Pension Schemes Bill

Debate between Baroness Drake and Lord German

Wednesday 7th January 2015 Lords Chamber

[Lord German (LD)]

My Lords, I have considerable sympathy with the amendment before us, not least because the chair of the Delegated Powers and Regulatory Reform Committee of your Lordships’ House would be very upset if we did not make sure that the report was brought before your Lordships’ House.

Pension Bills in the past—the report quotes pension Bills from the 1990s—were frequently used, with very much of the detail coming in the following regulation. However, as we know from the debates and discussions we have already had, there are no drafts available; we have had outlines and a sense of direction, but at the moment we do not have substantial amounts of supporting legislation drafts before us, as we might have had in much further primary legislation relating to welfare. The recommendation in paragraph 6 of the report of the Delegated Powers and Regulatory Reform Committee is clear. It says that,

“in view of the potential for the power to be exercised in a way that could significantly alter the constituent benefits included in the definition”,

of collected benefits,

“we are unpersuaded by the DWP’s explanation … why it considers the negative procedure to be an adequate level of Parliamentary control”.

Perhaps my noble friend the Minister in his response might tell us whether the Government will accept this report, and it might also help us if they say whether they would accept the other recommendations about the negative and affirmative resolution and first exercise recommendations which are in that report. That might save us a little time in the future.

[Baroness Drake]

My Lords, for the purposes of all of today’s business on the Bill I refer to the interests which I have registered as a remunerated trustee of both the Telefónica O₂ and Santander pension schemes and the board of the Pensions Advisory Service, and as a non-remunerated member of the board of the Pensions Quality Mark and a governor of the Pensions Policy Institute. I am also a member of the Delegated Powers and Regulatory Reform Committee. That is like an act of cleansing; I hope that I have stated all possible interests that could appear to conflict with anything I might say today.

I support Amendment 2 and very much share the spirit of the contribution made by the noble Lord, Lord German, particularly his comments about the estimable chair of the Delegated Powers Committee. I accept that it will be a very significant challenge to get collective benefit schemes established in the first instance. As we heard from the NAPF and the ABI, there is little observed appetite from providers or employers, certainly at this stage, for engaging with such schemes.

There are other barriers and constraints to be overcome because collective benefit schemes require an assured flow of new members, excellent governance and full transparency, and the new freedoms with their emphasis on individual freedom rather than risk-sharing may well act as a further deterrent. None the less, for those of us who are genuinely interested in seeing the development of more efficient ways of risk sharing, the Bill provides the opportunity to set the founding legal framework and is therefore worthy of proper scrutiny. In fact, not to scrutinise would be a failure to engage with the work that has been done by the Minister for Pensions and the Department for Work and Pensions.

However, Clause 8 is a key and critical provision because it sets the definition for what are collective benefits, on which the rest of the clauses in Part 2 and many of the associated delegated powers depend. That is why it is so critical in its construct and its definition of the delegated powers associated with it. In my view, the power to set regulations under Clause 8(3)(b) should be subject to the affirmative procedure because the definition of what is or is not a collective benefit makes it so critical to the scope of the whole of Part 2, which deals with collective benefits.

Clause 8(2) defines what a collective benefit is but Clause 8(3)—the subject of this amendment—defines what it is not. It is not a collective benefit if it is a money purchase benefit or, more particularly, some other benefit of such a description to be specified in regulation.

I understand the Government’s reasoning when they indicate that with-profit arrangements, for example, provided by some insurers should not come within the definition of a collective benefit scheme. It is perfectly reasonable for the Secretary of State to want some flexibility to respond as the market develops and innovation occurs in scheme or benefit design.

Clause 8(3)(b) would allow the Government to use regulation to avoid schemes being subject to the expense of meeting the detailed requirements set out in Clauses 9 to 35 if they are deemed not to be proper collective benefit schemes. But the clause, in granting the Government power to significantly alter by regulation the constituent benefits that are not included in the definition of collective benefits, has the ability therefore to potentially remove members of schemes out of the protection of the requirements in the other clauses in Part 2.

This, of course, could have considerable implications for members and the scope of the whole of Part 2. The potential of this regulation to remove members from the protections they may already have by being in a designated collective benefit scheme, which subsequently a change of regulation deems that they are no longer in, makes it compelling that this remains a power that should be subject to the affirmative procedure. This should be as a general practice, not just in first use, because if collective benefits take off—one hopes that they do and we therefore have wide coverage and scale—any review or change to the definitions of the benefits embraced by such collective schemes will be of outstanding importance to the members.

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

Debate between Baroness Drake and Lord German

Tuesday 22nd May 2012 Grand Committee

[Baroness Drake]

My Lords, starting positively, it is most welcome that auto-enrolment will really commence in October 2012, and this order is obviously an essential part of getting to that position. The pay reference periods in the draft order and the corresponding earnings values in respect of the relevant sections of the Pensions Act 2008 are sensible. We can understand why, for example, a daily pay reference period could deliver results that were not the policy intent.

It is also pleasing that the Government have held to the definition of qualifying earnings that reflects the common pay components that make up the pay packet. Aligning auto-enrolment triggers and thresholds with tax and national insurance thresholds in the interests of simplicity for employers wherever possible would seem a sensible approach—but only to the point where the pursuit of simplicity does not undermine desirable outcomes, particularly for women.

Aligning the upper limit of the qualifying band of earnings with the NI upper earnings limit provides simplicity, complements the policy intention and, by extending the range of earnings, increases savings a little. Similarly, setting the lower limit for the qualifying earnings band to the NI lower earnings limit provides simplicity and maintains contribution levels when auto-enrolment is triggered. That is the positive.

However, our concern is that the level of earnings that triggers the automatic enrolment of a worker is set for 2012-13 at £8,105, the PAYE threshold. This further rise in the trigger excludes yet more women, and places simplicity above enabling millions of women to increase their savings pot. We remain concerned for the reasons we have rehearsed previously: raising the earnings trigger has a disproportionate impact on women and the Government are repeating the errors of the past in designing a second-tier pension system that does not work for the life pattern of many women. In 10 years’ time, the error will be obvious, particularly to women themselves. I have no doubt that action will be taken to amend it, but by then thousands of women will have lost out unnecessarily.

The Government’s response to the automatic enrolment earnings threshold consultation reports that the main focus of consumer organisations was on equality issues, particularly the impact of higher thresholds on low-paid workers, the majority of whom are women, but clearly their views are not a dominant influence in setting the trigger. Millions of women have a life pattern in which periods of full-time work are interspersed with significant periods of part-time work when their caring responsibilities are at their greatest.

On the Government’s figures, of the workers eligible for auto-enrolment, two in five—39%—are women. Raising the trigger from £5,035 to £7,475—the 2011-12 PAYE threshold—excluded 600,000 individuals, 78% of them women, most of them part-time, but that decision was made. However, raising it to £8,105 excludes another 75,000 women, on the grounds of simplicity. If, over time, that earnings trigger rises even further in real terms, tracking proposed increases in the tax threshold, the number of women excluded from the benefits of auto-enrolment will grow even more.

The effect of excluding these women is, first, that they may not start to save when the reforms are introduced. Secondly, when they transition from full to part-time jobs they may face increased charges on their pension pot accumulated as a result of becoming an inactive member. Thirdly, ceasing to be auto-enrolled when they become part-time workers could break the persistency of the savings habit they built up when working full-time.

The Government sympathise with the view that only those who benefit from tax relief should be auto-enrolled. This ignores the working of the tax credit system. For example, household income brought to account when calculating universal credit disregards 50% of that income paid in pension contributions. Of course, before the reforms it was 100%. To quote from the Johnson report commissioned by the Government:

“Many or most very low earners are women, who live in households with others with higher earnings and/or receiving working tax credits. These may well be exactly the people who should be automatically enrolled”.

Those excluded women also suffer a loss in lifetime pay, albeit deferred pay, because they do not have access to the employer’s 3%—and for some employers the figure is higher. However, they will still lose out from any lower wage growth that flows from the cost of automatic enrolment.

If policy is predicated on the belief that most people will not begin to save unless the power of inertia is harnessed through auto-enrolment then it cannot be the case that the right of those below the earnings trigger to “opt in” will seriously mitigate the risk that many women will face lower incomes in retirement as a result of the level at which the trigger is put. As to persistent low earners, the argument that they should not save because they get state pension and benefit means yet again that there will be no “asset accumulation strategy” for low earners. If 100% of pension contributions were disregarded for universal credit calculation, this would reduce the risk of a fall in people’s welfare prior to retirement.

Furthermore, if the Government accelerate the move to a single flat-rate pension, depending how that is done, together with the more generous crediting arrangements for carers introduced by the Labour Government, then the incentive to save can increase for significant numbers. As the Johnson review again observes:

“earnings are highly dynamic and there are relatively few people who have low earnings throughout their lives”.

A make-weight argument for the higher earnings trigger is that it reduces the number of small pots of pension saving, which are disproportionately expensive for the insurance industry to administer. But of course that argument is totally contrary to the policy intention. The answer to that problem is the public service obligation of NEST not to increase the numbers of workers excluded from auto-enrolment.

Much is made by large employers—though having read the review, one sees that not many of them directly make submissions—of certainty and business planning from linking the earnings trigger to the PAYE threshold, so setting the direction of travel. In 2012-13 the Government are rolling out to the large employers and are raising the earnings trigger in order to simplify the process. However, these are large firms well versed in dealing with complexity. Surely we should not be trading fairness for women, which they need, for an alleged simplicity which these companies do not require.

Many large employers have already been given the simplifying benefit of an alternative certification test. Many use salary substitution, managing the complexity of employees opting both in and out of salary substitution. They are experienced in deploying often complex measures to manage their pay and tax liabilities and frequently changing tax rules. Do 75,000 more women need to lose the benefit of auto-enrolment to give them the alleged simplicity they seek?

To return to the positive: while we welcome the commencement of the new employer duty, and recognising some of the positives in this order, we remain concerned about the position of many women that is created by raising the earnings trigger.

[Lord German]

My Lords, I recognise in the consultation document and in the response from the Government that three-quarters of the respondents supported the trigger that is now being set by the Government in this legislation. Of course, this is not an exact science; one cannot say that a specific figure is the level at which people will benefit from coming in to automatic enrolment. However, we should recognise that for many low earners, investment in pensions is potentially unsuitable, and that it is not suitable for persistent low earners. I will come back to that point in a moment.

When the Pensions Commission did its initial work, it stated that low earners might aim for a gross replacement rate of 80% or more of their income when they retired. The Johnson review—which I, like the noble Baroness, will quote from—stated:

“This disproportionate impact on women is something we would wish to avoid if we believed that these people would benefit from saving”.

Individuals who are low earners throughout their lifetime will receive a relatively high income—I stress “relatively”—in retirement, without private pension saving. Paul Johnson quotes the example of an individual earning £10,000 a year from the age of 22, who would see a replacement rate of around 97% from the state alone. Therefore, the question is where the target trigger should be set. Surely the objective must be to maximise pensions saving where that saving is valuable and minimise it for people for whom it will not be worth while.

There is no doubt that this will have a disproportionate effect on women, but the question is whether potentially it would not be worth their while to invest in this manner. Would they benefit from the savings? The question that is being asked here is about what the threshold should be and whether it should be somewhere in the region of the figures that Paul Johnson quoted in his review for the Government. Individuals who are low earners throughout their lifetime will receive a relatively similar income without private pension saving. The question is: does the trigger enable people to come back in when their earnings level rises above the tax threshold? The question that the Minister might like to answer is: what will be the procedure for people who have been low earners, who are underneath the trigger, who have not chosen to opt in but who reach that figure to be automatically enrolled? If they are in the category of persons who will occasionally fall back below and then rise above the trigger level, how will their re-enrolment occur? Will there be encouragement, and will they be tracked so that the re-enrolment will occur seamlessly, without them losing out?

The other way in which people’s choices could be made is through opting in. I note that the consultation response from the Government states that people will be encouraged and that employers will be required to pass on information to their workforce. However, there is a difference between passing on information and encouraging people. The difficulty that many employers will have with low earners is in determining whether this is potentially good for them. It is a very difficult judgment to make, given that it may not be the right choice for a person who is a low earner throughout their life but might be for someone who is a low earner now but who has the potential to move back and forth across the trigger line.