Pension Schemes Bill [HL]

Debate between Baroness Drake and Lord Freud

Report stage (Hansard - continued): House of Lords
Monday 19th December 2016 Lords Chamber

[Baroness Drake]

I thank the Minister for his response and will address some of the arguments he put. The amendment does not introduce a sledge-hammer: it leaves the provision to the Secretary of State. It does not require a large infrastructure to deliver such a provision. It can be as straightforward as requiring master trusts to have tail-end risk insurance. It can use a precedent that is used in many other areas of identifying a provider or operator who carries the public service—

[Lord Freud]

I should make it clear to the noble Baroness that we looked closely at tail-end risk insurance. It works within the legislation and the regulator can accept it. We have not made it a major issue at this stage because, at the moment, no such insurance is available in the market. That may change, of course.

[Baroness Drake]

Perhaps I may finish my point. I understand what the Minister has described but is he saying that the Government will consider a provision such as tail-end risk insurance?

[Lord Freud]

I am saying that the clause is carefully drafted to allow tail-end insurance as part of the capital adequacy when the regulator looks at what is required. We are not in a position to do any more at this stage because that particular insurance is not available in the market. It may well become available in the market as people see the requirement.

[Baroness Drake]

I come back to my point that I am seeking not to tie the Government down to a particular provision or how they choose to interpret it, but to answer the question that no Government or regulator can guarantee that they can remove all risk of regulatory failure. In the Bill at the moment—unless the Minister wishes to contradict me—I can find no provision as to where responsibility would fall in the event of such failure occurring and there is not the funding to deal with the wind-up and the transfer.

I do not accept that it increases the chances of moral hazard. The Bill gives the regulators considerable power to set tough requirements. Indeed, the whole purpose of the regime is to address the moral hazard of introducing a profit motive into a trust-based arrangement. The existing regulation and legislation does not deal with that. However much we iteratively discuss this—I welcome the Minister contradicting me—in the event of a regulatory failure and a trust that does not have the means to finance wind-up, there is nothing in the Bill to show how a member is protected.

[Lord Freud]

I am grateful to the noble Baroness for inviting me to intervene again. Under the Bill, if there are costs, they will not fall on the members, so who is she trying to protect? As to my point about the sledge-hammer, if we could have found tail-end insurance, which the noble Baroness mentioned, it would have been cheaper. Other ways that I can think of are quite expensive. It is not appropriate to suggest a solution that is not available.

[Baroness Drake]

The Government are asserting that the costs will not fall on the member because they have put in place a prohibition to say that the costs will not fall on the member. However, if the member is in a master trust of some size which has to go into wind-up, and there are not the resources to deal with that wind-up, there is no answer to the question of who will bear the costs. An answer has to be given, and this amendment is asking the Government to put in place a provision to give effect to that prohibition and say that there will be an alternative provision to ensure that the costs do not fall on the member. I do not believe that the Minister has answered the questions. There are millions of people with potentially billions-worth of assets under the regime, and this is a fundamental question which remains unanswered.

[Lord Freud]

The noble Baroness has been so generous and I will take the opportunity to go over this because it is slightly back to front from normal. This is not like a defined benefit scheme worth billions of pounds which are at severe risk. This is about the costs of moving the money that is attached to individual people to another master trust. It is a completely different order of risk. I know that she is coloured by what she has seen in the defined benefit world, but this is quite different. It is a much smaller risk. As I have said, in any case the costs do not fall on the members and the mitigation issue is disproportionate.

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[Baroness Drake]

My Lords, there are four key references to administration charges in this Bill: Clauses 12 and 27, the continuity and implementation strategies for addressing how members’ interests will be protected in a triggering event; Clause 33, the prohibition on increasing members’ charges during a triggering event period; and Clause 40, the statutory override power of any term of a relevant contract on administration charges.

The power of the Secretary of State and the regulator to demand information on, and intervene on, the level of administrative charges, is a key part of the armoury in this Bill for protecting members’ pots. Clause 38 gives a definition of administration charges: that it,

“has the meaning given by paragraph 1 of Schedule 18 to the Pensions Act 2014”.

That schedule relates to the power of the Secretary of State to prohibit or cap administrative charges, as illustrated by the 0.75% cap on charges, excluding transaction costs, on workplace pension scheme default investment funds. But there appears no explicit reference to transaction costs in the definition of administrative charges in paragraph 1 of Schedule 18 to the 2014 Act, and no explicit reference to transaction costs in Clause 38.

The purpose of this amendment is to make it clear that any reference to administration charges in this Bill can include transaction costs, so ensuring that the Secretary of State and the Pensions Regulator have the fullest powers of intervention needed to fully protect members’ charges in master trusts. The transaction costs are an important determinant of the net return into the saver’s pot.

In recent weeks, including since this Bill was introduced into the House, three reports have been published. One addressed disclosure of transaction costs and two provided sustained evidence of continuing dysfunction and weak competition in the pensions and asset management industry. On 5 October 2016, the FCA published a consultation paper proposing rules to improve the disclosure of transaction costs in workplace pensions. Given the potential for multiple parties to be involved in managing pension investments and for transaction costs to be incurred at different levels, the FCA considers it essential that any rules of disclosure,

“enable the flow of information to the governance bodies of those schemes”.

It proposes that all those managing investments should report administration charges and transaction costs to pension schemes and intends to publish its rules in the second quarter of 2017.

On 13 December, the DWP and FCA published their joint review of industry progress in remedying poor-value workplace pensions, following the 2013 OFT report that revealed that more than 333,000 members of workplace pension schemes were still suffering annual management charges in excess of 1%. The review also found that most providers had not fully reviewed the impact of transaction costs in their value-for-money assessments and had no immediate plans for such a fuller review. Providers using in-house investment management services were singled out for particular criticism.

In November, the FCA published its Asset Management Market Study interim report, which provided a hard-hitting critique of the “sustained, high profits” that the industry has earned from savers and pension funds over the years—fund management firms, which three in four British households rely upon to manage their pensions.

The remedies proposed by the FCA include requiring investment managers to adopt an all-inclusive single charge for everything; an up-front estimate of transaction costs; and raising the fiduciary bar for the general obligation to treat customers fairly to a new requirement to act in the best interests of investors. The report also contains a withering critique of “active management”. A recent article in the FT pulled together all the adjectives deployed by the FCA:

“Underperforming, overpaid, too profitable, too expensive, too opaque, too unaccountable and too conflicted”.

The report is quite extraordinary. It compares the net return on a £20,000 investment over 20 years to show the impact of charges. Assuming the same return before charges, in a typical low-cost, passive fund, an investor would earn £9,455 more on a £20,000 investment than an investor in a typical active fund. This figure rises to £14,439 once transaction costs have been taken into account. In an exquisite example of laconic drafting, the FCA reports:

“We find that there is no clear relationship between price and performance—the most expensive funds do not appear to perform better than other funds before or after costs”.

The report makes it clear that seemingly small differences in fees and transaction costs can lead to significant losses for investors over time but finds that more than half of ordinary investors are still unaware that they were paying fund charges, let alone what they are.

I hope that the Government will force a pace on transparency and act to control unfair fees and transaction costs incurred by people who are saving, often through their workplace pensions, and an increasing number through these master trusts. But insofar as the Bill addresses the authorisation, supervision and resolution regime for master trusts, this amendment makes it clear that any reference to administration charges in any provision in the Bill can include transaction charges, so ensuring that the Secretary of State and the Pensions Regulator have the fullest powers of intervention needed to protect members’ savings in master trusts, particularly during triggering event periods. I beg to move.

[Lord Freud]

My Lords, the effect of Amendment 25 would be to widen the definition of administration charges for the purposes of Part 1 of the Bill, so that it is capable of including transaction costs. It may be helpful if I explain that we considered the inclusion of transaction costs when developing this policy. We concluded that the provision that has been made in the Bill under Clause 33, including prohibiting an increase in administration charge levels after a triggering event, was sufficient to minimise the risks faced by savers in master trust schemes.

The term “administration charges” may prompt Peers to believe that the prohibition in Clause 33 applies to only a narrow range of costs and charges faced by members. This is not so. Among the charges intended to be caught by the administration charge definition are fees on set-up, entry, exit, and regular and ad hoc fees paid not only to administrators but also many fees paid to governance bodies, regulators, asset managers, investment consultants, lawyers, accountants, auditors, valuers, bankers, custody banks, platform providers and shareholder service providers.

In the majority of cases, trustees do not currently have access to information about transaction costs. Including them within the scope of the prohibition under Clause 33, therefore, would place many trustees in a difficult position. I can assure noble Lords that we acknowledge the need for improved transparency and understanding by trustees about the transaction costs which the members of their schemes will bear.

Noble Lords will remember that, during the passage of the Pensions Act 2014, my department accepted a legal duty to make regulations requiring that transaction costs would be given to members of occupational pension schemes and be published. The Financial Conduct Authority took similar duties with regard to workplace personal pensions at the same time. Again, I acknowledge and thank my noble friend Lord Lawson for his input into the process of developing that part of the Act. I appreciate that some Peers may be disappointed that we have not yet discharged that duty, but in mitigation I should explain that there has never been a single agreed definition of transaction costs nor a way of calculating them. We have made progress in defining transaction costs, but until recently we made less progress on a way of calculating them. This is because many transaction costs are not explicit costs which appear on a scheme’s balance sheet but implicit “frictional” costs from trading, which need to be calculated. The wide variety of approaches to calculating transaction costs are not simply disputes about the odd one-hundredth of a percent but quite significant differences in methodology, which can result in transaction costs differing by a factor of five.

We clearly need to ensure that trustees of occupational schemes and the independent governance committees of workplace personal pension providers have complete, consistent and standardised cost and charges information before they can report it to members; at this point, they do not. The key stepping stone to putting this information into the hands of trustees and independent governance committees was laid down when the Financial Conduct Authority published in October of this year a consultation on proposals requiring asset managers to disclose information about transaction costs to trustees, and a detailed methodology for calculating those costs. Following the outcome of the FCA’s consultation, we currently plan to consult on the publication and onward disclosure of costs and charges to members in 2017. In conclusion on this point, I can assure Peers that we remain wholly committed to discharging this duty in the course of this Parliament. We want pension scheme members to have sight of all costs and charges, regardless of how they are incurred, and to give members the confidence that there are no other hidden costs and charges.

The noble Baroness, Lady Drake, made us aware of the interim findings of the FCA’s Asset Management Market Study, published last month, which found weak competition in the market and proposed remedies through the introduction of an all-in charge and standardised disclosures to all investors. These are timely findings, because noble Lords may also be aware that the Government announced this month that they would be examining the level of the 0.75% charge cap on administration charges in the default funds of schemes used for automatic enrolment and whether some or all transaction costs should be covered by the cap. This work will be undertaken in 2017 as part of the review of automatic enrolment. It will involve comprehensive engagement with a wide range of stakeholders, including asset managers, which will be important given the potentially complex nature of transaction costs. The outcome of the 2017 exercise will help to determine whether there is a need to amend the definition of administration charges in Schedule 18 to the Pensions Act 2014, and at that point we will consider whether we should also cover transaction costs in the master trust legislation.

I reassure noble Lords that in practice we do not believe that transaction costs are a loophole that will be exploited to drive up charges to the detriment of members. Noble Lords will be aware that the vast majority of defined contribution pension schemes, including master trusts, are invested via investment platforms in pooled funds in which the trustees of the scheme will be just one among many investors. Given this pooled and intermediated nature of pension fund investments, it is highly unlikely that a triggering event experienced by just one of the investors in the fund would drive up the ongoing transaction costs from remaining invested in the fund. Taking these points into account, it does not appear necessary to bring transaction costs into the charge prohibition measure in the Bill.

Before I conclude, I ought to acknowledge that this is the last time I will stand before your Lordships on a Bill as a DWP Minister, although it is not quite my last appearance in the role, because we will have some fun on Wednesday discussing universal credit—I hope we will. On Third Reading in the new year, and when the Bill potentially returns to the House for further consideration after it has been looked at by the Commons, I will be leaving your Lordships in the very capable hands of my noble friend Lord Young—the junior member of the Freud/“Jung” combo. I thank him for all the support and time he has given me, and I am sure that noble Lords will continue to afford him the same courtesy and patience that has been displayed thus far.

Pension Schemes Bill [HL]

Debate between Baroness Drake and Lord Freud

Committee: 2nd sitting (Hansard): House of Lords
Monday 28th November 2016 Lords Chamber

[Baroness Drake]

I thank the Minister for his detailed response to the particular issues I raised in the amendments that I spoke to. However, I do not find the arguments very convincing. The noble Lord said that a pause order would be exceptional—I very much hope it would be, because it would mean that the preceding authorisation and supervision regime had not been very successful. But looking forward, even in an exceptional circumstance, the numbers affected in a failing master trust could be quite significant. It is clear how large the footprint of those trusts will become. What will remain is that it is unfair to the individual during a pause order because the employee loses a contractual and statutory right to contributions, and the employer fails to honour a statutory and contractual obligation to make contributions. Unless the Minister wishes to direct me to a provision in the Bill, I can find nothing that protects the individual or the employer from breaches in those statutory provisions.

Unfortunately, I do not have with me the letter that the Pensions Minister wrote to my noble friend Lord McKenzie and me in response to a meeting of Peers on 8 November, where the Minister conceded that the Government had not fully considered a provision that would allow those contributions to be held in some alternative vehicle while the pause order was in place. As the noble Baroness, Lady Altmann, has said, there is a breach of a statutory obligation potentially arising from a term within this Bill.

The Pensions Regulator need not hold the funds. The Pensions Regulator would clear the arrangements, consistent with any regulations that were set, but the holder of the funds could be an alternative operator or provider, which regulation or the Pensions Regulator could choose to identify. The records that come in from the employer should still be possible because, immediately before the pause order, the employer would have to provide records of contributions collected and paid. No failure is being posed in terms of the employer, so records should be available for reconciliation quite quickly if those contributions are held in some kind of cash account or cash fund.

I note the Minister’s comment that the Pensions Regulator has a discretion as to what payments it does or does not prevent being paid out during a pause order, but it is concerning that we do not have clarity on the policy thinking around how those with serious ill health or real income dependency on their savings would be dealt with in a pause order situation, should they be embraced or potentially embraced by the terms of the order. I fully understand the need for an exceptional power, if evidence of fraud emerges in the records, for the regulator to have some control over payments made or contributions received, but at the moment the way in which it is proposed that this pause order would operate seems unfair on the individuals, puts the employer in breach of a statutory obligation and leaves unclear what protections would be afforded to the most vulnerable who may be impacted by that pause order.

[Lord Freud]

Let me just respond. The difference is that we are trying to get control of an obviously difficult situation. The pause is to allow the regulator to go in and make sure that the situation is sorted. We are not talking about keeping the flow of things going in a normal way; we are talking about a very difficult situation. We are worrying about losing the money that is already there, not about the smooth flow. We are typically talking about a very short period. Setting up large paraphernalia, which the noble Baroness is beginning to drift towards, would not be the point. The real point is to get the funds transferred as quickly as possible.

The noble Baroness asked where the legislation is. I can direct her to Clause 31(5)(c), which states that any contributions not paid over to the scheme are returned to the member, and paragraph 13 of Schedule 3, which ensures that the pause order will not cause employers to fall foul of their legal duties. I hope that that helps the noble Baroness in her consideration of what we are doing.

[Lord Freud]

I am grateful to my noble friend. There are different processes going on and the intention of the pause order is not to be the paraphernalia for sorting out a scheme that is in difficulty. What we are looking at is a process we can go to where we can discuss option 1 and option 2 in order to transfer the funds to a better functioning scheme. While we are doing that, we are pausing it to allow the process to happen. It is important to view the two things on more of a sequential basis than trying to make a big performance of the pause order. It is there for a different reason: it allows us to get on with sorting out the scheme and making the transfers that my noble friend is looking for.

[Baroness Drake]

I thank the Minister. He has said that the pause order will be short, but the problem is that the noble Lord contradicts himself because the Government have just tabled their Amendment 52 which removes the six-month limit on a pause order. That implies that situations are anticipated where the pause order would need not to be short and certainly in excess of six months.

I am certainly not looking for complicated paraphernalia here, although I would suggest that working through whether individuals are due a refund of contributions and sorting out the tax implications of such a refund could indeed be very complicated. My noble friend and I have suggested something simpler. The employer will still have the statutory obligation so it will have its records and collect the contributions. It was a question of having something simple for holding those contributions during the period of the pause order so that they can subsequently be reconciled against the individual members; it certainly does not need to be overly complicated.

I accept the noble Lord’s point that the driving force for a pause order is to deal with a threat to the assets or the scheme members’ interests in general, but in resolving that bigger problem it appears that the detail of the route being taken is unnecessarily unfair in terms of its impact on the statutory and contractual rights of individuals to continue having access to pension savings. I think that we have gone into the detail of this issue at some considerable length in this exchange, but I do feel that the Government have not explained satisfactorily why the contributions cannot be held during the pause order without believing that this needs to be terribly complex. They have not addressed the issue that this will put individuals in a position where they are denied their statutory and contractual rights for a period, and an employer in breach of its statutory duties, and there remains a lack of clarity in thinking about the impact on vulnerable people in the manner in which the pause order is introduced. However, at this stage I beg leave to withdraw the amendment.

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[Baroness Drake]

My Lords, as others have referred to, central to the resolution regime for a failing master trust is the transfer of the members and their benefits to another approved master trust. However, for this to be achieved efficiently and promptly, and indeed legally, it would be necessary to undertake a bulk transfer of members and their assets. But as the noble Baroness, Lady Altmann, has detailed, the current rules on bulk transfers would not be fit for purpose for a failing master trust, with its range of different employers and the potential to provide a wide range of benefits and investments to members, who could be either accumulating or accessing their savings. The amendment put forward by the noble Lord, Lord Flight, is an attempt to address that problem and provides a welcome opportunity to address the issues, because they are concerns that are clearly shared by various Members of this House.

The provisions in the Bill and the regulations will need to enable those bulk transfers to take place efficiently and legally. The regulations will need to set out a clear set of rules. Amendment 80 gives the Secretary of State considerable overarching and overriding powers to require the trustees of a failing master trust to transfer accrued benefits. They are extensive powers, but I suspect of an order probably needed to make the transfer regime work in the event of a master trust’s failure.

These powers will give the Secretary of State and the regulator the ability to direct where, potentially, many millions of pounds of members’ money is transferred to. Had we had draft regulations before us, we might have had many questions. I refer in particular to the House having discussed at length the problems that can occur if the administrative records of the master trust are incomplete or in disarray. Even something simple like the lack of a current address for a member can cause delay if a notification is required, I promise. I have been there and bought the T-shirt. It is a nightmare.

Is it the Government’s intention that bulk transfers will be able to take place during a triggering event before all past records are clarified? Post-transfer to the receiving scheme, who will bear responsibility for any administrative errors that existed at the point of transfer? Will there be circumstances where the regulations under this Bill will override other pension regulations in order to effect that bulk transfer? I have one small example. Under auto-enrolment, when members are in self-select funds and are transferred without their written consent, they are from then on treated as having been put into a default fund and the charge cap of 0.75% is applied. I do not want to go into too much detail, but that is to illustrate the question of whether there will be circumstances where the regulations under the Bill will override other pension-related regulations. I commend the amendment because it seeks to address an issue that all of us are aware of if the resolution regime will be based on directing the trustees of failing schemes to transfer their members’ benefits to other master trusts.

[Lord Freud]

My Lords, I hope that I do not have the wrong end of the stick with this. As I see it, my noble friend’s amendment is effectively about individuals being able to move and consolidate their pots, whereas the regime that we have for master trusts is for bulk transfers.

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[Lord Freud]

Now we are moving more closely into what I thought the amendment was about, which is the pot following the member. As my noble friend will know, that mirrors the spirit of Schedule 17 to the Pensions Act 2014. We have not commenced that schedule.

We are looking at another approach, which is the launch of a pensions dashboard. We want to see whether that will work. This would allow people to see their retirement savings from across the industry in one place, which they could consolidate where they felt it was in their interests. The Government will support industry in designing and delivering a pensions dashboard by 2019, with a prototype being developed by March 2017. Clearly, when we know how it works, it will set the context for looking at how best to worry about the problems of being left either in funds that an individual thought were not performing, or wanting to consolidate. It is not necessarily the case that it is always advantageous to consolidate all the different pots, given the way legislation works—in other words, where the member has valuable benefits or lower scheme charges in one or other of those pots.

There is a lot of development here and a lot of change going on. The pensions industry is absorbing a large number of reforms. The Government’s approach is to see how the industry’s plan to have the dashboard will allow much greater flexibility for individuals.

[Baroness Drake]

On rereading the amendment, its first subsection, which states:

“The Secretary of State may make regulations requiring the trustees … to transfer”,

is quite open-ended, so people would choose how to interpret it. The point I want to leave with the Minister is that in the particular instance of failing master trusts—I accept that in other circumstances there is a problem with the bulk transfer terms—the resolution regime is to transfer members and their benefits to another master trust. Existing bulk transfer regulations and legal requirements are not fit for purpose. As they stand, they will not permit the Government to achieve the objective of their resolution regime under the Bill. Although I wish the Government well in having an efficient resolution regime, it is important to understand their policy and thinking on how they will amend the bulk transfer regulations and processes to allow these bulk transfers in a failing trust situation to be undertaken both efficiently and legally. Both aspects need clarification. Certainly, if I may presume, the noble Baroness, Lady Altmann, and I are particularly concerned about the Government’s proposals for reviewing the bulk transfer arrangements in a failed master trust situation.

[Lord Freud]

I shall try to wind this up. I accept the implied—or not so implied—concern of noble Lords that making bulk transfers is more difficult than it should be when there is no regulator process. We are now looking at whether we can simplify those arrangements. I am not in a position to say that there is going to be a consultation, or any major process, but we are looking at that. It is not straightforward, as all noble Peers will accept.

I think I have the answer: master trust bulk transfer provisions will trump existing provisions on voluntary transfers. I hope that is a useful clarification for the noble Baroness, Lady Drake. With that explanation, I urge my noble friend to withdraw his amendment.

Pension Schemes Bill [HL]

Debate between Baroness Drake and Lord Freud

Committee: 1st sitting (Hansard - continued): House of Lords
Monday 21st November 2016 Lords Chamber

[Baroness Drake]

I thank the Minister for his detailed reply. I should be honest and say that I do not think that I have absorbed all the detail that he presented, and I will read the Hansard in detail to follow it through. In my defence, as one would expect in preparation for a Bill such as this, I spoke to pension lawyers, and there was a clear view that the parameters and restrictions on the use of members’ funds to meet the costs when a master trust fails were unclear and needed to be set out more clearly, so I am not alone in not understanding exactly how the prohibition clause works, and therefore what quality of protection is afforded. I simply say that others are unclear what the Bill provides.

I took one or two things from what the Minister said. The information charges provided on the implementation strategy are key. They are the driver against which it is assessed. It is on additional charges that one applies the prohibition; it identifies the charges in the implementation strategy which it is prohibited from exceeding. That needs some reflection.

I was a little confused by one point in the Minister’s response. He referred to default funds. Of course, the cap on default funds is 75 basis points, but the nature of his reply was that if the scheme was running a default fund on 50 basis points, one could rise to the cap to fund the administration charges. Reassurance on that point would be really helpful.

[Lord Freud]

I hope that I made it absolutely clear that we will look back at what was actually being charged to ensure that it was an annual effective rate of 0.5%. There is no space to try to get the next 0.25% once a triggering event has happened. You are left at the level at which you have been charging historically, and there will be a way of assessing that rate, which means that both the original amendment and my noble friend’s amendment to it fall away, because there is another method of maintaining the level of charges.

[Baroness Drake]

I thank the Minister for that clarity; that is quite reassuring in respect of one point, but I think that my noble friend and I will probably want to reflect on the detail of the Minister’s statement. It is also helpful that he has confirmed that the implementation strategy information charges are key in deciding the charges and the prohibition that applies. We will reflect on what is in Hansard, but I beg leave to withdraw my amendment.

Pension Schemes Bill [HL]

Debate between Baroness Drake and Lord Freud

Monday 21st November 2016 Lords Chamber

[Lord Freud]

My noble friend has put very bluntly what I was trying to say in a subtle and gentle way. If the landlord or another supplier to the scheme finds itself out of pocket, for instance, that is what will happen. It will go through the normal insolvency process, but it is not the job of the Pensions Regulator or the Government to be concerned about that. Our concern is purely with the members’ pots. Are they protected and is there a process to transfer them to someone who can look after them properly? I hope that is what I have been able to explain in an overlengthy reply. I hope it has enabled the noble Baroness to withdraw the amendment.

[Baroness Drake]

I shall try to pick up some of the Minister’s points. There was a lot of detail in his reply. I am conscious of the time. I shall start with the risks that we are trying to mitigate; there seems to be a lot of confusion about them. The risk this Bill is trying to mitigate is that the costs associated with managing scheme failure and winding up the scheme fall on the members, so their pots are drained to pay for them. Their pots are not protected. We are talking not about the equivalent of a DB benefit provision or a Financial Services Compensation Scheme provision on an annuity, but about the specific risk that the Explanatory Notes and all the associated documents from the Government in support of the Bill identify that it is seeking to mitigate. Members’ pots should not be raided to pay for a master trust failure.

The Minister set out in great detail how the authorisation regime, the supervision regime and the scheme failure resolution regime will work very effectively to protect the members against that risk. That was very clearly laid out. I complimented the Explanatory Notes and other documents at Second Reading. It is possible to clearly follow the regime proposed. However, the regulatory regime cannot ensure that the capital adequacy and supervision regime will always ensure sufficient resources in the scheme to finance the cost of failure in respect of wind-up and transfer costs. That is the risk we are trying to deal with. It is not the function of a regulator, whether it is the PRA, the FCA or anything else, to eliminate all risk. It cannot possibly do so, unless there is an unlimited guarantee from the taxpayer always to remove risk in a regulated system.

This amendment seeks to address what happens when the regulatory system around capital adequacy or resolution through transfer of another scheme does not work. As the noble Baroness, Lady Altmann, said, at the moment there is only one place to go, which is back to the members’ pots, which will be drained.

If I heard the Minister correctly, he said that there would be no liability for debt placed on the receiving scheme in a transfer situation, so he is saying that if there are insufficient resources in the failing master trust they cannot be offloaded on to the receiving scheme on transfer. They are still floating around to be paid for, so we cannot put them there and we cannot put them on the financial resources in the capital adequacy regime because that has failed, so we are still waiting for someone to pick up these costs because the only thing exposed at the moment is the members’ pots. In that situation, no regulator can guarantee whether there is a suitable master trust that will pick up all the members. It may want to cherry pick some and leave a rump behind. We do not know how this will play out. What has to be possible is that the capital adequacy and supervision regime does not always work and, if there is any one occasion when it does not work, the prohibition clause—Clause 33—cannot work because prohibition on increasing member charges when a failure takes place can operate only if someone provides the resources to fund that prohibition on increasing the charges.

There is no provision in the Bill or in any other policy document from the Government that states that, if a scheme fails in extremis and there are not the resources in place, there is no one to fund the prohibition order on increasing charges as a result of managing that failure other than the members’ pots.

[Lord Freud]

I want to be very clear. There was a useful dialogue between me and my noble friend Lord Flight. I would like to repeat what I said. I am not saying that no one will lose money if something goes wrong; what I am saying is that it will not be the members because their pots are protected.

We have bankruptcy or insolvency proceedings for other people when they get into financial trouble, but that is a separate matter. The members are protected. What we are worried about in this Chamber is the position of the members, and Clause 33 provides that fundamental protection. It is not open to the failing scheme funder to raid those pots; that is prohibited, and we have a regime to prevent it happening.

Just because someone somewhere loses money around this process does not mean that we need a compensation regime. I want to make that utterly clear, because there seems to be a concern to see that nobody can lose money. If people mess things up, they may lose money—but members will not lose money.

[Baroness Drake]

I accept the clarification from the noble Lord. The amendment—which at this stage is partly probing, although underlying it is a principle that is a matter of substance—was not intended to prescribe the model. It does not say it has to be a compensation fund—it could be a provider of last resort—but there needs to be an explicit provision in the Bill that makes it clear what happens to protect the members’ pots when the supervisory and capital adequacy regime fail in a failing master trust. I do not believe that the Bill addresses that at the moment. I am not arguing for a particular model; I am arguing for a principle of absolute clarity as to how members’ protection against exposure to meeting the cost that I described—the risk that the Bill seeks to mitigate—will be addressed in an in extremis position.

It is not a plaintive request—I say to the noble Lord, Lord Flight, that I am not a plaintive request person. I am standing here quite firmly because potentially 7 million people are going to be affected and, over time, there will be trillions of pounds under management. This matter is worthy of interrogation, rather than us simply hoping.

Pension Schemes Bill [HL]

Debate between Baroness Drake and Lord Freud

Committee: 1st sitting (Hansard): House of Lords
Monday 21st November 2016 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I refer to the interests that I recorded at Second Reading. I will speak also to the other amendments in this group. In part, these amendments are probing to understand what happens to non-money purchase benefits in master trusts under the Bill.

Clause 1(2), taken together with other clauses, means that the Bill applies only to money purchase benefits provided through a master trust, and excludes non-money purchase benefits. This means that potentially some of the members’ benefits provided by these schemes, including retirement products, are excluded from key protections in the Bill. On first consideration of that clause, it does not seem fair or sensible to exclude certain members’ assets from all of the Bill’s provisions. Master trusts can provide a variety of services both to employers under auto-enrolment and to individuals exercising pension freedoms. The master trusts may provide at-retirement products, such as annuities, guaranteed draw-down, and investment products which include some form of guaranteed rate of return. Annuity payments, for example, may be paid to the member but the actual annuities supporting those payments may be held as an asset of the scheme rather than in the name of the member. How are savers protected in that situation? Pension freedoms have seen the annuity market shrink, and they may radically transform the market for guaranteed income products. Pension savers will still have an appetite for some form of guaranteed product. The Bill will not apply to non-money purchase benefits, so it is unclear what happens to those benefits and, importantly, the assets backing them, when the master trust fails.

Master trusts are innovative. One such trust, for example, allows members to add in other savings and assets such as ISAs and property used for funding retirement. I read that, of the approximately 100 master trusts, only 59 are being used for auto-enrolment. Some have blossomed on the back of pension freedoms. Regulation should anticipate that master trusts will expand further into the decumulation market of retirement products. The exclusion of non-money purchase benefits raises three important issues. It is not clear what happens to the treatment of all non-money purchase benefits, and the assets backing them, in the event of a wind-up or other triggering event occurring. Will those members’ benefits be protected against funding the costs of a triggering event, and how, and where, will they be transferred on exit?

The Government’s position is that all the requirements in the Bill bite only in relation to money purchase elements in the scheme because other legislation protects non-money purchase benefits. But will all retirement products with an element of guarantee be covered by the PPF regime? I doubt it. Master trusts are not regulated by the FCA, so where does the saver look for protection?

The continuity strategy required under Clause 12 in the event of a wind-up will have to set out how the interests of members of a scheme in receipt of money purchase benefits are to be protected in a triggering event, but it appears that it will not have to set out how members in receipt of non-money purchase benefits will be protected. Such a requirement would at least clarify what range of member benefits were in the master trust; Amendment 26 in this group addresses this issue. Will master trusts be required to set out how members with non-money purchase benefits will also be protected if a triggering event occurs?

Amendment 16 provides for any assessment of a master trust’s capital adequacy backing money purchase benefits, required under Clause 8, not to take account of resources related to benefits other than money purchase benefits. There is only a brief reference—in Clause 38(2)—to both money and non-money purchase benefits being included in a master trust account. How will this work in practice? Will master trust accounts have to be disaggregated by type of benefit? Will requirements be imposed to identify the assets backing money purchase benefits, those backing non-money purchase benefits and any cross-subsidies between the two? Is it the intention that none of the assets backing non-money purchase benefits could be used to fulfil the requirements for financial stability under Clause 8 or to meet costs arising from a triggering event, including wind-up? The Bill raises uncertainties as to the treatment of the different categories of benefits at authorisation, ongoing supervision and when a triggering event occurs.

Finally, Clause 8, to which Amendments 16 and 17 are directed, is the capital adequacy provision clause. At Second Reading, several Peers expressed concerns about the adequacy of these provisions. The terms used are rather open-ended and will require implementing instructions, of which we have yet to see a draft. Concepts such as “sustainability” and “sound” are undefined, and the Bill does not include any explanation of what is meant by a scheme having sufficient financial resources. Even the reference to a scheme holding sufficient resources to continue running as a scheme for between six months and two years means that there is a big gap between the minimum and the maximum requirements. Yet the capital adequacy regime is intended to be the cornerstone or linchpin protecting members in a master trust in the event of its failure.

I will return to these arguments in more detail when we reach Amendment 21 in my name and that of my noble friend Lord McKenzie, but they are compelling reasons why Amendment 17 seeks regulations under Clause 8 to be subject to the affirmative rather than the negative resolution procedure set out in the Bill.

[Lord Freud]

My Lords, I am grateful to the noble Lord and the noble Baroness for tabling these amendments. Amendments 4, 16 and 26 relate to the question of how non-money purchase benefits in a master trust are dealt with and affected by the new regime, and Amendment 17 raises the question of the appropriate parliamentary procedure for regulations under Clause 8.

I will first deal with the question of non-money purchase benefits, as we have given a great deal of thought to it in developing the Bill. Amendment 4 seeks to amend Clause 1(2) so that the provisions apply to non-money purchase benefits in master trust schemes. Amendment 16 seeks to ensure that the Pensions Regulator does not take account of resources which relate to non-money purchase benefits in assessing whether the scheme has sufficient financial resources.

Amendment 26 seeks to ensure that master trusts set out the protections for non-money purchase benefits in their continuity strategy. Many master trusts will be money purchase schemes—that is, they will provide only money purchase benefits. However, a number provide both money purchase and non-money purchase benefits, and we therefore need to make provision to take account of this. As we have previously discussed, it is important that we do not create a loophole for schemes that offer mixed benefits. However, the policy intent is to specifically address certain risks that apply to members in master trusts related to the nature of the structure and funding of these schemes. These types of risk are managed in different ways in relation to non-money purchase benefits, and it is the risks around money purchase benefits that the Bill is focused on addressing.

Pensions Act 2014 (Consequential Amendments) Order 2016

Debate between Baroness Drake and Lord Freud

Thursday 8th September 2016 Lords Chamber

[The Minister of State, Department for Work and Pensions (Lord Freud) (Con)]

My Lords, you will recall a previous set of consequential amendments connected to the introduction of the new state pension, together with a set of affirmative regulations that were discussed in February this year. This order makes a small number of further such consequential amendments. They do two things.

First, they ensure that existing administrative arrangements which are designed to facilitate the annual uprating exercise will continue to operate as they do now. Secondly, they give appeal rights to decisions about national insurance credits that count for new state pension purposes.

Article 2 amends provisions of the Social Security Administration Act 1992 which deal with alterations in the payable amount of certain income-related benefits: income support, income-based jobseeker’s allowance, income-related employment and support allowance, universal credit and pension credit. These provisions allow the income-related benefit award to be adjusted without the need for a further decision if the adjustment is due to uprating—whether it is the benefit itself that is being uprated, another benefit is being taken into account, or both. They also enable the decision-maker to take account of the new rates from the uprating date in determining new awards that begin before the uprating order has come into force. These are long-standing administrative easements which help to ensure the effective operation of the annual uprating exercise.

As your Lordships know, where a person is a member of a couple, their entitlement to benefits can be affected by their status as a couple. Therefore, where a working-age income-related benefit is in payment for a couple but the non-claiming partner is a pensioner, the benefit income could include state pensions. The amendments made by Article 2 simply ensure that business as usual will continue where a person’s benefit income includes new state pension. The forthcoming uprating exercise which will determine the rates to be applied from next April is, of course, the first to apply to the new state pension.

National insurance credits which count for new state pension purposes are provided for under Part 8 of the State Pension Regulations 2015. These are new regulations, made under a new power inserted in the legislation by the Pensions Act 2014. The policy is that decisions made in relation to these credits should, as is the case with decisions made in respect of existing credits awarded under the old credits regulations, have the right of appeal. As the law stands, they do not. The amendment being made by Article 3 gives that appeal right. This amendment should have been in place from 6 April 2016 but, unfortunately, it was overlooked. Having identified the omission, we have acted as quickly as we could to put it right. This is why the order will come into force on the day after it is made.

My officials have been working closely with HMRC, which administers credits on DWP’s behalf, to devise a workaround. Once the order has come into force, HMRC will be revisiting the decisions made before it came into force. Where fresh decisions are made, they will carry an appeal right. There will be no substantial difference in outcome between an original decision, had it been appealable and successfully appealed, and a fresh decision that is successfully appealed. A successful appellant will have credits awarded to them. I should stress that to date there have been no appeals. That there have been no appeals is understandable. First, this issue relates only to decisions made in the period between 6 April 2016 and the date the order takes effect, which is around five months. Secondly, it only affects credits which a person has to apply for.

The practical impact of the gap in the law is restricted to decisions about credits which a person has been able to apply for since 6 April 2016. These include new credits to cover past periods in which a person was accompanying their Armed Forces spouse or civil partner on service overseas. Ordinarily, credits awarded for the tax year 2016-17 would be taken into account only in the assessment of new state pension awards made on or after 6 April 2017. However, the new credits for Armed Forces spouses and civil partners could affect awards made this year. A further mitigation is that before a disputed decision can be appealed, it goes through a process of mandatory reconsideration. So the decision-maker has to look at it again and if, on reflection, they consider that the decision should be changed then it can be revised, without the claimant having to go through an appeal process.

We also know that in relation to the new credit for an Armed Forces spouse or civil partner made under Part 8 of the State Pension Regulations 2015, out of 1,647 applications which have been decided up to 5 September 2016, 324 were refused—and of those refusals, 201 were because the tax year in question is already a qualifying year for other reasons.

Finally, based on data from last year—2015-16—about credits decisions made under the 1975 regulations, we know that only a tiny number of disputed credits decisions actually proceeded to appeal.

So with the change in the law imminent, and if they are needed, we anticipate that the contingency arrangements we have put in place will be required for only a very small number of cases. I can also confirm that, in my view, this statutory instrument is compatible with the European Convention on Human Rights. I hope this gives noble Lords reassurance that while it is accepted that justice may be delayed, it will not be denied. I beg to move.

[Baroness Drake (Lab)]

My Lords, it is unfortunate that there has been an oversight in providing a right of appeal in respect of certain decisions on NI credits for the new state pension, but clearly it is recognised that this SI seeks to correct that.

However, I am a little confused because, as I understand it, the decisions potentially impacted by the oversight in relation to the appeal relate to credits for, in certain circumstances, people caring for children under 12, carers and spouses and civil partners of members of Her Majesty’s Armed Forces. It would be helpful if the Minister could clarify exactly which classes of credits were impacted by this appeal oversight, because it is difficult for the layperson to work it out. In particular, will he say whether that category or class of credits includes applications for credits from those caring for at least 20 hours a week, including grandparents?

The concern has to be over the extent to which the omission of a right of appeal may have affected individuals’ access to such credits and whether this SI addresses that sufficiently. Again, it was quite complex trying to follow what exactly was the answer to that question. Is it possible for the Minister to confirm or indicate the number of claimants who have been denied a right of appeal to date as a result of this omission—that is, the population denied that right rather than those who sought, in the absence of that right, to appeal?

The oversight concerning an appeal embraces all decisions on the relevant credits made between 6 April 2016 and the date when these regulations restore a right of appeal. The Explanatory Memorandum refers to minimising,

“the period when there is no right of appeal”,

for these certain classes of credits, but I am not sure how that impacts the individuals who may have sought to exercise a right of appeal during the period. Does this mean, for example, that all those who made applications for such credits which failed will automatically be written to and told that they now have a right of appeal? I am not quite sure how they will be addressed under this SI. It would be helpful to have that clarified.

As the Explanatory Memorandum observes, some credits are posted automatically while other credits must be applied for: for example, the credit for caring for at least 20 hours a week. The omission of an appeal sits alongside what appears to be government reluctance to report on the success of measures to improve the take-up of claimable benefits. The noble Baroness, Lady Altmann, as Pensions Minister, commented that it was regrettable that the number of carers claiming for NI credits was still so low—so I will take this opportunity to ask the Minister whether it is possible to be advised on how many carers claim such credits and the number the DWP estimates could be eligible for such credits, so that we have some idea of what the noble Baroness, Lady Altmann, was referring to when she referred to the regrettably low number of claimants.

My final point is on the uprating of the new state pension and the consequential adjustment to income-related benefits. Sections 150, 150A and 151A of the Social Security Administration Act refer to uprating by no less than earnings or prices. There is no reference to the triple lock in the new state pension. I cannot miss this opportunity, given that there has been much speculation and comment about the longevity of the triple lock, not least from the Government’s previous Pensions Minister. Can the Minister confirm the exact extent of the Government’s commitment to retaining the triple lock?

Given the introduction of universal credit, over time the adjusting of income-related benefits to take account of the uprating of the new state pension will largely be in respect of awards of universal credit and pension credit. The experience of the poorest pensioners will continue to be influenced by the extent to which the uprating of the pension guarantee credit is comparable to, or less generous than, that applied to the new state pension. Can the Minister confirm the Government’s policy for the uprating of pension credit, not least over the course of this Parliament?

--- Later in debate ---

[Lord Freud]

I will confirm this in writing, but my impression is that there is a right of appeal in these circumstances. It may be that there was no gap in the legislation. I will confirm that, but that is my starting position for 10.

[Baroness Drake]

Before the noble Lord sits down, I just want to take advantage, if I may, to ask about the issue of pension credit. It has been confirmed that it will follow the earnings link, which we know is in the legislation. But in recent times we have seen increases in pension credit greater than what is required by legislation in order to ensure that the poorest pensioners do not receive a smaller increase than those receiving state pension. Given the kind of statements made in the Budget in 2015, is the disposition of the Government still to say that there will be a focus on the poorest pensioners through pension credit and that they will not feel constrained to stay only within what the legislation says but may go above it in order to protect those poorest pensioners? I am interested so I am pushing the Minister on this point.

[Lord Freud]

I always love to answer the noble Baroness in a positive way, but I am not in a position to speculate on the precise levels in any particular year. We do not have long to wait until we see some of the figures. I am feeling incredibly confident about my last answer, almost to the extent that a letter is not required on this particular point. With that response, I beg to move.

Motion agreed.

Welfare Reform and Work Bill

Debate between Baroness Drake and Lord Freud

Monday 14th December 2015 Lords Chamber

[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

Debate between Baroness Drake and Lord Freud

Monday 7th December 2015 Lords Chamber

[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: Draw-down Charges

Debate between Baroness Drake and Lord Freud

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 Bill

Debate between Baroness Drake and Lord Freud

Wednesday 12th March 2014 Lords Chamber

[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.

--- Later in debate ---

[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

Debate between Baroness Drake and Lord Freud

Wednesday 26th February 2014 Lords Chamber

[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.

Pensions Bill

Debate between Baroness Drake and Lord Freud

Monday 13th January 2014 Grand Committee

[Lord Freud]

I am grateful to noble Lords for their observations. I shall first take the query from the noble Lord, Lord Browne, about whether Amendment 44 is needed. I am conscious of his forensic skills in looking at particular bits of legislation in this area, and I therefore take his warning seriously. What it does is to remove a defunct reference on which legislation is worded. The default test is to meet the statutory standard. Actually, the legislation could work without this particular amendment, but it is confusing to those applying legislation and would leave an out-of-date reference on the statute book. The noble Lord, as usual, has picked up something quite clever.

He also picked up another clever thing: that I mis-spoke about my decades. I should have said two decades in each case, so I am pleased to correct that, and impressed that I was picked up.

On the negative procedure issue that the noble Lords, Lord Whitty and Lord Browne, and the noble Baroness, Lady Drake, mentioned, at this stage I do not have anything to add except to say that we are genuinely concerned about timing if the affirmative procedure is used. But that may be something we have a chance to discuss in our briefing ahead of Report.

On the question from the noble Baroness, Lady Drake, about the override being net or gross, as I mentioned in my letter on Friday, the intention is that the current rebate rate of 3.4% will be used for these calculations. Without reform, this rebate would change over time, but it is impossible to predict what would happen, and therefore creating a net value for the rebate in future years would be impractical.

[Baroness Drake]

I shall desist from arguing that point, as we are going to have a meeting, but it is such a wrong approach because it is an unexpected premium for employers. You can have net at the employer level and at the aggregate level—what employers would have to pay taking into account taxation and tax relief—as well as how you set the figure for NI overall. Individual employers would have been able to set the cost of the additional NI against their tax liabilities.

[Lord Freud]

I think my answer stands. It is gross, not net.

[Baroness Drake]

We are going to have another meeting, but the effect of what the Minister has just said worries me. Employers will be allowed to recoup the value that is crystallised in 2016, but everyone knows that if there had not been changes the post-2016 value would have gone down. In addition, the employer’s NI charges are an expenditure that can be taken into account and set against tax. If those two elements are not built in, is that not a little unfair in term of the rules for recoupment—a little imbalanced?

--- Later in debate ---

[Lord Freud]

I do not think that I am in a position to say anything further, but we will pick this up later and if we cannot satisfy the noble Baroness at that stage, I will have to write very specifically on that matter and the tax implications.

[Baroness Drake]

It goes to my point about negative regulations. We just do not get the opportunity to address these issues because they are not drafted.

[Lord Freud]

I hear the point. Clearly we will be looking at it some more.

On the point made by the noble Lord, Lord Whitty, about whether the override can be used for retrospective changes, the answer is no. That is contained in paragraph 3 of Schedule 14, which prohibits changes that might adversely affect subsisting rights; that is, rights to benefits already accrued.

On the noble Lord’s point about whether this undermines schemes, the override has been introduced precisely so as not to undermine schemes. Employers have told us that without the override, they would close schemes; the override is there to help them find ways of avoiding that.

On the protected persons question from the noble Lord, Lord Browne, I agree that it would be most unusual if the Government were not able to notify Parliament of their decision before the Bill completes its passage.

The noble Lord had a query about the rights of trustees to challenge. They could apply to the courts for direction, because amendments to the rules are not valid if they are beyond limits. Costs fall to the scheme, and ultimately the employer pays.

I hope that I have covered all the issues. Clearly this is an area of some interest and we will be spending more time on it.

--- Later in debate ---

[Lord Freud]

The Low Pay Commission reports on a much more regular basis than the five years envisaged here. To pick up the timings that we have experienced, there is the example of Independent Public Service Pensions Commission. The noble Lord, Lord Hutton, was appointed in June 2010 and reported some nine months later, in March 2011. In the intervening period the noble Lord held two calls for evidence, undertook a research event, published an interim report and published his final report. It is clear that a lot can be done in the space of a year, and that is the kind of period that we imagine is about the right length of time required for a review.

NDPBs also tend to look at a wide variety of regularly changing data in the areas of longevity, healthy life expectancy, socioeconomic variations, trends in the labour market and so on, and they tend to be published on a much less regular basis than this. I want to be clear, though, that the groups indicated in Amendment 57A and many others should all be encouraged to participate and contribute in the process. Indeed, the review has been designed to ensure that both Parliament and stakeholders will have ample opportunity to participate in the process and shape the outcomes. Furthermore, because the reviews will be regular, stakeholders may indeed be able to better prepare and contribute than they are now.

Of course, if the Government decide to bring forward changes to the pension age, then those changes must be secured through primary legislation and subjected to the full scrutiny and approval of both Houses, as now. However, to have such extensive and political input at the data-gathering and analysis stage risks stymieing the process before information can even be provided to the Secretary of State. Indeed, the House of Commons Disqualification Act 1975 prevents MPs sitting on many public bodies, precisely in order to avoid politics influencing their work.

Regarding the publication of this report, subsection (6) of this clause requires all reports prepared under the clause to be published. This means that both the Government Actuary and the report from the independently led review, including any recommendations that that component of the review makes, will be published, so all the evidence that has been taken will be made available. Every report will be laid in Parliament and published, including the report from the Secretary of State. As I said before, any proposed changes will require primary legislation.

It is for the Government of the day to put forward proposals resulting from the reports and to present any legislation to Parliament. Responsibility for publishing any overall report on the outcome of the review therefore has to remain with the Secretary of State. I hope that I have been able to provide some reassurance about how we envisage the review working and why. In this case, less is more. I urge the noble Baroness to withdraw the amendment.

[Baroness Drake]

I thank the Minister for his comments. I certainly was not trying to overleverage my experience on the Pensions Commission; that was not necessarily the main driver for my amendment. I shall respond to some of the points that he made. In Clause 26 the periodic review on the state pension age is a standing arrangement, which is why it provides an opportunity to create an independent commission in support of that arrangement. It is not a case of a one-off job and then it finishes, otherwise it would not be in the Bill. It is obviously intended as a standing arrangement, which is meritorious; I do not disagree with that. However, that is materially different from a one-off commissioning of something. It says that if you are going to have this standing arrangement and periodic reviews and assess whether the current rules on state pension age are fit for purpose, that lends itself to being supported by a commission on a standing basis.

Again, on reading Clause 26 it is not simply dealing with the narrow issue of the state pension age rules, it is also quite clearly saying it will review other factors relevant to the review. The implication in that must be that the Government recognise that complexities would arise around the demographic challenge. That would need to be understood in order to influence policy decisions across a range of issues. Again, a standing commission would be able to assist in looking at that wider range of factors that would inform the review.

I also repeat the point I made in moving the amendment because it is really important. The long-term management of public finances, particularly in respect of responses to the demographic challenge, would be really helped by having a standing commission. The fact that so much progress was able to be made on a political consensus that we are still getting the reward from was because there was a commission. It was able to present the issues and the case to Governments and political parties, as well as the country as a whole, in such a compelling way that it drives, almost from a sense of political responsibility, a consensus on the long-term management of public finances on that issue. It would be a shame to lose that.

Sustainability is a long-term project. Secretaries of State change, Governments change, but as a society we want a political system that delivers rational policies that give us good long-term outcomes. The one thing that characterised pensions in the last 20 years of the previous century was the incremental decisions that Government after Government made about both the private and public pension system. When you stood back you could see the complexity and the dysfunctionality of what the political system, motivated as it might have been in each instance in a very positive way, created. Certainly, when employers started to withdraw from the private pension system it started to show the weaknesses of our political system.

If we are looking for long-term effective management of public finances, the sustainability of the private pension system and the demographic response over the long term this strikes me as a way to go forward. To take an anecdotal example, I remember telling my husband that I was about to go and tell the whole country that they had to work significantly longer and we could not even promise that even the first forecast of how much longer they would have to work would not be increased further in the light of experience. He thought that I was committing career suicide and could not believe that I could possibly do that. I explained to him that the evidence was so compelling and if one cared desperately about a pension system and the interests of the people in this country you had to have the courage to take that debate out to people.

I can remember the CBI being horrified at the thought of having to retain older workers. I can remember trade unions being mortified at the prospect of the default retirement age being raised or abolished because it was a stalking horse for raising the state pension age. However, because you had a commission you could have a much more positive influence on that debate. I remember, as I am sure the Minister will experience, lots of people from around the world, particularly in Europe, asking how the UK managed to get such a consensus from the country about the reforms that needed to be made to the pensions system and the state pension age in particular. I genuinely think that one of the reasons that was possible, compared with some of the problems that are being experienced in other countries, is because the analysis and the narrative that were taken out to people were not just the product of party politics. They were the product of a commission that sought to identify the issues and the choices on the basis that even if you did not make a choice, that by definition was a choice because you would be inevitably moving along a certain line.

I think that that is right. There are 60 million people in this country who have an investment over the very long term, either for themselves, their children or their grandchildren, so we must get this right. What is there to fear in trying to sustain the political consensus by having a group of independent people who assist that process by being able to assist with the narrative and identify the issues? It is that passion that makes me move the amendment, not just that I happened to be on a commission at a point in time. I beg leave to withdraw the amendment.

Pensions Bill

Debate between Baroness Drake and Lord Freud

Wednesday 8th January 2014 Grand Committee

[Lord Freud]

I actually have very strong views on this matter but I think they are personal. I am going to utterly resist putting them on the record in this Committee but I would enjoy having tea with the right reverend Prelate and giving vent to my personal views at full force.

[Baroness Drake]

Could we come too?

--- Later in debate ---

[Lord Freud]

My Lords, I particularly enjoyed the stories of the noble Lord, Lord Browne, about his dealings with pensioners. I am disappointed that he and his silver tongue were unable to persuade against the pocket. After single tier is introduced, there will not be an additional state pension to contract out of. Employers with such schemes will no longer receive the national insurance rebate; they will pay the same rate as other employers and will have to continue to provide a pension scheme that is generous but which will therefore be more costly. To continue funding these defined benefit schemes and to keep them open without the rebate, employers will be forced to find other ways to reduce running costs. They may wish to reduce the future rate of accruals, or to increase employee contributions.

Employers have told us that, without the override, they will have to consider closing their schemes, particularly if they have no other way of offsetting the costs of contracting out. Clearly, members are not served by their pension schemes closing. It is vital that we support those employers who are seeking ways of offsetting the increased cost of national insurance, including where their scheme rules would not allow the change or where the consent of trustees cannot be obtained. We also recognise that trustees may be put in a difficult position if employers come to them with a request to reduce benefits or increase contributions.

[Baroness Drake]

On the point that trustees find themselves in difficult positions if they are asked to consider increasing contributions or reducing benefits, I am not sure whether the Minister appreciates what trustees have been doing in the past 10 years in addressing precisely those kinds of requests from employers.

[Lord Freud]

I understand what trustees in pension funds do and I understand that some of them find themselves in very difficult positions when having to address those issues.

Referring to those private sector employees who are contracted out immediately before implementation, who reach state pension age in the first decade of single tier, around 75% of them will receive enough extra state pension to offset both the increase in national insurance contributions that they will pay over the rest of their working lives and any potential adjustments to their occupational pension schemes. Such a move must be considered in this context.

In contrast to the figure that the noble Baroness, Lady Turner, and the noble Lord, Lord Whitty, were looking at—1.6 million in private sector schemes—regrettably, by 2016, we expect only 950,000 individuals to be affected. That figure is in the impact assessment at paragraph 128.

Amendments 37 and 38 would remove the statutory override power and prevent Schedule 14 from coming into force. The practical effect would be that an employer would be required to get trustee consent for the changes they wanted to make to their scheme should their pension scheme rules require this. For the reasons I have just set out, we feel the override is necessary.

Amendments 38ZA, 45, 46 and 47 of the noble Baroness, Lady Drake, relate to the calculation of the value of the employer’s lost national insurance rebate. For the statutory override to operate as intended we must balance two competing factors: first, safeguarding members from changes to scheme rules that go beyond offsetting the loss of the rebate; and, secondly, providing an override that remains workable for employers—otherwise in practice they will still be left with little real alternative to scheme closure. Schedule 14 sets out important safeguards in the Bill and includes powers to put further safeguards in regulations. Paragraph 2(2) of the schedule prevents the employer making changes beyond those necessary to recoup their increase in national insurance contributions. We intend for this amount to be calculated in accordance with regulations—allowing us to define annual national insurance contributions—and an actuary must certify that any changes do not recoup more than that amount before they are made.

Importantly, any proposed scheme changes cannot take effect before April 2016 and individuals’ accrued pension rights are protected by the Bill. The amount will be calculated in accordance with actuarial methods and I accept that that can be a changeable feast, as the noble Baroness, Lady Drake, pointed out. However, we intend to specify the methods and assumptions in regulations following consultation with the actuarial profession. We are working on the detail of the override regulations and are developing the legislation with stakeholders. We have shared an early draft of the key technical provisions of the regulations with the industry and will undertake a full public consultation on the full regulations as soon as possible. The override will not remove an employer’s obligations under existing legislation to consult their workforce in the usual way before making changes.

Amendments 38A, 39 and 50 refer to the role of trustees in the use of the statutory override. Legislating for trustee consultation risks unnecessarily complicating existing communication channels. It would be counterproductive to require employers to seek trustees’ agreement that the proposed changes recoup no more than the increase in national insurance costs. Trustees would be put in a position of either accepting or challenging the professional view of the certifying actuary. The proposal that the trustees could block the use of the override would negate its purpose. It is worth remembering at this point that, as with any significant alteration to pension schemes, existing legislative provision means that members must be consulted before any changes take place, which is a point I have made.

Where employers wish to make changes to their scheme, whether using the override or through existing scheme rules, it is in their interest, as my colleague Steve Webb said, to engage with their employees and scheme trustees. They will not want to make changes that are impractical or have unforeseen consequences for the scheme or themselves. We can see no reason why employers would not engage in the usual way without the trustees in this case.

We have placed a limit of five years during which employers may use the statutory override. This ends in 2021 but, as the noble Lord, Lord Browne, observed, that time limit may be extended by an order made by the Secretary of State. Based on all the information we have at the moment we believe employers who choose to use the override should be able to do so within this time limit. However, contracting out is complex and there may be unforeseen problems for some employers. An employer who is unable to use the override within the time limit, without the possibility of an extension, may have no option but to close their defined benefit scheme. This would be a compelling reason to use the power and we feel that an affirmative resolution procedure on this matter would not be a prudent use of parliamentary time.

--- Later in debate ---

[Baroness Drake]

I wish to clarify one or two points, if I may. The Minister said that these changes would still be subject to consultation with employers, by which I assume he is saying that they would be considered as listed changes and therefore trigger the listed changes regulations. What triggers that? Those provisions can be operated in a way that excludes the trustees, if the employer takes a certain route. I do not want to go into the detail; perhaps I can do so outside. I would like to understand how consultation with employers is triggered because I would almost certainly want to go on to say that what I think will be triggered will not be fit for purpose in a statutory override situation. I have a couple more points.

[Lord Freud]

Those are not straightforward points to answer and, given the time pressure we are under, I will write on those two matters.

[Baroness Drake]

I completely understand these technical matters. We are up against the clock but I think they need answering and I would want to respond to the answers. There could be an element of the positive in the second—on specifying the assumptions in the regulations—because it starts setting out the rules more explicitly. However, it appears that the Government are still proceeding on the basis that these are negative regulations. The trouble is that other interested parties cannot make an effective contribution unless this House has the opportunity to question those assumptions and those regulations. I have no idea what the delay implication would be of allowing this House to consider the proposed regulations and assumptions more actively when they are brought forward.

Secondly, I would still like an answer to what it is that can be recouped. Is it the definition of the NI rebate in 2016, or is it the NI rebate as it would evolve anyway over time under the current arrangement, meaning that, because of the reduction in the earnings element, it would contract?

Again, I do not want to get too much into protected persons but, on the fourth point, if one takes as an example the railway pension scheme, the Minister is absolutely right. Lots of people in that scheme do not have protected pensions, but they do have the shared cost. There are particular complexities that arise from shared costs and some other things as well, but I feel that there is no opportunity to flesh these out. I have spent some time looking at the railway pensions bill. Even if one did not want to challenge the Government on the principle, there are some complexities here. It is not easy just to adjust the contribution rate or to adjust the benefits in a shared cost situation and where there are variable accrual rates. How are we going to get a chance to look at these?

[Lord Freud]

My Lords, given our time constraints, I will pick up those issues—the shared cost and the rebate over time. With the negative and affirmative, there is a time saving and a certainty. The difference is that you get them in and, within a matter of a month, they are effectively law and they can then be prayed against, but they are in shape unless they are undone. Affirmative has to be approved. So there is quite a process and a time loss in going one way or the other, which I hope I have spelt out. Let me rush to—

Pensions Bill

Debate between Baroness Drake and Lord Freud

Monday 16th December 2013 Grand Committee

[Lord Freud]

I shall start with the question from the noble Baroness, Lady Hollis, referring to the previous amendment regarding men coming off guarantee credit. I commit to write to her with the data on the numbers coming off.

The central principle that these reforms represent is that the full amount of the single-tier pension will be above the basic level of the means-tested support for a single person. This provides a clear foundation for both private saving and automatic enrolment, and it builds on the broad cross-party consensus that has characterised the debate that there has been on pension reform: people need to save more, and to do that they need to know what they are going to get. The reforms are therefore not so much about spending more or less money on future pensioners but about restructuring the system to provide clarity and confidence to help people today to plan for their retirement.

In the White Paper, published in January 2013, we used an illustrative start rate of £144, which was above the minimum guarantee and forecast to stay within the projected spending on the current system. Every extra pound added to the start rate increases annual costs by £500 million in the 2030s. A start rate of 2% above the standard minimum guarantee would incur significant additional costs.

On the question from the noble Baroness, Lady Drake, on the narrowing of the gap between the standard minimum guarantee and the start rate of the single tier, the Green Paper said explicitly that the precise value of that start rate would need to be set at a level that met the affordability principle. The start rate that we will fix will need to be set closer to implementation, when the Government will be able to factor in both the 2016-17 level of the standard minimum guarantee and the latest economic and forecasting data.

The Committee will note that the regulations to set the start rate will be subject to affirmative resolution and will therefore be debated in this House. The noble Baronesses, Lady Drake and Lady Sherlock, asked why this is being done by affirmative resolution as opposed to in the Bill, as is the existing position. The different approach was flagged up by the DPRRC, although, interestingly, it did not recommend that we changed our legislative approach. That approach is consistent with recent legislation, such as establishing both the ESA and universal credit, and it is driven by not currently knowing what rate to use, given the enormous costs involved of getting that rate out even by a small amount from what it should be, relative to the means-tested level.

On contracting out, there is not a clear distinction between the people who are contracted in and contracted out. We estimate that even by the 2030s about 80% of people will have been contracted out at some point. The analysis we have done in the IA, as the noble Baroness, Lady Drake, pointed out, is based on the net state pension outcome, not the gross.

The stated intention of the Government is that the start rate should be above the standard minimum guarantee, and it is the Government’s intention that it should remain above the standard minimum guarantee into the future. That is why the Bill sets out that the single-tier pension will be uprated by at least earnings growth. There is flexibility in the legislation for discretionary above-earnings uprating, depending on the fiscal circumstances at the time.

I point out to noble Lords that where a couple both receive the full amount of single-tier pension, as a household they will receive almost a third more under the new system than the couples’ rate of the standard minimum guarantee. To promise a single-tier start rate at 2% above the basic level of means-tested support would mean that we could not guarantee that the reforms would be cost-neutral. With these reforms, we aim not to increase the amount spent on pensions but to provide clarity to support private saving.

On the question from the noble Baroness, Lady Sherlock, on the decrease in the numbers of those who are means-tested being driven by the end of savings credit, clearly the answer is yes, in part. However, that money is being used to provide the flatter state pension that is central to these reforms and it allows us to provide the single tier in a cost-neutral package, while simplifying the system. Although there is no Baroness Castle to barrack us from in front or behind, or wherever she did it, it clearly makes sense to go to a system that is less—or as little—reliant on means-testing as possible. This is the way to do that and I urge the noble Baroness to withdraw her amendment.

[Baroness Drake]

Was I correct in understanding that the noble Lord confirmed that the figures that we have show that notional gainers and losers are based on the net state pension figures, not the gross, and that a certain category of payment was therefore excluded in that analysis? Those net figures will not include total additional payment entitlements.

[Lord Freud]

The noble Baroness is correct that the analysis is done on a net basis. I am dubious about whether a gross basis is even possible, so I will not promise to have an additional analysis done on a gross basis.

[Baroness Drake]

That prompts the obvious question: why not? However, will the Minister write to us on why the net rather than the gross figures are used, and why the gross figures cannot be used, so that we can fully understand the implications of the gainers and losers analysis with which we have been provided? Certainly I had not realised that there was that distinction. I was scrabbling at or delving into trying to understand this issue when I asked some of my questions at the briefing. However, I think the distinction between net and gross is quite significant, and it would be helpful to have an understanding of those two issues.

[Lord Freud]

I will certainly be pleased to write on the thinking behind why it is net. As I say, I am not in a position to commit to anything on the gross figures at this stage, but I will set out the latest position in that area in that letter.

Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2012

Debate between Baroness Drake and Lord Freud

Tuesday 22nd May 2012 Grand Committee

[Baroness Drake]

I appreciate that the Government are looking at the whole issue of the transfer of small pots. The point that I sought to concentrate on was that it is very likely that the market will apply a differential charging structure to inactive members and to active contributing members. Even though the Government have taken powers to control that, those powers will not stop differential charging. If a woman is full-time, then takes on a part-time job with another employer and is not auto-enrolled—and so becomes an inactive member—one of the consequences is that the charges on her remaining pot start to rise, because inertia is not turned into a positive. It is that narrow point. I appreciate that the wider review of pension pot transfers is coming up.

[Lord Freud]

I will stand my ground a little bit on this, because these are some of the issues that really come into consideration when we look at the broader issue of pension pots. My colleague Steve Webb has said a few things about this in public, and I know that he is looking in private at this differential charging issue, so it is something that he is considering.

My noble friend Lord German asked a related question about the opt-in/opt-out rates. Those will be monitored on an ongoing basis. He also asked about people coming in and going out as their earnings change, perhaps going from full-time to part-time. These people will continue to make and receive contributions according to the rules of the scheme that they end up going into when they go in, but if earnings dip to the extent that no contributions are due in a particular period, they will restart immediately when their earnings are high enough, so there is no waiting period.

I will now return to two issues to deal with them precisely. I only touched on the differential charging that the noble Baroness was concerned about. We have powers under the 2008 Act to set a cap should charges become inappropriately high. We recently extended those powers to cover deferred members. Therefore, we have all the necessary powers, and my colleague is aware of the issue. We are monitoring the charges with rolling research and will continue to do that as enrolment is brought in.

I will close my answers by doing justice to the point about tax relief made by the noble Lord, Lord McKenzie. We will continue to take that into account. The matter is not entirely straightforward, as we established. At this stage we do not know how many people will get relief at source as opposed to making net pay arrangements. We will keep that matter, too, under review.

This is our first review. It took a major consultation effort to decide on the trigger and the earnings band. We would have preferred to come out with this earlier, and I will try to do better on timing next year because early certainty is important, for employers in particular. It was right to consult this time, and to gather the views of people who will need to make automatic enrolment work in practice: those who will have to administer pension schemes, employers who will have to deal with all the questions from their workers, and people who represent those workers. The one message that we got from all of them was that we should keep this simple. I shall take that to heart for the future. Of course, it chimes with the Government’s Red Tape Challenge.

As I said, we will come back to this in a little less than a year. I know that I look forward to it as much as other noble Lords in the Room. I commend the order to the Committee.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Monday 23rd January 2012 Lords Chamber

[Lord Freud]

My Lords, as always, I am incredibly grateful to the noble Baroness for her suggestion. I am thinking of offering her a job. However, let us not redesign the benefits system on the Floor of the House, although we have gone into it on many occasions. Let me ask the noble Baroness, Lady Drake, to withdraw her amendment.

[Baroness Drake]

My Lords, I thank noble Lords for their support and the noble Baroness, Lady Tyler, who also argued the case for family and friends carers in Committee. I accept that the noble Lord has shown a commitment to looking at the needs of this group and I think the charities would accept that.

My anxiety and that of the charities that articulate the interests of family and friends carers is that the Bill is going through the House without one having achieved clarity over the kind of protection that this community will get under the legislation. The Minister said that this community would be supported in the most appropriate way, and that it was necessary to get it right in regulation. It would be helpful if he confirmed that there will be regulatory provision to protect this group, notwithstanding what the precise solution may be, rather than leave the protection to discretion. It would be helpful if the regulatory route was being taken. I thank my noble friend Lady Hollis, as ever, for coming up with an excellent suggestion.

[Lord Freud]

Perhaps I may answer that straight on. I hope I made myself clear that when we get the regulations on handling the transitions and the options around it that we discussed earlier, we do it in a way that looks after this group. I am not committing here to specific exemptions for this group, but I am saying that we are looking at how to do it so that we meet its requirements, of which I am very conscious.

[Baroness Drake]

I thank the noble Lord for that response. In the earlier stages of the debate on this community, my particular concern was that the protection necessary for it is not dealt with solely as a matter of discretion and that there is clear guidance—whether or not as a consequence of dealing with the matter as part of a wider resolution—that it is not left solely to the individual discretion of advisers. I take the response of the Minister as meaning that it will not be left in that way. He is nodding.

[Lord Freud]

Hansard needs more than a nod. Without elaborating on a lot of transitional arrangements, I am not quite sure how this will work. I am not sure that I can give absolute assurance either way, although I would lean towards setting these things out formally without discretion; but I am not in a position to give any kind of assurance either way. There might be elements of discretion in any set of protections that we develop.

[Baroness Drake]

Obviously it would have been preferable if the Minister had said unequivocally that this matter will not be left to local discretion, but it is clear that I am not going to get that reassurance. However, the noble Lord has said quite a lot on record that he is committed to trying to resolve the needs of this particular group. Perhaps I may borrow a phrase from the noble Lord, Lord Newton, in a previous debate: I will hold the Minister’s feet to the fire on this issue. On that basis, I agree to withdraw the amendment.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Wednesday 14th December 2011 Lords Chamber

[Lord Freud]

I am going to have to write with a precise definition of domestic violence and the threat of domestic violence.

Turning to Amendment 26, we are all too well aware that in-work conditionality is a difficult and contentious area. In this debate and in Committee noble Lords raised a number of concerns and questions. I think that I have been open enough to admit that I do not have all of the answers to those questions right now, but I hope that I can provide some real reassurance by describing our planned approach. We are going to take some time to get this right, because it is a new area. I said in Committee that there may be a role for piloting and I can now be much clearer on that.

We have decided that when universal credit is launched we will not be imposing conditionality on claimants with income or earnings which would, broadly speaking, have taken them over the cut-off point for the current out-of-work benefits. So we are effectively continuing with the current system. Rather than a review, our approach will be to pilot the application of conditionality on claimants whose income is above this level. We will want to gather views on the sort of approaches that could be tested and I commit to publishing the details of these pilots. We will then reflect on the results of that process before adopting any national approach.

Finally, turning to Amendment 24A, I have listened very carefully to the feelings of noble Lords on this and again let me say that we are of one mind on this matter. Work is already under way, as I said in Committee, around how kinship carers should be treated for conditionality purposes. I agree that kinship carers who need a period of adjustment should be given time to return to a stable footing before being expected to meet work-related requirements and juggle conditionality with new caring responsibilities. Advisers will have discretion to lift temporarily the requirements on individual claimants where a child’s needs are such that the claimant must be able to provide full-time care. I repeat what I said in Committee. I recognise the potential for value and clarity in a legislative exemption from conditionality and we are carefully considering options for further provisions. The Bill provides scope for flexibility in this area and we have powers to make regulations as necessary. These things take time, but I can assure noble Lords that work is progressing. I am on this case. We are currently talking to the Department for Education—

[Baroness Drake]

I shall not miss any opportunity on this because I know that this important community will hang on the Minister’s every word—and I say that in the warmest sense. The Minister said that advisers would have the discretion to lift the conditionality and, at the same time, he repeated the reference to the value and clarity of legislation. If I may push him, is he saying that guidance and discretion around guidance are not of themselves sufficient to address this community?

[Lord Freud]

I think what I am saying is that you can take away the discretionary elements of support for this community, and that is already in the bag. I would like to add more to that, and that is what I mean when I say that there is value in legislative exemption. Then I move on to say that I am working on it. I am seeing some noble Lords who are familiar with government having a good giggle because they know exactly what is happening and they giggle with reality.

The way I have to express this—again, some noble Lords will recognise this better than others—is that doing more for this group may come at a cost, and we are operating in difficult financial times. I repeat that I have a real interest in this area, and when I am able to give firm answers, I will do so. This is a matter with which we will deal in regulations rather than in primary legislation. On that basis I urge the noble Baroness not to press her amendment.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Wednesday 14th December 2011 Lords Chamber

[Baroness Drake]

I speak as someone who is rather preoccupied with financial inclusion. The Minister is describing a process, but if there is a product—a bank account—that works for low-income or unemployed people and the account is in debt, how does one know that the bank will pay the direct debit? Can he be confident that it will pay if there is a deficit in that account?

[Lord Freud]

That is exactly what we need to ensure and that is exactly what we are discussing with the banking groups. Specific banking support is exactly the issue that we need to get right.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Monday 12th December 2011 Lords Chamber

[Baroness Drake]

My Lords, I thank the Minister for that reply. I do not think that I am supposed to say that any more—I think the new rules say that I can dispense with that—but I will remain courteous and thank the Minister. Or is that only in Questions? I am trying to keep up.

I will deal with each of his points. First, I did not know that there was a middle path. That is a whole new concept to me. I thought the issue was that in-work benefits would support the incentive to pay for, say, low-to-moderate-income people by disregarding pension contributions. As to the concept of a middle path, I do not know what the merit of that middle path is other than the opportunity to save some public expenditure. I have never seen it publicly debated that it makes a big or meaningful contribution to the pension settlement.

I accept that we may not strictly be comparing like with like, because I am trying to lift from a set of rules under one benefits system to the one that will apply under universal credit, but I do not think that I heard the Minister say that the £200 million saving from this change had varied. As I understand it, the Government are still expecting to save £200 million. However the cloth is cut. That means that, for a particular group of low-to-moderate-income people, £200 million will be taken out of their incentive to save. At the same time, there will be a staggering increase in public expenditure reduction of £59 billion from accelerating the state pension age. I do not want to debate the acceleration of the state pension age—I am sure that there will be opportunities to do that.

[Lord Freud]

If I could just clarify this for the noble Baroness, £200 million is the extra cost of doing this, not the money taken out.

[Baroness Drake]

I am sorry. I thought that the Minister said that they would save £200 million from this change.

[Lord Freud]

No, no, my Lords, I said that the cost of this amendment would be an extra £200 million.

[Baroness Drake]

I will have to go back and check on the figures. None the less, there will be a saving from this which has the effect of reducing the incentive to save for this group of people. As they will not be able to access the benefit of auto-enrolment until later, the contribution from their employer will come online more slowly, and therefore their ability and incentive to save will be reduced.

The Minister said that he sent a series of worked examples to my noble friend Lady Hollis that produced a range of outcomes. That is my whole point—some people can lose quite significantly under these new rules. It is not clear as to what the rules would be in all circumstances. Although there are transitional protections, that simply means that there will be a cliff-edge impact on another group of older couples when these rules come in. This will continue to add to the couple penalty and to the differing treatment of older couples depending on when precisely their qualifying age falls or on the age of their partner. That is why the amendment sought to give the Government flexibility as to how to address the problem of people suffering a significant drop in income. It did not of itself say that in all circumstances a partner should not be subject to work conditionality. However, I beg leave to withdraw my amendment.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Monday 28th November 2011 Grand Committee

[Lord Freud]

Clearly, there are always difficult and special cases. I suspect that an old lady would not be eliminated entirely. The answer is that there is support for people with particularly tricky circumstances. We will work with local authorities that will be collocated in many cases, especially with the single fraud operation being set up. The shades of grey, which will start to rule out negligence, will be very evident in most of those cases.

In justification of the £50, that sum was chosen because we believe that this is a sufficient amount that will act as a punishment and make claimants more personally responsible for the overpayments they incur and encourage a positive change in their future behaviour. We have also set a significantly lower amount than the harsher punishments available for fraud offences, which reflects the fact that it is directed at the failure to take proper care of a benefit award and is not about fraudulent behaviour. Under the appeal process, the claimant will be able to appeal against the overpayments decisions, the civil penalty or both.

For those reasons, I urge noble Lords to reject Amendments 104AA and 104ZA.

[Baroness Drake]

I thank the Minister. Perhaps I may address some of the points that he raised because I still feel deeply concerned. I probably have slightly more concerns now than I did previously. I do not say that provocatively and I will try to say why. First, it should be made clear that this is a civil penalty that does not deal with fraud issues. There are separate clauses for that. The stated purpose of this civil penalty is to improve people’s behaviour in the accuracy of their form-filling. The concept of introducing the civil penalty worries me, particularly for a community of people with a greater concentration of the vulnerable and lower levels of numeracy and literacy, and when we are taking this means of a civil penalty to address behaviours, some of which are systemic and cannot be dealt with simply by handing out civil penalties here, there and everywhere—notwithstanding that the Minister said that that is not the intention.

The Minister said that Clause 113 goes on to say that there will be no penalty if you take reasonable steps to correct the error, but the point is that someone cannot take reasonable steps to correct an error if he does not know that he has made it. That is the problem. Someone could face the civil penalty before having the chance to put it right because he does not know that he has done something wrong. A concentration of people will be increasingly in the category of not knowing that they have made the error when filling out the form.

The Minister also said that I should not be worried about how the powers will be deployed, but he gave me one of the reasons why I am concerned. Quite rightly, and I do not disagree with him, he said that a civil penalty always comes at the same time as recovering an overpayment. If you issue a civil penalty, you have confirmed that there is an error, so it must follow that there is the recovery of an overpayment. If ever an incentive were articulated, that is it. You do not have to exercise discretion on overpayments; the awarding of a simple penalty puts you straight into going for that overpayment. No other considerations come into play. You make the easier decision to award a civil penalty because you do not then have to make the more complex decision about how to apply a discretion to an overpayment.

[Lord Freud]

My Lords, let me make this absolutely clear. It is the other way round. You can charge a civil penalty only when there has been an overpayment and you would not necessarily charge a civil penalty when there was an overpayment unless you associated that overpayment with negligence.

[Baroness Drake]

That is my point. If civil penalties and overpayments are inextricably linked, you would not award a civil penalty unless there had been an overpayment. You can almost produce an incentive to put something into the category of an error attracting a civil penalty because it makes it easier to justify chasing the overpayment.

[Lord Freud]

My Lords, I must make this absolutely clear—it is my third go at this. An overpayment happens when someone is paid something they should not have been paid. A civil penalty will be charged only when there is both negligence and an overpayment. I forget the logical post hoc, or whatever. We need to get it round the right way.

--- Later in debate ---

[Lord Freud]

I will need to write.

[Baroness Drake]

On the clusters point, clusters will presumably arise by type of error or a particular demographic of those filling in the form erroneously. I come back to my point that that issue should be dealt with not by civil penalties but by taking a more focused look at how one deals with those types of problem. I welcome the Minister saying that he is absolutely for the forbidding of targets. As to whether a future Government would be so constrained, no doubt noble Lords can argue with a future Government if they want them to be so constrained. We are trying to constrain this Government, so I certainly welcome any offers to constrain the way in which this civil penalty is used, although my preference is for it not to be there. I worry about the concept of a civil penalty and its deployment in the community of people whom we are discussing.

Finally, the Minister said that information is readily available, but you need to be able to understand it. No doubt he would say that if you do not understand it you should seek further advice from the department. However, I come back to the issues around the numeracy and literacy skills of this community of claimants. My point is that a new system of civil penalties is coming in. This partly goes to the point that my noble friend Lady Hollis made about trying to run a system of civil penalties when a new system is coming in. There will be less opportunity to find the people who this community of people normally approaches for support and help in filling out their forms because legal aid support through the advice system will not be there. We know that the local authority service will be run down, given the way in which benefits will be dealt with. We know that Jobcentre Plus venues are closing, and the jury is out as to how efficient a call centre system can be—certainly in the first few years—in supporting some of the vulnerable claimants who could be caught by erroneously filling out their forms. I beg leave to withdraw my amendment.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Wednesday 23rd November 2011 Grand Committee

[Lord Freud]

No; we have made it clear that it would apply to housing benefit and not to other benefits. The cap will not have full coverage until universal credit comes in.

[Baroness Drake]

I did not get the chance to mention this when other issues were being discussed. The Minister gave a blunt message on what had caused benefit dependency. But the Bill is also setting the welfare system for people who have no record of benefit dependency. They are hard-working people who from time to time experience difficulty. We know that the Government are considering greater flexibility in the labour market. The newspapers have rumours about making group redundancies easier. Large-scale redundancies are much easier because it cuts the amount of consultation and makes it easier to dismiss people. I should like to push the Minister on the point that, notwithstanding the Government’s position on a cap, the transition to that cap needs to be considered so that the principle of the cap is not broken when hard-working people who do not have a record of benefit dependency are trying to engage in the labour market.

[Lord Freud]

I fully accept that point, as I have already indicated. I shall bear that point very much in mind as we go through the next stages.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Thursday 3rd November 2011 Grand Committee

[Lord Freud]

Yes, we have commissioned that as part of the requirements.

[Baroness Drake]

I appreciate that the Minister has to give the Government’s reasoning behind this decision, but I am absolutely aghast at the argument that it will cost £200 million to restore 50 to 100 per cent of the pension contributions being deducted. There was a pension settlement, which said that the state pension age had to go up but the earnings-related element would be removed from the state system and go flat rate, and that individuals, supported by their employer, would have to take on greater responsibility for personal saving. They would be auto-enrolled, and that was part of them taking responsibility for a sustainable pension system over the long term. As part of that, the incentive to save had to be right; that was a huge debate. In the third leg, between the state pension age going up, flat-rating the state system and moving private savings up and earnings-related out of the state system, the incentive to save had to be right.

At the time, there was a huge debate and a huge argument that it would not work unless you got the incentives to save right. At the lower end, how the benefit system interfaced with the pensions savings system was a very important part of the payback. It was also a very important part of the explanation to people—including shadow Conservative Ministers at the time, who were very vocal on this issue—that this was what the payback would look like, with incentivisations to saving that came through the tax credit system. This is what I mean about incremental decisions. Now somebody says, “Well, we can just remove a chunk of the payback for a particular group of people and save £200 million by reducing the figure from 100 to 50 per cent”. I really struggle with that because it is saying, “Never mind what the strategic analysis was or where we are trying to go; this convenient incremental policy will save us £200 million”—and somehow it is a fairer deal for the taxpayer. Maybe in 30 years’ time it will not be a fairer deal for the taxpayer if more people present themselves for benefits. I struggle with that line of reasoning for doing this for that group of people. Okay, it is £200 million. I am not avoiding the need to make tough decisions, but again one stands back and looks at the contribution that the taxpayer makes to the incentive to save across the piece.

My noble friend Lady Hollis is right. You can get £50,000 per annum incentivised right up to 50 per cent tax relief. I know that the noble Lord is going to shout at me that this will allow more people to keep their income and that it is a different analysis, but I do not accept that, particularly in the context of a sustainable pension strategy. We have all sorts of tax advantage savings arrangements that the well-off can take advantage of. You can fund a tax advantage stakeholder account for your child. You can fund a tax advantage ISA for your child or your non-waged spouse. I have taken advantage of some of these for my children. However, I struggle against the decisions on the incentive to save for low-to-moderate-income groups, which was inextricably linked to the in-work benefit system, when somebody says, “It saves £200 million. Just undermine the incentive to save and the payback for this arrangement”. It just does not stack up intellectually. It does not stack up when there is a consensus which says that everyone should buy into a pension solution that holds over the very long term. We have just taken £10 billion from a group of women who should not be bearing that level of savings, and we are now going to take £200 million out of low-to-moderate-income earners. My argument is losing subtlety because the quality of what I am pushing back on is unsustainable. It is £200 million for an irrational reason. Extremely reluctantly, I beg leave to withdraw the amendment, although I am sure I shall be coming back to this.

Pensions Bill

Debate between Baroness Drake and Lord Freud

Monday 31st October 2011 Lords Chamber

[Lord Freud]

That the House do agree with the Commons in their Amendments 3 to 17.

Lord Freud: My Lords, with Amendment 3 it will be convenient to consider Amendments 4 to 17.

Today we enter the final stages of an ambitious programme of legislation to transform the saving habits of working people in this country. Before we begin the debate, I pay tribute to the noble Lord, Lord McKenzie, and the noble Baronesses, Lady Drake and Lady Hollis, who throughout this detailed process have brought such value, wisdom and breadth of experience of proceedings to get us this far. Governments have benefited from a significant degree of consensus during the passage of this legislation. Our consensus has sometimes been stretched, but I hope that during this debate we will retain that consensual approach and a common goal to reshape retirement provisions fit for the next decades.

Many of my contributions to our pension debates have started with the words “Automatic enrolment”, and today is no exception. However, I stress one core feature. Automatic enrolment into a workplace pension scheme is an enduring duty: employers must put workers who satisfy age and earnings tests into a pension savings scheme and keep them in a scheme unless the individual chooses to leave. Employers may, of course, choose to close or change a scheme but, if they do, or the scheme ceases to qualify, there is a clear duty in the Bill to maintain scheme membership for all the jobholders affected by providing a replacement qualifying scheme if necessary. Employers may not induce someone to leave a scheme so that it can be closed unless they put them into another one. This is the core enduring duty.

Amendments 3 to 8 and Amendment 10 are technical amendments to make those continuity of membership provisions work as intended and make some minor technical corrections. They ensure that the automatic re-enrolment duty applies straightaway in situations where an employer, or any other third party, causes an individual to lose their membership. It also aligns this obligation to all active members irrespective of age. As a consequence we need to realign the key compliance provision in the Act that prescribes inducement with the automatic re-enrolment duty.

We also take the opportunity, with Amendments 5 and 6, to remove a redundant reference to the old style postponement provisions in the Pensions Act 2008 and amend a cross-reference in the uprating clauses which had inadvertently linked uprating to the jobholder age test rather than the automatic re-enrolment trigger. I remain grateful to the noble Baroness, Lady Drake, ably assisted by the noble Lord, Lord McKenzie, whose eagle eyes identified this mistake in Committee.

Noble Lords will recall that self-certification for defined contribution schemes was subjected to detailed consideration in this House. I am pleased that we were eventually able to reach agreement. Amendment 14 extends self-certification to employers using defined contribution schemes that have their main administration in another European Economic Area member state. EEA schemes are subject to the same European directives as UK schemes so members’ benefits should be similarly protected. We believe that putting EEA schemes on a comparable footing with UK schemes complies with our European Union treaty obligations.

Amendment 13 is minor, purely technical and consequential. It amends the title of Section 28 of the Pensions Act 2008 to reflect changes to the certification requirements introduced by Amendment 14, which extends the facility to EEA schemes.

Amendment 12 is a technical amendment which provides for a new test scheme standard for defined benefit schemes. This has been wrongly categorised as hybrid in the original clause. The new test standard does not alter the quality requirements for schemes but provides for them through the legislation relating to defined benefit schemes.

Amendments 15 and 16 are technical amendments to clarify the duty for employers with an existing defined benefit scheme to protect individuals. They align the rules on back payment of contributions when an employer moves a jobholder from a defined benefit scheme to a money purchase or personal pension scheme. Employers who have an open defined benefit or hybrid scheme may defer the automatic enrolment date for up to four years provided that the scheme remains open and the jobholder is still entitled to join it. Where this changes, the employer must enrol the jobholder into an alternative scheme and pay up to four years of back contributions. As drafted, the Act does not allow the employer to use a workplace personal pension as an alternative. These amendments fix that omission and ensure that the jobholder is not charged for the back payments.

Amendment 11 extends the reserve power in the Pensions Act 2008 to regulate to cap charges for deferred members in qualifying schemes. The current power to cap charges, should the need arise, applies only to active members who are paying contributions into the scheme; it does not apply to deferred members who have a dormant pension pot administered by the pension provider. It would not be fair to deferred members to be charged inappropriately high charges simply because they have moved jobs. Evidence suggests that the vast majority of schemes currently have low fund charges. However, savers may not understand the full impact that charges can have on their retirement pot. The risk that high charges could erode pension savings and bring pension saving itself into disrepute could increase as we make saving the default decision. The amendment provides a safety net for both active and deferred members in qualifying pension schemes. If we see charges creeping up after automatic enrolment, we will be able to intervene to set a cap to ensure that people’s savings are not eaten up by unreasonable charges. If such an intervention becomes necessary we will of course look at the impact across the pensions industry.

It is critical to the success of the workplace pension reforms that possible barriers to employer compliance are addressed before automatic enrolment starts. There is a potential overlap between the cross-border regulations, which deal with the provision of services by a pension scheme based in the UK with respect to an employee who is subject to the social and labour laws of another EEA state, and the automatic enrolment duty. This overlap could compromise the employer’s ability to comply with the duty. It can be complex and costly for schemes to accommodate pension rights acquired by individuals working in another EEA state and there is no obligation for schemes to do so. Amendment 17 provides for regulations that would exclude individuals who fall under the cross-border regulations from automatic enrolment. Without such a power we may find, when it is too late to address, that some employers will be unable to comply with the employer duties. Draft regulations would of course be subject to formal consultation and we would provide detail on the application of the exemption.

Additionally, the Pensions Regulator already provides guidance for employers and schemes covering the circumstances in which employees may be subject to the social and labour laws of other EEA member states and how this may make the employer a “European employer”. Should the Government make regulations, in practice the employer would need to take a view as to whether or not he is a “European employer” in relation to the employment of an individual and accordingly as to whether he should enrol that individual. I beg to move.

[Baroness Drake]

My Lords, in the consensual approach that we are invited to take by the Minister, I rise to support government Amendment 11. I am absolutely delighted and welcome the opportunity to return the compliment to the Minister in acknowledging that the Government are extending the powers in Section 16 of the Pensions Act 2008 to allow the Secretary of State to set a cap on charges to deferred members. That is significant progress, to my mind. I see that the Minister, Steve Webb, is here today, and I take the opportunity to say, “Well done”. I am taking this opportunity, too, to press him further.

As we know, with the advent of the new employer duty in October 2012, we will see millions of new savers being auto-enrolled into pension schemes. These workers will change their jobs on average 11 times over their lifetime and, in some occupations, that will be even higher. This means that, when workers leaves their job and their employer’s pension scheme, they are likely to leave a pot of pension saving that is still being administered by the pension provider but is not under the employer’s scheme. The pension pots of these deferred members, which are often modest in size, can be complex, costly and difficult to transfer and will be vulnerable to higher charges and poor governance over investment decisions.

I urge the Government, when they take the power to cap charges to deferred members, which Amendment 11 will allow them to do, not to wait to see what happens, because this is already an area that needs to be addressed. The capping or controlling of charges on deferred members by the Secretary of State should be undertaken through the microscope of the saver. If a provider cannot look after a deferred member’s pot of savings at low charges, it is for the Government to impose protection and, ideally, to facilitate the transfer of modest pension pots to NEST, where they will be looked after at a 0.3 per cent annual management charge, with very high standards of governance. Using the stakeholder cap on charges—the 1.5 to 1 per cent formula—is far too high a charge level for moderate to low income earners and should not be seen as an acceptable level for deferred members. That level of charges eats up far too much of the pension savings of low to moderate income earners. When millions of workers are automatically enrolled, the majority are unlikely actively to engage with their pension arrangements. Therefore, it is important that the Government have a very clear view of what a good pension scheme should look like and important that the Secretary of State uses the powers given under the Pensions Act 2008 to ensure that quality standards are set and met.

As to charges on pension savings, there are few barriers to entry to the market of private pension provision, and the Government need to make clear their expectations to monitor the situation to see whether those expectations are met and be prepared to respond quickly to address adverse developments. When a worker leaving a job leaves a pot of pension saving to be administered by the contract provider and is no longer in that employer’s scheme, who will exercise a duty of care in managing the worker’s investment? Who has the duty of care to ensure that the worker is not subject to high or excessive charges? This is territory within the framework of pensions reform that is much in need of further attention.

Another important area is the ability of workers who are deferred members to aggregate their different pension pots through a simple transfer process and that any charges for doing so are low or negligible. The administrative process of transfer must be made as simple as possible without significant charges being levied, and the ban on transfers to the National Employment Savings Trust should be lifted. I cannot see any gain for workers with moderate pots from that ban on transfers; I struggle to find any suggestion that it does—it can support only the industry, not the employee. I am not contradicted in that view by Paul Johnson, who was appointed by the Government to undertake the review of auto-enrolment policy. As for employers dealing with the issue of charges, transfers and the restrictions on NEST, it is not putting a burden on them. On the contrary, it will reduce the complexity they face when they are trying to do the best by their workers.

--- Later in debate ---

[Lord Freud]

My Lords, in discussing Amendment 18, it is convenient also to discuss Amendments 19 to 28. These amendments are about the revaluation and indexation of pensions—that is, revaluing deferred pensions at the point at which they are put into payment and indexing pensions once they are in payment. The first five amendments relate to the change to using the consumer prices index as a measure of inflation and the others are about the indexation of cash balance schemes. The changes to Clause 15 are a positive response to the consultation on the change to using the CPI as the measure of inflation. The consultation ended in March and we published the Government’s response on 16 June. There were more than 150 responses, many of which were technical and detailed.

The areas that attracted the most comments were the CPI underpin and revaluation. There were also concerns about the CPI underpin provision already there for indexation. Respondents suggested that this was too restrictive and unhelpful for corporate restructuring. Removing the CPI underpin for the revaluation of deferred pensions was not originally covered because the different ways indexation and revaluation work means that the likelihood of the CPI acting as underpin for revaluation is small. However, we have listened to the consultation responses, which indicated that even a small risk has consequences for administration and investment costs. The amendment adds a new method of calculating a revaluating addition to Schedule 3 to the Pension Schemes Act 1993. Some schemes will be able to continue calculating revaluation additions using the retail prices index. They will not be obliged to undertake additional calculations using the CPI as well.

We also made easier the application of the CPI underpin exception for pensions in payment. The test now targets whether RPI-based increases have actually been paid rather than whether the rules require RPI-based increases. The amendments also make sure that the application of the CPI underpin exception survives transfers. We do not want the possibility of a CPI underpin to become a barrier to scheme restructuring. The amendment ensures that the provision to address the underpin problem survives a transfer if the result is that the member has received RPI-based increases since the start of 2011 and will continue to do so.

I turn to Amendments 24 to 28 to Clause 17, which removes the requirements for cash balance scheme annuities to have a limited price index. Amendment 24 does not represent any change in policy; it simply makes a technical change to clarify that schemes that are or were contracted out on a defined benefit basis are still subject to indexation requirements. Amendments 25 to 28 remove the potential for confusion. They ensure that schemes that pay a pension commencement lump sum, or allow a survivor’s benefit of a set percentage of the member’s benefit, can be included in the definition of cash balance schemes and can benefit from this easement. They also ensure that the existing indexation requirements continue to apply to career average schemes or schemes that guarantee a member a pension calculated as a percentage of the lump sum. It was never the intention to exclude these types of scheme from the indexation requirement. I beg to move.

[Baroness Drake]

My Lords, I can see the purpose of Amendments 18 to 23, particularly the need to address the consequences of the Government’s decision to use the CPI for the statutory revaluation of pension benefits, yet not proceeding to introduce a statutory override to pension schemes whose rules explicitly provide for the revaluation additions to be calculated by reference to the RPI. I recognise that where the statutory method uses the CPI, there is an inconsistency for schemes that apply the RPI in the very infrequent event that the CPI exceeds the RPI in a particular year. In such a situation, schemes paying the RPI would, without these amendments, be faced with a statutory underpin of CPI. In effect, the rules of schemes that apply RPI would be interpreted to mean that revaluation is calculated by reference to the CPI or the RPI, whichever is the greater.

This amendment would remove that underpin requirement and allow schemes to continue to revalue by reference to the RPI, which would seem sensible and reasonable. While the Government are to be congratulated on not imposing a statutory override on pension scheme rules to apply the CPI rather than the RPI, where the rules so explicitly provide, the need for these amendments occur in part because of the open-ended decision by the Government to substitute the CPI for the RPI in the uprating of most benefits. It is with some regret that the Government did not put a time limit on that switch from RPI to CPI. There is scope for a review because I am sure that over the long term, when the economy returns to strong growth and earnings outstrip prices, and the price of key items is excluded from the indexation, the Government will need to revisit this matter.

That is particularly so for pensions, although I doubt that the Government will revisit this now. The change to the CPI from the RPI for evaluation effects a switch of assets and benefits from scheme members to scheme sponsors and does not directly impact the public deficit. None the less, it is clear that these amendments are a necessary flow-through from the Government’s decision, and I can see no reason to oppose them.

Amendments 24 to 28 are technical in nature and address matters relating to the indexing of the guaranteed minimum pension. Again, I see no reason to disagree with them.

--- Later in debate ---

[Baroness Drake]

My Lords, I shall speak also to Amendment 32. The purpose of Amendment 29A is to give absolute clarity to the legal meaning of a money purchase benefit in so far as it relates to pensions in payment. As the Minister said, the Government’s Amendment 29 is addressing the consequences of the Supreme Court’s decision in Bridge and restoring the legal meaning of money purchase benefits to that narrower meaning it was understood by most observers to have before the litigation. In doing this, it is restoring what was understood to be the extent of protection to scheme members and beneficiaries when their pension benefits could face funding deficits and preserving their potential access to the Pension Protection Fund. It is the Government’s intention that a pension in payment is a money purchase benefit if its provision is secured by an annuity contract or insurance policy. I do not disagree with that intention.

My concern is that the legislation should make it absolutely clear that any annuity purchase for a pension in payment must explicitly be in the name of that member and ring-fenced for them. I am not confident that the wording of subsection 3(a) of the new Section 181B inserted by the Government’s Amendment 29, which is before us, does that. My amendment simply adds the words,

“in the name of the member”,

to make crystal clear that the annuity must be ring-fenced for that member. The Government’s view, with which I have no disagreement, is that normally pensions in payment within a scheme are not money purchase benefits as the amount of the liability of that pension is unlikely to be matched exactly by assets held by the scheme. That being the case, there will always be scope for a deficit or a surplus in the funding of those pensions in payment. The exception, which the Government’s amendment allows for and which they propose to include within the definition of money purchase benefit is pensions in payment secured by annuity. Again, I have no disagreement with that proposal.

I repeat that my concern is that, in purchasing those annuities and insurance policies, schemes might not necessarily have ring-fenced such policies for the members concerned. They may have been secured as assets of the scheme as a whole and not for the named pensioner in receipt of a pension, which would not be unusual. Should that be the case, it would mean that those with a pension in payment would not have an automatic right to those assets in the event that there was an employer default on an underfunded scheme. Members could lose out if the scheme was wound up or underfunded.

I know that the Government’s intention is that the definition of money purchase is such that members should have the benefits of these annuities ring-fenced to them, but I am concerned that the Government’s amendment still leaves room for ambiguity because it does not, to use layman’s words, nail the point that the annuity must be held in the name of the member. My amendment simply seeks to provide that nail and so adds the phrase,

“in the name of the member”.

Current legislation has allowed the Supreme Court decision to arise notwithstanding the intention of policymakers, so if we are to avoid Lady Bracknell’s descriptive distinction between two comparable events, I believe it is appropriate to tighten the wording of the definition of money purchase benefits to reduce the likelihood of a similar problem in the future.

My amendment does not question the intention of the Government’s Amendment 29. I agree with them. All I am trying to do by the deployment of a few words is to make absolutely clear that a pension in payment is a money purchase benefit only if it is secured by an annuity or insurance policy in the name of that member.

Amendment 32 confers upon the Government the power to change the definition of money purchase benefit in the future, and one can see the common sense reason for this. Having been faced with a Supreme Court decision which ran contrary to what most observers thought was the definition, it is better to reserve powers to address a simple or comparable problem should it arise in the future—and other complexities may arise. The definition of a money purchase benefit is important because money purchase benefits are not subject to the regulation designed to mitigate deficits in a pension fund and to extend particular protections to pension scheme members.

What I am concerned about is the breadth of the power conferred on the Government or the Secretary of State by Amendment 32. I am particularly concerned that it could be used retrospectively to remove access to Pension Protection Fund protection from scheme members and beneficiaries by broadening the definition of money purchase benefit. I have similar concerns in respect of people having access to the financial assistance scheme.

The Pension Protection Fund exists to offer a level of protection to members of occupational pension schemes, unless they are excluded for certain reasons, the main ones being the existence of a crown guarantee; the trustees having compromised a fund debt; and that it is a money purchase scheme.

I am sure that the Government have no intention to use the power conferred by their Amendment 32 to remove Pension Protection Fund protection from schemes or members as currently defined. None the less, it would appear that the powers extended to the Government in Amendment 32 would allow such a possibility in the future. It is not clear to me what other existing statutory provisions, if any, would overlay the Government’s ability to use these powers. Put simply: what would limit a Government’s freedom to use the power conferred by Amendment 32 in a way that meant pension scheme members and beneficiaries would lose out?

I ask the Minister, if this amendment is made to the Bill, what, if any, limits would there be on the Government’s power retrospectively to remove protections from members and beneficiaries of funded pension schemes facing deficit and/or default. In respect of the other amendments in this group, they are largely technical in nature and I see no reason to disagree or query them. I beg to move.

[Lord Freud]

My Lords, I pay tribute to the noble Baroness, Lady Drake, for her precision analysis in this area, which—I say this as a compliment—has had the team seriously thinking about the issues involved. I also pay tribute to the noble Baroness, Lady Thomas, and the Delegated Powers and Regulatory Reform Committee, for applying such scrutiny to the powers contained within the Bill. I trust that noble Lords are as content with the Government’s amendments, even though they have some broad powers within them, as the committee was after its consideration.

Let me turn now to Amendment 29A. The noble Baroness, Lady Drake, highlights a key question. How do we ensure that those people whose benefits are classified as money purchase benefits in payment, because their scheme has bought an annuity to match the liability, actually benefit from that annuity? The Government share the noble Baroness’s aim in laying this amendment, but the issue is how one ensures the right outcome. I have concerns that the way this amendment is designed could have desirable consequences and place an unnecessary regulatory burden on schemes.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Wednesday 26th October 2011 Grand Committee

[Baroness Drake]

First, I will respond to the comments made by the Minister. I fully recognise that he has shown a real interest in this community of family-and-friend carers; and that his interest was shown before any prompting by this amendment. It seeks to ensure that his resolve stays firm and to push him firmly into including something in the Bill to address this community. I welcome his positive response this evening.

Guidance does not do it; it will not be acceptable. It may be imposed, but that is not where I, or those who are interested in this issue, want to be. Nor do we want case-by-case consideration. It does not give the clarity of treatment, the confidence, or the protection that this community should have when they take on children. I agree with my noble friend Lady Lister that if something firm could come from the Government on this before the Bill leaves the House, it would be warmly welcomed. I wish to push the Minister, between now and the appropriate stage of the Bill, to reflect on something firm that could be placed on the record.

In response to my noble friend Lady Sherlock’s point, I must be honest and say that in drafting the amendment I was conscious of balancing the needs of a community with people’s concerns about more informal arrangements for the care of the child. This amendment specifically addresses a community of carers where there is a legal order.

My noble friend is right that, particularly if parents are, for instance, taken to prison, there could be an immediate effect of children needing to be looked after, even if subsequently there is a legal process to follow. Perhaps the Minister could reflect on the weakness of my amendment, which I will address at a later stage.

[Lord Freud]

If I can wrap up, in anticipation of the noble Baroness, Lady Drake, wrapping up: I take on board the points. In fact I make a point which should cheer up noble Lords, in that the DWP process is more flexible than these legal orders. We can do things to support kinship carers without this huge paraphernalia, and that is one of the areas I am looking at. We can do it just by understanding that that is where the child is, and we do not need all these processes.

In that way, we are doing something way ahead of the concerns of this particular amendment. I know I am being pushed; I am not sure about timing, because of negotiations, but I can do something narrow. To the extent that we want to go broader for this community, these things take time but I am on the case. That is all I can say.

[Baroness Drake]

At the request of the Minister that I wrap up, I duly wrap up, and agree to withdraw my amendment.

Welfare Reform Bill

Debate between Baroness Drake and Lord Freud

Monday 10th October 2011 Grand Committee

[Lord Freud]

My Lords, I will have to write to the noble Earl, Lord Listowel, with precise information on that.

[Baroness Drake]

My Lords, on the point about people who sell their houses and have capital from that, current rules allow the discretion to extend to 12 months. The provision is already there, so I do not see why one could not have efficiencies in the system since the cost of applying discretion is reduced to the difference between six and 12 months and people are given greater clarity in what is a complicated market for buying and selling houses. Also, the rules are being applied to a population that would not previously have been subjected to them. Millions of people will be impacted over time, and this is not a difficult alteration to make in the rules.

On the definitive set of rules setting out what capital or earned and unearned income is or is not going to be taken into account, the exchange with my noble friends has indicated why people are concerned to see and understand the list as soon as possible—again, particularly the application of those rules to the in-work population. For the moment, however, I beg leave to withdraw the amendment.

--- Later in debate ---

[Baroness Drake]

The Minister opened by asking whether the taxpayer should support someone with £50,000 in savings. My initial reaction to that is that the taxpayer supports people on £500,000 because there is 40 per cent to 50 per cent tax relief up to the value of £1.8 million and £50,000 per annum for pension savings. Actually, the taxpayer supports people on much higher levels of income, and we can think of lots of other incentivised examples. There is no limit on the ability to use the advantageous tax opportunities of ISAs year on year depending on what capital is held in other places. I am not sure that that would withstand the test of rigorous intellectual analysis.

[Lord Freud]

I am sorry, but I cannot not respond to that because there is a difference. I think everyone in the Room will appreciate the difference between not taking someone’s own money away from them and giving them money from the taxpayer, which is the comparison that the noble Baroness has just made.

[Baroness Drake]

I do not accept that defence because tax relief on pension savings is not taking money away from people; it is giving them their tax back.

The other point is that even on ISAs, those who are well off can take every member of their family, their spouse and children, and give them ISAs, thus taking taxpayers’ money for the incentivised advantage that that brings. So the taxpayer supports all sorts of people, some of whom are more worthy than others. On that basis, if the exam question is whether the taxpayer should support someone who has £50,000, I should like to get the whole list of incentivised savings and do some comparative analysis.

The effect of this policy is that people in hard-working families will be disincentivised to save and will face greater risk in managing a labour market that the Government themselves want to deregulate further but do not want to support people in managing that deregulated labour market. As my noble friend Lady Sherlock has said, there is not just the issue of the £16,000. For all those low and moderate-income people who have more than £6,000—

--- Later in debate ---

[Lord Freud]

I was going to say today. In fact, I can say more. I have copies in the Room. I can do better; I can ceremoniously deliver the impact assessment to the noble Lord with that figure explained.

[Baroness Drake]

In response to the Minister, I am able to pre-empt his arguments because the quality of the DWP briefings is so good that I can see where he is likely to be coming from. The fact that I can anticipate is an indirect compliment. On the substance of his comments, he argues that it is important to get the architecture in. The problem is that the architecture has opted for a very harsh and anti-savings regime, and for applying it to those in work. I am not sure that I would want that element of the architecture to be in, but at least some of my amendments seek to say not, “Oh, let’s find bits of money”, but that if one chooses to take that harsh anti-savings regime—quite clearly, as I have quoted, I am supported in that view by the CSJ—some of the consequences are so perverse that you have to address them not as bits of money but as perverse outcomes of that choice of architecture.

We have dealt with one of the outcomes, but another is that when this comes in a population of people who are currently in work, who may be in work in the future, and who have got savings, are going to find that those hard-earned savings for a deposit on a house are now going to result in an adjustment of their benefit entitlement. That strikes me as unfair and perverse. If one is looking for fairness, one needs to have intergenerational sympathy for the combination of factors that young people face in the current market, which I have tried to spell out one by one. This, to me, becomes an even more compelling argument for saying, “Are you going to put this on their shoulders as well?”.

I accept that there may be process or product design challenges around this, but I have every faith in the creative ability of the Minister and the DWP team to find a process route through this and still urge them to allow all these people who are saving for their houses not to suddenly find that they have to draw down on their savings or lose benefit. I withdraw my amendment.

Retirement Age

Debate between Baroness Drake and Lord Freud

Monday 5th September 2011 Lords Chamber

[Lord Freud]

Yes, my Lords, it will be extremely expensive if we do nothing. In the past five years we have already seen real expenditure on pensions go up by £20 billion to £81 billion a year. If we do nothing, the projections are that age-related spending will go up to more than 5.5 per cent by the middle of the century. We must do something about it. That is why we have this consultation to look at the best way of moving the pension age upwards to reflect the changes in ageing.

[Baroness Drake]

My Lords, the level, manner and timing of any increase in the state pension age will be controversial, as instanced by the recent debate on women’s state pension age. I hope the Minister will agree that it is important to build a consensus on how to respond to increasing life expectancy, both between political parties and between government and the people. In particular, we must avoid undermining confidence in pension saving, particularly in younger generations, where the problem is so deep. Are the Government considering setting up an independent body to monitor and analyse matters related to increasing life expectancy, including socioeconomic differences in morbidity and mortality? Its published findings could inform government and parliamentary decision-making. Anecdotal, sentimental and emotional debate is not the way to resolve this issue.

[Lord Freud]

My Lords, this is a long-term issue and one needs to address it on a long-term basis. When the Chancellor introduced this topic, he said that he would like to see it addressed on a cross-party basis. That remains the position.

Pensions Bill [HL]

Debate between Baroness Drake and Lord Freud

Wednesday 30th March 2011 Lords Chamber

[Baroness Drake]

My Lords, I shall also speak to Amendment 21. The new pension arrangements that are to apply from 2012 provide a minimum level of pension contributions, based on a band of qualifying earnings, of 8 per cent, of which at least 3 per cent must be met by the employer and the rest from the employee contribution and tax relief or credit. The required minimum contribution levels are set as a quality requirement for a qualifying pension scheme. Some employers who already operate good workplace pensions base their pension contribution calculations not on earnings but on other definitions of pay such as basic pay. It has been argued that the regulation should be set so as to encourage employers with good-quality schemes to stay with them. Clause 10 seeks to recognise this by introducing an additional provision to the powers in the Pensions Act 2008 that allows the Secretary of State to set an alternative process of certification known as the alternative requirement. That will allow employers to certify that overall their schemes satisfy the quality criterion for pension contributions. This process involves setting a regulatory test which, if met, will allow employers so to certify.

Although the Government have published the test that they intend to set in regulations, the regulations are still subject to consultation, so we do not know what they will finally look like or how they may change over time. The Johnson review asserts that under the regulatory test that is proposed, 92 per cent of workers would still match the statutory quality criterion on contributions under the qualifying band of earnings. This assertion is based on the ONS survey of hours and earnings. The assertion of 92 per cent is based also on the pattern of earnings before auto-enrolment. Our concern is that after the onset of auto-enrolment, an incentive may have been created that will encourage bad employers to arbitrage between the statutory quality criterion of an 8 per cent contribution on a band of earnings and the alternative requirement, to the detriment of some workers. In a nutshell, our concern is that while trying to accommodate good employers, a compliance loophole is created for bad employers.

The purpose of the amendments is to strengthen the protection afforded to jobholders under the alternative requirement. For the purposes of the amendments, I do not seek to debate the detail of the proposed regulatory test for the alternative requirement, or even whether there should be such a requirement. I want to focus on the powers that are enshrined in Clause 10 and what must be satisfied before the Secretary of State can set the alternative requirement.

The Delegated Powers and Regulatory Reform Committee refers to the Secretary of State's power to set an alternative requirement as “significant”, as indeed it is. Clause 10 prescribes the power of the Secretary of State in setting an alternative requirement, but it does not go far enough for the following reasons. In Clause 10, the Secretary of State must, for most schemes, ensure that, for all jobholders or a cohort of the relevant jobholders, the contributions paid into the pension scheme satisfy the quality criterion. However, the clause requires this to be the case only for a majority of the individual relevant jobholders—a majority being 50 per cent plus one. We are concerned that this could lead to a significant number of individual jobholders missing out on what should be their statutory entitlement. In effect, the aggregate requirement could be met by more generous contributions for some jobholders, with less than qualifying amounts, or potentially even none, for others.

The intent of Amendments 20 and 21 is to strengthen Clause 10 such that in all cases—not just most—schemes will be able to satisfy the alternative requirement only if, for no less than 90 per cent of the individual relevant jobholders as distinct from a simple majority, the amount of contributions paid under the pension scheme meets the qualifying amount. As my noble friend Lord McKenzie said in Committee, it is not acceptable that,

“an alternative requirement could allow nearly half of all jobholders”—

with a particular employer—

“to be short-changed”.—[Official Report, 15/3/11; col. GC 2.]

I beg to move.

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)]

My Lords, I thank the noble Baroness, Lady Drake, for introducing this debate. The amendments to Clause 10 would require the Secretary of State, before making regulations on certification, to be satisfied that in every single scheme at least 90 per cent of individuals would receive contributions no less than if the scheme had satisfied the relevant quality requirement.

I fully understand that the noble Baroness still has reservations about the breadth of the Secretary of State's regulation-making power and individuals losing out under the proposed certification arrangements. The whole purpose of the reforms is to transform the savings culture by improving the coverage of and participation in workplace pension saving. To succeed, we need to incentivise employers to retain their good-quality schemes. Certification gives employers an incentive to keep their good-quality schemes by simplifying the automatic enrolment requirement. It protects members by discouraging levelling down. The flexibility provided by certification is an important counterbalance to the burdens being placed on them by automatic enrolment. Getting the balance of protection right is crucial because introducing complexity will encourage employers to level down by abandoning good schemes and individual savers will be short-changed.

To help employers plan for the reforms, I should like to put on record that employers using certification will be able to phase in their contributions gradually. That question has been of some concern to the industry and I am pleased to clear it up. I believe that employers using certification will welcome that easement to help with the administrative and contribution costs of increasing enrolment into their schemes. We recognise the advantage that such an approach would bring and so have already kicked off discussion on how we might operate phasing within the certification model. We propose to set out the detail in regulations and guidance. The plan is to consult on secondary legislation informally over the spring, with a more formal consultation after the Bill receives Royal Assent.

However, I recognise and share the noble Baroness’s concern about some individuals receiving less than the minimum contributions, for whatever reason, under the certification arrangements. In developing the certification model, we have undertaken some detailed analysis of pay and reward systems using data from the annual survey of hours and earnings. Based on that analysis, we believe that the number of people who could potentially lose out is quite marginal. If all employers were to use certification, the data tell us that around 9 per cent of individuals could experience a shortfall resulting in contributions less than if the scheme had satisfied the relevant quality requirements. Those individuals are concentrated in industries where basic pay can be supplemented by overtime and other non-pensionable income.

We are committed to finding a pragmatic solution to certification which protects individuals without alienating employers. I believe that the certification test which I have previously described is that solution. However, to address the concerns raised, particularly in relation to the breadth of the regulation-making power, I take this opportunity to commit to looking at how we can reasonably circumscribe the scope of the Secretary of State's powers without compromising his ability to deliver the certification model welcomed by employers. We will be analysing the available data sets on earnings and contribution rates to see how that can be achieved. If it is possible, I should like to return with an update at Third Reading in the shape of an amendment to be introduced in Committee in another place.

I hope that, based on the assurances I have given, the noble Baroness will feel able to withdraw her amendment.

[Baroness Drake]

I note what the Minister said about phasing in contributions gradually. I was not anticipating that. He said that there will be consultation about the regulation on that point, so we will have an opportunity to look at that. I note what he said about the regulatory test. I had stayed off the detail of that test because I was focusing on the powers in the Bill.

I am grateful for the Minister's commitment to look at how the powers of the Secretary of State could be reasonably prescribed in order to address the concerns that we expressed and to return to it at Third Reading. I hope that between now and Third Reading it will be possible to sort out a form of words that would reassure us on that point. If it is not possible, I reserve the right to come back to the matter at Third Reading. On the basis of what the Minister has said this evening, I shall not press the amendment.

Pensions Bill [HL]

Debate between Baroness Drake and Lord Freud

Wednesday 30th March 2011 Lords Chamber

[Lord Freud]

My Lords, this group of amendments in effect aims to provide mitigations to the state pension age timetable. I thank the noble Baroness, Lady Turner, for giving us the opportunity to discuss the issues surrounding those in ill health and those in arduous or dangerous employment. Similarly, I thank the noble Baroness, Lady Drake, for her proposed changes to the pension credit qualifying age timetable.

The amendments were tabled with the intention of helping those people who might be described as vulnerable, as noble Lords pointed out. I very much agree with the principle that we should assist those who require additional support. However, a balance must be struck between doing the right thing for those people and making the system more complex and harder to understand when it comes to delivering that support.

As I said, Amendment 9 allows for mitigations to the proposed change to the state pension age timetable for those in ill health and those in arduous or dangerous employment. While I have great sympathy for the people these amendments aim to help, the arguments against accepting them that I set out in Committee have not changed. The changes would make the system too complex.

I will pick up a point made by the noble Baroness, Lady Drake, about the life expectancy of people on low incomes. There is good news here. Male manual workers saw a two-year increase in life expectancy at the age of 65 between the 1992 to 1996 and the 2002 to 2005 assessment periods. Women manual workers saw a one-year increase. When one drills down into the figures—I was looking at them this morning—one sees an acceleration for manual workers. Perhaps the nature of manual work is easing. In the latest period, life expectancy for both men and women improved more rapidly for manual workers than for non-manual workers. Between the 1997 to 2001 and the 2002 to 2005 periods, male manual workers saw their life expectancy rise by 1.2 years, against 0.8 years for non-manual workers. Clearly in this latest period there is very good news.

As I said, we have already made strides on the value of the state pension by introducing a triple lock. As we discussed, we are looking to reform and simplify the state pension, which has become unbelievably complex.

[Baroness Drake]

Perhaps I should have intervened a sentence or two earlier, but I was not sure whether the Minister had finished on the longevity point. I accept his point that the life expectancy of certain lower socioeconomic groups has also improved. However, the evidence of the Marmot review and of a recent NAO report also shows that inequalities are increasing in healthy life expectancy, and that this group is less likely to be healthy and therefore less able to re-enter the workforce at short notice in the accelerated timetable. I accept the general proposition about improving the state pension age.

[Lord Freud]

I thank the noble Baroness, Lady Drake. We could get into a long debate here that perhaps would not be hugely valuable. The figures for life expectancy, healthy life expectancy and disability-free life expectancy are all moving up. They are moving up at slightly different rates for different people, but the general movement is in an encouraging direction. Healthy life expectancy is moving up almost as fast as life expectancy—just slightly slower.

I come back to the point about the state pension age and the amendment of the noble Baroness, Lady Turner. A state pension age that is different for different groups would take us further away from the goal of a new flat-rate, single-tier pension based on contributions, which is simple to understand. It is important for the state to be clear how much someone will receive in retirement, and it should be equally clear about when they can receive it. A variable state pension age will not help this. Now is not the time to bring in further complexity by introducing bespoke state pension ages for individuals.

Adding to the complexity of this concept is the problem of defining prolonged ill health or arduous and dangerous employment. It might seem straightforward to produce a list of health conditions and occupations, but our direction with welfare reform is precisely the opposite, away from categorisation of people towards individualising and looking at how they can function and what they are doing. We are looking towards assessing each person’s appropriate pension age. Then we begin to get into very difficult territory, which we will discuss under the personal independence payment and the capability assessment. I need not spell out for a third time how difficult that is.

People are working longer and are living longer and healthier lives. We need a system that takes into account recent changes. I must accept, with regret, that some people, due to ill health, have to leave work before they reach state pension age. However, it should be acknowledged that support is already available for those people. Although they may not be entitled to a state pension immediately, that does not mean that they are left with nothing. As my honourable friend the Minister for Pensions recently said, it is not a case of going from a £97 pension to zero: working age benefits will continue to be available for those whose state pension age has increased and those who are unable to work because of health problems. They may very well be able to claim employment support allowance. Support through other benefits and credits is available today and will continue to be available in future, whatever the state pension age. Indeed, the introduction of universal credit will make it much easier to see precisely what entitlements are.

We need to ensure the sustainability of the state pension system and our proposals strike the best balance between the impact on individuals and fairness to the taxpayer. I should make one slightly technical point, to which I think many noble Lords will be sympathetic. Changes to the state pension age should be made only following agreement in this place and another place. For the Government to be able to vary the provisions of the schedule through regulation is a significant power, and one which should not be treated lightly.

I turn to Amendments 11 and 14. The arguments remain the same. It is vital that our system strikes that balance. I thank the noble Baroness, Lady Drake, for tabling the amendments and allowing us to consider the role of income-related support for those over a specified age. The amendments would keep the pension credit qualifying age in line with the existing legislative timetable for women's state pension age. Their effect would be that the pension credit qualifying age would diverge from the women's state pension age from 2016, as proposed by the Bill. The amendments, while seeking to ensure that the pension credit qualifying age cannot be higher than the state pension age, also leave the door open to retaining a pension credit qualifying age below the state pension age—possibly permanently. That seems to me to be based on a fundamental misapprehension. The underlying assumption seems to be that by keeping the pension credit minimum qualifying age pegged to state pension age, we seek to attack the incomes of older people. That is just not the case. We think that, for all people of working age, the appropriate form of support is a working-age benefit.

The Government introduced the Welfare Reform Bill, which sets out the proposals for universal credit by 2016. There is widespread support for the principles underpinning universal credit—in particular, the principle that work should always pay. We should define people of working age by using the state pension age, not that of pension credit. We have used that only because state pension age has not been equal between men and women. The upper age limit for universal credit will be set at the pension credit qualifying age. That ensures that the appropriate work-focused and work-related support is targeted at those of working age. Providing an arbitrary age for pension credit which breaks the link with state pension would also compromise that important aspect of welfare reform. If it is not state pension age, when should it be?

[Baroness Drake]

I must correct the noble Lord, because I think that he is misrepresenting my amendment. It asks the Government only to commit to separating pension credit qualifying age from the women's state pension age for four years, from 2016 to 2020, to mitigate the impact on a particular group. It does not ask them to commit to a policy beyond 2020; that is for the Government to decide. We already have a precedent for separating state pension age from the qualifying age for pension credit, which is that of men. The amendment would not by the back door set a formula for the future; it simply provides that for a four-year period from 2016 to 2020 there is a separation to mitigate disproportionate impact. It does not require the Government to commit beyond that.

[Lord Freud]

Let me accept that that is the intention behind the noble Baroness’s amendment—although when we costed it, we had to make an assumption about how we then bring it back up to pension age. We need not be technical. It is important when we debate these matters that we debate the underlying intention and not worry about precise things.

I reinforce my point: if we divorce the minimum qualifying age for pension credit from the state pension age, with the exception that the noble Baroness pointed out, the minimum age for pension credit becomes arbitrary, and people would well ask why it is at that age, not one year sooner or one year later. As life expectancy increases, more and more people will want to improve their incomes by working for longer. We should celebrate and encourage that. The amendment goes completely against that principle. We are clear that we want people below state pension age to work if they possibly can. The point of the proposals is not to take money away from people, as some noble Lords have said, but to encourage people to go on working longer, which should leave them with more income. We cannot give up on those people. They deserve our help and support in their endeavours to support themselves.

The other misapprehension is that there is inadequate provision in the universal credit for those who cannot work—people in ill health or people who have worked in manual jobs, who may not be able to continue working as state pension age increases. Again, that is simply not the case. Universal credit is intended to provide appropriate levels of support for those of working age, including those who, for whatever reason, are unable to work or have limited capacity for work.

The amendment will give no comfort to those who want to make entitlements much clearer and more transparent in an effort to ensure that they reach those who need them. It would mean providing complex and confusing information to customers. Unfortunately, it would come into place just when we are introducing universal credit, which is designed to have a pure, simple messaging to people to convince them of how they need to interact with the state. By producing this new, complicated system, we would undermine that simple messaging.

Quite apart from the messages, it would also add significantly to the complexity of the benefits system, confusing the people it is designed to help and the organisation delivering it. In order to deliver that confusion, which would obscure entitlements and potentially discourage people from working in the years before they get their state pension, the amendment would present the taxpayer with an unaffordable bill. For the financial years 2016-25, we estimate that it would be around £1.9 billion, and there would be further costs in the years to follow, depending on when it is withdrawn.

The amendment would add complexity to the system and have the effect of withdrawing valuable in-work support for people below state pension age. It would obscure entitlements for those who need them most and incur a very substantial increase in expenditure. I think I have clearly set out the rationale for the Government’s position. It is simply impractical to assume that the system will be improved by adding further complications to an already complex beast. For these reasons, I urge the noble Baroness to withdraw the amendment.

Pensions Bill [HL]

Debate between Baroness Drake and Lord Freud

Tuesday 15th March 2011 Grand Committee

[Lord Freud]

My Lords, I shall speak also to government Amendment 45. The backdrop to many of the measures set out in Part 2 of the Bill is to provide employers with greater flexibility and to ease their burdens. These amendments continue that practice.

With regard to Clause 10, Amendment 44 introduces an amendment into Section 32 of the Pensions Act 2008. The purpose of the amendment is to make it easier for employers, in collaboration with their scheme trustees or managers, to make certain improvements to their occupational money purchase pension scheme and some hybrids to meet the requirements of a certification test. The modification powers in Section 32, as amended by Clause 12, enable trustees or managers to make certain improvements to their scheme by resolution with the employer’s consent to comply with the automatic enrolment requirements. Amendment 44 extends this facility to employers using certification.

Self-certification will provide employers with a straightforward way of ensuring that their money purchase pension scheme satisfies the relevant quality requirements. Employers intending to use self-certification will need to ensure that their scheme satisfies the relevant requirements both at the outset and on an ongoing basis. We have just debated the self-certification option. The point is that this amendment will make it easier for employers, in liaison with their trustees, to make improvements to their schemes in order to comply with the automatic enrolment requirements.

Government Amendment 45 is a technical amendment to Section 30 of the Pensions Act 2008. Section 30 allows employers who are using defined benefit and hybrid schemes to defer the automatic enrolment date for jobholders when certain conditions are satisfied. Where certain conditions cease to be satisfied during the transitional period, the employer must ensure that the jobholder is enrolled into an alternative scheme.

At present, the Pensions Act 2008 restricts the employer to using either another defined benefit or hybrid scheme, or a money purchase scheme, as the alternative scheme. The amendment provides employers using defined benefit or hybrid schemes with greater flexibility around their choice of an alternative automatic enrolment scheme. It will allow employers to choose to enrol jobholders into a personal pension scheme. This is in line with the original policy intent of giving employers maximum flexibility.

Under the amendment, we intend to amend the automatic enrolment regulations to ensure that an employer who intends to use a personal pension scheme for this purpose provides the jobholder with information about the scheme. This mirrors the existing arrangements for money purchase schemes and therefore provides parity. As has already been mentioned, the amendment will ease burdens on employers and provide them with greater flexibility.

To address the concern about whether employers might abuse these amendments, we will monitor trends along with pay and reward packages. If we identify that employers are manipulating the test, the Secretary of State has the power to strengthen the test or, as a last resort, to repeal the legislation. I beg to move.

[Baroness Drake]

My Lords, as anticipated by the Minister, I rise to express reservations about government Amendment 44, which continues to give rise to the anxieties expressed by my noble friend Lord McKenzie. While on the face of it the amendment appears to be somewhat benign, aimed at improving the drafting of the Bill, on more detailed reading it raises anxieties, certainly in my mind. As I understand it, this amendment would allow trustees to change pension scheme rules to enable their employers to meet the regulatory test set by the Secretary of State for the alternative requirement for certifying that their scheme meets the qualifying earnings contribution standard—the alternative requirement regulatory test, which my noble friend Lord McKenzie was addressing in Amendments 42 and 43.

My anxieties are twofold and I will try not to be too technical in addressing them. First, the intention behind the regulatory test for the alternative certification to the normal statutory quality requirement was, I believe, to assist good employers who run good schemes but who use a definition of pay for pension purposes other than earnings. However, either their scheme meets the test or it does not. An assessment against that proposition should stand or fall on its own merits. Having made the concession of an alternative qualification test, surely one cannot allow scheme trustees to change their scheme rules in order that the alternative regulatory test is met. That strikes me as changing the original intention of the alternative test and encouraging arbitrage by bad employers, particularly if that regulatory test is weakened, because if a bad employer—and I know that good employers will not do this—can see the benefit of redistributing pay between base pay and other elements of earnings, they may be able to avoid paying contributions on a segment or proportion of members of their workforce. If we have good employers—and the primary intention of this regulatory test is to allow them to show that they are good employers—I do not see why the proposition cannot stand or fall on that basis and why we need to allow subsequent amendments to the scheme rules.

Secondly, the Bill allows for the regulatory test, as my noble friend Lord McKenzie has said, to make an assessment for an employer’s workforce as to whether it meets the contribution requirement at the aggregate level. However, it allows simply for an assessment for a majority of employees at the individual level and, in that way, the regulatory test can still be met. This amendment appears on the face of it to allow trustees to change their scheme rules, with the effect that some individuals are made worse off, under both the scheme rules and the statutory provisions, because no one has disputed that it is possible for some individuals—maybe up to 5 per cent or more, even on the Government’s own arguments—to be excluded from a contribution to which they might have had access if the statutory provisions had been strictly applied. However, we now find the situation where a group of individuals could be made worse off—not only under the statutory provisions but also under their scheme rules—but where an employer can still meet the regulatory test.

I am also concerned that this regulatory test could be made weaker. The consultation on the regulatory test, as outlined by the Minister, has not concluded. We know that it is ongoing, so we do not know what will eventually be brought forward in the regulations. If the regulatory test becomes weaker, the problem could become worse, because there is an even greater incentive to change the scheme rules to take advantage of that regulatory test. Therefore, I have reservations.

--- Later in debate ---

[Baroness Drake]

My Lords, this is a probing amendment to understand fully the implications for scheme members in cash balance schemes that are not contracted out or where members have not accrued benefits on a contracted-out basis. This clause removes the requirement to index pensions that come into payment at a future date under cash balance schemes.

I have two concerns. In the first instance, cash balance schemes usually fall into one of two types. The first is cash balance with guaranteed conversion terms, whereby the pension pot at retirement is defined, based on the proportion of salary set aside each year and the guaranteed rate of interest earned, and the pot is converted to pension on guaranteed terms that are set by the scheme at an agreed point before retirement. Once in payment, the amount of pension is guaranteed. The second type is a cash balance scheme with open market annuity, whereby the pot is converted to pension on open market annuity rates and, once in payment, the amount of pension is guaranteed.

My concern is that, under the open market option, an individual has a choice between a level and an indexed pension, whereas the effect of the clause—on first reading of the Bill—could require an individual in a cash balance scheme to accept conversion of their savings pot into a pension on terms that were potentially less favourable than those available on the open market option, given that they could not have access to an indexed pension. Hence my amendment, which seeks, on removal of the indexing requirements, to anchor the conversion rates in cash balance schemes to being no less favourable than those available on the open market.

My second concern arises from the removal of the indexation requirements from cash balance schemes that are not contracted out, as the Bill states. Given the Government’s aspirations to accelerate the integration of the basic state pension and the state second pension into a single state pension, which will result in all schemes being contracted in, what would be the implications for scheme members who had not yet converted their assured sums into pension from their previously contracted-out cash balance schemes but had a reasonable expectation of indexation? I beg to move.

[Lord Freud]

My Lords, the amendment would require that an annuity without indexation bought by a cash balance scheme member or the pension provided by the scheme must be no less than that available on the open market option. In moving the amendment, the noble Baroness, Lady Drake, raises an important issue.

It is important that individuals can shop around to get the best type of annuity for them at the best available rate. This will affect their level of income for the rest of their lives. This clause, which gives members of cash balance schemes more choice about the shape of the income that they take in retirement, will support this. However, in compelling members to take a pension of no less than that available on the open market option, there arises a practical difficulty.

Annuity pricing is now highly individualised. Most providers offer rates by postcode. Enhanced and impaired life annuities also offer significantly higher rates for those with health conditions or lifestyles that are likely to reduce their life expectancy. This makes it difficult to establish what the right open market rate for comparison should be and very difficult for schemes to establish a workable process to find out what a member is likely to be offered on the open market.

In addition, different types of annuity offer different starting payments. For example, an individual might wish to buy an annuity with a guarantee period. This is likely to give a slightly lower payment, but it gives the member a guarantee that the annuity will continue to be paid if they die before the end of the guarantee period. This is unlikely to represent the best available rate on the market, but is it right to deprive the individual of this choice? For these reasons, I believe that any amendment of this nature would be unenforceable and, as a consequence, unworkable in practice.

I would like to pick up one of the questions that the noble Baroness asked with reference to further reforms to the state pension. It is too soon to speculate about those—certainly, it is too soon for me to speculate about them. We believe that it would be too difficult in practice for schemes to separate out periods of contracted-out service. The same scheme member may have periods of contracted-out and non-contracted-out service. There is also a danger of the possible franking of one benefit against increases to another. All those schemes that have been contracted out on a defined contribution basis no longer have to provide an indexed annuity. Schemes that are contracted out on a defined benefit basis, either where a guaranteed minimum pension is payable or on a reference scheme test basis, have to provide indexation to the relevant level. With that explanation, I urge the noble Baroness to withdraw the amendment.

[Baroness Drake]

I thank the Minister for that response. I have sympathy with what he says because I would be the last person to want to discourage cash balance schemes, as they allow for a degree of sharing and in today’s world one does not want to discourage that. I can see the compelling argument and I understand the point about the annuity pricing market becoming more individualised, which makes it difficult to establish an open market comparator, especially where a scheme may be wanting to set conversion terms. However, I remain concerned, as it is desirable for individuals to have the choice to access indexing, otherwise they are denied an opportunity to lay off some of their inflation risk. Given that in a DC world they bear so much risk, it would be a little sad if the unintended consequence of this Bill was to deprive to a greater extent than currently exists a group of people who would otherwise have exercised an option to go for indexing and to give themselves some protection against inflation.

I did not expect the Minister to speculate on future state pension arrangements, but I flagged up the issue as sometimes these things are forgotten. Those who have worked with me will know that I consistently flag up the impact of removing contracting out from the system, not least in public service pension schemes. Having said that, I beg leave to withdraw the amendment.

--- Later in debate ---

[Baroness Drake]

My Lords, I have considerable sympathy with the amendment moved by the noble Lord, Lord German. Notwithstanding the impact of the events of 2008-09 on regulators around the world, which are no doubt focused much more acutely on governance, with the shift from defined benefit to defined contribution pension provision, which the noble Lord referred to, and the imminence of auto-enrolment, the design of the default investment funds and the investment principles surrounding them are going to gain more attention. The issue of how shareholders, particularly institutional shareholders, approach their responsibilities as owners of assets is coming under increasing scrutiny by the Government, regulators, the members of pension schemes and those who discharge fiduciary duties on their behalf.

Corporate governance, principles of stewardship and interactions between institutional shareholders and companies are increasingly considered as a coherent whole in exercising ownership rights. As the noble Lord said, defined contribution schemes in money purchase and in personal pension schemes in future shift the risk on to the individual. Although the Myners principles have improved decision-making, achieving best practice in the investment governance of pension schemes—both trust-based and, particularly, contract-based, which I will come back to—still poses a challenge.

We have seen evidence of that concern in the Pensions Regulator’s recently published consultation on investment governance in DC schemes, which included a table of accountabilities. The table aims to define and clarify the roles and responsibilities of each decision-maker in each part of the investment governance chain, but I read it again last night and, unless I missed this, it does not refer explicitly to social and ethical considerations or to exercising voting rights. Close to my heart, NEST, and its predecessor PADA, published their own document on exercising responsible ownership in a low-charge scheme. Discharging this governance in the context of maintaining low charges is equally important.

As the noble Lord, Lord German, referred to, the Financial Reporting Council published the UK stewardship code in July 2010, which is designed to lay out the responsibilities of institutional investors as shareholders and provide guidance as to how those responsibilities might be met. Pension fund trustees are strongly encouraged to report how they have complied with that code. As a conscientious pension fund trustee, I have attempted to do just that, and my own experience suggests—here I concur with the noble Lord, Lord German—that if the code is to bite, trustees will need a great deal more guidance on how to comply with it if box-ticking is not to continue to be the method of compliance with these standards.

The Occupational Pension Schemes Investment Regulations, which the amendment refers to, say clearly that when setting out their statement of investment principles, trustees should identify,

“the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments; and … their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the investments”.

It is clear that this is an area where guidance and best practice are growing in importance. Because of the political risk that Governments face, with the biggest experience of asymmetrical paternalism that we are about to see, I bet my bottom dollar that this will grow and grow. If you transfer responsibility to the individual, politically Governments have a responsibility to ensure that government frameworks are up to the job.

Clearly, there are issues around how trustees can fulfil these responsibilities. One issue that we must address—I will not dodge it—is how one can be an effective, active asset owner while maintaining low charges, and how one can effectively monitor stewardship policy when one selects passive funds. Although I am absolutely committed to the highest level of governance at every stage of the investment chain, and believe that the ability of trustees to discharge their disclosure requirements in electronic form will help, these things must always be proportionate, because in a DC world it is the individual who bears the charges. I would not want a scenario in which we say that the good news is that we have gold-plated system of governance on disclosure, but the bad news is that it will cost X per cent. Therefore, we need to look at how all the players, including the fund managers, can raise the overall level of governance.

I come back to the providers of contract-based pensions. With the shift away from DB to DC, we are seeing a big shift away from trust-based DC to contract-based provision. Therefore, if we talk only of a model for how the trustees will discharge their governance function in this area, we will miss an ever-growing part of the pension provision market. A big issue, with which I know others are concerned, is who in a contract-based provision world should accept the fiduciary responsibility of designing the default fund or deciding how investment governance should be discharged. This takes us into areas where the Pensions Regulator has no reach. The guidance and regulatory framework must catch up with the shift from trust-based to contract-based provision, because in a contract-based provision world there are no trustees, unless there is a master trust, on whom to place clearly the fiduciary duty. It is clear that the Government will need to look both to the Pensions Regulator and to the FSA or their successors to raise the governance standards in the way that the noble Lord, Lord German, seeks through his amendments.

[Lord Freud]

My Lords, I thank the noble Lords, Lord German and Lord Stoneham, for tabling these three amendments. They encourage trustees and managers of occupational and stakeholder pension schemes to engage more fully with environmental, social and ethical considerations in the selection and retention of their investments. These are important issues. They resonate with me personally. I remember writing many a happy Lex column in the 1980s on the structural issue. The issue is the separation of the responsibilities of ownership and the attraction of investment returns in the marketplace. Trying to get them back together has proved very difficult. A lot of effort has been thrown at it in the past decade, with the Myners principles and the IGG.

The amendments would have a similar effect on the trustees and managers of occupational and stakeholder pension schemes. Therefore, we should look at the amendments together. There has been a consensus in many previous debates on social and environmental issues that companies perform better when their activities are monitored by shareholders. Therefore, it is important for pension funds and their investment managers to be transparent in publishing their approaches to such issues in their statements of investment principles. That is why this Government, like the previous Government, have been open to suggestions on how to improve this process. In the end, it is a matter for managers and trustees to determine the level at which they engage and what is appropriate for them. It is a statement of the obvious that small schemes, in particular, may not be able to take account of governance issues to the extent that large schemes can.

--- Later in debate ---

[Baroness Drake]

My Lords, I am very sympathetic to the amendment, which draws attention to the need to bring a practical resolution for those individuals who have not been able to benefit fully from the Gender Recognition Act 2004. I compliment the noble Lord, Lord Boswell, on raising the matter, because the issues facing transgendered people are considered too infrequently. They will appreciate the fact that their concerns are being recognised in the amendment and in the debate.

As noble Lords said, the welcome introduction of the gender recognition certificate in 2005 meant that individuals for the first time could have their acquired gender formally recognised. However, as with all changes of this type, some individuals are caught in the transition process and risk losing out. As the noble Lord, Lord Boswell, indicated, there are no official data on the size of the transgender population, so it is difficult to quantify the number of individuals who would benefit from a resolution in the manner of the amendment. However, it is clear that the number of individuals is likely to be very small. Therefore, it is unlikely to make a substantial financial difference to government expenditure, although it will do for the individuals concerned.

The Gender Recognition Act 2004, which was introduced in 2005, brought in the official process to recognise gender change. For those who transitioned prior to 2005, there was no official recognition of their change in gender, although the DWP, to the extent that it could use its discretion, was often sympathetic in allowing the change to be recognised in some circumstances. Since the introduction of the gender recognition certificate, an individual with such a certificate is are treated as though that is their natal gender. The amendment seeks to ensure that those who transitioned prior to the implementation of the provisions, and those who did so immediately after the Act came into effect, are not disadvantaged.

The primary beneficiaries of the amendment would be male-to-female transgendered people who reached female state pension age before 2007. At present, they are unable to claim their state pension for that initial period. For example, a male-to-female transgendered person who turned 60 in 2005 but got a gender recognition certificate only in 2007 would not have received the state pension until they gained the certificate in 2007. Therefore, they feel that they lost two years of state pension provision given their acquisition of the female gender. Also, as we know, the women's state pension would have been based on a lower number of working years—39 years for women as against 44 for men. The amount that would have been accrued and credited, as well as the time at which it was paid out, would have been different.

The noble Lord recognises in his amendment that there could be losers. Female-to-male transgendered persons would face the reverse issue to the one that I described for male-to-female transgendered people. The aim of the amendment is to ensure that there are no losers. It seeks to implement the provisions to the detriment of no one. I do not know whether the Minister will pick up on that point. It is a not unreasonable position because those most affected, who will be small in number, would have been near to pension age and would have had less time to adjust to the implications of that.

There will be other issues, such as those relating to divorce. When one partner wishes to transition with a gender recognition certificate, the couple cannot legally remain married. They must divorce and become civil partners. That could create winners and losers. The noble Lord, Lord Boswell, is right to say that what he aspires to achieve in the amendment should not be done in a way that is detrimental to the entitlement of anyone affected. I commend the noble Lord for addressing the sense of unfairness to a small group of individuals, and I join him in urging the Minister to address it.

[Lord Freud]

My Lords, the amendment seeks to provide a remedy for a group of older transsexual people who have missed out on full state pension rights because the Gender Recognition Act does not allow for retrospective legal recognition of a person’s acquired gender. This is a very complicated area, as my noble friend Lord Boswell pointed out. He spared us some of the detail when he introduced the amendment, but I should take a little time to outline the issue and give him the up-to-date information on the current position.

A transsexual person is someone who desires to live their life permanently in the opposite sex to that which they were assigned at birth; although “assigned” might be the wrong word. This desire often stems from a medical condition called gender dysphoria. The Gender Recognition Act, effective from April 2005, allows transsexual people, through the granting of certificates, to gain recognition of their acquired gender for all legal purposes. It covers only people who have suffered from gender dysphoria.

It is a general principle of our legal system that the laws relating to legal status should have only prospective effect. This ensures legal certainty and clarity. There was no reason to depart from this principle when the Gender Recognition Act was introduced, as my noble friend will be fully aware. Although the Act established future rights, a question remained over the past.

The position on the equal treatment rights of transsexual people for periods before 2005 was tested in the domestic and European courts. In 2006, the European Court of Justice held that it was discriminatory not to have had a means of recognising a person’s acquired gender, for social security purposes, prior to the introduction of the Gender Recognition Act. However, importantly, the court left it up to the UK Government to set the conditions for granting equal treatment for periods prior to the introduction of the Gender Recognition Act in 2005. The European Court clearly considered that it provided adequate cover for periods after that date.

Perhaps I may give my noble friend more up-to-date figures than those he might have. Records held by HMRC suggest that around 750 people in the UK are likely to gain from the European Court ruling, compared with the figure of 50 that he imagined. Under that ruling, where a person is successful in their equal treatment claim, we would need to make increased state payments on the basis that they had foregone all entitlement from the age of 60 or the date of surgery, if that was later. The costs of making such payments would amount to somewhere between £9 million and £38 million over the lifetime of the award. One can recognise the level of uncertainty surrounding that wide spread.

Pensions Bill [HL]

Debate between Baroness Drake and Lord Freud

Thursday 3rd March 2011 Grand Committee

[Lord Freud]

I do not need to write. I can confirm that. It does not have to be NEST. The pensions may or may not be NEST in each case.

[Baroness Drake]

If it was NEST, it would not be two pots; it would all go into one NEST account. But if the employer choice in each instance was a different pension scheme, by definition there would be two pots. To clarify on the previous debate, my understanding was that those earnings that came within the band—forget all other triggers—attracted an employer contribution. That is the critical thing. To get the employer contribution, the earnings must be in the band. If your earnings are below that band, you can opt in but you cannot trigger the employer contribution.

[Lord Freud]

That is exactly what I said, so I thank the noble Baroness, who is an expert in this area, for giving me the relief of not making a horrific solecism.

--- Later in debate ---

[Baroness Drake]

My Lords, I express my support for the sentiments and views of the noble Lord, Lord German, in moving this amendment. I, too, noted the Minister’s comments on regulation on this matter. As we move nearer to the commencement of auto-enrolment in 2012, I am also conscious that both the Department for Work and Pensions and the pension regulator will need to prepare for a major programme of communication and guidance to workers and employers. Can the Minister assure us that sufficient funds will be made available for this scale of communication and guidance programme? As the Minister said, this is the biggest ever example of asymmetrical paternalism, and, given the constraints on public expenditure, the old phrase about not spoiling the ship for a ha’porth of tar, is extremely important in this instance.

I, too, agree with the noble Lord, Lord German, that, if individuals are to be given the right to opt in during the deferral period, it has to be a meaningful right, understood both by the employer and by the employee. A meaningful right to me means three things: do you know you have it; do you know how to exercise it; and do you not suffer a detriment in exercising it? That is quite important if the three-month waiting period is to have integrity for the reasons given as to why a three-month period is needed and the individuals none the less can opt in. It is quite important that guidance and culture meet those three requirements. I hope there is guidance to both the employer and the employee that makes the opt-in opportunity meaningful.

[Lord Freud]

My Lords, I thank my noble friends for this amendment, which would require us to make sure that guidance is issued to employers and jobholders explaining their rights during the waiting period under Clause 6, including their right to opt in. Let me try to describe what our plans are in this area and explain why putting it in the Bill could potentially be counterproductive. We aim to specify in regulations how quickly the employer must give a notice to the individual about the waiting period. We will also set out in regulations what information that notice must contain, and any other accompanying information the employer must provide. In particular, this will include information about the right to opt in during the waiting period.

We recognise the need to provide certainty as quickly as possible, as my noble friend Lord German pointed out. We intend to put out the draft regulations after what we call a “soft consultation” period in April. We intend in this way to inform employers of the requirements around waiting periods as soon as possible. To use the waiting period provision, employers will have to provide information to individuals about their right to opt in. It is essential that employers understand the operation of the waiting period and their obligation to provide information to affected workers. That will be done through the Pensions Regulator, who is developing clear guidance for employers explaining their duties under the reforms and including information about the waiting period. The Pensions Regulator plans to publish the guidance in the current year.

--- Later in debate ---

[Lord Freud]

We have committed to monitor this situation quite widely, in particular how the waiting periods are working. It is essential to get it right. We have not developed the specification of that monitoring, but we will do so. We will watch closely that and other issues.

[Baroness Drake]

The three-month waiting period gives rise to concerns over bad employers. However, on the monitoring point, the Pensions Regulator has an obligation to monitor and look for non-compliance. One of the ways in which they will do so is by looking at the number of employees in a firm who have been auto-enrolled, because they will at least get a sense from the numbers involved whether there is a flashing red light over compliance. The problem is that the Pensions Regulator will focus on where the biggest risks are and look at the bigger employers first. If the compliance hazard is around small employers, there has to be discussion with the Pensions Regulator, because compliance monitoring is resource-intensive. Even if one was running the argument that the problem can be picked up in compliance monitoring, the requirement on the regulator to be risk-focused and therefore to target where they think the greatest non-compliance issues would be, or to get scale of coverage on non-compliance, could be a problem.

[Lord Freud]

I repeat that we are committed to looking at waiting periods and there is a general duty on the Pensions Regulator to look at compliance. If we suspect any kind of systemic abuse, our aim will be to find it in our monitoring. For example, we might look at it from the other end and survey individuals, perhaps those in the low-paid environment, who are at risk. However, this is an issue that we are alive to, and this debate has made us even more so. I therefore need to thank the noble Lord for raising it.

--- Later in debate ---

[Lord Freud]

All this is saying to me that, right now, uprating measures for entry and savings levels need to be flexible. Therefore, we want to maintain flexibility to consider a wide range of economic measures. Pensions cast long shadows. Pension law has to last for the long term. We believe it is prudent to build in maximum flexibility for all eventualities, as regrettably we do not have 20:20 foresight.

I sympathise with the intention behind the amendment and I understand the concerns about any unfettered discretion or an unrestrained dash to a £10,000 trigger. However, the primary aim here is to ensure that we target the people who should be saving, while excluding those who should not. If, at the same time, we can align with a threshold that employers are already familiar with and minimise administration burdens, so much the better.

Automatic enrolment has to be sustainable. My worst fears are that we set rules which scoop up people who cannot afford to take a hit on their pay packet. If we get the trigger wrong—if we set it too low—we risk high levels of opt-out. Once we do that, we turn people off pension saving, even if we have applied asymmetric paternalism to get them to save. To get the trigger right, we need flexibility.

Today’s debate is further ample evidence that the automatic enrolment earnings trigger is a matter of deep interest and concern to this House. For that reason, we want to ensure that the House has an ongoing opportunity to debate this issue. We recognise that including such a flexible power to amend figures that appear in primary legislation represents a very broad power, and that is why the uprating order will be subject to an affirmative resolution procedure. It will mean that this complex issue, and the exact rates set for the launch of automatic enrolment, will be the subject of a full debate to ensure complete transparency.

It would be unusual to commit to an impact assessment in the Bill, as requested by the noble Baroness, Lady Drake. However, I make a commitment to provide an impact assessment for the next five years, up to the 2017 review and shortly afterwards. This will allow time for the reforms to bed in and for us to understand the wider landscape. Therefore, there will be full information on the uprating order as a basis on which the House can conduct the debate.

I hope that I have been able to set out the case for flexibility and the need to future-proof these provisions. I also hope that I have provided the reassurance on transparency that noble Lords are seeking with their request for an impact assessment. However, I regret that I cannot give a guarantee that the trigger for pension saving will in future be set in complete isolation from prevailing personal tax thresholds. I am afraid we are unable to accept the amendments and I ask the noble Baroness to withdraw this amendment.

[Baroness Drake]

I thank the Minister for his response but I am not persuaded by his arguments to feel confident. I come back to the point that I made in moving the amendment: the UK has a history of making what it feels are good incremental adjustments to the design of the pension system for short-term considerations. Inevitably, 10, 20 or 30 years downstream, there will be a sub-optimal outcome in the strategic sense, and there will then be a rush around to try to find plasters to deal with that. I worry that the ease with which the earnings threshold could be raised so significantly is a potential example of the same error being made in the future.

The Minister said that the Government wanted to retain flexibility. I do not think that I am arguing about the Government not retaining flexibility; I was seeking to put a limit on the extent of that flexibility that can be addressed through an order, because I think that the threshold for earnings is so significant. The Minister said that he had listened to employers and pension providers. That is good, because employers are very important in this new settlement. However, there are also consumers and citizens whose views and interests in this matter are equally important. These reforms represent a contract with citizens, whereby the Government are expecting them to take greater responsibility for providing for their own income in retirement, and also for removing the state from any responsibility for any earnings-related second-tier provision. It is therefore very important that the employers’ views are engaged because they are part of the tripartite delivery of this. I do not demur from that at all. Equally, the view of the citizens, or those who are able to speak for them, is also to be represented. Something as significant as the trigger for the earnings threshold will be very important for them and for the outcomes of their saving activity.

In the amendment, we were seeking to give the Government the flexibility which at least kept broadly constant the proportion of the population covered by automatic enrolment, with some degree of variation either way. But if there is to be a major change in the threshold, I do not believe that that should be done by an order—even by an affirmative order. It is of such significance to the outcomes to the pension reform programme over time and there should be a high level of awareness of the consequences. People should understand the impact and all interest groups should be involved in that decision.

The Minister referred to a possible change in the state pension system in the future. Speculating, the change will be accelerating the flat-rating of the state second pension and integrating and bringing forward the two into a replacement single state pension. Presumably that would strengthen the argument that raising the earnings trigger, other than by reference to earnings or comparable situations, should not be raised significantly.

I remain concerned because the arguments deployed by the Government for wanting to retain the level of flexibility that will allow them to raise the earnings trigger so high are not very persuasive. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Freud]

My Lords, my noble friend Lord German has tabled an amendment to give the Secretary of State powers to make regulations to issue guidance on the level of charges made by defined contribution pension schemes to deferred members. These deferred member charges, as he called them, are called “active member discounts” by the industry. Effectively, they offer lower charges to active members as an incentive, and perhaps a reward, for continuing loyalty.

The DWP has done some robust research on defined contribution schemes sold in the 2008-09 financial year. That showed that—somewhat to our surprise—charges typically do not exceed 1 per cent across the market, including trust-based and contract-based schemes. Where different rates were applied to active and deferred members, this tended to be in the form of even lower rates for active members, which begins to suggest that a true discount is emerging for active members, rather than a penalty for deferred members. It may be that consumer groups are saying that, as the pressure on charging comes down, the gains are taken by active members rather than deferred members. That might be one way in which we would like to look at it.

[Baroness Drake]

Even though the evidence that the Minister refers to shows that he is referring to 1 per cent, on a base load contribution of 8 per cent we aspire to charges of the order of 0.3 per cent and 0.4 per cent. A charge of 1 per cent is not a statement of success. We are trying to deal with two things. The inactive or non-contributing member should not suffer a disproportionate penalty, which they would not suffer in NEST. Equally, at the same time, charges should be brought down overall. I would not be very content if we were willing to settle on something of the order of 1 per cent. One would hope that, with mass auto-enrolment, the market generally would move to 0.3 per cent. If not, perhaps the provider should not be in the market providing products.

[Lord Freud]

I thank the noble Baroness, Lady Drake, for her market insight here. I choose my words carefully. It is clear that the capping has had an effect on charges. We are concerned that the pressure on charges should be maintained. That is why we have committed to monitoring levels of charging in the marketplace as automatic enrolment is introduced. We will publish guidance on default investment options in automatic enrolment schemes later in the spring. This sets out guidance for suitable charging structures. The guidance encourages appropriate charges, which match members’ interests, and protects individuals from charges that are excessive in relation to the product they are paying for.

Let us not forget, as the noble Baroness has just pointed out, that we are introducing a major change to the pensions landscape. NEST is being set up to offer low-cost pension provision to individuals on low to moderate earnings. We expect this, as does the noble Baroness, to act as a benchmark across the pensions industry, as well as to help millions of low to moderate earners to save. We are also looking seriously at how transfers can be facilitated across the industry so that savers can shop around for better charge rates more easily. As I described in my response to a previous amendment, HMT recently held a call for evidence on early access, including a specific question on ways to improve the transfer process. The DWP, as I have already described, has recently published a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. In this, we are seeking solutions to address existing rules that could impact on the success of the reforms. Those include rules on early scheme-leavers and disclosure.

We are actively seeking to identify ways to facilitate the best possible deal for savers across the areas of charging and transfers. Therefore, I do not believe that regulations to make guidance are necessary at this time. I urge the noble Lord to withdraw the amendment.

--- Later in debate ---

[Baroness Drake]

I am conscious of the time and do not want to hold anybody up, so I shall try to be brief. I understand the issues that the Minister is trying to address, but I repeat that low levels of charges—for example, 0.5 per cent or below—are fundamental to the success of this asymmetric paternalist product. Somehow accommodating business models for suppliers whose charges hover around 1 per cent will not deliver the necessary strategic outcomes.

[Lord Freud]

I reassure the noble Baroness, Lady Drake, that if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a charge cap for qualifying schemes and auto-enrolment schemes. NEST will offer low-cost provision to individuals on low to moderate earnings. As the noble Baroness knows better than anyone else in the world, the annual management charge will be 0.3 per cent. If the contribution charge is taken into account, the overall annual charge is the equivalent of about 0.5 per cent. That will provide a clear benchmark for pension providers.

Given the safeguards that will be in place, and in light of the assurances that I have been able to give on Amendment 40, I urge my noble friends Lord Stoneham and Lord German not to press their amendments.

Pensions Bill [HL]

Debate between Baroness Drake and Lord Freud

Tuesday 1st March 2011 Grand Committee

[Lord Freud]

I need to come back to the point that working-age support systems are much better systems of supporting people, particularly by universal credit, than artificial manipulation of when pension age and pension credits click in. There is very little difference between the position of people who are just below state pension age and those just above it. We just happen to use this age as a useful justification of where we can draw the line. Just as there is little difference between the line at state pension age, so there is little difference between those who are 63 and 62 or 62 and 61. In benefit terms, the only difference is what help people might receive to get into or stay in employment. We are quite certain that we want people below state pension age to work if they possibly can. We cannot give up on these people. That has been going on too long. The right place for people below state pension age is on a working-age benefit, and universal credit, which will be available in 2016—although it is starting in 2013—will be the most suitable benefit.

It is important that we target means-tested help in the most appropriate way. State pension age is a fair way of separating out support for those of working age and of pension age. Ensuring that people get the appropriate work-related support and making work pay are essential to enable people to move out of poverty and build up sufficient resources for their retirement. For these reasons, I urge the noble Baroness, Lady Drake, to withdraw her amendment.

[Baroness Drake]

I shall try to pick up some of the points put by the noble Lord, Lord Freud. This amendment breaks the link between the state pension age and the pension credit qualifying age only until 2020 because the associated amendment puts a time limit on that. It seeks to replicate the 1995 timetable for equalisation because it is trying to address a problem created by the acceleration of the original timetable. It is not seeking to bind the Government’s hand once that problem has been dealt with. The amendment would allow the Government to restore the link between the state pension age and the pension qualifying age. In another place, in another debate, I might want to argue the merits of not doing that, but that is not what this amendment seeks to do. We have sought to avoid the complication of that debate. It is merely for a defined period to address this disproportionate income impact point from this accelerated timetable.

--- Later in debate ---

[Baroness Drake]

I would like to comment on Amendment 8, tabled in the name of the noble Lords, Lord German and Lord Stoneham, which has my sympathy. I concur with the comments made by the noble Lord, Lord German, that we are clearly all concerned with the consequences of the accelerated timetable. The noble Lord, Lord Boswell, referred to us all looking for different architectures with which we can address this matter, and one should never close one’s mind to architectures if one can get the outcome that one desires, or at least progress towards it.

With regard to the legs to the amendment—(a), (b) and (c)—on the basis of what I said on my Amendment 7, I wholeheartedly agree with making some pension credit adjustment but it would need to be made for both men and women, otherwise you would simply address the issue of poor women, not poor men.

On the question of providing for women with serious illness, those who are seriously ill clearly believe or feel that they have a payment that they have built up and are entitled to under the state pension system that has been withdrawn with little notice. They will have absolutely no prospects of adjusting to their loss, and are unlikely to benefit from the argument that they will live longer. I imagine that there would be some complexities in trying to administer a provision that focused on those with a serious illness, and I take my noble friend Lady Hollis’s point about who, and how much, should be paid.

It may be that the easiest solution is still to look at decelerating the timetable. As my noble friend Lord McKenzie said in responding to the amendment of the noble Lord, Lord Boswell, we are all keen to make progress and should stay open to looking at timetables. My noble friend and others have revealed how the timetable has an accelerating effect. There are those who lose for a year, those who lose for up to 18 months and those who lose for up to two years, so there is an accelerating impact in terms of numbers of people affected. Still, I would not want to fall out over architecture if there was a way of moving forward to get the kind of outcome that we all seem desirous of achieving—those of us moving amendments, anyway.

[Lord Freud]

I thank my noble friend Lord German for tabling the amendment. We have covered a lot of the ground in relation to it already, so I shall try not to be repetitious. We are talking about what has been variously described as an acceleration bubble, a moving horizon or a squidgy balloon—as the noble Baroness, Lady Drake, said. We are effectively looking at concessions for women born between July 1953 and September 1955.

I am not in a position at this stage to provide any additional information about discussions on a single tier, which I referred to at Second Reading, but one of the issues here is clearly that when one looks at the complexity of the architecture, one has to have an eye to whatever might or might not emerge from those discussions. We have already talked about freezing or delaying the increase in the pension credit qualifying age for people affected by the changes in state pension age. We are not going to make a song and dance about technical drafting here, although the noble Baroness, Lady Drake, made the point about the application of the amendment to women, when it would actually have to apply to men. However, let us put that to one side.

The issue that I aimed to emphasise in the previous discussion was that pitching the pension credit qualifying age at a point below the state pension age for a specific group would undermine fundamental welfare reforms. However, it is not about just the structure—and I accept that this is about a temporary change—or purely the money; it is complex for customers and complex to administer. That is one of the reasons why that solution is difficult, if not undesirable.

In response to the request of the noble Baroness, Lady Hollis, for me to write to her on the costs of paying people in between the old and the new pension ages, I am happy to look at those costs and to write to interested noble Lords. I imagine that that includes most of us in the Room.

I move on to the issue of serious illness and emphasise that we have great sympathy for those with ill health, including those in this particular cohort of women. However, I must point out that help and benefits are already available for people with health problems and I do not therefore accept that we need to provide additional financial support, whether that is in the form of a payment above what we already pay out or some bespoke pension age arrangement.

The final option suggested by the amendment is slowing the acceleration of the pension age increase for these women.

I can assure noble Lords that, when we were considering how to bring forward the increase to 66, we looked at whether we could start that change for men slightly earlier than for women, to avoid altering women’s state pension age before 2020. The reason that we have not done this is because it would be unfair to increase the difference in treatment between men and women. It would also be unfair to prolong the difference in treatment beyond the period already agreed. I will take this opportunity to explain why, and I am picking up the question raised by my noble friend Lord Boswell earlier in the afternoon. The equal treatment directive allows the setting of the state pension age to be a limited exception to the overarching rule that men and women must be treated equally in social security matters. This exemption, or exception, is only temporary to give member states time to adjust their state pension ages so as to bring women’s state pension age into line with men’s. As we know, the legislation in 1995 set out a timetable for equalising the state pension ages between 2010 and 2020, so anything we do now will be measured against that timeline. That is why we decided that we must increase the state pension age to 66 only after women’s state pension age has reached 65. I therefore urge the noble Lord to withdraw his amendment.