason why the sums are small is that, wherever you set the auto-enrolment start line, whether it is LEL at £5,200 or ET at £7,400, the first £1,000 or £2,000 of earnings above any line that you set will by definition produce only a very modest increment in pension. That would be true whether you were on £10,000, £15,000, £20,000 or £22,000. The first £2,000 produces little additional revenue. That is why, while the argument is true that you might as well put it up to £7,500 because the difference between £5,200 and £7,500 is tiny, it is also the case for the first £2,000 of earnings above £7,500. It is true for wherever you set the threshold, so it does not apply to the figure of £5,200 as such; it applies to the fact that you have a threshold at all, which is not based on the first zero pound.
The whole of the report is fallacious, in so far as it hinges on that argument. Otherwise, if the woman is auto-enrolled at £5,200 with earnings of £7,400, her pot over 25 years, I estimate, with a levy on the £2,000 increment, will be about £10,000 greater than if she was enrolled at £7,400. But if she is enrolled at £7,400, and has earnings of £2,000 above that—say £9,400 or £9,500—she will still have the same size pot on the first £2,000 or so of income, give or take £100 or £200.
The additional pot argument, in other words, applies wherever you pitch the threshold—unless, of course, you are up in the £30,000 or £40,000 region, where by definition you have a much higher increment. Therefore, the argument that the pots are too small to be worth bothering about either is valid for wherever you set the threshold for low earners or is not valid at all. The problem is not whether it starts at the LEL of £5,200 or at the ET at £7,400; it is that it does not cover the earnings below the threshold—the first £5,200 or £7,400. Auto-enrolment on those would make the difference that matters. That is what this amendment is about.
I am pleased that the Government have agreed that, following the Johnson report, wherever a woman wishes voluntarily to enrol between the LEL of £5,200 and the ET at £7,500, the employer must contribute. As I have suggested, although that is useful, it is not enough to make a really significant difference unless it is extended to embrace the whole of the earnings from pound zero.
My amendment adduces no new principle. The Government have already agreed—unless they have changed their mind and I have not picked that up—that young people below the age of 22 can voluntarily enrol. I welcome this. The Government have also agreed—I also welcome this as a concession following the report—that low earners earning between LEL and ET can also voluntarily enrol before they hit the auto-enrolment figure of £7,500. This amendment would allow the earner voluntarily to enrol on all her earnings from pound zero, provided that she was at or above the threshold—a threshold that I would like to be the LEL for the sake of consistency.
Therefore, no new principle is involved in this amendment. It would merely bring into NEST those employees who, if they were in a standard occupational pension, would have their earnings covered from pound zero. It would merely align NEST with best practice already in occupational pension schemes—nothing new or novel. Only NEST has the LEL threshold for voluntary entry at £5,200 and ET at £7,500 for auto-entry.
What does all this mean? Take a woman on half average earnings—say £11,000 a year. Only in NEST would a third of her earnings, between £7,500 and £11,000, be automatically pensioned. If she were in an OP, her entire earnings would be automatically pensioned. I emphasise that it would be voluntary for her to make the choice as to whether she welcomes and wants this form of savings going back to pound zero, given her family circumstances.
Why is it necessary? Some 40 per cent of women at retirement may not be married; they may be cohabiting and they may or may not be financially interdependent with their partner. As a result, they need to carry their own pension. I am sure that the Minister and everyone in this Room would agree with me on that. As it stands, only a third of her income would be automatically pensioned. Should ET rise to £10,000 and she is on earnings of £11,000, almost none of her earnings—a paltry £1,000—would be pensioned unless she chose voluntarily to go back down to the LEL. Not surprisingly, this would result in the small sums which the industry finds a hassle and the employee finds disappointing and which trap employees into benefit tapers.
I will repeat the statistics that I offered at Second Reading. Under these proposals, a woman has the right to enrol voluntarily below the LEL, so a woman on £11,000 after 25 years who voluntarily saved on all her earnings could end up with a pension pot of £40,000 over 25 years. If she relied on auto-enrolment and it were to kick in with an ET of £10,000, which is what the Pensions Minister, the honourable Steve Webb, is promising us, she would retire with a pot of virtually nothing. So the difference is between £40,000 or £1,000 or £2,000.
This amendment adduces no new principle. It is about voluntary enrolment in which the employer must contribute. That principle has already been established for young people and for the gap between LEL and ET. There would be no additional small pots. On the contrary, it could well double the pots and more, to the gain of all parties concerned, and make it worth saving, which is what we all want. I beg to move.
Baroness Drake
My Lords, to my mind there are two reasons why Amendment 16, tabled by my noble friend Lady Hollis, is attractive. First, it would enable people outside the lower limit on the band of earnings who want to save to be able to. Those of us who followed the debate know that a reason for the lower limit on the band of earnings, as distinct from the earnings trigger that is now proposed, was the consideration of the persistently very low-paid workers and whether it was appropriate for them to be nudged. However, as my noble friend said, this amendment is not auto-enrolling. It allows for the active choice of the worker—an active decision of someone on low earnings for a particular job. If they choose positively to make that decision, there seems to be a good and fair reason for the employer to make a matching contribution of 3 per cent, particularly because their incomes are low. The individual would still be a worker and the 3 per cent employer contribution would also assist with the arguments about de minimis levels of contribution and the consequential impact on costs and charges.
My second reason for finding this amendment attractive is that it extends the principle that the reforms should work for women because, although women are most likely to have earnings below the qualifying band, their household income may be such that they still want to make a pension contribution. That is very important. I declare an interest because of my involvement with NEST. NEST is designed to allow someone voluntarily to contribute once they have a NEST account, although I acknowledge that there are de minimis requirements because of the need to keep costs and charges low. However, I am sure that in most instances the combination of the employer contribution and the employee contribution would go above those de minimis requirements. It could also start to address the multi-job problem where women have several mini-jobs, because individual contributions per job look low but in aggregate could be much greater. Although I fear that many women in such mini-jobs will not have the confidence to overcome the barriers of inertia and voluntarily opt in—their needs will require more systemic change, as we discussed yesterday—none the less there will be women who will want to make the active choice and who will be in circumstances where that makes economic sense and where it will assist the asset accumulation for a pension in their own name. So the proposal certainly has attractions.
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
This is an important amendment, not just for this but for all the other areas where we are looking at voluntary enrolment. I hope, therefore, that the Minister will reassure us on the employer making sure that the employee in the waiting period can voluntarily enrol into a NEST scheme before it becomes automatic. I hope that he will also reassure us that employees earning above the LEL, but below the automatic enrolment threshold will be made aware of their rights. That could involve quite a considerable number in jobs where, for example, very many women work part time; I am thinking of retail, where women might work two days a week and so on. I hope he can give us some reassurance as to how he is going to operate a nudge, where there is opt-in, as opposed to where there is auto-enrolment.
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 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.
Baroness Drake
Baroness Drake
My Lords, I shall also speak to Amendments 29 to 32. Please forgive me if I take a little of your Lordships’ time on this matter, because I feel strongly about it. The policy of auto-enrolment—or asymmetrical paternalism, because we should give the friend of the noble Lord, Lord Freud, his due recognition—has the broad support of all the main political parties and stakeholders. That broad support and consensus are important. However, let me capture our concerns which led to the tabling of this and the associated amendments.
The definition of the workforce who should be auto-enrolled into a workplace pension and benefit from the contingent employer compulsory contribution and the tax relief or credit is the product of both thorough analysis and the iterative process required to deliver such a widespread consensus. The definition of the workers to be covered by the new employer duty to automatically enrol, the band of qualifying earnings and the minimum contributions are all captured in legislation. The intended outcomes include the need to achieve a very wide coverage of the working population, including low-income to moderate-income earners, to facilitate them saving from a relatively early age given the long years of saving needed to achieve an adequate income in retirement, and for the design of the private pension system, as well as the state system, to work for women.
On taking office, the Government commissioned Paul Johnson and his colleagues to review the auto-enrolment policy and its provisions. I commend and thank the Government for holding to the main thrust of the policy that was enshrined in that consensus and captured by the previous Government through the Pensions Act 2008. I am sure that maintaining that position did not come without its challenges, not least, no doubt, in exchanges with the Treasury, so I would be the first to acknowledge my thanks to them for holding to the main thrust of the policy.
Our concern, however, is that Clause 8 gives to a Secretary of State too great a power to significantly change the population of workers who will be the beneficiaries of auto-enrolment—in particular, the power to raise the age requirement for a qualifying worker above the current age of 22 and the power to raise significantly the earnings threshold at which a worker would qualify for automatic enrolment.
The purpose of Amendment 28 and those associated with it—Amendments 29 to 32—is to probe why and in what circumstances the Government would wish to raise the qualifying age. It is also to limit the Secretary of State’s powers on the extent to which he or she can increase the level of the earnings threshold at which the automatic enrolment of a worker would be triggered and to require the Secretary of State to provide an impact assessment to accompany any order to increase or decrease any of the amounts that he is empowered to increase or decrease under this clause.
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 Drake
My Lords, I share the concerns of the noble Lord, Lord German, and I am pleased that he has tabled this amendment, as it allows us to debate a matter which is of increasing concern to consumer groups, such as Which?.
There is a real issue of how the Secretary of State exercises his powers under the 2008 Act in terms of setting qualifying standards. Here, we are seeing two tensions coming into play. With higher levels of scheme membership, which automatic enrolment will bring, increasingly employers will not want to retain former employees—the leavers—in their trust-based DC schemes. They will prefer to transfer them out or default them into some form of personal pension. That is not necessarily an irrational position for an employer to take but the former employee—the leaver, the deferred member, the not-contributing-to-that-pot member—will move away from the preferential charges structure that their employer may have negotiated into a personal pension scheme with a much higher level of charge.
Where the employer workplace pension is delivered by a contract-based provider, both the employer and the contract provider may have an interest, for different reasons, in defaulting a departing employee or leaver into a personal pension which will very likely have higher charges, the employer motivated by not wanting to be responsible for a former employee and the insurance company because it does not want to maintain the lower charges for a non-contributing former employee. As the noble Lord, Lord German, has said, we have already seen instances of insurance companies offering active-member discounts, which, like Which?, I always say can be described as inactive-member premiums in terms of the charges raised. I know that this is something preoccupying the National Association of Pension Funds because it wants to set a quality mark and it knows that this is a particular problem.
In a world of auto-enrolment with an average of 11 job changes over a lifetime and the prospect not only of the difficulty of achieving a transfer but sometimes the costs involved in transferring and consolidating pension pots, there will over time be an increasing number of individuals who will have pension pots into which they are not actively contributing. It is this status of not actively contributing to the pension pot which leaves people vulnerable to the high or higher charges and the consequent returns on their pension contributions.
Therefore, whether the Secretary of State uses the opportunity of an amendment such as the one tabled by the noble Lord, Lord German, or the powers reserved to him in the 2008 Act, he will need to think about what he chooses to do to control the vulnerability of workers to escalating charges on pension pots where they are not actively contributing because they have changed their employer. I am confident that that problem is not going to go away. Which? is seized of it, as is the NAPF, and it is something that the Secretary of State is going to have to address. It is not just a case of looking at the charges when somebody is actively contributing and accruing; there is the question of what is happening to the charges when people are no longer actively contributing into that pot because they have gone to another employer and may be saving into another scheme. It is a growing and important issue, and certainly consumer bodies are very alert to it.
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.
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.
Pensions Bill [HL]
Baroness Drake Excerpts(15 years ago)
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Baroness Drake
My Lords, I support Amendment 1 and others in the group in the name of my noble friend Lord McKenzie. As so many speakers have already said, the amendment is not an argument in principle about whether the state pension age needs to rise to keep fiscal sustainability in the state pension system. It is not an argument in principle about whether or not the timetable for the move to age 66, 67 or 68 should be revisited. On the point made by the noble Lord, Lord Boswell, I do not even argue that one cannot disturb settled expectations; in the face of the longevity trends, it is not sustainable to make that assumption. This is not even an argument about whether or not women’s state pension costs or poor people’s pension credit costs should make a contribution to reducing the fiscal deficit in this Parliament, because the Government’s proposals mean that the savings would flow from 1916—sorry, not 1916; oh that that were true. I mean 2016.
The amendment, however, is an argument about an important principle that is valid not only in this instance but whenever one revisits accelerating the state pension age, which might be the case on the subsequent increases—that is, that the manner and the timing of any state pension age increase has to give people fair and sufficient notice to adjust and minimise any disproportionate impact on particular groups of people. The acceleration of the equalisation timetable does not meet that principle.
I asked myself three questions. Who is impacted by the accelerated timetable? Are particular groups disproportionately impacted? Can those impacted reasonably adjust to their loss in the time given? I invite the Committee to look at those questions as well. In terms of those impacted, I do not want to rehearse all the figures that we have shared about the position of a particular group of women in their late 50s, but it is worth confirming that it is not a small number—500,000 will have their state pension age deferred for at least 12 months, and 300,000 for 18 months to two years.
With regard to the amendment of the noble Lord, Lord Boswell, it is important to see the distributional impact. I would not want the situation to be like the water in a balloon, where you think you have dealt with it moving one way but you have just created a consequence in another. If progress can be made, though, progress is valuable.
Baroness Turner of Camden
My Lords, I am attempting to follow on from what I said at Second Reading, when we discussed the Bill in its entirety. I said at that time that there were many people, mostly men, who wanted to work on and who enjoyed the jobs they were doing, and did not object at all to working on. I made the point, however, that not all jobs or all people were the same. There were instances where I thought that there should be provision for some flexibility, and that is what my wording seeks. It may not be particularly marvellous wording and I am not committed to it, but I have some concern about the issues raised by it.
There are numerous people—mostly those who have manual skills but both men and women—who perform work that, if it is not done, we would notice and we would no doubt complain about it. We complain if our hospitals and schools are not properly cleaned and if we cannot get work done on the maintenance of our homes, if we want somebody to do it. These are the sort of people who, generally speaking, do not have a great deal of educational attainment, and whose skills are manual. They often, at the end of their working lives, look forward very much to being able to retire at what was the standard retirement age, but they now find that they are expected to work for longer, and in many cases they do not want to do so. In many cases they feel that enough is enough. They have had enough working time doing the sort of arduous, not particularly interesting and perhaps even back-breaking job that they have been doing, and they want the opportunity to retire. We want to make provision for people like that to be able to retire earlier. Often they have health problems of one sort or another. That is made clear in my amendment, where I say,
“case of illness or infirmity”.
My noble friend Lady Hollis has already drawn attention to the fact that there are many instances of, and much information available about, the ways in which some poorer people at the end of their lives are subject to ill health of one sort or another, and who should therefore not be expected to continue to work in order to acquire entitlement to their state pension, and certainly not when more years are required. That applies equally to women. Again, as I have said, if you have been doing a job cleaning, you may not want to go on and on until you are 66 or whatever. Certainly, although lighter work might be available, they might not be able to do it. I remember talking to a cleaner who said, “I have not got much education. I am not very good at reading or writing. I could not do another sort of job; I can only do this sort of work”. These people are valuable to us. We notice it very much, and do not like it, if they are not there to do the work that we expect in order to keep our lives reasonably comfortable. I therefore think that arrangements should be made for some flexibility in relation to people doing arduous and sometimes dangerous work. We do not want elderly people clambering up ladders in order to do construction work. That is not a good idea, and it might not even be safe for them to do it. We ought to have a degree of flexibility. I am not wedded to this wording, but that is what I am after, and it is worth considering.
Baroness Drake
I express my sympathy with the sentiments that concern my noble friend Lady Turner in her amendment. As we can see from the previous debate, the acceleration of the equalisation timetable is disproportionate in its impact on the poorest and on those with disabilities, many of whom will have worked in manually demanding professions. I look to speak to that issue in my Amendment 7. Although I have great sympathy with her concerns, I am not sure whether the state pension age is the right mechanism for recognising the disparity in life experience that people have, and it may take some time to reduce that disparity of experience or outcomes as a result of working life experiences. Certainly, initiatives aimed at improving health generally and reducing the disparities between socioeconomic groups and geographies—because that can be quite distinctive as well—are important, because I have a great deal of sympathy with the point made by my noble friend Lady Hollis, who said that when you look closely at the figures, certainly for lower socioeconomic groups, the healthy life expectancy rate of improvement is not as great. One does not absolutely know how that will evolve over time, which is why it is important that the Government retain initiatives aimed at reducing existing health disparities.
Flexibility in working arrangements is also extremely important because, regarding scrapping the default retirement age—of which I approve—and other stated policies to improve the working position of older people, it is one thing to have a policy but it is quite another challenge to deliver the changes and cultures in working practices at the work face to deliver the flexibility in working arrangements that you need for older people. Certainly, changing employers’ practices and attitudes is important. Those may be more effective mechanisms in reducing that disparity over the long term.
Having said that, if ill health disparity persists between socioeconomic groups, and one does not know how that will evolve—in terms of ill health the early signs are that those disparities could persist—a Government may well want to look at the qualifying age for pension credit to deal with those issues, where it is not possible for someone with ill health to address the disadvantaged-income position that they will be in. The Government should certainly remain open to that, depending on how the figures evolve.
Lord Boswell of Aynho
I wish briefly to comment on the amendment of the noble Baroness, Lady Turner. She is on to a substantive issue of concern: that there are clear occupational differences which, in a sense, mirror some of the concerns that many of us across the parties would have in relation to differential health outcomes between people with different occupations. In a sense, that supports some of the points that have been made about relative gender disadvantage. We understand why the Bill is conceived as it is, but those are issues that are entirely proper to raise in Committee.
I am not enthused by the text of the amendment, not least because I am not a Treasury official, and I notice that it provides a power to revise but does not explicitly state that there should be a power to revise downwards. Knowing one or two Treasury officials, they might have a go at the opposite. More seriously, there are concerns about whether we should differentiate the pensions and benefits system by different occupational groups, in the way that some of our continental neighbours have done. I may be old fashioned, but I would be reluctant to do that. Whether we could define the categories in any coherent way that did not give rise to further anomalies or whether this is the right approach, I am sure there is a problem which the noble Baroness is right to draw to the Committee’s attention. For example, I am sure that there are lots of issues in the construction industry or agriculture, which I know well, whereby we can try to mitigate and improve occupational health. We should do that, but I am not sure that a vehicle that is about the state pension age is the appropriate one to do it.
Baroness Drake
“Qualifying age for pension credit
(1) The Secretary of State must make regulations setting out the qualifying age for pension credit.
(2) The qualifying age for pension credit from 6th March 2011 until 6th March 2020 shall be set so that the timetable in Schedule (Graduated timetable: qualifying age for pension credit) has effect.
(3) After 6th March 2020, the qualifying age for attaining pension credit shall be set at an age that does not exceed the age that a person qualifies for the state pension.”
Baroness Drake
My Lords, I shall speak also to Amendment 11. I return to the principle that the manner and timing of any increase in the age of state pension payments must give people fair and proper notice and should not be disproportionate in its impact on particular groups. The Government’s proposals for accelerating the timetable for state pension age equalisation and commencing the move to 66 for men and women from 2018 provides a five-year or seven-year notice period, depending on whether you are a man or a woman. Under the Government’s proposals, however, the age of eligibility for the receipt of pension credit, which is targeted on the poorest pensioners, follows the women’s state pension age. Both the short and shorter notice for the acceleration of the equalisation timetable impacts the poorest men and women, who will have to wait longer to receive their pension credit income but with little time to prepare.
Pension credit in 2011 will be £137.35 per week for a single person, so a further increase in the state pension age of two years, for example, results in a corresponding increase in the age for eligibility for pension credit and will result in a loss closer to £15,000 for those affected. To get some sense of scale, in 2010 there were approximately 954,000 claimants for pension guarantee credit, of whom over 540,000 were women.
The amendment is intended to reduce the disproportionate loss that would be experienced by those who are the poorest and on the lowest incomes, and are the least able to adjust to the short notice from the accelerated timetable. The amendment would provide for a way of mitigating that disproportionate impact by allowing the age for eligibility for pension credit to track the original equalisation timetable set out in the Pensions Act 1995—that is, for it to rise more slowly. Those eligible to receive pension credit would do so on the same date between 2011 and 2020 as they would have done under the original timetable for state pension age equalisation. In this way, the beneficiaries of pension credit—men and women currently in their late 50s—would not experience the markedly higher loss of pension credit income that would otherwise occur. Amendment 11 reinstates that timetable for wholly pension credit purposes.
I repeat, because it is important, that the Government’s current proposal that the age for receipt of pension credit should track women’s state pension age, in line with their accelerated timetable, does not make a contribution to reducing the fiscal deficit in this Parliament, because of the flow of savings from 2016. Again, this amendment does not undermine fiscal stability in the long term. The state pension age will still rise in response to increasing life expectancy, although my noble friend Lord McKenzie and I would argue that the increase from 65 to 66 should commence in 2020, which would still maintain the course for the long-term fiscal sustainability of the state pension system. This amendment is about fairer treatment for the poorest and least well off who are in their late 50s and nearer to pension credit age.
I turn now to the justification for the amendment. The Government, in their impact assessment, identified key criteria against which they assess the timetable options for accelerating the increase of the state pension age for women and men, and consequently the impact on the eligible age for pension credit. One criterion was the effect on the fiscal sustainability of the state pension system and another was inter- and intra-generational fairness. This amendment does not undermine long-term fiscal sustainability or prevent progress on inter-generational fairness. However, it seeks to inject some intra-generational fairness in that it seeks to mitigate for the concentrated impact on the poorest group of people who had the misfortunate to be born in particular months in the 1950s.
Perhaps I may pause here to anticipate the point made by the noble Lord, Lord Freud, in response to Amendment 1, which I am sure will be influencing his thinking on this amendment too; namely, that once one has reduced the level of debt in this Parliament, one cannot afford to relax because there is still the long-term sustainability challenge. I agree that one cannot relax over that, but there are more changes in the pension system to come. The timing of the phases of other increases—to 66, 67 and 68—I am sure will be a debate of some substance. The adjustments that will be made to increasing longevity in private pensions are happening and will continue to happen because of the impact that will be felt in annuity rates. We know that, even where there are DB schemes, normal retirement ages are rising and we await the report of the noble Lord, Lord Hutton, on longevity and the Government’s exposure to fiscal liability over the long term.
These are the big battalion contributions to fiscal sustainability over the long term. It is not the treatment of women in their late 50s, or of the very poor who happen to have a birth date in some period in 1954, that is going to deal with that major challenge, which I completely accept, of long-term sustainability. We can banter about which political party or group had the better timetable—I still hold to my principle on any timetable—but I pay credit to the noble Lord, Lord Turner, because he relayed the narrative to the country that the state pension age had to rise. He took the flak and he drew the sting, which allowed politicians to debate it and to produce the policy changes that were required in that situation.
So there is an important argument about long-term fiscal sustainability. I continue to struggle with the fact that with those big battalions, which are important—we have some big debates to come—somehow a group of women born in a particular period in the 1950s has to be treated in a deeply unfair way for this country to be in a sustainable position.
The Government's figures confirm that the pension income loss for those men and women who face a more aggressively accelerated increase in eligibility age for pension credit is even more marked for those for whom receipt of pension credit is deferred for more than a year than would be the case under existing plans. If allowance is made for their lower life expectancy, because they are more likely to be in the lower socioeconomic groups, that loss rises even further to as high as 10 per cent of state pension income. I accept that the evidence shows that those in lower socioeconomic groups have also benefited from improvements in their life expectancy—although, as we have just discussed and as my noble friend Lady Hollis was sharp correctly to point out, not necessarily so greatly in their healthy life expectancy. That improvement is an argument in support of the general proposition that the state pension age needs to rise. It is not an argument to deploy to defend giving those on the lowest incomes so little time to adjust.
The men and women who will be impacted by the accelerated rise in the qualifying age for pension credit will have little opportunity to adjust to their loss in the time available. For men and women without private savings and dependent on pension credit, working may not result in any improvement in post-retirement income, because any resulting gain in state pension accruals could be offset by reduced pension credit entitlement. For women who will be dependent on pension credit, we have only to look at the difference in median pension savings between those of a 56 year-old woman of £9,100, which translates to £11 per week on a level basis, and those of a man, at £52,800, which translates to more than £60 a week, to confirm on those median figures how little prospect low-income women have of saving sufficient to cover their loss from the delayed receipt of pension credit. That is particularly so given all that we know about their labour market participation level, earnings, membership of pension schemes and caring responsibilities. We partly debated this under the previous amendment, but men who are dependent on pension credit face similar challenges.
Lower-income groups are likely to be less healthy and, if working, to have lower incomes and to be less able to adjust to the short notice by working longer and saving more. The Government's impact assessment shows that men and women born between 1953 and 1955 on lower earnings, with interrupted careers and dependent on pension credit throughout retirement, will suffer the greatest percentage loss in lifetime pension income as a result of the accelerated timetable.
The Government’s modelling shows that people who rely mainly on pension credit in retirement will lose proportionately more than higher earners, who can also carry on contributing to their private pension saving. A lot of those figures are taken from the impact assessment. If we relate them to different ethnic groups, people of black and black British origin have the lowest level of private pension and investment income: £46 per week compared to £155 for white people.
Lord Freud
I need to come back to the point that working-age support systems are much better systems of supporting people, particularly by universal credit, than artificial manipulation of when pension age and pension credits click in. There is very little difference between the position of people who are just below state pension age and those just above it. We just happen to use this age as a useful justification of where we can draw the line. Just as there is little difference between the line at state pension age, so there is little difference between those who are 63 and 62 or 62 and 61. In benefit terms, the only difference is what help people might receive to get into or stay in employment. We are quite certain that we want people below state pension age to work if they possibly can. We cannot give up on these people. That has been going on too long. The right place for people below state pension age is on a working-age benefit, and universal credit, which will be available in 2016—although it is starting in 2013—will be the most suitable benefit.
It is important that we target means-tested help in the most appropriate way. State pension age is a fair way of separating out support for those of working age and of pension age. Ensuring that people get the appropriate work-related support and making work pay are essential to enable people to move out of poverty and build up sufficient resources for their retirement. For these reasons, I urge the noble Baroness, Lady Drake, to withdraw her amendment.
Baroness Drake
I shall try to pick up some of the points put by the noble Lord, Lord Freud. This amendment breaks the link between the state pension age and the pension credit qualifying age only until 2020 because the associated amendment puts a time limit on that. It seeks to replicate the 1995 timetable for equalisation because it is trying to address a problem created by the acceleration of the original timetable. It is not seeking to bind the Government’s hand once that problem has been dealt with. The amendment would allow the Government to restore the link between the state pension age and the pension qualifying age. In another place, in another debate, I might want to argue the merits of not doing that, but that is not what this amendment seeks to do. We have sought to avoid the complication of that debate. It is merely for a defined period to address this disproportionate income impact point from this accelerated timetable.
Baroness Drake
I would like to comment on Amendment 8, tabled in the name of the noble Lords, Lord German and Lord Stoneham, which has my sympathy. I concur with the comments made by the noble Lord, Lord German, that we are clearly all concerned with the consequences of the accelerated timetable. The noble Lord, Lord Boswell, referred to us all looking for different architectures with which we can address this matter, and one should never close one’s mind to architectures if one can get the outcome that one desires, or at least progress towards it.
With regard to the legs to the amendment—(a), (b) and (c)—on the basis of what I said on my Amendment 7, I wholeheartedly agree with making some pension credit adjustment but it would need to be made for both men and women, otherwise you would simply address the issue of poor women, not poor men.
On the question of providing for women with serious illness, those who are seriously ill clearly believe or feel that they have a payment that they have built up and are entitled to under the state pension system that has been withdrawn with little notice. They will have absolutely no prospects of adjusting to their loss, and are unlikely to benefit from the argument that they will live longer. I imagine that there would be some complexities in trying to administer a provision that focused on those with a serious illness, and I take my noble friend Lady Hollis’s point about who, and how much, should be paid.
It may be that the easiest solution is still to look at decelerating the timetable. As my noble friend Lord McKenzie said in responding to the amendment of the noble Lord, Lord Boswell, we are all keen to make progress and should stay open to looking at timetables. My noble friend and others have revealed how the timetable has an accelerating effect. There are those who lose for a year, those who lose for up to 18 months and those who lose for up to two years, so there is an accelerating impact in terms of numbers of people affected. Still, I would not want to fall out over architecture if there was a way of moving forward to get the kind of outcome that we all seem desirous of achieving—those of us moving amendments, anyway.
Lord Freud
I thank my noble friend Lord German for tabling the amendment. We have covered a lot of the ground in relation to it already, so I shall try not to be repetitious. We are talking about what has been variously described as an acceleration bubble, a moving horizon or a squidgy balloon—as the noble Baroness, Lady Drake, said. We are effectively looking at concessions for women born between July 1953 and September 1955.
I am not in a position at this stage to provide any additional information about discussions on a single tier, which I referred to at Second Reading, but one of the issues here is clearly that when one looks at the complexity of the architecture, one has to have an eye to whatever might or might not emerge from those discussions. We have already talked about freezing or delaying the increase in the pension credit qualifying age for people affected by the changes in state pension age. We are not going to make a song and dance about technical drafting here, although the noble Baroness, Lady Drake, made the point about the application of the amendment to women, when it would actually have to apply to men. However, let us put that to one side.
The issue that I aimed to emphasise in the previous discussion was that pitching the pension credit qualifying age at a point below the state pension age for a specific group would undermine fundamental welfare reforms. However, it is not about just the structure—and I accept that this is about a temporary change—or purely the money; it is complex for customers and complex to administer. That is one of the reasons why that solution is difficult, if not undesirable.
In response to the request of the noble Baroness, Lady Hollis, for me to write to her on the costs of paying people in between the old and the new pension ages, I am happy to look at those costs and to write to interested noble Lords. I imagine that that includes most of us in the Room.
I move on to the issue of serious illness and emphasise that we have great sympathy for those with ill health, including those in this particular cohort of women. However, I must point out that help and benefits are already available for people with health problems and I do not therefore accept that we need to provide additional financial support, whether that is in the form of a payment above what we already pay out or some bespoke pension age arrangement.
The final option suggested by the amendment is slowing the acceleration of the pension age increase for these women.
I can assure noble Lords that, when we were considering how to bring forward the increase to 66, we looked at whether we could start that change for men slightly earlier than for women, to avoid altering women’s state pension age before 2020. The reason that we have not done this is because it would be unfair to increase the difference in treatment between men and women. It would also be unfair to prolong the difference in treatment beyond the period already agreed. I will take this opportunity to explain why, and I am picking up the question raised by my noble friend Lord Boswell earlier in the afternoon. The equal treatment directive allows the setting of the state pension age to be a limited exception to the overarching rule that men and women must be treated equally in social security matters. This exemption, or exception, is only temporary to give member states time to adjust their state pension ages so as to bring women’s state pension age into line with men’s. As we know, the legislation in 1995 set out a timetable for equalising the state pension ages between 2010 and 2020, so anything we do now will be measured against that timeline. That is why we decided that we must increase the state pension age to 66 only after women’s state pension age has reached 65. I therefore urge the noble Lord to withdraw his amendment.
Pensions Bill [HL]
Baroness Drake Excerpts(15 years, 1 month ago)
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Baroness Drake
My Lords, I thank the noble Lord, Lord Freud, for introducing the Bill and I acknowledge his willingness to discuss matters. We are pleased that the Government are pushing ahead with the automatic enrolment of workers into workplace pensions, thereby continuing the reform programme, introduced under the Labour Government, which commanded widespread consensus across political parties and stakeholders. We want to work with the Government to maintain that consensus and to build on it. However, we believe that they should not proceed with the accelerated timetable for equalising the state pension age; that the proposals for the threshold of earnings which trigger the automatic enrolment of workers into a pension have the potential to detract from enabling low to moderate earners to save; and we have concerns about the employers’ self-certification and occupational pensions indexation.
In the face of increasing life expectancy, I accept that raising the state pension age is part of the solution to maintaining a sustainable state pension system that supports private pension saving. I accept that when improvements in life expectancy accelerate at a greater rate than anticipated, it becomes necessary to revisit existing plans. As a principle, however, the manner and timing of any increase in the state pension must give people fair and proper notice and sufficient time to adjust, and ensure that the impact is not unfair and disproportionate for particular groups. The acceleration of the timetable to achieve the equalisation of pension age for women and men, from April 2020 to November 2018, does not meet that principle and breaks the promise made in the coalition agreement not to start increasing the state pension age to 66 for women before 2020. The Government should honour the 2020 timetable for equalisation and focus the acceleration of the timetable for the state pension age to rise from 65 to 66 for both men and women to between 2020 and 2022
Let me state the nature of the unfairness. Under the Government’s proposals, some half a million women will receive their state pension at least 12 months later than they had previously been advised. For 300,000 women born between December 1953 and October 1954, this delay will increase to between one and a half to two years. For 33,000 women born between 6 March and 5 April 1954, it increases to two years. For them, the loss in state pension is around £10,000; for those on full pension credit, the loss is closer to £15,000. These women, with five years’ notice of the timetable change, have little time to prepare for their income loss, which is neither fair nor reasonable. The impact of the accelerated timetable is too harsh on women in their later 50s, the poorest of whom will have to wait longer for their pension credit. The argument that women live longer than men, so draw their state pension for longer, is not mitigation for women in their late 50s being given so little time to adjust to their loss of income. It is simply not realistic for women in their later 50s to be able to save sufficiently to address the loss. The introduction of the employer duty to enrol workers into a pension scheme will not conclude until 2017, just 12 months before the start of the move from 65 to 66 in 2018 and 12 months after the start of the accelerated timetable in 2016.
Women in their later 50s are less likely to be in a pension scheme and more likely to be working part-time, earning low incomes. Many are inactive because of looking after family. Even the Government, in their report A Sustainable State Pension, concede that speeding up the pension age equalisation timetable will not significantly reduce the gap in the proportion of women aged 55 to 65 who are out of the labour market compared to men. Women in their later 50s have fewer savings: the median pension saving of a 56 year-old woman is just £9,100, almost six times lower than that of a man, which stands at £52,800. Although as a result of reforms introduced by the Labour Government, most women reaching state pension age in late 2018 will be entitled to a full basic state pension, they will still have a lower entitlement to additional state pension. Nearly 40 per cent of women approaching retirement are not part of an ongoing marriage so many cannot rely on their partner's income to cushion the financial loss.
In summary, women in their later 50s, for historic reasons of gender discrimination, will have lower state pension and private savings than men, will have earned less over their lifetime, may have been unable to join a workplace pension, had interrupted careers and are more likely to be carers. This inequality will remain and is exacerbated by the accelerated timetable, which does not give them sufficient time to prepare for their income loss. The fiscal benefit from the acceleration of the equalisation timetable will not impact on the deficit reduction in this Parliament. The savings will start to flow from 2016, when net borrowing is forecast to have fallen significantly.
We are pleased that the Government are pushing ahead with automatic enrolment, but the changes to the earnings threshold, which triggers a worker’s enrolment into a pension scheme, cause deep concern. The Government have set the threshold at £7,475 in 2011-12 earnings terms so that it is aligned with the threshold for income tax. However, the Government’s aspiration for the income tax threshold is to raise it to £10,190. If the threshold to trigger auto-enrolment were to rise to £10,190, it would exclude nearly 1 million workers per year from workplace pensions, 76 per cent of whom would be women, with the loss of £40 million of employer pension contributions. Consequently, of the group targeted to benefit from the workplace pension reform, 66 per cent would be men and only 34 per cent women. The earnings threshold for auto-enrolment should be set and maintained in relation to the national insurance threshold, not the income tax threshold. Raising it to £10,100 would not, if I may say so to the Minister, be a slight increase, but directly undermine the objective of enabling low and moderate earners to save, which is confirmed by the Government’s own impact assessment and the Paul Johnson review. Nearly half of those in the lowest earning group are in couples, where one works part time and the other full time. The Johnson review says:
“Many or most very low earners are women, who live in households with others with higher earnings and/or receive working tax credits. These may well be exactly the people who should be automatically enrolled”.
Yet we have a set of proposals that would exclude them.
A key principle of pension reform is to enable women to build up a pension in their own right. The higher the threshold for auto-enrolment, the less the reforms will work for women. Evidence also shows that earnings are not static and that for many workers, men and women, they can change significantly over their lifetime. Most low earners go on to earn more, so saving will still be very beneficial, because of the continuing contribution to their pension over their working life. The Johnson review presented a variety of evidence to show that relatively few people have persistently low earnings over their lifetime. If the threshold is raised to £10,190, it is not sufficient to say that the impact can be mitigated by those earning below this being allowed voluntarily to opt in. Inertia prevents people from saving, which is why we have these reforms. So it is really not credible to say that the lower paid still have to overcome these barriers but that those earning higher incomes would benefit from auto-enrolment—or asymmetric paternalism.
A higher threshold disregards how working-age benefits can make it pay to save. Individuals’ pension contribution is disregarded from income when calculating entitlement to tax credits. Just over one-third of those earning between £5,000 and £10,000 are in receipt of tax credits. That, for some, can produce an implied tax relief of 50 per cent to 60 per cent, which provides a very positive incentive to save.
The Bill provides for an employer to certify, subject to a regulatory test, that their company arrangements meet the requirements on minimum pension contributions. Although the Bill prescribes the powers of the Secretary of State in setting the test, our concern is that, in trying to accommodate the good employers, a compliance loophole is created for bad employers. The test is still subject to consultation, and there may be pressure to change further. Although the Johnson review asserts that under the proposed test, based on ONS figures, 92 per cent of workers would match the qualifying earnings, post auto-enrolment an incentive may have been created to reduce basic pay and arbitrage between the 8 per cent on the band of earnings test and the certificate of alternative test.
I must take the opportunity of this Bill to refer to the decision to use CPI as a measure of increase in the general level of prices, which is estimated to deliver—in estimates revised upwards by the Government—an £83 billion reduction to occupational scheme members’ pension benefits over the next 15 years. This change effects a switch of assets and benefits from scheme members to scheme sponsors but does not directly impact the public deficit. While one can see the merits in a change for a limited period, the permanent change will be felt even after the fiscal deficit is long gone. I say this against a background of concern over whether the CPI index is appropriately constructed, given the basket of goods that it captures, notwithstanding the merits or otherwise of an argument on the way in which the mean and the substitution effect is calculated.
The Bill allows employers to defer enrolling eligible workers into a pension for up to three months and consequently reduces annual employer pension contributions by some £150 million. Given that individuals have, on average, 11 different labour market interactions during their working life, this could add up to nearly three years of pension savings or a 7 per cent reduction in an individual’s fund. Will the Government be monitoring the impact of the three-month waiting period and how widespread the usage of that facility will be by employers? Finally, stakeholders need timetable and policy certainty so that they can understand and prepare. The Bill leaves a significant amount to regulation. Can the Minister therefore confirm in writing when the regulations will be available in draft?