Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) (No. 3) Regulations 2012

Lord Freud Excerpts

Monday 15th October 2012 Grand Committee

Moved by

[Lord Freud]

That the Grand Committee do report to the House that it has considered the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) (No. 3) Regulations 2012.

Relevant document: 6th Report from the Joint Committee on Statutory Instruments.

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

My Lords, I am pleased to introduce this instrument which was laid before the House on 2 July. I am satisfied that it is compatible with the European Convention on Human Rights.

Two weeks ago we celebrated a major milestone: the start of the rollout of the workplace pension reforms. These reforms are critical to allow people to start planning for their retirement. Your Lordships will no doubt have seen the, “I’m in!” campaign in the media to raise awareness about the reforms. By the time all employers are included, millions more people will be able to join the bosses by saying, “I’m in”, with more than 500,000 new savers in workplace pensions by Christmas. For many it will be the first time they have had the opportunity to save in a pension.

The instrument that we are to debate today is very technical and might seem to be a relatively insignificant part of the landscape. But for some of the largest employers in the country, who are at the front of the queue, these amendments will play a vital role so that they can use their existing high quality, career average pension schemes to meet their duties. Without this amendment, an oversight in the original regulation would prevent them doing so.

The issue emerged earlier this year during the department’s engagement with employers as they prepared for the onset of the new duties. The problem lies in the way that the quality requirements for career average schemes interact with the scheme rules for some career average schemes. A key part of the quality requirement for career average schemes is that accrued benefits must be revalued. The policy intent is to ensure that individuals are given a measure of protection against the effect of inflation. It is important that benefits accruing in a career average scheme are revalued in service as well as in deferral.

The minimum level of revaluation required by Regulation 36 of the 2010 automatic enrolment regulations is a guaranteed annual increase by reference to the increase in the general level of prices. If the benefits are to be revalued only on the exercise of a discretionary power, the scheme may still qualify if the funding of the scheme assumes the minimum increase is to be made, and the funding is provided for in the scheme’s funding plan. This easement was made available only to schemes that revalue purely on a discretionary basis. Those that feature an element of guaranteed revaluation below the minimum, but which also have a discretionary power to revalue at the minimum rate, would not qualify.

This is the problem which puts the regulation at odds with the original policy intention of allowing schemes to qualify if they revalue on a discretionary basis provided the increase is properly funded. We consulted earlier this year on proposals to allow schemes which provide for a mix of guaranteed and discretionary increases to qualify. We also asked whether there were other aspects of this regulation that might inadvertently prevent perfectly good quality schemes qualifying. The objective is to give an appropriate degree of protection to members’ benefits against the effects of inflation and to ensure that the quality requirements are applied consistently across scheme types. At the same time, we want to allow flexibility on how these requirements are actually met. This will ensure that we do not impose any unnecessary and costly burdens.

We received a number of suggestions in this area, some of which we are considering further. One was very simple to agree to. Regulation 36 currently allows a scheme that revalues by reference to the increase in RPI to qualify only if it was in existence on 1 July 2012. We agreed with respondents who saw no reason to prevent a scheme that is set up after that date also qualifying if it chose to revalue by reference to RPI without the need for a CPI underpin in years when the CPI is higher than the RPI. So the draft before the Committee today also allows for revaluation by CPI or RPI, subject to the cap on required revaluation at 2.5%.

As I said earlier, this amendment is not the most attention-grabbing piece of legislation that we will make this year, but for some major employers getting ready for the workplace pension reform it may be one of the most important. I commend this instrument to the Committee.

--- Later in debate ---

[Lord Kirkwood of Kirkhope]

My Lords, I want to add my support for these regulations. I have myself had one of the four or five questions from the noble Baroness, Lady Drake. It concerns the consultation that the Office for National Statistics is engaged in at the moment in terms of RPI versus CPI. That needs to be thought about quite carefully because it could have a dramatic impact on some of the scheme rules we are talking about and which these regulations cover. I want to put in a request that the department ensures that the ONS is careful about this issue and that people are made aware of the consultation it is currently engaged in.

There is one point I do not understand. I imagine that an average salary scheme must be a defined benefit scheme and therefore it will have a statement of funding principles and trustees. Given that, I do not understand why the easier fix for this was not to change the scheme rules in order to make them compliant. I cannot believe that trustees would want to do anything other than that. They may have a contest for the sponsor of the scheme in terms of getting the resources, but I cannot see how that would be a problem. My question is this: although I am in favour of them, why are these regulations necessary? Why can the trustees of the scheme not deal with it by making a small amendment to the funding rules in the statement of principles for their own individual salary schemes?

If it is easier to give answers to these rather more simple questions by letter, I am quite happy to receive one as well.

[Lord Freud]

My Lords, I think I will end up writing a letter, but I ought to try to answer the questions in general terms, thus saving a little effort in terms of letter writing. The first point made by the noble Lord, Lord McKenzie, concerned the potential changes to CPI and RPI. About a year ago we had the most glorious debate on this matter, for which I enjoyed researching probably more than any other topic. I think I am pretty comfortable in saying that the authorities are looking at these two measures and that there are likely to be some changes. RPI has had a very bad press lately, as some noble Lords who are aficionados will have noticed. If and when that change happens, we will have to take a decision, but it is pretty premature to take two hypotheticals and jump to a conclusion ahead of time. We will engage closely with the ONS to ensure that the potential impact on pension re-evaluation is fully considered.

On relying on trustees, my noble friend is absolutely right that there will be trustees here. This is just a technical change. The way it was drafted would have excluded these particular schemes, so that is the way that that has been addressed. This is moving into where schemes go into deficit and the question from the noble Lord, Lord McKenzie. They will be required to find funds for the minimum revaluation rate. Section 75 debt will continue to be calculated on the basis that the minimum revaluation rate will apply. The sums go on, even though the scheme has a problem which needs to catch up.

On the schemes that revalue benefits by reference to earnings, we are committed to considering further how that kind of revaluation could be allowed for. Historically, earnings have gone up faster than inflation so it is a lower risk, although that has not necessarily happened in recent years. On the question of whether the provision for discretionary revaluation would be required to be at least that necessary to meet the minimum rate—CPI, RPI or whatever is lower—the answer is yes. Regulation 36(3)(a) stipulates that a scheme with benefits to be revalued on the exercise of the discretionary power can be a qualifying scheme if,

“the funding of the scheme takes account of the exercise of the discretionary power and does so on the assumption that accrued benefits would be revalued at or above the minimum rate”.

That figure is CPI or RPI, whichever is the lower.

I may have answered all the questions without the need for a letter. That would be one of the miracles of our time. I will make sure and, to the extent that we have not absolutely locked this down, I will send a letter over because it is a very technical area.

[Baroness Turner of Camden]

I have a question. There has been a report in the newspapers recently that a number of small employers have no idea how to operate the new scheme. Of course, the problem is that if it is not operated, a lot of people will not get the choice of whether to go in, opt out or whatever. I am interested to know whether the Government are taking on board the problems with smaller employers who really do not understand what is actually involved in getting people into the automatic scheme.

[Lord Freud]

Yes, I can pick that up. Clearly, there is a staging going on. Smaller employers are towards the end of that, and are two or three years out from now. It would clearly be hugely counterproductive to send them an early letter which tells them that in two years’ time this or that will happen because they will tend not to look at it. It is really important in a communication exercise that we time it right. It is somewhat encouraging that quite a few knew that this was coming. A communication exercise is integral to us launching this properly. That is a key point.

To sum up, the point of this measure is to make sure that good-quality career-average pension schemes can be used for automatic enrolment. It allows flexibility without compromising individual protection and closes a particular gap in the legislation that we would not have wanted to see. On that basis, I commend the instrument to the Committee.

Motion agreed.