Pensions: Automatic Enrolment

Lord Kirkwood of Kirkhope Excerpts

Thursday 10th June 2010 Lords Chamber

Moved By

[Lord Kirkwood of Kirkhope]

To call attention to Her Majesty’s Government’s plans to introduce automatic enrolment in workplace pensions; and to move for Papers.

[Lord Kirkwood of Kirkhope]

My Lords, it is a pleasure to open this short debate. If I may, I would like to preface the debate by welcoming the Minister to his new and interesting position. He still has that sunny disposition and smile on his face. I hope that it is there until 2015. With a bit of luck, I will try to help him to get there. We will do the best we can.

I have never had the opportunity to thank the noble Lord, Lord McKenzie of Luton, for the professional and collegiate way in which he, as a Minister, allowed me and other Opposition spokesmen to share some of the Government’s thinking. I appreciated that support, and look forward to listening with great interest to what he has to say in future; that is really a way of softening him up, because the full-frontal attack will come any moment now.

It is hard to cover this territory in 15 minutes, but the debate’s purpose is to allow the incoming Government to report progress on automatic enrolment and personal accounts. We should take time at this stage to reflect on some of the continuing concerns identified by the industry, because they are real. Some understanding of the timetable, and the planned next steps, would be extremely helpful. Noble Lords will know that the new NEST—the National Employment Savings Trust—is vested with its powers on 5 July, which is not a long time coming. It is an important reform and an important body. There is a lot of money at stake. The success of this policy programme is fundamental to the future provision of workplace pensions in this country.

The context is well known and understood across the whole House. Not only is the United Kingdom seriously personally indebted at the level of households—we have had some interesting discussions about that in the debate on the Loyal Address—but, looking forward to pension provision in the longer term, it has undersaved as a nation. We obviously face the financial constraints of which everyone is aware. That will become clearer later in the year.

I never tire of making the point that, as a country, we underestimate the impact that demographic trends will have on all of our policy areas. I attended an interesting PPI AGM yesterday where the point was made that the best projections we are all working on are estimates. If they are wrong by even 1 per cent in an upwards direction, there are some serious consequences. The noble Baroness, Lady Greengross, chaired the event, which was an interesting demonstration of how some of these estimates can be wrong. There have been underestimates in the past, and we must make proper provision for long-term saving for some of our citizens, who are just ignorant—in the best sense—of how long they will have to make provision for when it comes to their retirement: some 20 or 30 years. It is perhaps not surprising that some do not think about that because they are working out how to budget through the next week, never mind the next 20 or 30 years.

There is a need to understand the context, and to re-establish the consensus across the party divide if we can. Pension provision is a long-term problem. Of course, there might be tactical differences and different approaches in dealing with the next Comprehensive Spending Review provisions. However, we must not lose sight of the fact that pension provision is a long-term strategy. We must get it right for the long term.

The National Employment Savings Trust is an important element in all of this. I support workplace pensions. I was first introduced to the idea by a man called James Purnell, of whom noble Lords may have heard since he served on the Select Committee that I had the privilege to chair in a previous incarnation. Auto-enrolment is a key new factor in being able to encourage people to save properly.

The Government are new. We have had a period of purdah when everything has been in stasis and no one has been able to take things forward. The mid-2012 introduction date is fast approaching. Some clarification of the Government’s position on the review and its terms of reference would be useful. The scope and membership would obviously be part of that. How long is it going to take? When will we get access to its conclusions? Are we right to assume that it will include the delivery contract, which is quite controversial? By that I mean the contract with TATA to provide the default NEST pensions provision. We have already spent some £60 million on loans for the personal administration—that is, on PADA, which preceded NEST. Is there any further information about how that looks and what the Government propose to do about it? We would also like to hear from the Government about the annual management charges for personal accounts. All of that is simply to clarify the situation, so that the industry, which is interested in engaging with this as positively as it can, can respond as positively as it is able.

There are other, perhaps less obvious, questions about the review. There is a business department review of red tape, which will look at whether and how employers can certify existing schemes to qualify under the new provisions. There is a huge amount of red tape there. We know about this because we spent a long time discussing it in the course of the primary legislation. Will that be a factor? Is the review taking into account the business department’s interest in this important area of policy? It would be helpful to know that. Is it likely to be directly affected by expenditure cuts? We all expect the Comprehensive Spending Review in October to be quite difficult to handle. Will those CSR announcements indirectly or directly affect the proposals for personal accounts and auto-enrolment?

In the longer term, although still important, is there any fresh thinking about how the auto-enrolment personal accounts will impact on and fit with means-testing policy? This is a debate that I know the noble Lord, Lord Freud, is actively and rightly engaged in. He is trying to get some of these incentives changed and made more positive. It is difficult to see how you can be confident about deploying the NEST and personal accounts policy without being careful about how it fits with means-testing in the longer term.

The problems with this debate are very interesting. I recently had the pleasure of sponsoring a lunch here, where the pensions company AXA brought forward its research entitled Public Policy Research Report: Workplace Pensions. The results of this survey are very important. AXA carried out an equivalent piece of work in 2006, at the same time as the White Paper was published. It found some interesting concerns that needed to be addressed. Three years on, in December 2009, AXA repeated the research, covering a group of 300 employers of different sizes and scale and more than 1,000 employees, just to test what they knew and thought about these policy proposals. The conclusion, I think, is that support for this policy is waning. That is the worrying thing and it is my conclusion from reading this research.

Mr Steve Folkard, who is head of pensions and savings policy, reports in his foreword to the research that he expected support to grow between 2006 and 2009, but writes:

“However, in the three years that have passed the findings do not make for the most comfortable reading for policy makers”.

Looking at the detail, I agree with that statement. Mr Folkard concludes his foreword by saying:

“NEST is designed for the low to average wage earners and its success will be judged not just by the extent to which the number of people saving for retirement increases but whether the aggregate amount saved by the population increases too”.

I agree with that.

The survey has five bullet point findings which are worth rehearsing. First, it states:

“Support among employers for the introduction of NEST has dropped to 26%”.

That is a fall of 26 points over the three-year period, which is of serious concern. Secondly, it states:

“There has been a 7 point fall in companies being able to ‘absorb the costs and comply’”.

Thirdly, it states:

“19% of employers say they will reduce employee numbers as a result”—

of this policy’s introduction. That is “up 3 points”, which is bad news. Fourthly, there is a piece of good news. The survey states:

“21% of employers would level down to 3% per cent”—

there is a problem with levelling down—which is,

“5 points lower than in 2006”.

However, I am sure that colleagues will be concerned that 21 per cent of employers are considering levelling down. Fifthly, I was interested to note that the survey stated that,

“matched contributions is the single biggest issue that would encourage employees to raise their contributions followed by better awareness of what they may receive in retirement”.

I hope that the Government will study that survey carefully as it raises concerns that we all share.

I believe that two or three points need to be added to that list. Size of business is an issue. There is clear evidence in AXA’s survey that smaller companies will struggle to deal with all this to a far greater extent than some bigger businesses. We need to consider that further. If we are not careful, low-income workplace savers, particularly early joiners who are close to retiring age when they join, may get no benefit whatever from this system. That also needs to be looked at. Going forward over the next three years, opting out will be even more important for reasons which we all understand; that is, household domestic budgets will be under even more pressure. People will think of this measure as a wage cut if its positive aspects are not explained to them to enable it to be taken forward.

What can we do to help? What should we be looking to do? I look forward to hearing about the review. I understand that that discussion may be premature in that the Government have been in office for only 20 minutes, as it were, and reviews are reviews.

[Noble Lords]

Too long!

[Lord Kirkwood of Kirkhope]

I hear cries of “Too long” from a sedentary position. We have been in office longer than 20 minutes, but these are early days. However, I hope that the Minister and the department will understand that we need to take account of the urgency of this matter. The Government should restate their position as energetically and urgently as they can. They must demonstrate enthusiasm and demonstrate that they are up for this fight as it will be a struggle to win hearts and minds to make this policy successful. It is clear to me that we need to provide more flexibility for employers, and soon. We need to be able to access better information systems that explain the long-term benefits of this policy for employees and employers. We need to be able to do that in pretty short order if this policy is to succeed.

In the longer term we need to look at the promise of an evaluation when the “steady state” is reached in 2016. It is a shame that this has slipped back. I understand the reasons why the previous Administration slipped back the timescale slightly. I supported that as the original timescale presented many challenges. However, we will now not have a fully functioning 8 per cent annual saving amount until 2016. That is a long time coming and people will suffer from being undersaved between now and then as a result. We also need new impact assessments of the cost provisions that accompanied the draft regulations. I do not think that the earlier cost assumptions were sufficiently realistic. There should be better information. The department should have done more work since the previous assumptions were published. It would give the industry confidence if the department undertook to set up a working group with it and other interested parties in order to engage with the deployment and implementation of this policy. That is important.

This is a very important piece of legislation that we must get right. There is a case in the even longer term for the Government to think about creating an independent body to formulate strategy for long-term savings. It should be broadly drawn, because it is important to try to develop and enforce a consensus in this important policy area. It is too important to get wrong. I hope that today’s debate will help to shed some light on the Government’s thinking. That was the purpose of tabling the Motion in the first place. I look forward to contributions from colleagues and others. I beg to move.

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[Baroness Anelay of St Johns]

No.

[Lord Kirkwood of Kirkhope]

Shame.

[Lord Freud]

I saw someone else obtain three minutes the other day, but this is not permissible. I will write to noble Lords on other issues that I have not managed to cover. I have a lot to write to noble Lords about; I apologise.

Our goal is straightforward—

--- Later in debate ---

[Lord Kirkwood of Kirkhope]

My Lords, I am seriously grateful to the Minister. It is perfectly understandable, because he had questions of very high quality thrown at him from all sides, that it was impossible for him to respond in the time allotted, but perhaps he could respond—the noble Lord, Lord McKenzie, said that there were common issues—and take advantage of the useful briefing that is already in his inside pocket. Perhaps he can put copies in envelopes and send them to us in due course. It would be extremely helpful if we could be told the terms of reference for the review before the House rises for the Summer Recess. Obtaining a fuller response by the time that we return after the Recess is an acceptable timetable, if the noble Lord can keep to it. I promise that if he does not keep to it, some of us will remind him of the target date that he set for himself. I am very grateful for his reply, which will repay careful study, and to colleagues for contributing to the debate. I am seriously interested in the fact that the coalition Government are now committed to asymmetric paternalism, in addition to the other matters in the joint agreement.

These are pesky issues with which we will all have to wrestle, but knowing the noble Lord, Lord Fowler, to be a hospitable host with a 40th anniversary approaching, I am sure that we can all console ourselves when he convenes—we all look forward to joining him in the Bishops’ Bar, or wherever, to celebrate his distinguished anniversary. I am very happy to withdraw the Motion.

Motion withdrawn.