Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2016

Baroness Drake Excerpts

Monday 14th March 2016 Grand Committee

[The Minister of State, Department for Work and Pensions (Baroness Altmann) (Con)]

My Lords, this order, which was laid before the House on 8 February 2016, reflects the conclusions of this year’s annual review—required by the Pensions Act 2008—of the automatic enrolment earnings thresholds. The review considered both the automatic enrolment earnings trigger, which determines the point when someone becomes eligible to be automatically enrolled into a workplace pension, and the qualifying earnings band, which determines the earnings levels in relation to which the enrolled employee and their employer have to pay contributions into a workplace pension.

The order sets a new upper limit for the qualifying earnings band and is effective from 6 April 2016. The earnings trigger and the lower earnings limit are not changed within this order. The lower earnings limit remains as set in the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2015. The earnings trigger also remains that set in the Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014.

Automatic enrolment continues to make workplace pension saving the “new normal”. The proportion of those enrolled who later choose to opt out remains low, at 9%, according to the Employers’ Pension Provision Survey 2015, which is well below the original programme assumption of 28%. Our new awareness campaign, launched in October 2015, Don’t Ignore the Workplace Pension, builds on previous campaigns that sought to normalise pension saving among individuals and is designed to prompt employers—small and large—to find out about their duties and the process of automatic enrolment.

Automatic enrolment continues to bring into its target group those least likely to save for retirement. Low-paid workers and women, who are often likely to be low earners, have traditionally been underrepresented within workplace pension savings. Since 2011 the private sector has seen a 24-percentage-point increase in eligible female participation in workplace pensions, and in 2014 there was no gender gap in participation, with 63% of both eligible men and women participating.

This positive trend is expected to continue as we enter automatic enrolment’s most significant stage: the phased rollout to small and micro employers from now on. Last year saw the successful staging of the first tranche of small and micro employers. Over the next 12 months, more than 700,000 small or micro employers are projected to have started enrolling their employees into a workplace pension. Many tasked with this legal duty are not commercial enterprises but individuals who employ single members of staff, such as nannies, home helps or personal care assistants. At this crucial stage of implementation, it is therefore more important than ever that when deciding the thresholds for joining and contributing to a workplace pension we strike the correct balance between minimising the administrative burden on employers and ensuring that as many people as possible save in a workplace pension.

To describe the impact of the order, I turn first to the qualifying earnings band. This sets the earnings levels within which an automatically enrolled employee and their employer have to pay a proportion of the employee’s income into a workplace pension. Past reviews have generally linked this to the national insurance bands and this has been uncontroversial. As I signalled in my Written Ministerial Statement on 15 December 2015, the lower limit for the qualifying earnings band will remain unchanged and aligned with the national insurance lower earnings limit of £5,824. This order will align the qualifying earnings band upper limit with the new national insurance upper earnings limit of £43,000. By maintaining the alignment with the national insurance thresholds, both at the point where contributions start for low earners and are capped for higher earners, the overall changes to existing payroll systems are kept to a minimum. This decision therefore both ensures simplicity and minimises the administrative burden of compliance for employers in 2016-17.

The order does not change the earnings trigger. This remains at the value set in the 2014-15 order. This trigger is the earnings level at which individuals are eligible to be automatically enrolled into a workplace pension scheme by their employer. We have decided to maintain the existing automatic enrolment earnings trigger for 2016-17, so it will remain at £10,000. Due to anticipated wage growth, and with maintenance of the earnings trigger, we expect that an additional 130,000 individuals will now meet the earnings criteria and be brought into the automatic enrolment population. Of these, we estimate that 71%, or around 91,000, will be women. Individuals earning below the £10,000 earnings trigger but above the lower earnings threshold will still have the option to opt into a workplace pension and benefit from their employer contributions, should they wish.

In conclusion, the decision to maintain the earnings trigger at £10,000 will increase the number of low earners and women who meet the earnings criteria, and who are therefore automatically enrolled into a workplace pension. This decision will increase the total numbers saving into a pension and total savings. It is expected to further increase the number of women eligible to enrol, or be re-enrolled, into a workplace pension.

The decision to maintain the alignment of the lower and upper earnings qualifying bands with national insurance contributions thresholds maintains simplicity, and ensures that there are no new potential administrative burdens on employers at a crucial stage of the programme’s wider rollout. The order therefore ensures that automatic enrolment will continue to provide greater access and opportunity for more individuals to save into a workplace pension with the help of their employer, and those enrolled will have a chance to build up meaningful pension savings. I commend the order to the Committee.

[Baroness Drake (Lab)]

My Lords, these regulations provide an annual event for me. While I consistently recognise the success of the department in rolling out auto-enrolment, and we have all been pleased by the power of inertia to sustain low levels of opt-out, in previous years I have been increasingly frustrated by the number of women being excluded from auto-enrolment because of the rather aggressive way in which the earnings trigger was increased. Last year I came with a little more humility and was pleased to see that the earnings trigger was being maintained at £10,000 rather than tracing the tax threshold, and of course I am pleased that it is being maintained at £10,000 again. Those are the positives, and I am a “half full” person, but even a “half full” person still wants the extra half-glass that remains empty. I continue to remain concerned that only 38% of the eligible auto-enrolment population are women. In my view, that is still too low. A core principle in designing the new private pension system was that it should work for women, and I do not think that that principle is being met with in that percentage level.

Welfare Reform and Work Bill

Baroness Drake Excerpts

Wednesday 27th January 2016 Lords Chamber

[The Earl of Listowel (CB)]

My Lords, very briefly, I support these amendments as vice-chair of the parliamentary group for young people in care. Having followed this issue through the whole Bill process so far, I was grateful for the opportunity to meet with the Minister last week and for his careful consideration of our concerns on these matters.

Over the course of 10 years of listening to young people in care and hearing about what is important to them, they tell us that the most important thing is that someone sticks with them through the care process. That is why the Government have been so keen on supporting adoption: so that children who have been traumatised go on to have the continuity of care and relationship that helps them to recover. That is where the Government invested in and legislated for “staying put”, to allow children in foster care to remain with their carers to the age of 21.

I am sure that the Minister will give a sympathetic response to this as it is at the heart of government policy. I look forward to his response.

[Baroness Drake (Lab)]

My Lords, I shall speak to Amendment 30 in the hope that the Minister has been persuaded by the arguments made in Committee that kinship carers and adopters should be exempt from the two-child limit. I also thank him for the very constructive meeting that he held with us.

We have enunciated many times the valuable contribution that kinship carers and adopters make, supporting as they do more than 200,000 children, many of whom have emotional difficulties because they have been living with parents who are drug abusers or who have abused or neglected them. They save the taxpayer the alternative cost of placing a child in care, which is £40,000 a year, and care proceedings of £25,000. The savings that 132,000 kinship carers deliver by voluntarily caring for these children runs into billions. Yet, significant costs fall directly on the carers themselves. Many have to give up work or reduce their hours—a requirement frequently set by the social worker—to settle what is often a traumatised child for a good reason. The need for such carers is not going away. The number of looked-after children has increased steadily over the last seven years, as has the number of care order applications.

The Government’s reasoning for limiting benefits to two children is set out in the impact assessment. It is to reduce welfare costs and introduce a behaviour-related measure that will encourage parents,

“to reflect carefully on their readiness to support an additional child”,

which could have,

“a positive effect on overall family stability”.

It continued that,

“people may respond to the incentives that this policy provides and may have fewer children”.

The policy is intended to deter people having more children where they cannot afford to support them.

The Minister reported in Committee:

“The average number of dependent children in families in the UK in 2012 was 1.7, so … it is fair and proportionate to limit additional support provided by the taxpayer through child tax credit and the child element of universal credit to two children”.—[Official Report, 7/12/15; col. 1328.]

Even if one were to accept that reasoning when applied to birth parents who are considering having more children—I accept that there are many in this House who do not—it is a non sequitur when applied to kinship carers and adopters. It lacks common sense. There, the need is not to get kinship carers and adopters to reflect carefully on their readiness to care for an additional vulnerable child. To the contrary: public policy needs to support carers in their readiness to do so. That is better for the children and their family stability, and secures savings for the state by not placing them in the care system.

Kinship carers and adopters are not the birth parents of the children but they voluntarily embrace them. They are not making a decision to become pregnant; they are making a decision to care for an existing vulnerable child who cannot be raised by their parents. For adopters and kinship carers, the behavioural disincentive in the two-child limit is directed at their taking on responsibility for that existing vulnerable child. Imposing the two-child limit will deter adopters or kinship carers from coming forward to take on a sibling group, or a child if they have dependent children of their own, undermine the child’s interest and potentially increase the number in care. This is inconsistent with the Government’s commitment to ensuring that families are stable and create the best possible environment for children to flourish.

The two-child limit applied to adopters and kinship carers does not even stack up in cost terms. Exempting carers from the two-child limit would cost an estimated £30 million but the limit needs to deter only 200 kinship carers from caring for three or more children in the future before the £30 million saving would be wiped out, as the taxpayer would then have to face the cost of placing a child in care—£40,000 a year—and the cost of care proceedings, which is £25,000. I asked the Minister what behavioural response the Government were seeking to achieve from potential kinship carers and adopters with the two-child limit on benefits but I never had a reply. I returned again to the impact assessment but I could find no answer there either. Indeed, I could find no assessment of the impact on potential kinship carers, adopters or the children.

For kinship carers and adopters, the choice is whether or not to embrace an existing vulnerable child—a different choice to a parent choosing to become pregnant. The Minister advised in Committee that,

“there is a difference between the voluntary and involuntary taking on of children, whether they are your own or anyone else’s. That is what our exemptions are for. We are seeking to try to draw the line between where it is involuntary, as in the case of rape, and where it is not”.—[Official Report, 7/12/15; col. 1332.]

However, taking a behavioural measure into the benefits system for one purpose, then applying it to carers of children who might otherwise enter the care system without an explanation of the behavioural response being sought and with no assessment of the negative impact on the carers or the children is not good public policy.

I hope that the Government have deliberated further on where to draw that line and that they will exempt kinship carers and adopters from the two-child limit. In doing so, they would avoid building a perverse disincentive rather than positive support into public policy on people caring for vulnerable children, avoid undermining the interests of the child and avoid failing to recognise the real savings that these kinship carers and adopters provide.

[Baroness Tyler of Enfield (LD)]

My Lords, I rise briefly to speak in support of Amendment 38 and the other amendments in this group, having spoken on the matter in Committee. In the interests of time, I will focus on two of the proposed exemptions set out in Amendment 38, but I make the point that I consider all five exemptions equally deserving.

On the issue of disabled children, which has already been set out powerfully by the right reverend Prelate the Bishop of Portsmouth, the Government have framed the two-child limit as being about choice, but no parent makes a conscious choice to bring a disabled child into the world—a point already made powerfully in the debate today. It is not something you plan for. If that unforeseen event happens, however, surely that child deserves our help to ensure that they can be a fully functioning member of society. Research has shown that raising a disabled child can cost three times as much as raising a non-disabled child. Surely that is part of the rationale for this exemption.

Turning to the proposed exemption when new families are being formed, in a speech last year to the Relationships Alliance the Prime Minister thanked relationship support organisations which help to keep families together and, critically, to bring new families together. I declare an interest as vice-president of the charity Relate. The Prime Minister said that,

“government should do everything possible to help support and strengthen family life in Britain today”.

In fact, he even criticised the welfare state, saying that it was,

“incentivising couples to live apart”.

How, then, can it be that the Government have brought forward a Bill which says that if two lone parents come together to raise a family—one of them having possibly suffered bereavement—their child tax credit will be cut? Surely, creating that incentive in the benefits system would accomplish exactly the opposite of what the Prime Minister wanted to achieve, as I understand it—that is, giving children the right to live in a two-parent household and providing the stability that that often achieves. In saying that, I do not mean any detriment to single-parent families, who do a very good job of raising their children. However, we know that half of all single-parent families find a new partner within five years of their previous relationship breaking up, indicating that cuts in this area could affect as many as 500,000 people. This is not an insignificant matter.

To conclude, we have heard much debate on how these proposed changes will impact vulnerable groups. I think we can all agree that it is better to be pound wise than penny foolish. As such, we need to look at changes holistically and ask whether they help individuals who can work to seek work and whether they help to ensure that the next generation is healthy and ready to contribute to society. How do we ensure that the vulnerable in our country do not start behind and get left further behind? Amendments 38 and others in this group are necessary to ensure that the vulnerable, especially children, do not start behind because of their failure to choose the right parents.

Welfare Reform and Work Bill

Baroness Drake Excerpts

Monday 21st December 2015 Lords Chamber

[The Lord Bishop of Southwark]

My Lords, I rise to express my support for the intention behind the amendment in the name of the noble Earl, Lord Listowel, which makes sound social and economic sense. If a child can be cared for within the family network, and that is not to be parents or step-parents, that is in most cases preferable for the emotional, physical and spiritual well-being of the child. Churches have watched and participated for centuries in the patterns of such relationships and know that while they can hide dangers, they provide in the main the best setting for the formation of life. Better that than the anxiety, grief and hardship imposed by benefit rules not designed for such scenarios, and that a proportion of such children be an economic charge on local authorities and reap the emotional deficit that will all too often occur.

We have heard that there are an estimated 200,000 children raised by kinship carers across the UK. Some 50% are grandparents and a little under a quarter are siblings bringing up younger brothers and sisters. If 95% of children living in kinship care arrangements are not looked after by the local authority, can we imagine what the cost would be if there were any sort of shift in that figure—yet we expect the carer to bear that cost? It is a cost often undertaken at short notice and in an emergency. Kinship carers face significant additional costs in terms of both equipment needed and maintenance costs. Their family size increases and can even double overnight. Unlike adopters, they are not entitled to a period of paid leave for the children to settle in. The largest survey of kinship carers in the UK, conducted by the Kinship Care Alliance, found that 49% of respondents had to give up work permanently as a result of taking on the kin children, a further 18% had to give up work temporarily, and 23% had to reduce their hours temporarily or permanently. In many cases, this plunged the household into poverty and debt. One grandmother carer responding to the survey said:

“We are struggling to buy food and pay our bills. We have to get food vouchers every three months”.

The Kinship Care Alliance survey found that 30% of kinship carers’ households were currently receiving housing benefit. The figure rose to 36% among larger kinship care households with three or more children—kinship care households such as that headed by Rachel, a grandmother in her 50s who lives near my diocese in south London. She took on the care of her three young grandchildren when her daughter died in a car accident last year. The children’s father is in prison. She has had to give up work to raise the oldest grandson, who is six years old and her two youngest granddaughters, who are three and one years old. She is also grieving the loss of her daughter, just as the children are grieving the loss of their mother.

I would be grateful to the Minister if he could tell me whether the Department for Work and Pensions has undertaken an assessment of the likely impact of this measure on kinship care households and, if so, whether he could provide the detailed figures. Furthermore, if the Government do not favour this amendment, will they bring forward their own amendment to address the points I have raised? Is the Minister not concerned—as I am—that the numbers in care may rise if action is not taken?

Many of the children arrive to live with kinship carers following a crisis and are deeply traumatised. Many have severe needs and some have suffered prior abuse. The survey to which I have referred found that kinship carers reported that a staggering 43% of the children had emotional and behavioural problems. Forcing carers into work cannot always be a just and appropriate response.

The right reverend Prelate the Bishop of Portsmouth, who spoke earlier in these debates, dearly wished that he could have spoken today, and I pay tribute to his endeavours in this regard. I welcome the focus of the Government’s own family test on stable and strong family relationships and the explicit reference to kinship carers in the test. This amendment is entirely consistent with the application of the family test and I hope that the Minister will accept it.

[Baroness Drake (Lab)]

My Lords, I, too, support Amendment 90B, which seeks to exclude kinship carers from the benefit cap. The amendment is, indeed, a logical extension of our discussion on the first day of Committee on kinship carers and their exemption from the two-child limit. To reiterate, care proceedings cost an average of £25,000 and foster care £40,000 a year, yet most kinship care arrangements can be fixed without recourse to the courts, with dramatic savings to the public purse as well as significantly improving outcomes for the children. However, much of the financial cost of raising the child typically falls directly on the carers themselves.

When we discussed this issue on 7 December, I found the Minister’s response on kinship care profoundly worrying. He was pressed on his failure to acknowledge that a family taking in other people’s children is not doing so through some concept of voluntary freedom of choice, as normally understood, but is choosing to take on the responsibility of vulnerable children rather than abandon them. The Minister responded:

“Clearly there is a difference between the voluntary and involuntary taking on of children, whether they are your own or anyone else’s. That is what our exemptions are for. We are seeking to try to draw the line between where it is involuntary, as in the case of rape, and where it is not”.—[Official Report, 7/12/15; col. 1332.]

That statement shocked many in this House because in effect the Minister was saying that if a kinship carer takes on responsibility for vulnerable and distressed children, that decision is voluntary and therefore not worthy of state support if it means that there are more than two children in the household. I find that reasoning quite extraordinary and, indeed, quite dreadful.

Welfare Reform and Work Bill

Baroness Drake Excerpts

Monday 14th December 2015 Lords Chamber

[Baroness Hollins]

My Lords, I will speak to Amendment 67, in support of my noble friend Lady Campbell. Given the Government’s ambitious commitment to halve the disability employment gap, it seems logical and common sense to require the Secretary of State to report on progress, but such a report would need to be broken down by disability or impairment. For example, the Spinal Injuries Association draws attention to a number of issues that prevent people with new spinal cord injuries returning to work. I shall mention just two of those. The first is the need to have the right care and support package in place that is flexible enough to enable a person to work. The second is the need for accessible transport to and from work.

The employment rate for people with learning disabilities, mental illness and autism remains stubbornly low, which highlights the very real structural and attitudinal barriers that exist for them. Worryingly, the Health & Social Care Information Centre reports that the percentage of people with learning disabilities in paid work has dropped from 7.1% to 6% in the past few years. To be frank, the current government employment schemes have failed people with learning disabilities. The National Development Team for Inclusion has done some thorough research into the cost-effectiveness of employment support for people with mental health problems and learning disabilities. It shows that much of the current public spending in this area is being wasted, as it goes on non-evidence-based models that are more expensive and have poorer outcomes than the approaches that do work. If scaled up, effective interventions could be expected to support up to three times as many people in retaining paid work. This would save considerable sums in traditional care services.

A major obstacle for people with learning disabilities to getting into work is the lack of aspiration, for themselves if they have grown up not having any expectation of working, and of their families, their supporters and the professionals who advise them. The two approaches found by the NDTi to be effective were individual placement support and supported employment. I declare an interest here as I have published a book for employers which tells the story of Gary Butler and his work at St George’s, University of London, where he is employed to teach medical students how to communicate with people with learning disabilities. It is interesting because it is a job which only those with learning disabilities can do. The normal image of work that is suitable for such people is traditionally along the lines of collecting trolleys at Sainsbury’s and so on, but there are jobs which are particularly suited to people’s own needs and interests. St George’s has been employing two people with learning disabilities as trainers for 23 years. It is something that I initiated after having seen a similar kind of scheme in Boston.

With the right support, people with learning disabilities and those with mental illness make valued employees who are more likely to stay in work with lower sickness rates than non-disabled people, and there is research evidence for this. I hope that the Minister will recognise the value of a detailed report so as to understand any remaining barriers to halving the disability employment gap and, as my noble friend said, to get behind the figures.

[Baroness Drake (Lab)]

My Lords, I rise to speak to Amendment 64A. On 25 November, the Chancellor stated that he was determined that the economic recovery would be,

“for all, felt in all parts of our nation”.—[Official Report, Commons, 25/11/15; col. 1358.]

Increasing employment is a key indicator of the benefits of economic recovery, but there is much debate about whether the increase has been at the cost of job quality, weak pay growth and productivity performance, and rising and deepening job insecurity for a significant number of workers. Understanding the reality and extent of these concerns is important to understanding progress to full employment. Level of employment is a necessary but not sufficient indicator of whether the recovery is benefiting all parts of the nation and providing opportunity for all, which the Chancellor aspires to.

The plethora of amendments to the Clause 1 obligation to report on progress to full employment reveals that many noble Lords share that concern, if for slightly different reasons. Amendment 64A requires the report to address additionally what is happening within the labour market, in particular but not exclusively in terms of changing employment practices and types of employment, as well as on self-employment, non-guaranteed hours of work, quantitative and qualitative underemployment—that is, people working fewer hours than they want, or at a lower level of skill than they are capable of—and younger workers.

The UK Commission for Employment and Skills reports that, since 2008, the UK labour market has been more efficient than some other economies in keeping people at work, but that there have been significant changes in the nature of that employment and that those at the margin are impacted especially harshly. Labour productivity is struggling to recover. This results from factors such as the decline in youth employment, rising underemployment, a falling number of jobs in middle-skill occupations and a shift to a lower-wage, lower-skill economy. There are concentrations of unemployment and evidence of quantitative and qualitative underemployment. The commission found that nearly half of establishments reported that they had employees with skills more advanced than their job required, which accounts for 16% of the workforce and 4.3 million workers—indeed, more than are considered to have a skills gap.

If the commission is correct, when it comes to considering how full employment is interpreted, the available supply of labour will be much bigger than those officially classified as unemployed. Economic growth has increased employment but not always of the type and with the hours that people seek. If the Government want to achieve opportunity for all and lower welfare, the higher minimum wage cannot be a direct replacement for welfare. Arithmetic tells us that the £4 billion rise in pay it will produce will not compensate many whose benefits will fall as a result of the £12 billion cuts. The minimum wage targets the hourly pay of low earners and we hope that it will deliver increased productivity. Welfare supports low-income families. A goal to benefit all families needs the progress report to cover types of employment and practices.

The rise in self-employment—83% of net gains in employment between 2007 and 2014, rising to 4.5 million and 15% of workers—was accompanied by a 22% fall in self-employed average median income. The Resolution Foundation found that more than half of full-time, self-employed people are low paid, compared to around one in five employees. My noble friend Lady Donaghy gave an excellent articulation of the problem and any repetition from me would merely detract from that clarity. To restate, increasing the minimum wage is a solution largely confined to those directly employed. The minimum wage does not apply to low earning, self-employed people. Whether self-employment falls with recovery is uncertain, but policies focused on increasing high-wage employment need to deliver for the self-employed too.

The labour market has witnessed the rise of other precarious forms of employment, such as a sustained increase in the use of fixed-period contracts, casual employment, short-term arrangements and non-guaranteed hours. Recent ONS updates on the use of non-guaranteed hours contracts—zero hours for short—reveal around 1.5 million such contracts where work was carried out in the survey period, which is an increase of 6%. But in addition to the 1.5 million, there were 1.9 million contracts where no work was carried out, which is up from 1.3 million. This is not a small business phenomenon, as nearly half of businesses with employment of 250 or more make use of non-guaranteed hours contracts, compared with 10% of businesses with less than 20.

The key observation is that the increased use of non-guaranteed hours contracts over a period of stronger employment recovery suggests that they are becoming a permanent feature. The Resolution Foundation comments that,

“it is clear that this form of working is not fading away as our employment recovery gains ground … some people value the flexibility offered by ZHCs, for many they bring deep insecurity … for those affected—particularly in low-paying sectors … the danger is that job insecurity is becoming deeper”.

The Clause 1 report needs to inform us whether such contracts are becoming a standard form of employment in low-paid sectors, such as hospitality, care and retail, and how the Government will respond.

--- Later in debate ---

The noble Baroness, Lady Drake, proposed Amendment 64A, which would require the report to include information on the self-employed, which I have already discussed, NEETs and underemployed groups. In discussing some of the trends, she made the point that self-employment makes up most of the total employment growth since 2007—that is a slightly statistical quirk, since it happened because the number of employees fell sharply in the recession, as it always does. All the losses in employee numbers have since been regained and figures are up by 1.5 million since 2010.

[Baroness Drake]

The Minister is taking us through a series of reasons why he cannot give the granularity in the report that people seek. Given that the Chancellor said that it was his aspiration to have a higher-wage, low-welfare economy that benefits all, unless Parliament has some granularity in the metrics for assessing that progress, it sounds as though the Chancellor is setting his own aspiration and his own marking system. Everyone agrees that there has been a material change in the nature of employment over the last 10 years, which influences what people can earn and how they can participate in the labour force. If one aspires to a low-welfare economy that benefits all, we need to understand these trends and what is happening to people with disabilities, the self-employed, carers, people on zero-hours contracts and so on. The Minister seems to be listing why that cannot be provided.

[Lord Freud]

As the noble Baroness knows perfectly well, so I do not have to tell her, a lot of these issues are quite contentious and there is a lot of analysis going on, some of which takes many years to complete and to come to fruition. Our problem is that this commitment runs through the rest of this Government to 2020, and putting in some of the management information requirements that these amendments in practice look for is expensive and risks delaying universal credit, because we are on a tight timetable. I know noble Lords have a primary interest in seeing us move with as much speed as we safely can. We would probably not be provided with adequate information anyway, given the length of time it takes to get it into shape, to take us out to the 2020 deadline. I hope that has cleanly summarised why we are not objecting with horror to the prospect. We looked at it very deeply, but we have to use the information that is available and the extra information we are gathering to get this report to work.

[Baroness Drake]

I am not trying to put an argument for deferring universal credit, and I understand some of the difficulties, but at the very least the Government should be able to commit to giving us an interim report on the progress they are making on these issues, so we can begin to understand the likely developments and how successful the Chancellor’s aspirations are.

[Lord Freud]

The whole point of our clause is that we will set out our proposals on how we intend to report on employment. Clearly, a lot of the thoughts expressed here and the specific requests and reasoning are pretty valuable to us as we develop how best we can do a good report on what is happening to our progress to full employment.

Our latest figures on NEETs are rather encouraging and show that around 14% of 16 to 24 year-olds are NEETs, which is the lowest figure on record. It is a constantly changing group, and many people leave the labour market for short periods between jobs, so it does not tell us, of itself, where we stand in relation to full employment. Zero hours—which I almost thought I would not talk about, because we always have a little snip at each other about it—is only 2% of the market and we have outlawed exclusivity clauses in those contracts. Over the past year, part-time work has been driven entirely by people choosing to work part-time, which might not have been the case in the depth of the recession. Again, it is a constantly changing group.

On some of the concerns expressed by the noble Baroness, Lady Drake, I sometimes feel I am living in a parallel universe. Employment growth has been dominated by full-time and permanent employment. It has risen in all regions since 2010. Underemployment is on the turn and going the right way. Wages are now growing quite a lot faster than inflation and temporary work in the UK is among the lowest, so the trends are a lot more encouraging than they have been.

Given these arguments, and given that statistics on these issues are already widely available, I do not believe that specifying them in the report is necessary. However, I understand that full employment is not just about a particular percentage of working-age adults in work, and, as I have said, we will give further consideration to how this annual report can best reflect the diversity of labour. I apologise for the length of my response. I urge noble Lords not to press their amendments.

Welfare Reform and Work Bill

Baroness Drake Excerpts

Monday 7th December 2015 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I support the amendments in this group, because Clause 11 removes eligibility for the child element of child tax credits for the third and subsequent children and Clause 12 introduces the two-child limit for receipt of the child element of universal credit for families making a new claim. Families with three or more children could lose up to £2,780 per year for each additional child, and may also face the loss of the family element of tax credits—currently £540 per year per family.

Like other noble Lords, I am deeply concerned about the impact of these changes on the families of friends and kinship carers. Some 22% have three or more children in their household—about 29,000 families. That is why these amendments seek to exempt kinship carers from the two-child limit. Otherwise, future carers voluntarily taking on vulnerable children will hit a financial barrier to support, even where the third child is disabled. Yet these carers will still incur significant costs and may face financial distress from taking on these children. Kinship carers provide vital support for some 200,000 children when parents are unable to care for them, often because of urgent circumstances. The children frequently have emotional difficulties, often because they have been living with parents who are drug-dependent or who have abused or neglected them.

The Family Rights Group estimates that exempting carers from the two-child limit would cost £30 million. Yet these carers already save taxpayers the cost of placing the children in care. To restate the figures referred to by the right reverend Prelate the Bishop of Portsmouth, the cost of keeping a child in care for a year is £40,000. The cost of care proceedings is £25,000. The savings that the 132,000 kinship families deliver by voluntarily caring for these 200,000 children run into billions. The disincentive effect of the two-child limit needs to deter only 200 kinship carers from caring in the future for three or more children, and the £30 million saving would be wiped out. That is without counting the human cost to the children.

This disincentive effect on kinship carers is compounded by the benefit cap, which will be set at an increasingly lower level. Kinship carers are not entitled to paid leave while children are settled; they care for the children at their own cost. Some 49% have to give up work when the children move in, or reduce their earnings, because they need to take time to settle a distressed child—often a requirement imposed by the social worker, for good reason. Children can arrive with no notice, after a late evening call from the social worker asking the carer to take the children. The impact of the two-child limit on the kinship carer is deeply unfair, and could act as a disincentive to care for the children. It will impact on future carers, whether working with modest incomes or not working. It will impact harshly on carers who already have their own children, or who are young themselves and want to have their own children—such as the family that Grandparents Plus is in touch with, a sibling carer and his partner who are raising four brothers and sisters since their father’s death as well as their own baby.

Let us look at the reasoning for withdrawing support for any child beyond the first two. The impact assessment advises that the Government expect the limiting of the child element of child tax credit and universal credit to the first two children to,

“encourage parents to reflect carefully on their readiness to support an additional child”.

Of course, such a statement is a nonsense—in fact, contrary to common sense—in the context of kinship carers. The need is not to get such carers to reflect carefully on their readiness to care for the vulnerable child. To the contrary, public policy needs to support such carers in their readiness to care for an additional vulnerable child. That is better for the children and secures savings for the state by not placing them in the care system. Kinship carers are not the birth parents of the children, but voluntarily embrace their care. The Government stress that the limits on benefits beyond the first two children is a behaviour-related measure, because,

“encouraging parents to reflect carefully on their readiness to support an additional child could have a positive effect on overall family stability”.

However, such reasoning is incoherent when applied to kinship carers. Encouraging carers to pause and reflect on the disincentives in the Bill on taking responsibility for a vulnerable child could, perversely, have a negative effect on the family stability available to the child. Kinship carers should not be disincentivised; they should be supported.

During the passage of the Children and Families Bill, I listened to a BBC radio programme examining the experiences of kinship carers and interviewing a lady who recounted the night—she remembered the date, having celebrated her birthday with her own two children—when her doorbell rang around midnight. She opened the door to see a police officer, a social worker and two distressed children, her sister’s children, at risk of domestic violence. She told movingly of how she had raised those children along with her own two, and had struggled, with little support from the local authority services, and of how proud she was of the recent graduation of the little girl on her doorstep that night. That alone was a powerful story but she went on to recall how, a few years after that night, the doorbell rang, again late at night. This time, the policeman and the social worker were holding her sister’s baby. The interviewer asked if she was tempted to decline to take the baby in view of the lack of support that she had received previously. I remember the incredulity in the woman’s voice at the question, and the power of her answer to the effect of: “How could I abandon a little baby just because I had been poorly treated?”. She brought up five children, two that she gave birth two and three that she embraced. I ask the Minister: if someone like that lady were faced with a similar scenario in future, under this Bill, what behavioural response would the Government be seeking to achieve from them with the two-child limit on benefits?

If the Government disincentivise kinship carers, the people they will hurt are vulnerable children. I doubt that that would pass the public litmus test. The Minister has previously demonstrated his understanding of the importance of kinship carers to vulnerable children, so I ask him to commit to considering that kinship carers be exempted from the two-child limit on benefits. It does not make sense, either for the interests of the child or in terms of public expenditure.

[Lord Kirkwood of Kirkhope (LD)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Drake. The House owes her a debt because of the exemplary work that she has done over many months and years on the subject of kinship caring. Her speech will repay careful study, and I shall look forward to doing that when the Official Report is printed.

This is going to be a harder Committee stage in social security terms than some that we have had in the past. This is basically a Bill that reduces money but does little else of interest. However, it is a very important one. I noticed that the very mild-mannered noble Lord, Lord McKenzie of Luton, characterised it as the most wretched Bill that he had ever seen in his life. That is a considered view from a moderate man, so we need to be careful about how we take our proceedings forward.

The Bill dramatically changes the money and resources available to the social security system. I am sure that everyone understands that there is a case in periods of austerity for making special arrangements to deal with immediate and urgent circumstances. However, we need to be careful that we are not making changes that, as if by magic, get woven into the social security fabric in perpetuity. What I am most worried about—this is really a discussion for clause stand part on Clauses 11 and 12—is that the two-child limit is going into universal credit. That is a matter of great concern to me. I say in passing that the noble Earl, Lord Listowel, was contrite earlier about having been too nice to the Government. Indeed he was, but I am pleased that he has put the record straight.

The department has certainly done a very good job, because the universal credit situation could have been a whole lot worse, which would have overshadowed all these proceedings in Committee. The way we contrive to support people is important, particularly those with larger families; it is mainly ethnic minority communities which have that culture, which we know predisposes them to risk of poverty, and we need to take that into account along with everything else as we go forward.

The Minister needs to listen carefully to the case for exemptions. The Committee will be faced, certainly at the later stages of proceedings on the Bill, with deciding to what extent what the Government are trying to do is reasonable in the long term as well as in the short term. As far as I am concerned—I put it bluntly on the record and cannot make it any clearer than this—I am willing to work with the Government to mitigate some of the sharp edges of the Bill as regards the savings that they hope to make. If the Government are willing to make concessions and think carefully, which the Minister in the past has demonstrated he can successfully do, and if he is willing to go away and look at some of these exemptions we are talking about today, I would be much more disposed to decline to support attempts on the Marshalled List to vote against Clauses 11 and 12 standing part. I will approach the Bill in that way. I will not be unreasonable; I perfectly well understand the financial exigencies that we must face and the continuous battle the department has with the Treasury—it would be unrealistic not to accept that. However, the onus is on the department to look at ways of mitigating some of the changes in the Bill, because it needs to be changed.

I said at Second Reading that I wanted to pursue preventive spending. After the cases that have been made, by the right reverend Prelate and others, I find it hard to believe that a saving of £30 million would not risk a much greater public cost in other silos within Treasury spend across central government as a whole. Therefore the question asked by the noble Baroness, Lady Sherlock, on whether the Government have done any work about what it would cost if we reduced the support to kinship carers in this way is important.

The situation we face as a Committee will be difficult to reconcile unless the Government are able to answer some of these questions, certainly about spending money and investing to save in future. I certainly hope that the Government will think very carefully about some of the powerful speeches that have been made, in particular on kinship carers.

--- Later in debate ---

[Lord Freud]

Again, all I can say is that the impact assessment looks at all the impacts. The costs and savings derived are based on the full gamut of impacts.

[Baroness Drake]

Perhaps I may say this to the Minister. That is why I was looking back at the reasoning for this policy. When it comes to kinship carers, it cannot possibly be directed at influencing the decision of the carers as to whether or not a woman conceives and has another child, because kinship carers are taking on other people’s children. The choice is whether you embrace a vulnerable child or you abandon them. That is a totally different choice from someone in a family where their parent decides to get pregnant and have three, four or five children. Therefore the reasoning that applies to the person choosing to become pregnant is not the same reasoning that is applied when someone says at midnight, “I will take on this child rather than see them abandoned to the care system”.

[Lord Freud]

Clearly there is a difference between the voluntary and involuntary taking on of children, whether they are your own or anyone else’s. That is what our exemptions are for. We are seeking to try to draw the line between where it is involuntary, as in the case of rape, and where it is not.

Pensions: Reforms

Baroness Drake Excerpts

Thursday 18th June 2015 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I refer to my interests in the register as a trustee of the Telefónica/O2 and Santander schemes and as a member of the boards of the Pensions Advisory Service and the Pension Quality Mark. I begin by congratulating the Minister on her appointment; I look forward to debating with her in this Chamber. She has certainly assumed responsibility for pensions at a time of radical change, but I have no doubt that she is more than capable of embracing it.

Commenting on the freedom of choice agenda is made difficult when the Government’s strategic objectives for the long term remain unclear. People now have open access to their savings, but when the state has auto-enrolled workers into schemes, compelled employers to contribute and invested billions in tax relief, there is a public policy interest in knowing what the Government’s intended long-term outcomes are. As the noble Lord, Lord Flight, conceded in opening this welcome debate, we no longer have a private pension system; rather, we have a long-term saving system. We no longer talk about desirable replacement incomes, because people are no longer required to secure an income. What is the desirable savings pot size for the median earner that policies should be targeting? What is the Government’s aspiration for contribution rates and how will they achieve them? What is the intended balance between individual freedom and societal outcome? As my noble friend Lord Hutton indicated, these are matters of some significance, on which society requires the political system to come to a consensus position.

Let us take employers, for example. Their workplace pensions are key to delivering savings. The Government’s pension proposition has to be attractive to the senior managers who decide on their company’s pension arrangements if we are to avoid a drift to simple minimum compliance. Employers’ disengagement from pensions was, after all, a major reason for the decline in savings that led to auto-enrolment and employer compulsion. Yet their behavioural response to the freedom agenda has attracted very little analysis. There are more changes to come—tax relief, lifetime allowance, annual allowance, salary sacrifice—but what is the impact of policy decisions on the level of employers’ engagement with pension saving? Saving for retirement is a 40-year project and policies must work not only for today’s older workers who have been able to save but also for younger people who are still to save if they are to get to retirement and have a reasonable existence.

There is clearly benefit in giving greater freedom to the saver, but the impact of the extent of the freedoms, the speed of their introduction, the response of the market, the shift of the risk to the individual and the impacts on employers were never fully considered. The Government are dependent on the market to deliver the choice agenda, yet we know that there are features of the pensions market that hinder the proper functioning of competition—complexity, consumer inertia, asymmetry of knowledge—and that legitimise more state intervention than would otherwise be the case.

We see problems emerging that were raised in this House only days ago, in particular by my noble friend Lord Bradley. It was therefore welcome to hear the Chancellor acknowledge that there are concerns that some companies are not doing their part to make those freedoms accessible and that the Government are now considering a cap on charges and have asked the FCA to investigate. Yet the FCA warned some months ago, in its interim report on the retirement income market, that consumers were poorly placed to drive effective competition and that the introduction of greater choice and more complex products would reduce consumer confidence and weaken the competitive pressure on employers to provide good value.

What of the requirement on the independent governance committees to report on draw-down products? Will the Minister be asking them to give the matter priority? The Chancellor advised that he wants to make sure that savers are treated fairly, but the FCA’s rules on treating customers fairly contain no explicit requirement on providers to act in the best interests of savers. They rely on effective competition to deliver for the saver, yet time and time again experience shows that competition is not able to deal with conflicts of interest and the failure to deliver value for money. The Government need to find a sustained resolution to the dysfunctions in this market. We cannot go on endlessly dealing only with the symptoms.

What is required is not an alignment of interests but a hierarchy of interests, where conflicts of interest are resolved in favour of the saver. Providers have to be able to make a profit but only on products which are designed and operated in the saver’s interest and which provide value for money. Now, we face an urgent need for substantive data so that regulators and the Government can identify early and respond quickly to emerging problems. It would be helpful to know from the Minister how the Government intend to meet this need.

New freedoms come with new inefficiencies, which undermine value for money. These include some providers’ restrictive processes for accessing the freedoms, their charges for advice, for transfer out and for transfer in, charges for looking after your money, charges for accessing your money, embedded commission and other charges, which need to be addressed.

There is a danger in the current debate that the message simply becomes, “Everyone must be free to make a dash for the cash and no barriers must be put in their way”, but of course that cannot be right either, and we need a measured debate on this matter. The Government are right to require individuals to take advice in certain circumstances, such as when seeking to transfer substantial defined benefits or protected rights into cash. The risk from pension scams is growing.

It is right that people take time to consider their options, because choices taken can be irreversible. We want providers to behave more responsibly. It is difficult to compel providers to provide certain products, and one would not want to compel the inefficient ones simply because of the debate that is currently taking place. We know that some employers and trustees are reluctant to provide access to choice through their workplace schemes. They are concerned about their own liability. Some fear associating with poor decision-making by savers or assisting access to products in case there is a mis-selling scandal. They are waiting to see how the market evolves.

Providers are setting their own access processes and requirements for customers wanting flexible access. Some face problems. As Martin Wheatley at the FCA observed, the timescale for delivering the freedoms and design products was challenging, and providers struggled to complete due diligence testing on their products. Many have had to significantly change their business model, systems and procedures. For some, that remains a big challenge. Some providers may also be cautious because they fear the risk of mis-selling. When advice should or should not be required is an example of the struggle between public policy and what the market feels it wants as its operating model.

The issue of the ease and cost of transferring from one scheme to another so that people can access their freedoms becomes of increasing importance, as the Government are now discovering. However, we know that there are real inefficiencies in facilitating ease of transfer between one pension scheme and another.

Much of the recent debate is focused on the post-55s, significant numbers of whom were in good occupational schemes. They may not be reliant solely on their DC pots; they may have other incomes, such as from DB schemes, but over time this will change. The savings of future generations may all be DC. Greater freedom and irrevocable decisions put more risk and responsibility on to the individual.

The Minister wishes to promote greater financial awareness and understanding, and the decision to provide guaranteed guidance was a welcome step in that direction. However, the need for guidance over a working life will grow as the personal responsibility to make provision for retirement and other needs increases. Access to advice at a cost that is reasonable, particularly for those on moderate incomes, will not be readily available. People will be left with limited support if there is no source of independent and impartial guidance. People need guidance from a trusted source, delivered by an entity that has no commercial interest in the customer’s next steps. This allows the guidance to be personalised and gets closer to the boundary of the advice—without stepping over it—that can be delivered by a commercial organisation that has a vested interest.

Guidance should be offered at the main life event touch points, such as student loans, childcare costs, changing employment and starting to save. If the future is greater personal responsibility, the provision of support and guidance needs to be more radical. The noble Baroness has been radical in the past and I am sure that she will be so in the future.

Perhaps I may conclude by making a personal plea to the Minister: could she please pay full regard to the position of women in pension reforms? We now face a situation where a little over one in three of the people who are auto-enrolled are women. In part, the problem has evolved because of the earnings trigger—the level of earnings that you have to achieve before your employer is obliged to auto-enrol you into a pension scheme. Fortunately, after several years of argument, the Government have frozen the value of the earnings trigger rather than relentlessly tracking the income tax threshold. I fear that there is a loss of focus on the need for the private pension system to work for women as much as for men. At the moment, two in every three of the people being auto-enrolled are men. I hope that the sororal commitments of the Minister, which have been ably and warmly demonstrated in the past, are not diminished by ministerial office.

Pensions: Draw-down Charges

Baroness Drake Excerpts

Tuesday 9th June 2015 Lords Chamber

[Lord Freud]

We are doing that, as exemplified by the new Pensions Minister meeting the industry and working with it to make sure that it produces the right level of charging. The Government and the FCA are able to monitor that to see that we get appropriate and fair charges.

[Baroness Drake (Lab)]

My Lords, I refer to my entry in the register of interests, including my role with the Pensions Advisory Service. Some providers of income draw-down will charge between £150 and £200 each time a customer takes out cash, so a person with a £30,000 pot who takes out £5,000 in cash over six years will lose between £900 and £1,200. Will the Minister challenge the industry on why the charge to access cash now is so ridiculously high?

[Lord Freud]

As I said at the outset, this market is two months old and we are watching very closely to see how the charges develop. There is a range of different charges; some providers charge for drawing down and others do not, but we will be watching it very closely.

Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014

Baroness Drake Excerpts

Wednesday 9th July 2014 Grand Committee

[Lord Kirkwood of Kirkhope (LD)]

My Lords, I am pleased to have the opportunity to contribute to this technical debate. I declare an interest as chairman of the defined benefit superannuation scheme of the General Medical Council, so unfortunately I know nothing about money purchase schemes. I did try, honestly—I took home the 36-page judgment of the noble and learned Lord, Lord Walker, and read it carefully until Germany scored the second goal. I still do not understand the noble and learned Lord’s reasoning, but I am sure that it is sound.

I hope that the Minister can help me. I understand that we are dealing with two sets of statutory instruments. The department deserves credit for taking on board the suggestion made by the Secondary Legislation Scrutiny Committee of teasing out the negative from the affirmative. That is always good practice. However, I do not know where the transitional regulation, Regulation 1711, comes from. I assumed that it would have been sensible to have taken these together because they talk about the same thing and are all part of a piece. However, I may have missed something and the Minister might be able to put me right on the procedure that is involved.

This is a small but important issue and anyone who looks at it will be reminded of the ineffable complexity of our pensions system. I have to say that although this is the right thing to do and I am content with the regulations, they form another layer of complexity—because they have to. If money purchase is not defined in this way, it would leave a terrible amount of uncertainty. If people do not understand a valid, watertight description of money purchase, chaos will ensue. Lots of schemes could get into even greater difficulties in the future.

We always have to be careful about retrospective provision. These regulations go back to 1 January 1997. I understand perfectly why and, in the circumstances, that is justified, but, as I say, we must always be careful about retrospective provision. However, I think this is the right tactic. It is not perfect because retrospection never is, but the stated case is accepted, certainly as far as I am concerned. Clarity is the order of the day, as much as we can achieve it in pension provision.

I have a couple of questions for the Minister. Some of these things are imponderable because the data are not available in money purchase schemes to the same extent as in defined benefit schemes, but the number of affected schemes has been listed as being around 800. Is there an update on that figure and is there now a better definition? Has the number gone up or down since these matters started to be drawn up by the department? I also want to try to understand what the costs of non-compliance would amount to. What is the worst that could happen? If everything that can go wrong does go wrong, what would happen to hybrid schemes such as these which involve money purchase in a way that we have to change through these regulations?

As the chairman of a superannuation scheme myself, the key and overriding priority of a trustee is to protect the members’ benefits. Are there any circumstances where benefits afforded to members could be prejudiced by these changes? I have looked at the very helpful Explanatory Memorandum. Paragraph 19 explains the provisions of,

“transitional measures to assist affected schemes in three ways”.

The first bullet point talks about,

“retrospective protection so that schemes do not have to revisit past decisions”,

and goes on to conclude that,

“there is very likely to be no detrimental material impact on member benefits”.

That is a nuanced subordinate clause, and perhaps it has to be so. I would rather have the truth than be given a more definitive statement that was easier to understand and more reassuring. However, that is a key question for me. If I could be given some reassurance on that point, I would be even happier than I am at the moment.

Finally, I think that the consultation was exemplary. I looked at the document very carefully and the department did everything it could. The consultation was responded to well and those who did respond are experts who know the exact consequences of these changes. For me, that has lifted a great deal of concern and apprehension about the effects of these changes. These regulations reflect circumstances that no one could have foreseen and the Government have responded to them in the best way they can. The situation is still a bit fuzzy at the edges, but I hope that the Minister will give us an assurance that the appropriate officials who understand these things will monitor the position so that we can be assured in the fullness of time that the assumptions we are making of very little or no loss of benefit to individual members are found to be what happens in practice in the future.

[Baroness Drake (Lab)]

My Lords, I declare my interests as a trustee of both the Santander and Telefónica pension schemes.

This statutory instrument has been on a rather interesting journey. In part it supersedes draft regulations published in May, which were withdrawn and subsequently divided into two in order to separate provisions required to go through affirmative procedure from those required to go through negative procedure. It has therefore been a little confusing to try to anticipate the affirmative provisions to be relaid in the form of a pared-down instrument, as this SI was not laid until last Thursday. Having said that, I appreciate that dealing with the uncertainties and complexities that flow from the Supreme Court decision in Bridge cannot have been straightforward for the Government. I compliment the drafters of the Explanatory Memoranda and the impact assessment, who tried to provide clarity as to what the Government intend and why, in what to most normal people would seem a rather dense and complex set of requirements.

The two regulations have separate Explanatory Memoranda, but they share a common impact assessment, so one can assume that certain key assumptions and conclusions underpin both orders. I refer in particular to the fact that, having considered the consultation responses, the department has changed its policy on retrospection for non-compliant schemes. Decisions taken by schemes between 1 January 1997 and the coming into force of Section 29 will be validated, except in two limited circumstances that relate to winding up and employer debt, where there is a risk to members’ benefits.

The department has been persuaded that it would therefore be unduly burdensome to require schemes to revisit past decisions, which could give rise to expensive administrative costs that could deplete scheme assets and therefore the ability to fund members’ benefits—that is the argument put by the Government—and that the impact of members’ benefits of revisiting past decisions since July 2011 would be negligible. In summary, the Government are persuaded that with two exceptions, Section 29 will come into force only with prospective effect; there will be retrospective protection for schemes and past decisions will be validated.

However, in coming to that view and giving that retrospective protection to decisions made, the department is unable to quantify the impact of the regulations on schemes likely to be affected. There are no data available at an industry-wide level. The consultation did not elicit sufficient data at scheme level to allow the department to produce reliable estimates of the impacts on schemes and on members—and indeed, on employers. The department engaged further through the pensions regulator’s annual survey and the wider pensions industry to enable some quantification of costs and benefit. However, insufficient information was forthcoming.

A question must be, therefore: are the Government right to be persuaded, and indeed confident, that except in the defined limited circumstances that they have identified, there is negligible risk to members’ benefits in validating decisions taken by schemes before the coming into force of Section 29? Should there be more exceptions to the retrospective validation? How do the Government give themselves the level of confidence they need to give that retrospective validation? I will illustrate my concern with reference to a couple of examples.

The very important rules which govern any attempts to change pension rights or entitlements are detailed in Section 67 of the Pensions Act 1995, popularly referred to as “Section 67 rights”—an often quoted phrase because of its protected nature. During the course of the consultation on the regulations arising from the Pensions Act 2011, stakeholders advised the department that there could be schemes which had inadvertently changed their benefits from non-money purchase to money purchase; for example, by removing a guarantee from a cash balance scheme because of their interpretation of the law in force at the time. In doing so they may not have secured the members’ consent as is required.

The department has taken the view that schemes should not be required to revisit these decisions and that it would deem that the requirements of Section 67 of the Pensions Act 1995 had been satisfied where the actuarial equivalence requirements were met before such a scheme modification took effect. But those actuarial equivalence assumptions may not hold good over the longer term, and the issue remains that a guarantee or some other right has been removed without consent. The Section 67 requirements have not been met and the beneficiaries may be worse off.

--- Later in debate ---

These draft regulations make modifications to the existing primary legislation to provide supplementary and consequential measures—

[Baroness Drake]

My Lords, this may be an appropriate moment to intervene because I want to push the Minister on a couple of points. I have been trying to anticipate when he would be coming to the end of his remarks.

Perhaps I may go back to two points. First, Section 67 rights under the 1995 Act are pretty important rights that get people rather excited. The concern I was trying to express was that this seems to set the precedent that you can provide retrospective protection for schemes that have breached Section 67 rights and obligations. What level of assurance can the Minister give that this is not a precedent that could be used for undermining the strength of Section 67 in the future by giving retrospective protection?

Secondly, in terms of how this retrospective protection applies where schemes have breached Section 67, I should point out that the Government do not know which schemes have done this. They have just heard about this from the industry, so they are giving a sort of blanket assurance without knowing the number and type of breaches of Sections 67. If they do not meet the actuarial equivalence terms, it is not clear whether they will have to go back and redo it.

Thirdly, if they did it inadvertently, they probably did not do any actuarial equivalence exercise at the time. Is it therefore being said that they can do one with hindsight now, and can look back and say, “Had that been applied at the time”? It is quite important to get clarity on this Section 67 point, because there are lots of disputes and case law around it. It tends to get people who are interested in members’ benefits quite excited if there is an attempt to compromise it in some way.

On the flipping schemes, which are not protected in terms of access to the PPF until April 2015, I note that, as was said, if you have not paid the levy then the liability if your employer goes insolvent should not go to other levy payers. However, the issue is that it is a government responsibility, because the Government are obliged under the EU directive. I was looking for as firm an assurance as possible that, if an employer with a scheme that has to flip from DC to DB goes into insolvency before or up to April 2015, the Government will not walk away from giving some kind of protection to those schemes with DB benefits the members of which may now be caught outside the protection regime; hopefully there are none or, if there are, they are very tiny.

[Lord Bates]

I am grateful for those additional points. Let me try to answer them as best I can. It might be helpful if I wrote to the noble Baroness and shared those responses with the Committee. I realise that they are important issues.

To respond to the specific issue of Section 67 rights, the appropriate regulation is Regulation 8(3)(b). The Government believe that the protection is not undermined, because there must have been an actuarial equivalence. If they do not meet the actuarial equivalence requirements, they will have to go back and unpick them. In fact, the regulations introduce a new protection for members, which underpins the benefits. However, as I said, I shall seek further guidance on that and write to the noble Baroness and other Members of the Committee.

These draft regulations make modifications to existing primary legislation to provide supplementary and consequential measures to support the coming into force of the clarified definition of money purchase benefits in Section 29 of the Pensions Act 2011. I hope that I have set out for the Committee the rationale for these regulations and have responded to the matters raised. I commend these regulations to the Committee.

Pensions Bill

Baroness Drake Excerpts

Wednesday 12th March 2014 Lords Chamber

[Lord Lawson of Blaby (Con)]

My Lords, I need not detain the House long because, I am glad to say, my noble friend the Minister has met pretty well in full the points that we made at earlier stages of the Bill. I am extremely grateful to him for that. There is a real mischief in the huge range of costs which bear no relation whatever to investment performance incurred in different pension schemes. It has always been known, but it was documented fully by the Pensions Commission some time back. That we have been able to improve the Bill in this way is a tribute to this House, but particularly to my noble friend the Minister, who has listened carefully, accepted the need to deal with that mischief, and put forward a practical and sensible way of doing it.

There is only one loose end, and although the Minister dealt with it I would like to spend a minute or two on it. The amendment says “some or all” costs, but that is purely a legal technicality and in fact it means all costs, itemised. That is the firm intention. They will be published generally, not just given to the members of the schemes, so that all can see. However, as the Minister said, the provision deals exclusively with defined contribution schemes and not with defined benefit schemes. I understand his reason for that—because it is only in the defined contribution schemes that pensioners are, in effect, from time to time ripped off by investment managers who charge far too much in the way of costs. There are five times as many people in defined benefit schemes as in defined contribution schemes, however, and the money in defined benefit schemes is well over £1 trillion.

Of course, if the same kind of ripping off goes on—obviously it does; there is no difference in the investment manager’s behaviour from one to the other—it is not a victimless crime. The pensioners may not be the victims, but the shareholders in the companies certainly are. The Government cannot desire to see shareholders ripped off when it can so easily be prevented by extending to defined benefit schemes the disclosure and transparency requirements that the Minister will put in place for defined contribution schemes. He says that he will consult on that. I am delighted to hear it, but I very much hope that the result of the consultation will be to require the same disclosure and transparency for defined benefit schemes as for defined contribution schemes.

[Baroness Drake (Lab)]

My Lords, I declare my interests in the area: I am a trustee of the Santander and Telefónica pension schemes, and a member of the NAPF Pension Quality Mark board. As no doubt other noble Lords here today are, I am concerned to understand the extent to which Amendments 2 to 5 provide for full transparency on transaction costs and deliver on the assurances that the noble Lord, Lord Freud, gave on Report. I would therefore like to ask the Minister several questions.

The Minister confirmed that the Secretary of State would be divested of the power to set the requirements for securing transparency of transaction costs in relation to money purchase personal pension schemes, by giving that responsibility to the FCA. As he said, the amendment does not extend the existing powers of the FCA but imposes a duty on it to make rules on the disclosure of information, following consultation with the Secretary of State and the Treasury, to ensure consistency between FCA rules and the regulations made by the Secretary of State. If the FCA response to that consultation is not considered adequate in achieving such consistency, which Minister will be responsible for ensuring that the FCA fulfils its duty in that regard, and with which powers?

There will no doubt be much consultation and lobbying prior to regulations and rules being set, and no doubt various interests will be brought to bear in those considerations. However, does the Minister agree that the draft statement of recommended practice put forward by the Investment Management Association to the FCA does not provide a sufficient set of requirements for full reporting on transaction costs by investment managers?

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[Lord Freud]

My Lords, let me start by dealing with the question raised by the noble Baronesses, Lady Drake and Lady Sherlock, on the way in which the regulation works between two groups. The Pensions Regulator and the FCA work closely together to ensure that the regulatory frameworks for trust-based pensions under the regulator and contract-based pensions under the FCA are aligned and provide for a robust system of governance and fair treatment for members. The Government are not looking to change the current regulatory structure, as was confirmed in the DWP’s Triennial Review of Pensions Bodies, which was published in December 2013. Structuring the duties in this way is necessary to reflect the dual regulation structure and the fact that the FCA is an independent body in statute. Without this approach, there would be no duty on the FCA to make these rules.

In addition to their existing duties to consult, the amendments mean that both the Secretary of State and the FCA will be under statutory duties to consult one another in making regulations and rules, enabling us as far as possible to ensure consistency of approach with the rules following the regulations. There is absolute commitment from the Government and from the FCA to aim for consistency. The FCA would not propose to deviate from government regulations. The aim of a separate duty is not to provide room for inconsistency—far from it; it is about giving the FCA the flexibility that it needs to use its powers and expertise to respond as an independent regulator.

The noble Baroness, Lady Drake, raised a question on hybrid schemes. The regulations will be able to extend the disclosure rules to the DC element of hybrid schemes. The duty is in addition to the existing power in Section 113 of the Pension Schemes Act 1993.

The noble Baroness also raised a question on the relative position of the PRA—the prudential regulator—and the FCA. The FCA, as per its rules, will be consulting on the development of disclosure and requirements and will work closely with both Her Majesty’s Treasury and the PRA. Treasury Ministers are committed to strong disclosure of member-borne costs and believe that the FCA is best placed to make those rules.

On the question of the SORP code, raised by the noble Baroness, Lady Drake, the Government recognise industry initiatives to improve transparency of pension costs and charges, but as the OFT noted, such measures are voluntary and can be piecemeal. That is why the Government believe that transparency measures should be compulsory and standardised.

[Baroness Drake]

The Minister’s response on the SORP is helpful to a point. The Minister is making a distinction between a compulsory and a voluntary regime. My more detailed point was about the proposals as to what there should be transparency on, and the costs involved. I was asking whether the Minister could give an assurance that he accepts that the range of costs proposed in SORP would not be sufficient to meet a full transparency criterion.

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[Lord Freud]

The DB element will be part of the consultation. Depending on that consultation, we will have to decide how to treat that particular aspect.

On the questions around the EU, clearly right now we are free to write these regulations and rules and there are no EU rules to hinder that. However, that might change in the future. One of the attractions of pulling the FCA into this process is that it has technical expertise in this area and is the body negotiating in Europe on relevant EU legislation. It is therefore best placed to work with DWP on determining how costs and charges can be defined, captured, measured and disclosed. By using its own rule-making power, the FCA may be able to respond quicker than the parliamentary process to changes in the market or from the EU.

I think I have dealt with all the issues.

[Baroness Drake]

I hope the Minister does not think I am being pushy, but this is probably the last chance we will have to question him on this before we complete this stage of the Bill. On the issue of EU regulations, the Minister has confirmed that at the moment there are no EU rules constraining the Government from pushing for full transparency on transaction costs. Hopefully, any product from the EU in favour of transparency would work to the Government’s remit. However, one of the underlying concerns is that the earliest there could be any impact from any change that comes out of the European Parliament and from the EU would be 2016, maybe later. People are looking for an assurance—I certainly was asking for one—that the FCA would fulfil its duty without being constrained to await the outcome of any EU discussions and would push ahead to an early timetable consistent with the spirit of the point the Minister made on Report.

[Lord Freud]

I am pleased to be able to confirm that it is not tied to the EU in any way. We will be pushing ahead with this at the speed I indicated, which is—

Pensions Bill

Baroness Drake Excerpts

Wednesday 26th February 2014 Lords Chamber

I think many in this field suspect that the Pensions Minister came to a fork in the road and chose the wrong fork. I understand that. I have done it myself in my time. I suspect the Minister realises now that he made a mistake, but he may just feel that he is too far down that road to turn back. We have the chance to build a bridge back to the main road where he can reflect further on the choices available to him. If he then decides he wants to stay with pot follows member, he may do so, but let us give him the chance to think again, not for our sake, but for the sake of all those workers who are doing the right thing and, despite cost of living pressures, are managing to put aside hard-earned money towards the cost of their retirement. I beg to move.

[Baroness Drake (Lab)]

My Lords, I speak to Amendment 23 and the associated amendments to Schedule 17. I declare my interests as a trustee of both the Santander and Telefónica pension schemes, and as a member of the NAPF pension quality mark board.

It is clear that the Government are right that a solution is needed for millions of dormant small pots arising under auto-enrolment because of the large number of workplace schemes and the frequency with which workers change employers. The Government are right that neither scheme members nor providers benefit from workers leaving behind small pots as they move from job to job. The Bill gives the Secretary of State the power to make regulations to transfer automatically small pots to form, and keep track of, bigger, more efficient pots. The contentious issue is what the default transfer solution should be.

The Government, as my noble friend has said, has chosen pot follows member, whereby a small pension pot automatically follows a member to their new employer’s pension scheme, rather than the alternative of small pots being transferred to an aggregator scheme which consolidates all the small pots accumulated by an individual each time they change their employer. The Association of British Insurers supports this view but, as my noble friend has pointed out, many others—the Confederation of British Industry, the NAPF, the Cass Pensions Institute, Which?, EEF, Age UK, the TUC, the centre for pension studies and others—believe that pot follows member has a number of inherent risks and weaknesses.

The amendment retains the power of the Secretary of State to make regulations to transfer small pots automatically, but not the requirement that this must be through PFM. It allows time for further consideration by the Government without excluding any particular solution, as the consequences of getting this wrong are absolutely huge. PFM cannot be implemented without raising quality standards, or the Government risk transferring the savings of millions of ordinary people into many thousands of different schemes over which they have very little quality control.

Confidence that quality standards would be raised sufficiently has also been dented by the decision to defer introducing a charges cap, increasing the risk of saver detriment. PFM also increases the risks of charges and transaction costs being incurred on the whole pension pot as it moves with each job change, rather than on the incremental amount saved with the previous employers. Savings would be switched out of investment assets into cash, then reinvested with every job change, exposing workers to repeated transaction costs, extra investment risk and the risk of being switched out of low-risk lifestyle funds as they approach retirement. The more frequent the change of job, the greater the risks—risks that an aggregator could reduce.

The impact assessment acknowledges that individuals may be better or worse off, depending on the charges or the performance of the investment fund into the scheme into which they are transferred. However, the DWP expects,

“the gains and losses from differences between scheme charges and investment performance to cancel out on average”.

However, there is no consolation for individuals if their higher charges on transfer are off-set by another’s lower charges. An automatic transfer solution, using a limited number of aggregators, can require them to deliver a low-charge, high-quality standard, so mitigating the risk of saver detriment overall on transfer.

All qualifying automatic enrolment schemes should meet minimum standards, but regulating for differences in quality between schemes is impossible. There will always be a wide range between minimum standards and best practice. PFM fails to work for everyone, as it only transfers a pension pot into a workplace scheme of which an individual is an active member. It fails those who leave the workforce or become self-employed, as they are no longer active in an employer’s scheme. Their small pots are left to flounder. Employers may even default their small pot into a poorer-quality personal pension because they simply do not allow ex-employees to remain in their existing scheme. By comparison, an aggregator does not require a worker to be an active member, so it can cater for more people. PFM increases administrative burdens on employers, obliging every workplace scheme to be capable of communicating with every other scheme. Aggregators reduce this burden as there would be only a few schemes in which to transfer. Auto-enrolment was intended to carry a lighter regulatory burden on employers, especially SMEs. However, PFM rows in the opposite direction.

DWP modelling suggests that for any pot size, the aggregator will achieve slightly less consolidation with PFM, and that irrespective of pot size limit, the aggregator model would achieve at best only half of the net present value of the economic benefit of the PFM approach. DWP modelled pot follows member and aggregator over a range of pot size transfer limits, initially setting a £2,000 pot limit for aggregators while modelling PFM up to £20,000. After protests, it issued an ad hoc release, modelling the limit for aggregators up to £20,000. The Government argue that an aggregator solution would require transfers to be restricted to pots of £2,000 or less rather than the £10,000 intended for pot follows member, a figure suggested by providers to ensure that aggregators did not dominate the market and upset competition. The whole analysis underpinning auto-enrolment, the building of NEST and the need to regulate value for money is based on massive market failure and the inability to rely on fair competition. A hypothesis that dominant aggregators might emerge is not a valid argument against aggregation at higher pot levels.

The assertion that the aggregator model would achieve only half of the net present value of the PFM approach assumes a one-off cost of £105 to transfer a pot and a PFM, and a saving of £20 each year from not having to administer annually a transferred pot. However, if that saving and assumption, an uncertainty in itself, turns out to be lower, the economic advantage of PFM also falls.

The DWP assumes that an aggregator cannot hold live pots, but if employers were also allowed to use a good-quality aggregator as their scheme, it could provide pension portability to many members, removing the need for transfers at all when they change jobs, and the costs that would go with it. The Government impact assessment accepts that it would be more efficient to use existing schemes as aggregators because,

“active members would be saving in the scheme that also holds their dormant pots”,

but they fail to reflect this concession in their own modelling.

As my noble friend said, there are significant delivery challenges with PFM. The Government believe that in the long term PFM will deliver low charges for savers due to efficiency savings made by the industry having to manage fewer small pots. However, those savings are by no means assured. The impact assessment acknowledges that,

“there is a risk that some providers will not experience the resource savings projected”,

that,

“trying to estimate the cost of administrative processes many years ahead is fraught with difficulties and is a key uncertainty over the estimated cost savings”,

and that the,

“wide range of estimates provided … in discussions with stakeholders suggests there may be some genuine variation across providers”.

To be successful and to be delivered, PFM requires pan-industry collaboration. There are significant technical challenges for it to be delivered. The DWP is working with providers to find an industry-led IT solution. However, what happens if the direction of travel gets too tough and they disagree with the Government or with each other—not an infrequent occurrence? Do we get another deferral?

The unresolved weaknesses in the pot follows member solution are apparent in the inherent risks, the uncertainties in key assumptions and the delivery challenges. The transfer solution chosen by the Government must give greater confidence to mitigating saver detriment. This amendment reflects the very real concerns that not only I but many others have expressed, but it retains the power of the Secretary of State to make regulations automatically to transfer small pots while allowing him to give more time to detailed consideration on the model of the solution.

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[Lord Freud]

Those figures are pretty detailed and I will write to the noble Lord with them if I do not get a detailed breakdown in the next minute or two—which I might. It is a huge amount of money, which the noble Lord will appreciate as well as anyone else, and it is a lot of money to have in a complacent and stagnant market. If, as the noble Baroness, Lady Drake, suggested, employers could choose the aggregators, and these aggregators were to become open to active members, this market dominance would be complete.

[Baroness Drake]

I do not think I said that the employer could choose the aggregator. I said that if the aggregator was able to have active members as well as aggregated members, that would enhance portability, particularly in some industries, which would reduce the need for transfers and the consequential costs. I do not think I actually said that the operating model would mean the employer chose the aggregator—I left that to the departmental assessment.

[Lord Freud]

Well, if they started moving to active members as well, whatever the route, it would give this group of organisations an enormous market position. I confirm to the noble Lord, Lord Hutton, that I will have to write to him.

It seems strange that, in response to the OFT’s conclusion that there is a lack of competition in the pensions market, the Opposition are calling for the creation of a market dominated by a few big master trusts. We need only to look at other industries, such as the energy market or banking sector, to see that dominance by a few powerful players can result in real concerns for consumers. If we were to press on regardless with enabling these large aggregators to come into being, we would need to be clear that there would be no turning back. It would be extremely difficult to reverse the process if we found that an aggregator model was not sustainable, and to tackle the vested interests if consumers were getting a poor deal.

We have heard—for example, from the noble Baroness, Lady Sherlock—that the Government are alone in supporting pot follows member. It is not true that few people support it but I agree that there is a powerful lobby supporting the aggregator model. It is hardly surprising that those who are shouting the loudest are those who are lobbying on behalf of master trusts that could come to dominate the market under an aggregator model.

The ABI itself supports pot follows member, as do many groups within it—Aviva, Fidelity, Friends Life, HSBC, Origo, Scottish Life and Scottish Widows—as well as non-members of the ABI such as Alexander Forbes, Altus, Buck, Foster Denovo, the Investment Management Association, JLT and the National Federation of Occupational Pensioners.

This Government’s starting point is the consumer—and it is the individual who wants to see their pension follow them to their new employer, as the research from NOW: Pensions, which we have already touched on, underlines. The ABI’s consumer research showed that 58% of individuals said that the pot should follow them automatically to the new job; 10% were in favour of a new central scheme, the aggregator; 15% said the pot should stay where it is and it is up to you to move it; and 17% said it should be visible with all other pension pots at a central place online. That is the sentiment among consumers.

I appreciate that some consumer groups have concerns. I say to them that we are listening to those concerns and that low charges and scheme quality are top of our agenda, not just for automatic transfers but for all schemes. We want these groups to work with us and the industry now to deliver pot follows member in the simplest, safest way for consumers.

The noble Baronesses, Lady Drake and Lady Sherlock, raised concerns about consumer detriment. I remind the House about the work the Government are doing to ensure that all schemes are good schemes. Uniformity is not good for consumers, but only if all aggregators had identical charges and standards would we completely remove the risk of an individual moving to a worse scheme. The noble Lord, Lord Turner, made the point about the interconnectedness of these issues. The Minister for Pensions has confirmed that he remains “strongly minded”—I think that is fairly parliamentary language —to introduce a charge cap. My noble friend asked about the DWP response to the OFT and the consultation on charges. That response is coming soon and we will be discussing that later this afternoon.

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[Lord Turner of Ecchinswell]

Obviously, it is possible that with higher charges there might be a higher return, but many of the variations that we see in charges in the industry are for things that clearly will not produce a different return. One sees, for instance, a wide spread of charges for index funds, where one knows that there will be no difference. We also know that, on average, active management does not add a return above index funds: that is a very strong empirical result from a lot of analysis. While it is possible that with higher charges come higher return, in a great many cases that is not so. One thing pension savers would be wise to concentrate on is the charges they face, because that is one of the few things that they can definitively influence, whereas the gross return is a promise that may or may not be delivered.

Those are the reasons that led the Pensions Commission to focus very strongly on the issue of cost and the variation of cost. We noted, for instance, that many people employed in the UK are in large trust-based schemes and already enjoy, on defined contribution schemes, total fund management charges of 20 basis points, 0.2%, or less. For those 20 basis points, they get fund management at the gross level quite as good as people paying 1.5%. If you pay 0.2%, by the end of your savings life, you would have given up only around 4% or 5% of your savings in the charges, which is probably about as low as we can get it, given the fundamental things that have to be done. Again, that is confirmed in the Government’s own consultation paper on charging, which illustrates that 10% of trust-based firms have annual management charges of 0.19% or less. That is possible, provided we get economies of scale, without giving up a significant choice of range of funds. However, at the other end of the scale, we noticed many SMEs were paying 1.5% and therefore, as per the Government’s consultation paper, losing 34%; or 1%, at which point you lose 24%.

That is why, as I said earlier, the recommendations of the Pensions Commission covered not just auto-enrolment, to use the inertia power to get people to save, but the design of the scheme, to ensure that access at the sort of low costs already enjoyed by employees of large firms can be enjoyed by employees of small firms. That was the reason for the design of NEST, which was designed by looking at detailed cost analysis and working out at what level it ought to be possible to deliver a default fund and also at models from elsewhere, such as Sweden. We became convinced that it ought to be possible to deliver to all people the opportunity to invest in a default fund—probably an index fund—with all explicit end costs of 0.3%. A set of decisions were subsequently made that the cost would have to be 0.5%, which is what it went forward as in the NEST environment. That at least establishes a benchmark and means that people who invest in NEST are only giving up 13% of their end-of-life savings pot in charges.

It is important that that should be the benchmark and that we have a charge cap. We know from the OFT’s and other analysis that this is simply not a market where the operation of individual customer choice is effective in driving cost-efficient competition. If that were the case, we would never have had to have the recommendations of the Pensions Commission and the auto-enrolment to which we are now committed. If we do not impose a charge cap, we will leave many savers, in particular lower-income people working for SMEs, facing unnecessarily high costs. I think they are unnecessary if, for a default fund, we are above 50 basis points, or 0.5%. I am therefore concerned that the two options the Government were looking at in their consultation paper on charging were 0.75% and 1%. If we come forward with a cap of 1%, we are giving to the ordinary saver the extraordinary promise that, on their behalf, we have made sure that their loss of pot at the end of their life is only 24%. I do not think that is a very compelling promise to give to people. I therefore strongly believe that we should make a clear commitment, by a clear date, to get on with this and have a charge cap in place, and that 0.5% is the appropriate figure.

Although a price cap on explicit costs is important, it is not sufficient. That is why I strongly support the sentiment of the amendment of the noble Lord, Lord Lawson, which seeks to cover all the other costs which are not covered in explicit fund management charges. The issue of these other costs was also one with which the Pensions Commission was concerned. We were concerned that, beyond what you can see in an annual management charge for a fund, there are lots of other costs involved. These are precisely the sort of costs described in Amendment 28, in the name of the noble Lord, Lord Lawson, which inlcude,

“fees and performance fees paid to investment managers … commissions and bid-offer spreads paid … fees, revenue splits and bid-offer spreads paid to custodian banks”.

These are very significant but are not well understood.

On the Pensions Commission, we sought to see whether research had been done on how big these were. Interestingly, there was one piece of research, which was sponsored by the FSA back in 2000 and written, after a lot of research, by a man called Kevin James. It tried to work out just how large these other costs were in the UK and in the US. We called them implicit costs in addition to explicit costs. There is a box in the first Pensions Commission report which explains that piece of analysis and how big they are. His analysis, which we interpreted, suggested that some of these costs might be as high as 90 basis points, on top of the overt, explicit costs. We ended up, for the purposes of modelling, believing that if we were to try to understand what got lost between the gross return on equities that you see by looking at the FTSE All-Share Index every year and what the saver gets, we had to allow, in addition to the explicit asset management costs, for 65 basis points on average going in these implicit costs—more for actively managed funds, less for index funds.

It is possible that those costs have come down since that analysis was done and since we looked at it—there has, for instance, been some compression of bid-offer spreads—but they are sufficiently large that it is incredibly important to focus on them, pay attention to them and, as it were, bring the disinfectant of transparency to bear on this bit of the cost base. Let us suppose that they were 65 basis points. That means that if somebody thought that they were paying 0.85% on an explicit annual management charge, between the gross return on equities in the market and what they actually get, they would be paying 85 basis points plus 65 basis points, which takes us back to the 1.5% per annum, which is 34% of their pot disappearing.

The noble Lord, Lord Lawson, has put an immensely important issue on the table. I would encourage the Government to widen their focus even beyond pensions, because it is important not only in the pensions arena but for the other ways that people save, for instance with ISAs. When people save in ISAs, they are looking at an overt, explicit asset management charge, but sitting behind that is a set of other hidden costs. This is an issue where more information will help. It will not transform the situation—we are deluding ourselves if we believe that lots of individual savers are themselves, individually, going to pay attention to this—but as the noble Lord, Lord Lawson, has said, the press, including the specialist press, will pay attention to it and a wider debate about just how large these charges are is very important. It would, for instance, be very interesting to start seeing how much higher these hidden costs are for actively managed funds versus index-linked funds, because that is a piece of information that people ought to bear in mind when they make those decisions between different classes of assets.

I urge the Government, as they go forward with this idea, to look at whether that disclosure should in future apply not just to pensions but to a wider class of investments—to cast it, as the noble Lord, Lord Lawson, said, as widely as possible so that we capture all costs—and to see this as a start point of an extremely important debate in which we get a better handle on the total costs that are being imposed by the asset management and investment fund management industries.

I do not think that transparency is an alternative to a charge cap, which is why I have also put my name to Amendment 29, but it is a very valuable additional tool.

[Baroness Drake]

I do not intend to make my contribution because I do not think there is anything I can add to what the noble Lord, Lord Turner, has said. However, as I have never been a Minister I am not familiar with the dark art of crafting ministerial syntax, so perhaps I could take this opportunity to ask the Minister a question before he responds.

I have before me the Written Ministerial Statement, which says:

“Last year, we consulted on whether to cap charges in the default funds of schemes used for automatic enrolment, and the Government remains committed to seeing this policy through during the life of this Parliament”.—[Official Report, Commons, 24/2/14; col. 11WS.]

My simple question is: does the phrase,

“seeing this policy through during the life of this Parliament”,

mean that the Government will introduce a charge cap before the election in 2015? A simple yes or no answer would be helpful.

[Viscount Eccles]

My Lords, I had not really intended to intervene. I have not played any part in this Bill since Second Reading, but I just want to draw attention to the fact that there is a difference, in my opinion, between price control and transparency.

I am 100% in favour of transparency. Perhaps I should declare that I have a very complicated pension situation. I have been in defined benefit schemes and money purchase schemes and I have a SIPP. I have also been the trustee of probably half a dozen pension schemes. I have done transfers of people under TUPE in the Local Government Pension Scheme. So I have had a lot of reasons to worry about the amount of somebody’s pension fund that is absorbed by costs. I am totally on board with complete transparency on that issue.

However, that is a different matter from price control. The problems in this market, which I fully agree has very considerable aspects of dysfunctionality, are created, in part at least, by the incredibly complicated structure of pensions that we have created, in both the public and private sectors, over many years. It is a very complicated subject and of course there are people who take advantage of that complexity, I completely agree. There are also people who are so frightened by the complexity that they do not know when they are getting value for money and when they are not.

That is my point: there is a great difference between a market which by its transparency enables people to see whether or not they are getting value for money and a market in which there is price control. Picking a figure for the price control would be a very foolish thing for any Government to do.