Pensions Act 2011 (Consequential and Supplementary Provisions) Regulations 2014
Baroness Drake Excerpts(10 years, 5 months ago)
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Lord Kirkwood of Kirkhope (LD)
My Lords, I am pleased to have the opportunity to contribute to this technical debate. I declare an interest as chairman of the defined benefit superannuation scheme of the General Medical Council, so unfortunately I know nothing about money purchase schemes. I did try, honestly—I took home the 36-page judgment of the noble and learned Lord, Lord Walker, and read it carefully until Germany scored the second goal. I still do not understand the noble and learned Lord’s reasoning, but I am sure that it is sound.
I hope that the Minister can help me. I understand that we are dealing with two sets of statutory instruments. The department deserves credit for taking on board the suggestion made by the Secondary Legislation Scrutiny Committee of teasing out the negative from the affirmative. That is always good practice. However, I do not know where the transitional regulation, Regulation 1711, comes from. I assumed that it would have been sensible to have taken these together because they talk about the same thing and are all part of a piece. However, I may have missed something and the Minister might be able to put me right on the procedure that is involved.
This is a small but important issue and anyone who looks at it will be reminded of the ineffable complexity of our pensions system. I have to say that although this is the right thing to do and I am content with the regulations, they form another layer of complexity—because they have to. If money purchase is not defined in this way, it would leave a terrible amount of uncertainty. If people do not understand a valid, watertight description of money purchase, chaos will ensue. Lots of schemes could get into even greater difficulties in the future.
We always have to be careful about retrospective provision. These regulations go back to 1 January 1997. I understand perfectly why and, in the circumstances, that is justified, but, as I say, we must always be careful about retrospective provision. However, I think this is the right tactic. It is not perfect because retrospection never is, but the stated case is accepted, certainly as far as I am concerned. Clarity is the order of the day, as much as we can achieve it in pension provision.
I have a couple of questions for the Minister. Some of these things are imponderable because the data are not available in money purchase schemes to the same extent as in defined benefit schemes, but the number of affected schemes has been listed as being around 800. Is there an update on that figure and is there now a better definition? Has the number gone up or down since these matters started to be drawn up by the department? I also want to try to understand what the costs of non-compliance would amount to. What is the worst that could happen? If everything that can go wrong does go wrong, what would happen to hybrid schemes such as these which involve money purchase in a way that we have to change through these regulations?
As the chairman of a superannuation scheme myself, the key and overriding priority of a trustee is to protect the members’ benefits. Are there any circumstances where benefits afforded to members could be prejudiced by these changes? I have looked at the very helpful Explanatory Memorandum. Paragraph 19 explains the provisions of,
“transitional measures to assist affected schemes in three ways”.
The first bullet point talks about,
“retrospective protection so that schemes do not have to revisit past decisions”,
and goes on to conclude that,
“there is very likely to be no detrimental material impact on member benefits”.
That is a nuanced subordinate clause, and perhaps it has to be so. I would rather have the truth than be given a more definitive statement that was easier to understand and more reassuring. However, that is a key question for me. If I could be given some reassurance on that point, I would be even happier than I am at the moment.
Finally, I think that the consultation was exemplary. I looked at the document very carefully and the department did everything it could. The consultation was responded to well and those who did respond are experts who know the exact consequences of these changes. For me, that has lifted a great deal of concern and apprehension about the effects of these changes. These regulations reflect circumstances that no one could have foreseen and the Government have responded to them in the best way they can. The situation is still a bit fuzzy at the edges, but I hope that the Minister will give us an assurance that the appropriate officials who understand these things will monitor the position so that we can be assured in the fullness of time that the assumptions we are making of very little or no loss of benefit to individual members are found to be what happens in practice in the future.
Baroness Drake (Lab)
My Lords, I declare my interests as a trustee of both the Santander and Telefónica pension schemes.
This statutory instrument has been on a rather interesting journey. In part it supersedes draft regulations published in May, which were withdrawn and subsequently divided into two in order to separate provisions required to go through affirmative procedure from those required to go through negative procedure. It has therefore been a little confusing to try to anticipate the affirmative provisions to be relaid in the form of a pared-down instrument, as this SI was not laid until last Thursday. Having said that, I appreciate that dealing with the uncertainties and complexities that flow from the Supreme Court decision in Bridge cannot have been straightforward for the Government. I compliment the drafters of the Explanatory Memoranda and the impact assessment, who tried to provide clarity as to what the Government intend and why, in what to most normal people would seem a rather dense and complex set of requirements.
The two regulations have separate Explanatory Memoranda, but they share a common impact assessment, so one can assume that certain key assumptions and conclusions underpin both orders. I refer in particular to the fact that, having considered the consultation responses, the department has changed its policy on retrospection for non-compliant schemes. Decisions taken by schemes between 1 January 1997 and the coming into force of Section 29 will be validated, except in two limited circumstances that relate to winding up and employer debt, where there is a risk to members’ benefits.
The department has been persuaded that it would therefore be unduly burdensome to require schemes to revisit past decisions, which could give rise to expensive administrative costs that could deplete scheme assets and therefore the ability to fund members’ benefits—that is the argument put by the Government—and that the impact of members’ benefits of revisiting past decisions since July 2011 would be negligible. In summary, the Government are persuaded that with two exceptions, Section 29 will come into force only with prospective effect; there will be retrospective protection for schemes and past decisions will be validated.
However, in coming to that view and giving that retrospective protection to decisions made, the department is unable to quantify the impact of the regulations on schemes likely to be affected. There are no data available at an industry-wide level. The consultation did not elicit sufficient data at scheme level to allow the department to produce reliable estimates of the impacts on schemes and on members—and indeed, on employers. The department engaged further through the pensions regulator’s annual survey and the wider pensions industry to enable some quantification of costs and benefit. However, insufficient information was forthcoming.
A question must be, therefore: are the Government right to be persuaded, and indeed confident, that except in the defined limited circumstances that they have identified, there is negligible risk to members’ benefits in validating decisions taken by schemes before the coming into force of Section 29? Should there be more exceptions to the retrospective validation? How do the Government give themselves the level of confidence they need to give that retrospective validation? I will illustrate my concern with reference to a couple of examples.
The very important rules which govern any attempts to change pension rights or entitlements are detailed in Section 67 of the Pensions Act 1995, popularly referred to as “Section 67 rights”—an often quoted phrase because of its protected nature. During the course of the consultation on the regulations arising from the Pensions Act 2011, stakeholders advised the department that there could be schemes which had inadvertently changed their benefits from non-money purchase to money purchase; for example, by removing a guarantee from a cash balance scheme because of their interpretation of the law in force at the time. In doing so they may not have secured the members’ consent as is required.
The department has taken the view that schemes should not be required to revisit these decisions and that it would deem that the requirements of Section 67 of the Pensions Act 1995 had been satisfied where the actuarial equivalence requirements were met before such a scheme modification took effect. But those actuarial equivalence assumptions may not hold good over the longer term, and the issue remains that a guarantee or some other right has been removed without consent. The Section 67 requirements have not been met and the beneficiaries may be worse off.
Baroness Drake
My Lords, this may be an appropriate moment to intervene because I want to push the Minister on a couple of points. I have been trying to anticipate when he would be coming to the end of his remarks.
Perhaps I may go back to two points. First, Section 67 rights under the 1995 Act are pretty important rights that get people rather excited. The concern I was trying to express was that this seems to set the precedent that you can provide retrospective protection for schemes that have breached Section 67 rights and obligations. What level of assurance can the Minister give that this is not a precedent that could be used for undermining the strength of Section 67 in the future by giving retrospective protection?
Secondly, in terms of how this retrospective protection applies where schemes have breached Section 67, I should point out that the Government do not know which schemes have done this. They have just heard about this from the industry, so they are giving a sort of blanket assurance without knowing the number and type of breaches of Sections 67. If they do not meet the actuarial equivalence terms, it is not clear whether they will have to go back and redo it.
Thirdly, if they did it inadvertently, they probably did not do any actuarial equivalence exercise at the time. Is it therefore being said that they can do one with hindsight now, and can look back and say, “Had that been applied at the time”? It is quite important to get clarity on this Section 67 point, because there are lots of disputes and case law around it. It tends to get people who are interested in members’ benefits quite excited if there is an attempt to compromise it in some way.
On the flipping schemes, which are not protected in terms of access to the PPF until April 2015, I note that, as was said, if you have not paid the levy then the liability if your employer goes insolvent should not go to other levy payers. However, the issue is that it is a government responsibility, because the Government are obliged under the EU directive. I was looking for as firm an assurance as possible that, if an employer with a scheme that has to flip from DC to DB goes into insolvency before or up to April 2015, the Government will not walk away from giving some kind of protection to those schemes with DB benefits the members of which may now be caught outside the protection regime; hopefully there are none or, if there are, they are very tiny.
Lord Bates
I am grateful for those additional points. Let me try to answer them as best I can. It might be helpful if I wrote to the noble Baroness and shared those responses with the Committee. I realise that they are important issues.
To respond to the specific issue of Section 67 rights, the appropriate regulation is Regulation 8(3)(b). The Government believe that the protection is not undermined, because there must have been an actuarial equivalence. If they do not meet the actuarial equivalence requirements, they will have to go back and unpick them. In fact, the regulations introduce a new protection for members, which underpins the benefits. However, as I said, I shall seek further guidance on that and write to the noble Baroness and other Members of the Committee.
These draft regulations make modifications to existing primary legislation to provide supplementary and consequential measures to support the coming into force of the clarified definition of money purchase benefits in Section 29 of the Pensions Act 2011. I hope that I have set out for the Committee the rationale for these regulations and have responded to the matters raised. I commend these regulations to the Committee.
Pensions Bill
Baroness Drake Excerpts(10 years, 9 months ago)
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Lord Lawson of Blaby (Con)
My Lords, I need not detain the House long because, I am glad to say, my noble friend the Minister has met pretty well in full the points that we made at earlier stages of the Bill. I am extremely grateful to him for that. There is a real mischief in the huge range of costs which bear no relation whatever to investment performance incurred in different pension schemes. It has always been known, but it was documented fully by the Pensions Commission some time back. That we have been able to improve the Bill in this way is a tribute to this House, but particularly to my noble friend the Minister, who has listened carefully, accepted the need to deal with that mischief, and put forward a practical and sensible way of doing it.
There is only one loose end, and although the Minister dealt with it I would like to spend a minute or two on it. The amendment says “some or all” costs, but that is purely a legal technicality and in fact it means all costs, itemised. That is the firm intention. They will be published generally, not just given to the members of the schemes, so that all can see. However, as the Minister said, the provision deals exclusively with defined contribution schemes and not with defined benefit schemes. I understand his reason for that—because it is only in the defined contribution schemes that pensioners are, in effect, from time to time ripped off by investment managers who charge far too much in the way of costs. There are five times as many people in defined benefit schemes as in defined contribution schemes, however, and the money in defined benefit schemes is well over £1 trillion.
Of course, if the same kind of ripping off goes on—obviously it does; there is no difference in the investment manager’s behaviour from one to the other—it is not a victimless crime. The pensioners may not be the victims, but the shareholders in the companies certainly are. The Government cannot desire to see shareholders ripped off when it can so easily be prevented by extending to defined benefit schemes the disclosure and transparency requirements that the Minister will put in place for defined contribution schemes. He says that he will consult on that. I am delighted to hear it, but I very much hope that the result of the consultation will be to require the same disclosure and transparency for defined benefit schemes as for defined contribution schemes.
Baroness Drake (Lab)
My Lords, I declare my interests in the area: I am a trustee of the Santander and Telefónica pension schemes, and a member of the NAPF Pension Quality Mark board. As no doubt other noble Lords here today are, I am concerned to understand the extent to which Amendments 2 to 5 provide for full transparency on transaction costs and deliver on the assurances that the noble Lord, Lord Freud, gave on Report. I would therefore like to ask the Minister several questions.
The Minister confirmed that the Secretary of State would be divested of the power to set the requirements for securing transparency of transaction costs in relation to money purchase personal pension schemes, by giving that responsibility to the FCA. As he said, the amendment does not extend the existing powers of the FCA but imposes a duty on it to make rules on the disclosure of information, following consultation with the Secretary of State and the Treasury, to ensure consistency between FCA rules and the regulations made by the Secretary of State. If the FCA response to that consultation is not considered adequate in achieving such consistency, which Minister will be responsible for ensuring that the FCA fulfils its duty in that regard, and with which powers?
There will no doubt be much consultation and lobbying prior to regulations and rules being set, and no doubt various interests will be brought to bear in those considerations. However, does the Minister agree that the draft statement of recommended practice put forward by the Investment Management Association to the FCA does not provide a sufficient set of requirements for full reporting on transaction costs by investment managers?
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.
Lord Freud
The DB element will be part of the consultation. Depending on that consultation, we will have to decide how to treat that particular aspect.
On the questions around the EU, clearly right now we are free to write these regulations and rules and there are no EU rules to hinder that. However, that might change in the future. One of the attractions of pulling the FCA into this process is that it has technical expertise in this area and is the body negotiating in Europe on relevant EU legislation. It is therefore best placed to work with DWP on determining how costs and charges can be defined, captured, measured and disclosed. By using its own rule-making power, the FCA may be able to respond quicker than the parliamentary process to changes in the market or from the EU.
I think I have dealt with all the issues.
Baroness Drake
I hope the Minister does not think I am being pushy, but this is probably the last chance we will have to question him on this before we complete this stage of the Bill. On the issue of EU regulations, the Minister has confirmed that at the moment there are no EU rules constraining the Government from pushing for full transparency on transaction costs. Hopefully, any product from the EU in favour of transparency would work to the Government’s remit. However, one of the underlying concerns is that the earliest there could be any impact from any change that comes out of the European Parliament and from the EU would be 2016, maybe later. People are looking for an assurance—I certainly was asking for one—that the FCA would fulfil its duty without being constrained to await the outcome of any EU discussions and would push ahead to an early timetable consistent with the spirit of the point the Minister made on Report.
Lord Freud
I am pleased to be able to confirm that it is not tied to the EU in any way. We will be pushing ahead with this at the speed I indicated, which is—
Pensions Bill
Baroness Drake Excerpts(10 years, 10 months ago)
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Baroness Drake (Lab)
My Lords, I speak to Amendment 23 and the associated amendments to Schedule 17. I declare my interests as a trustee of both the Santander and Telefónica pension schemes, and as a member of the NAPF pension quality mark board.
It is clear that the Government are right that a solution is needed for millions of dormant small pots arising under auto-enrolment because of the large number of workplace schemes and the frequency with which workers change employers. The Government are right that neither scheme members nor providers benefit from workers leaving behind small pots as they move from job to job. The Bill gives the Secretary of State the power to make regulations to transfer automatically small pots to form, and keep track of, bigger, more efficient pots. The contentious issue is what the default transfer solution should be.
The Government, as my noble friend has said, has chosen pot follows member, whereby a small pension pot automatically follows a member to their new employer’s pension scheme, rather than the alternative of small pots being transferred to an aggregator scheme which consolidates all the small pots accumulated by an individual each time they change their employer. The Association of British Insurers supports this view but, as my noble friend has pointed out, many others—the Confederation of British Industry, the NAPF, the Cass Pensions Institute, Which?, EEF, Age UK, the TUC, the centre for pension studies and others—believe that pot follows member has a number of inherent risks and weaknesses.
The amendment retains the power of the Secretary of State to make regulations to transfer small pots automatically, but not the requirement that this must be through PFM. It allows time for further consideration by the Government without excluding any particular solution, as the consequences of getting this wrong are absolutely huge. PFM cannot be implemented without raising quality standards, or the Government risk transferring the savings of millions of ordinary people into many thousands of different schemes over which they have very little quality control.
Confidence that quality standards would be raised sufficiently has also been dented by the decision to defer introducing a charges cap, increasing the risk of saver detriment. PFM also increases the risks of charges and transaction costs being incurred on the whole pension pot as it moves with each job change, rather than on the incremental amount saved with the previous employers. Savings would be switched out of investment assets into cash, then reinvested with every job change, exposing workers to repeated transaction costs, extra investment risk and the risk of being switched out of low-risk lifestyle funds as they approach retirement. The more frequent the change of job, the greater the risks—risks that an aggregator could reduce.
The impact assessment acknowledges that individuals may be better or worse off, depending on the charges or the performance of the investment fund into the scheme into which they are transferred. However, the DWP expects,
“the gains and losses from differences between scheme charges and investment performance to cancel out on average”.
However, there is no consolation for individuals if their higher charges on transfer are off-set by another’s lower charges. An automatic transfer solution, using a limited number of aggregators, can require them to deliver a low-charge, high-quality standard, so mitigating the risk of saver detriment overall on transfer.
All qualifying automatic enrolment schemes should meet minimum standards, but regulating for differences in quality between schemes is impossible. There will always be a wide range between minimum standards and best practice. PFM fails to work for everyone, as it only transfers a pension pot into a workplace scheme of which an individual is an active member. It fails those who leave the workforce or become self-employed, as they are no longer active in an employer’s scheme. Their small pots are left to flounder. Employers may even default their small pot into a poorer-quality personal pension because they simply do not allow ex-employees to remain in their existing scheme. By comparison, an aggregator does not require a worker to be an active member, so it can cater for more people. PFM increases administrative burdens on employers, obliging every workplace scheme to be capable of communicating with every other scheme. Aggregators reduce this burden as there would be only a few schemes in which to transfer. Auto-enrolment was intended to carry a lighter regulatory burden on employers, especially SMEs. However, PFM rows in the opposite direction.
DWP modelling suggests that for any pot size, the aggregator will achieve slightly less consolidation with PFM, and that irrespective of pot size limit, the aggregator model would achieve at best only half of the net present value of the economic benefit of the PFM approach. DWP modelled pot follows member and aggregator over a range of pot size transfer limits, initially setting a £2,000 pot limit for aggregators while modelling PFM up to £20,000. After protests, it issued an ad hoc release, modelling the limit for aggregators up to £20,000. The Government argue that an aggregator solution would require transfers to be restricted to pots of £2,000 or less rather than the £10,000 intended for pot follows member, a figure suggested by providers to ensure that aggregators did not dominate the market and upset competition. The whole analysis underpinning auto-enrolment, the building of NEST and the need to regulate value for money is based on massive market failure and the inability to rely on fair competition. A hypothesis that dominant aggregators might emerge is not a valid argument against aggregation at higher pot levels.
The assertion that the aggregator model would achieve only half of the net present value of the PFM approach assumes a one-off cost of £105 to transfer a pot and a PFM, and a saving of £20 each year from not having to administer annually a transferred pot. However, if that saving and assumption, an uncertainty in itself, turns out to be lower, the economic advantage of PFM also falls.
The DWP assumes that an aggregator cannot hold live pots, but if employers were also allowed to use a good-quality aggregator as their scheme, it could provide pension portability to many members, removing the need for transfers at all when they change jobs, and the costs that would go with it. The Government impact assessment accepts that it would be more efficient to use existing schemes as aggregators because,
“active members would be saving in the scheme that also holds their dormant pots”,
but they fail to reflect this concession in their own modelling.
As my noble friend said, there are significant delivery challenges with PFM. The Government believe that in the long term PFM will deliver low charges for savers due to efficiency savings made by the industry having to manage fewer small pots. However, those savings are by no means assured. The impact assessment acknowledges that,
“there is a risk that some providers will not experience the resource savings projected”,
that,
“trying to estimate the cost of administrative processes many years ahead is fraught with difficulties and is a key uncertainty over the estimated cost savings”,
and that the,
“wide range of estimates provided … in discussions with stakeholders suggests there may be some genuine variation across providers”.
To be successful and to be delivered, PFM requires pan-industry collaboration. There are significant technical challenges for it to be delivered. The DWP is working with providers to find an industry-led IT solution. However, what happens if the direction of travel gets too tough and they disagree with the Government or with each other—not an infrequent occurrence? Do we get another deferral?
The unresolved weaknesses in the pot follows member solution are apparent in the inherent risks, the uncertainties in key assumptions and the delivery challenges. The transfer solution chosen by the Government must give greater confidence to mitigating saver detriment. This amendment reflects the very real concerns that not only I but many others have expressed, but it retains the power of the Secretary of State to make regulations automatically to transfer small pots while allowing him to give more time to detailed consideration on the model of the solution.
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.
Lord Turner of Ecchinswell
Obviously, it is possible that with higher charges there might be a higher return, but many of the variations that we see in charges in the industry are for things that clearly will not produce a different return. One sees, for instance, a wide spread of charges for index funds, where one knows that there will be no difference. We also know that, on average, active management does not add a return above index funds: that is a very strong empirical result from a lot of analysis. While it is possible that with higher charges come higher return, in a great many cases that is not so. One thing pension savers would be wise to concentrate on is the charges they face, because that is one of the few things that they can definitively influence, whereas the gross return is a promise that may or may not be delivered.
Those are the reasons that led the Pensions Commission to focus very strongly on the issue of cost and the variation of cost. We noted, for instance, that many people employed in the UK are in large trust-based schemes and already enjoy, on defined contribution schemes, total fund management charges of 20 basis points, 0.2%, or less. For those 20 basis points, they get fund management at the gross level quite as good as people paying 1.5%. If you pay 0.2%, by the end of your savings life, you would have given up only around 4% or 5% of your savings in the charges, which is probably about as low as we can get it, given the fundamental things that have to be done. Again, that is confirmed in the Government’s own consultation paper on charging, which illustrates that 10% of trust-based firms have annual management charges of 0.19% or less. That is possible, provided we get economies of scale, without giving up a significant choice of range of funds. However, at the other end of the scale, we noticed many SMEs were paying 1.5% and therefore, as per the Government’s consultation paper, losing 34%; or 1%, at which point you lose 24%.
That is why, as I said earlier, the recommendations of the Pensions Commission covered not just auto-enrolment, to use the inertia power to get people to save, but the design of the scheme, to ensure that access at the sort of low costs already enjoyed by employees of large firms can be enjoyed by employees of small firms. That was the reason for the design of NEST, which was designed by looking at detailed cost analysis and working out at what level it ought to be possible to deliver a default fund and also at models from elsewhere, such as Sweden. We became convinced that it ought to be possible to deliver to all people the opportunity to invest in a default fund—probably an index fund—with all explicit end costs of 0.3%. A set of decisions were subsequently made that the cost would have to be 0.5%, which is what it went forward as in the NEST environment. That at least establishes a benchmark and means that people who invest in NEST are only giving up 13% of their end-of-life savings pot in charges.
It is important that that should be the benchmark and that we have a charge cap. We know from the OFT’s and other analysis that this is simply not a market where the operation of individual customer choice is effective in driving cost-efficient competition. If that were the case, we would never have had to have the recommendations of the Pensions Commission and the auto-enrolment to which we are now committed. If we do not impose a charge cap, we will leave many savers, in particular lower-income people working for SMEs, facing unnecessarily high costs. I think they are unnecessary if, for a default fund, we are above 50 basis points, or 0.5%. I am therefore concerned that the two options the Government were looking at in their consultation paper on charging were 0.75% and 1%. If we come forward with a cap of 1%, we are giving to the ordinary saver the extraordinary promise that, on their behalf, we have made sure that their loss of pot at the end of their life is only 24%. I do not think that is a very compelling promise to give to people. I therefore strongly believe that we should make a clear commitment, by a clear date, to get on with this and have a charge cap in place, and that 0.5% is the appropriate figure.
Although a price cap on explicit costs is important, it is not sufficient. That is why I strongly support the sentiment of the amendment of the noble Lord, Lord Lawson, which seeks to cover all the other costs which are not covered in explicit fund management charges. The issue of these other costs was also one with which the Pensions Commission was concerned. We were concerned that, beyond what you can see in an annual management charge for a fund, there are lots of other costs involved. These are precisely the sort of costs described in Amendment 28, in the name of the noble Lord, Lord Lawson, which inlcude,
“fees and performance fees paid to investment managers … commissions and bid-offer spreads paid … fees, revenue splits and bid-offer spreads paid to custodian banks”.
These are very significant but are not well understood.
On the Pensions Commission, we sought to see whether research had been done on how big these were. Interestingly, there was one piece of research, which was sponsored by the FSA back in 2000 and written, after a lot of research, by a man called Kevin James. It tried to work out just how large these other costs were in the UK and in the US. We called them implicit costs in addition to explicit costs. There is a box in the first Pensions Commission report which explains that piece of analysis and how big they are. His analysis, which we interpreted, suggested that some of these costs might be as high as 90 basis points, on top of the overt, explicit costs. We ended up, for the purposes of modelling, believing that if we were to try to understand what got lost between the gross return on equities that you see by looking at the FTSE All-Share Index every year and what the saver gets, we had to allow, in addition to the explicit asset management costs, for 65 basis points on average going in these implicit costs—more for actively managed funds, less for index funds.
It is possible that those costs have come down since that analysis was done and since we looked at it—there has, for instance, been some compression of bid-offer spreads—but they are sufficiently large that it is incredibly important to focus on them, pay attention to them and, as it were, bring the disinfectant of transparency to bear on this bit of the cost base. Let us suppose that they were 65 basis points. That means that if somebody thought that they were paying 0.85% on an explicit annual management charge, between the gross return on equities in the market and what they actually get, they would be paying 85 basis points plus 65 basis points, which takes us back to the 1.5% per annum, which is 34% of their pot disappearing.
The noble Lord, Lord Lawson, has put an immensely important issue on the table. I would encourage the Government to widen their focus even beyond pensions, because it is important not only in the pensions arena but for the other ways that people save, for instance with ISAs. When people save in ISAs, they are looking at an overt, explicit asset management charge, but sitting behind that is a set of other hidden costs. This is an issue where more information will help. It will not transform the situation—we are deluding ourselves if we believe that lots of individual savers are themselves, individually, going to pay attention to this—but as the noble Lord, Lord Lawson, has said, the press, including the specialist press, will pay attention to it and a wider debate about just how large these charges are is very important. It would, for instance, be very interesting to start seeing how much higher these hidden costs are for actively managed funds versus index-linked funds, because that is a piece of information that people ought to bear in mind when they make those decisions between different classes of assets.
I urge the Government, as they go forward with this idea, to look at whether that disclosure should in future apply not just to pensions but to a wider class of investments—to cast it, as the noble Lord, Lord Lawson, said, as widely as possible so that we capture all costs—and to see this as a start point of an extremely important debate in which we get a better handle on the total costs that are being imposed by the asset management and investment fund management industries.
I do not think that transparency is an alternative to a charge cap, which is why I have also put my name to Amendment 29, but it is a very valuable additional tool.
Baroness Drake
I do not intend to make my contribution because I do not think there is anything I can add to what the noble Lord, Lord Turner, has said. However, as I have never been a Minister I am not familiar with the dark art of crafting ministerial syntax, so perhaps I could take this opportunity to ask the Minister a question before he responds.
I have before me the Written Ministerial Statement, which says:
“Last year, we consulted on whether to cap charges in the default funds of schemes used for automatic enrolment, and the Government remains committed to seeing this policy through during the life of this Parliament”.—[Official Report, Commons, 24/2/14; col. 11WS.]
My simple question is: does the phrase,
“seeing this policy through during the life of this Parliament”,
mean that the Government will introduce a charge cap before the election in 2015? A simple yes or no answer would be helpful.
Viscount Eccles
My Lords, I had not really intended to intervene. I have not played any part in this Bill since Second Reading, but I just want to draw attention to the fact that there is a difference, in my opinion, between price control and transparency.
I am 100% in favour of transparency. Perhaps I should declare that I have a very complicated pension situation. I have been in defined benefit schemes and money purchase schemes and I have a SIPP. I have also been the trustee of probably half a dozen pension schemes. I have done transfers of people under TUPE in the Local Government Pension Scheme. So I have had a lot of reasons to worry about the amount of somebody’s pension fund that is absorbed by costs. I am totally on board with complete transparency on that issue.
However, that is a different matter from price control. The problems in this market, which I fully agree has very considerable aspects of dysfunctionality, are created, in part at least, by the incredibly complicated structure of pensions that we have created, in both the public and private sectors, over many years. It is a very complicated subject and of course there are people who take advantage of that complexity, I completely agree. There are also people who are so frightened by the complexity that they do not know when they are getting value for money and when they are not.
That is my point: there is a great difference between a market which by its transparency enables people to see whether or not they are getting value for money and a market in which there is price control. Picking a figure for the price control would be a very foolish thing for any Government to do.
Pensions Bill
Baroness Drake Excerpts(10 years, 10 months ago)
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Baroness Drake (Lab)
My Lords, a sustainable welfare system needs to be affordable, but it also has to be inclusive and responsive to the realities of the contemporary labour market. For a long time, the national insurance and state pension system has been exclusive, indeed unfair, in its application to a particular group of workers, mainly women—a community which the department estimates to be about 50,000 and consisting of people who undertake mini-jobs. Each job delivers earnings below the lower earnings limit of £5,668, the access point for the national insurance and state pension system, but there is no provision for people with these mini-jobs to aggregate their earnings in a way that would allow them to enter the national insurance system. For example, a woman with two part-time jobs, earning £100 a week from each, will not accrue national insurance and pension rights unless she is covered by some alternative crediting arrangements. Someone earning £110 from one job would accrue. Yet £100 equals about 16 hours on the national minimum wage, so a person with more than one such mini-job could be working a significant number of hours.
Mini-jobs may be driven by caring responsibilities, work availability and, more recently, the increasingly common phenomenon of the zero-hours contract. Some of these women could gain state pension through their husband’s entitlement, but from 2016 they will not be able to build up an entitlement through their spouse because the new single-tier pension allows women to accrue pensions only in their own right. My noble friend Lady Hollis demonstrated the example of women in households who no longer have young children and whose spouse’s income floats them off universal credit being locked out of the pension system. The Bill makes the default position of entitlement through their spouse for many women disappear, which gives the problem fresh urgency.
My noble friend Lady Hollis has long campaigned to have this unfairness addressed and lists the rebuttals she has faced over the years: that it is not reasonable to try to share employers’ national insurance across mini-jobs; that the women will not want to pay class 1 contributions; that there are not very many of them; that their situation is temporary; that they have time to make up missing years; and, if all else fails, that there is pensions credit.
However, the urgency and the scale of the problem have increased exponentially since my noble friend started her campaign and those rebuttals are no longer valid. A much larger number of people with mini-jobs are affected as a result of the growing use of zero and short-hours contracts, where workers have little or no control over the hours they may be offered in any one week. The Office for National Statistics estimates that 250,000 people worked on zero-hours contracts between October and December 2012. However, its survey relied on people understanding that they were on zero-hours contracts, and the ONS has conceded that that may well have resulted in the true figure being substantially understated and that it may be much higher. The ONS is now running a survey to,
“obtain robust data directly from employers”.
As my noble friend said, the Chartered Institute of Personnel and Development suggested that up to 1 million people—around 3% to 4% of workers in the UK—are on zero-hours contracts.
The zero-hour mini-job problem is now systemic in nature. According to the Government’s workplace employment relations survey, in 2011 23% of workplaces with 100 or more employees used zero-hours contracts. Surveys reveal sector concentrations too: 61% of domiciliary care workers in England were employed on zero-hours contracts; and Unite and others report a high incidence in low-paying sectors such as the docks, retail, catering and social care, and they are not restricted by age. These workers face weekly insecurity in hours and pay and many are not building up entitlement to national insurance benefits. The DWP and the Government will have to address a problem that now has scale, is systemic and does not interface with the national insurance system.
When launching his consultation on zero-hours contracts, the Secretary of State, Vince Cable, said:
“It is clear that they are much more widely used than we had previously thought”,
and further that:
“Our aim through this consultation is to find which options best prevent any abuse of zero hours contracts while maximising the opportunity and flexibility such contracts can present”.
This suggests he believes these contracts will be a widespread and sustained phenomenon. The noble Lord, Lord Freud, in his normal straightforward manner in Committee when responding to my noble friend Lord Browne, recognised the growing evidence of zero-hours contracts. He said that,
“the Government have estimated their costings and needs, on the basis that it is a tiny minority”,
and that this basis,
“will be undermined. He certainly makes me even more uneasy about the neglect of this group than I was before we discussed the issue today”.—[Official Report, 18/12/13; col. GC 332.]
Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014
Baroness Drake Excerpts(10 years, 10 months ago)
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Baroness Drake (Lab)
My Lords, I wish to speak on the earnings trigger in particular. I offer my apologies to the Committee: this item of business was not published and I have been sitting in a finance sub-committee taking evidence from Her Majesty’s Treasury and Her Majesty’s Revenue and Customs, which was quite compelling. I therefore ask your Lordships to accept my apologies for being a few minutes late.
I rise to speak on this statutory instrument because we see another year and another increase in the earnings trigger for automatic enrolment and another several thousand more women being disadvantaged and excluded from the UK pension system. I shall persist with this issue year after year because I fear that we are taking what started as a well designed private pension system, certainly in intent, and trying to make it an increasingly part-time-women-free area.
In 2011-12, 600,000 individuals, 78% of them women, were excluded from automatic enrolment. In 2012-13, the Government excluded another 100,000 people, 82% of them of women, by virtue of raising the earnings trigger. In 2013-14, another 420,000 people were excluded, 72% of them women, and now, for 2014-15, by increasing the trigger to £10,000, another 170,000 people will be excluded, 69% of them women. It reads as a rather depressing roll-call. The culling of women from the UK private pension system has almost become the Government’s annual sport.
I find it quite extraordinary that the coalition Government are so determined to carve out so many women from the UK private pension system. If women and men who earn below £10,000 are not automatically enrolled and do not, because of inertia, voluntarily opt in to their employer’s workplace scheme, many of them will experience several disadvantages. When automatic enrolment is phased in to their employer, they will not be in the pension scheme. Those excluded—mostly women—will suffer a loss in lifetime pay, albeit deferred pay, because they do not have access to the employer’s 3%—for some, where the employer contribution is above 3%, the loss is even greater. However, they will still lose out from any reduction in wage levels that flows from the cost to the employer of automatic enrolment.
When they move from a full-time job with one employer to a part-time job with another, they may not join the new employer’s scheme and are therefore at risk, first, of becoming an inactive member and subject to inactive member charge premiums on their existing pension pot unless the Government ban active member discounts—whether they will do that is a big question. Secondly, they are at risk of being defaulted into a personal pension by their previous employer, who does not allow ex-employees to stay in their workplace scheme. Therefore they leave an employer and are full-time, and then as a part-time employee they are not covered by auto-enrolment. Their accrued pot is vulnerable to higher charges and would not be protected by a pot-follows-member or any other aggregation mechanism.
As I said, they would not benefit from any aggregation mechanism, so they are not in their new employer’s scheme. They are not an active member, so their previous pension pot will flounder. When I raised this point in Committee the last time we discussed the increase in the earnings trigger for auto-enrolment, it was before we had the detail of pot follows member. The Minister, Lord Freud, commented:
“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”.—[Official Report, 22/5/12; col. GC 20.]
However, we now know that pot follows member will apply only where an individual is an active member of their employer’s scheme. Therefore, if these women are not automatically enrolled and inertia keeps them out of their scheme, they are unprotected; they are not protected by pot follows member. The noble Lord, Lord Freud, may have stood his ground then, but I am afraid that, now that we know the details of pot follows member, that ground has now moved from beneath him. Those women’s pots will just flounder without protection.
If part-time workers earning below £10,000 are not persistent low earners over their lifetime, which many will not be—a point confirmed in the Johnson review commissioned by the Government—and are not automatically enrolled into their employer’s pension scheme when they are on the lower earnings, the persistency of the savings habit that they built up will be broken and the accumulated value of their pension pot over their lifetime of pension saving will be reduced. Given the advent of the single-tier pension, which will be set at a level only slightly above pension credit but which will be based on national insurance record and crediting and not means-testing, the fact that low-paid workers are not automatically enrolled into their employer’s pension scheme means that they will simply be denied the opportunity to accrue even a modest amount of capital. That is yet another example of the awful attitude that says that public policy does not need to assist low-paid workers to accumulate capital or assets.
The reasons why the earnings trigger should not be raised any further are absolutely clear. Not all those earning below the earnings trigger of £10,000 are persistent low earners. Low earners should be able to accumulate savings over and above the single-tier pension, and the trivial commutation rules will allow most of them to take it in cash. This disproportionately affects women and breaches a basic principle that, in designing state and private pension systems, both systems should work for women, yet each time this earnings trigger is raised we carve out or cull thousands of women from the UK private pensions system.
Let us look in detail at some of the Government’s arguments—their preoccupation with the low earners. Almost half of those in the lowest-earning group are in couples where one works part-time and the other full-time. Most very low earners are women who live in households with others on higher earnings and they are receiving working tax credits. These are precisely the people who should be automatically enrolled in saving, yet we have seen persistently a rising earnings trigger that excludes them. Furthermore, the value of the loss of the employer’s contribution of 3% of qualifying earnings from raising the earnings trigger and not being auto-enrolled is greater than the tax reduction that they get from increasing the tax threshold. The combination of the two therefore means that the lowest earners could be worse off. They lose more from not being auto-enrolled than they gain from the increase in the tax thresholds.
Earnings are not static for many workers, either men or women. They can change significantly over a lifetime. Most low earners go on to earn more, so saving would still be beneficial because of the continuing contribution to their pensions over their working lives. Millions of women have a life pattern in which periods of full-time work are interspersed with significant periods of part-time work when caring responsibilities are at their greatest. Part-time working is part of the systemic solution to childcare in this country. When we look at the labour market statistics, we see that we respond by saying, “We are not going to auto-enrol you into your employer’s pension scheme when you are working part-time for periods of childcare or other forms of care”.
The Explanatory Memorandum states:
“The Secretary of State has concluded that it is appropriate to enrol people automatically into workplace pension saving once they earn enough to pay income tax”.
However, this disregards how working-age benefits can make it pay to save. The 100% disregard of individuals’ pension contributions from income brought to account when calculating entitlement to universal credit has been maintained thanks to the intervention of the Minister and the consequence is that it provides a positive incentive to save for many low-paid people. However, what are we doing? We are excluding them from the benefits of auto-enrolment by raising the earnings trigger.
As to persistent low earners, because within that population there will be some, the argument that they should not save because they get state pension and benefits means that yet again there will be no asset accumulation strategy for them. That position is even more indefensible with the advent of the single tier because it is not means-tested, so there is no means-tested track against the single tier that they can genuinely build up, even by only a modest amount of capital, by being auto-enrolled, that will not be lost on the means-tested basis against that single tier.
On my approximate estimates, increasing the earnings trigger to £10,000 from its original level has excluded 1,290,000 individuals per year from workplace pensions, 75% of whom would be women, at a loss to those individuals of approximately £40 million of employer pension contributions. But the cumulative total of those impacted, because different individuals are impacted year on year, will be much higher. This suggests that the group targeted to benefit from workplace pension reform will comprise approximately 65% men and only 35% women.
I come back to my basic point. We are increasingly designing, or “undesigning”, a private pension scheme to exclude ever greater numbers of women every time the earnings trigger is raised. It is simply not a credible argument to say that the impact of the earnings trigger can be mitigated by those earning below the £10,000 threshold being allowed to opt in voluntarily. Inertia prevents people from saving, and that is the whole point of auto-enrolment. You cannot say, “Because the rest of the population will not save we have to have auto-enrolment, but the very low earners can opt in”. It is an absolute nonsense. Low earners are not exempt from the maxim that inertia stops people saving, which is why you need auto-enrolment. As I said, a key principle of pension reform is to enable women to build up a pension in their own right. The higher the earnings threshold for auto-enrolment, the less the reforms will work for women. Each year since 2010, the Government have consistently excluded more and more women from the UK private pensions system.
The numbers remaining in employers’ pension schemes as a consequence of auto-enrolment have been a success for the Government. To date, roughly 90% of people have embraced auto-enrolment and stayed in. Perhaps that will drop a little when we get to the smaller companies, but it has been a success and the Government should be pleased with that. But when it comes to the reforms working for women, particularly women who work part-time, the Government are in danger of snatching failure from the jaws of success.
With the exclusion of 1.25 million women—and rising, because I am sure that the earnings trigger will go up again—we are designing a private pension system that does not work for women who work part-time. We know that in five or 10 years’ time the absolute failure of that decision will be exposed, as previously when women who work part-time were excluded from pensions. But by that time millions of women will have lost the advantage of being auto-enrolled into a private pension. The Government are simply wrong to say that simplicity for employers is worth the price of excluding 1.25 million women—and rising—from the benefits of auto-enrolment.
Lord Bates
My Lords, first, both the noble Baronesses referred to the speed with which we have gone through the Order Paper. In fact, that caught all sides on the hop, and apologies are due all round. The responsibility, of course, lies in the preceding orders going too speedily. However, I am grateful to both noble Baronesses, who, in the exchanges we have had over many sittings on the Pensions Bill, have demonstrated their incredible grasp and knowledge of these complex areas, and have spoken passionately about the impact upon women in particular. I will come to these points, and respond to them as best I can.
One of the key things I said in the concluding remarks of my speech was that we recognise that setting these thresholds is a balancing act and that there is no right or wrong answer. It is therefore right that there should be a debate and that it has become an annual debate. It is an affirmative instrument and therefore any changes that are made annually have to come before your Lordships’ House for consideration. That is the right way to do it.
The other point of context we need to acknowledge, which the noble Baroness, Lady Drake, was good enough to make, is that the figures for auto-enrolment, which I accept came out of the Turner commission, which in turn came out of the Pensions Act 2008 under the previous Government, have been impressive. Significant progress has been made in encouraging the right people to save for their retirement. In pursuing that, we are absolutely on common ground.
It might be helpful if I went through some of the figures that we have for the number of people affected. Raising the 2014-15 value of the automatic enrolment trigger from £9,440 to £10,000 will exclude around 170,000 individuals, of whom around 120,000—69%—are women. Raising the 2013-14 value of the automatic enrolment trigger from £8,105 to £9,440 excluded around 420,000 individuals, of whom 300,000—72%—are women. I am going back through these numbers because it is a rough way of getting back to the calculation made by the noble Baroness, Lady Drake, which the noble Baroness, Lady Sherlock, asked me whether I agreed with. Raising the 2013 value of the automatic enrolment trigger from £7,475 to £8,105 excluded around 100,000 people, 82% of whom were women. Finally, raising the 2011-12 value of the automatic enrolment trigger from £5,035—in 2006-07 terms—to £7,475 excluded 600,000 individuals, 78% of whom were women. If one calculates those figures, one begins to recognise the numbers that the noble Baroness, Lady Drake, presented to us.
However, it is not so simple as to say that 70,000 women would be in automatic enrolment if their part-time earnings were brought together. I realise that there is a big education job to be done here, because many women who are underneath the threshold need to realise that if they are above £5,772 in terms of the lower earnings limit, they can opt in and therefore get the benefits that would accrue from that.
Baroness Drake
Does the Minister agree that we do not ask the rest of the population to opt in to get the benefits of pension saving and an employer contribution? Why should we ask women to opt in to get the benefit, when all the evidence is that most people will not opt in? Why do we discriminate against lower earners in that way? We do not expect a £40,000-earning male to overcome his own inertia. Why do we expect a £9,000-earning woman to overcome her own inertia?
Lord Bates
I take the point, but the threshold needs to be drawn somewhere. That is the discussion that we are having. There has to be a threshold somewhere because, below a certain level, the benefits of saving will not be as acute for the retirement pension. The question that we are debating is where that threshold should be set. We are not saying that this is a gender issue; we are saying that it is a threshold and income issue.
The noble Baroness is perhaps being a little harsh on this Government’s record on auto-enrolment, but it is worth pointing out that we have also taken a very large number of people, mostly female, out of tax altogether. The rises in the personal allowance since 2010 have taken 2.7 million people out of paying tax. The majority of those people will be female. That is a very positive thing, but I accept that more needs to be done to encourage people to save for their retirement. The benefits of the 3% employer contribution, which the noble Baroness, Lady Drake, pointed to, will come when the scheme is fully implemented in 2018 and the thresholds and contribution levels increase. At the moment it is 1%, but it is very important that people engage at that 1% level so that their savings can rise as the employer contribution increases.
Of course, in addition to the employer contribution increasing, the employee contribution will rise, and many people who do not make pension savings point to the fact that affordability is the key issue that they are wrestling with.
Baroness Drake
I am sorry for interrupting, but I feel really strongly about this point and I shall come back to it year after year. We are, admittedly, phasing in the contribution rate. However, you cannot get the benefit of the 3% contribution rate unless you are also enrolled at the 1% contribution rate.
Lord Bates
I do not think we disagree with that. I accept that you need to enrol in—to opt in to—the scheme. We are saying that you can opt in and get tax relief from the lower earnings limit of £5,772, and that your employer will have to do that from £10,000. Therefore, we agree on that. Persistent low earners tend to find that the state pension alone provides them with a retirement income similar to that which they would have had during their working life.
Baroness Drake
The noble Lord is arguing that if someone is poor all their life they can make do on the single tier and we are not obliged to give them the opportunity to build up a little capital—is that the policy of the coalition Government?
Lord Bates
The noble Baroness knows that is not our argument. We are encouraging people to save, as far as possible, but we recognise that savings, and how people spend their disposable income, is a choice. At what point does it become an automatic responsibility of the employer to enrol an employee in the scheme? That is what we are debating, not whether people are being encouraged to save. I hope that there is genuine cross-party agreement on this, coming out of the Turner commission, of which the noble Baroness was a distinguished member.
Of course, the whole objective is to increase savings across society. Thirteen million people are not saving enough for their retirement and we want that figure to improve. We want to ensure that as many people as possible are automatically enrolled. The Government believe that the decision on lower earnings is a decision for each person to take, and I hope they will take advantage of it.
Baroness Drake
The noble Lord is defending arguments that are untrue. Auto-enrolment does not work on the basis of it being a decision for individuals. They are put in, they have to come out. They have the choice to come out, but they are put in in the first place. These women are not getting the advantages of auto-enrolment. The point of inertia is that it is not based on informed choice; it is based on the assumption that the individual does this because it is in their best interest.
Lord Bates
We accept that. However, basically we are talking about the same issue: whether people have to opt out when they are put in an auto-enrolled scheme. They have the opportunity to decide to opt out. If they are above £5,772 they have the opportunity to opt in. I take the point that the threshold has to be set somewhere. Having looked at all the evidence, this is where the Government have come down—for this year. As the scheme gathers pace, more information will be available to us and we will be able to make that information available to your Lordships and have it influence decisions.
Baroness Drake
I do not want to be too difficult. However, the Secretary of State has stated clearly that this is driven by his view that people should not be auto-enrolled into pensions until they start paying tax. That is not doing a balancing act; that has been the Government’s consistent position since 2010. The Hansard record shows that I keep asking the question, “Are you going to keep tracking the tax threshold, because if you keep doing that you will exclude more and more women?”. That is not a balancing act. If you did a balancing act, you would say, “What is the balance between that approach and the number of women excluded?”.
The Government have locked themselves in, both by the Secretary of State’s statement and by their behaviour since 2010, when they said that people who do not pay tax should not have the advantage of auto-enrolment. The benefit of releasing them from a certain level of tax is reduced by the fact that they lose the employer’s contribution, and we are now getting to a point where the gain from the increase in the tax threshold is less than the loss of the 3% of the employer’s contribution. So over their lifetime, the low-paid person is actually worse off.
Baroness Sherlock
My Lords, before the Minister answers that, I asked him whether he felt that the way in which the Government have designed the service served women well. His defence appeared to be that there has to be a line somewhere. The point I was trying to put to him is that the Government have designed this scheme in such a way that only a third of its target population are women; in other words, they have designed a scheme that will benefit two men for every woman. Does he feel that the way the Government have chosen to design the scheme benefits women?
Pensions Bill
Baroness Drake Excerpts(10 years, 11 months ago)
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Baroness Drake
“(c) may provide for requirements for the identification, avoidance and management of conflicts of duty and interest”
Baroness Drake (Lab)
My Lords, Amendment 62GA is designed to address shortcomings in the governance of pension schemes, particularly contract-based schemes. It would give the Secretary of State the power to set regulations that
“provide for requirements for the identification, avoidance and management of conflicts of duty and interest”.
They would require, in the event of a conflict of interest, for priority to be given to the interests of the saver and to ensure that the duties to the saver are met despite the conflict.
In his review, John Kay criticised FCA rules as falling,
“materially below the standards necessary to establish”,
trust, confidence and respect. He recommended a shift towards fiduciary standards. In an auto-enrolled world, that comment has even more resonance because, increasingly, private sector workers’ pensions will be contract based, where, as the noble Lord, Lord Turner, mentioned in debate last Wednesday, there is a,
“fundamental inefficiency of the market ... It is a system absolutely shot through with market failure where the process of trying to provide in a competitive fashion simply does not work well”.—[Official Report, 15/1/14; col. GC 161.]
My amendment seeks to capture that governance challenge. To achieve an increase in pension savings, workers are auto-enrolled into workplace pensions. There can be no caveat emptor, as the saver does not buy. The system is designed to restrict the saver to one choice—either stay in or opt out and lose the employer contribution. Current regulation of contract-based pensions is at odds with the assumptions underlying auto-enrolment. Contract-based regulation is built on informed consent and consumer choice. Auto-enrolment is designed and built on the principle of inertia, on a population of savers who do not engage with investment choice. A plethora of reports has revealed the conflicts of interest in the industry. The OFT report confirms a dysfunctional pensions market with a weak demand side and concludes that the market could not be expected to self-remedy and that there is a need for intervention.
The introduction of auto-enrolment has been a success and the Government should be pleased. Opt-out rates have been low. The Government must now secure a level of quality and governance that delivers optimal results for savers in terms of building trust so that workers persist with their savings, thereby setting the ground for increasing contributions beyond the current statutory minimum and improving savers’ chances of achieving a reasonable income in retirement. Measures to encourage savers to engage with their pension savings are important but of themselves are not sufficient. The majority of savers will not actively engage. It is that very inertia that can be used by some providers to create or sustain profitable inefficiencies. The legal framework must protect those who do not engage.
The challenge of inertia means that there is a need for efficient defaults over the life cycle of the pension saver. For example, there is a need to get people saving; to determine a minimum they should save; to determine their investment choice at different intervals in the life cycle on, for example, joining a scheme or following a quality review as they get nearer to retirement age; and, by default, to transfer and consolidate their pension pots. Over time, I suspect that we will be considering default arrangements on decumulation when a person retires. The need for defaults raises the bar on governance because someone is using their discretion on behalf of the saver.
Contract pension provision has systemic weaknesses of governance and a particular feature that constrains efficient default arrangements. For example, looking forward, an employer conducting a triennial review that decides that the current scheme is poor value will be unable to switch workers in a contract-based scheme unless they individually consent. However, the very nature of auto-enrolment means that this active consent is unlikely to be granted by many savers. On legacy schemes and pots, I am sure that any OFT-driven audit will reveal poorly performing funds and high charges, but the solutions will not be effective if they require individuals’ consent.
We have a misalignment between what contract-based provision can do and what it is necessary to deliver in the interests of the saver. How does one respond to that challenge? Recent press comments are peppered with references to making it easier to move contract-based scheme members from old to new schemes. Standard Life’s head of workplace pensions, speaking at the NAPF conference, said that contract law acted as a barrier to moving people from poor-quality schemes to good-quality schemes, and added:
“We need to learn the stuff that works in the trust-based world”.
A recent Pensions Institute report found potential for massive improvement in outcomes where poor-quality legacy schemes transferred en masse into better-quality modern schemes with lower charges. The Pensions Institute called on the Government to facilitate changes to contract law to allow such transfers to be made without the individual consent of scheme members where it is clearly in their best interests. However, there is the rub. Who decides where it is clearly in their best interests? How is the primacy of the saver’s interest protected? Governance requirements must be fit for purpose under auto-enrolment and remove a constraint in contract provision, but in a way that ensures that the interests of the saver trump the interests of others when there is a conflict. Putting the legal responsibility for the best interests of the saver on the employer will be problematic, particularly for the long tail of SMEs and micros.
The Government’s use of statutory overrides has a role to play, particularly in placing new quality and governance requirements into future, existing and legacy pension contracts. I ask the Minister to confirm whether this Bill would give the Secretary of State the power to change retrospectively the terms of existing pension contracts to embrace any new quality or governance requirements.
However, the solution must rest in major part in raising the governance in the pensions industry. Like trustees, it should carry a fiduciary responsibility in the management and provision of its pension products and investments. Conflicts of interest must be resolved in the interests of the saver. An efficient private pension system that requires the default transfer of savers’ pots to new schemes and funds simply cannot happen without that.
There is an imbalance in the duties of contract-based pension providers, compared to those placed on trustees, which challenges the success of auto-enrolment. The OFT stressed the need for stronger measures to improve governance but I fear that the independent governance committees that it has agreed with the industry—here there are shades of what the noble Lord, Lord Lawson, referred to as the fox in the hen coop—will fail to achieve the requirement of aligning scheme governance with the interests of savers.
The proposed independent governance committees have many weaknesses. At the very least, such bodies need both a duty to act in members’ best interests and the power to make decisions. The current OFT proposal fails on both points. As the Law Commission commented,
“there are many difficult questions about how these committees will work”.
They,
“will not have the power to change investment strategies or investment managers ... Furthermore, it is not clear whether ... the committees will be under explicit legal duties to act in the interests of”,
the savers. Introducing independent governance committees accountable to the boards of pension providers, without addressing any of the conflicts faced by these providers, or clarifying that decisions must prioritise the interests of policyholders over those of the shareholders, does little to solve the governance deficit.
As a comparator, the governance requirements for the Australian private pension system have been toughened up recently. It is a sad reflection on my character that I spent a significant number of days over the Christmas holidays ploughing through the regulatory requirements under the Australian system—I promised in my new year’s resolutions to get a more exciting life in future. The Australian Prudential Regulatory Authority enforces a range of prudential standards on pension providers, including an unequivocal requirement that conflicts of interest must be resolved in the beneficiaries’ interests and a specific duty to deliver value for money.
The advent of auto-enrolment raises the bar on governance. I welcome the Government’s decision to impose quality and governance requirements on pension schemes, but I think that it is necessary to make it explicit that those requirements should provide for the identification, avoidance and management of conflicts of duty and interest. Conflicts of interest go to the heart of the problems in the private pension system. The regulations, when addressing governance requirements, must address the issue of conflicts of interest. Amendment 62GA, without being prescriptive, seeks to do that. I beg to move.
Lord Browne of Ladyton
My Lords, I speak to Amendments 67ZB and 67ZC in my name and that of my noble friend Lady Sherlock. It is always a pleasure to follow my noble friend Lady Drake on issues such as this. She has once again characteristically set out an informed and persuasive argument in her contribution to the debate. To a degree, I accept that it could be said to undermine Amendment 67ZC in that it approaches the same issue but in a distinctly different fashion, accepting the same principle. From my perspective, however, I am not that concerned how the Minister responds to the nature of the challenge that my noble friend set out. If he chooses to accept her amendment—I venture to suggest to him that he would invariably be wise to do so in such matters—he will find no great cavil from these Benches that our amendment fell by the way as a consequence.
Amendment 67ZB is designed to address the issue of scale by way of a new clause. It would promote good value in scheme sizes and would require trustees to consider whether the scheme had sufficient scale to deliver good value. I note that, in the Government’s consultation on quality standards in workplace defined-contribution schemes, the Government reveal that they are “interested” in the idea that trustees should have a duty, and underline their interest in the Australian approach to imposing duties on trustees.
I am glad that the Government are beginning to catch up with the Labour Party’s policy review on these issues, but I also note that they have not yet progressed sufficiently far in its investigations to recognise that the Australian Government, the policies of which have already been prayed in aid by my noble friend, also deploy the regulator in this respect. It is not clear why the Government think that trustees of very small UK schemes, which we know from the TPR surveys self-identify as not incapable of understanding investment processes, will be able to make a judgment as to whether they have sufficient scale. If these trustees fail to act, what is supposed to happen?
In Australia, those intending to supply a pension scheme have to apply to the regulator for a licence, and one of the licence conditions requires a reasoned attestation as to how the trustees of the scheme will meet best practice in terms of scale at the investment and administration layers. This process has a ratcheting effect, as the attestation must be repeated on an annual basis and, as best practice improves, this forces mergers. Failure to attest would mean a breach of the regulatory licence, and commentators believe that there will only be a sixth of the current number of schemes within 20 years. For trustees to move to scale we would need a ubiquitous requirement for trustees, a duty on them to assist scale and a mechanism to require action where they fail to act or mis-assess. That is what we seek to provide the beginnings of with this amendment.
Amendment 67ZC would provide for regulations to require any pension scheme to appoint a board of trustees which will have fiduciary duties towards the members of the pension scheme. Our view is that a minimum requirement for auto-enrolment schemes is that they must be governed in a way which legally requires the scheme to prioritise the interests of members over all other interests.
The Minister may say that they have consulted on governance for automatic transfer schemes; again, it is a good thing if he is catching up with our policy review. However, his quality standards are intended for automatic transfer schemes only. Under our approach, automatic transfer will be limited to aggregators, as the Minister is well aware. Our requirement for trustees applies to all qualifying schemes, not just to automatic transfer schemes, and, in addition, our definition of qualifying schemes includes closed-book schemes, which his does not.
As a further point, these conditions will apply to schemes that wish to operate as automatic transfer schemes, but an automatic transfer system is years away. The requirement for trustees is immediate, however, as my noble friend has pointed out. Why should we adopt a lesser principle than that adopted by the Australians? Their Cooper review found:
“Superannuation must always be for the benefit of members. The superannuation system does not exist to support intermediaries. Trustees must be relentless in seeking benefits for members”.
Thanks to my noble friend Lady Drake, we now know that that has also been translated into regulation in Australia.
Lord Browne of Ladyton
Perhaps I might engage with the Minister on the issue of whether or not larger pension schemes provide better returns to their members. I do not intend to delay the Committee long on this issue but I have before me a page and a half of significant research that challenges the assertion made by the Minister. I will say only this: recent NAPF research shows that a person in a larger scheme will get a 28% larger pension pot than a person in a smaller scheme. Indeed, research from Australia supports the assertion that fund size has a positive impact on the performance of not-for-profit superannuation funds there. I shall arrange for the Minister to have access to this research but I could not let that assertion remain unchallenged.
Baroness Drake
I thank my noble friend Lord Browne for his supporting contributions in this debate. I thank the Minister for his response but he has not actually answered my question—I did listen; perhaps I missed it but I do not think so—which was: can the Minister confirm that this Bill will give the Secretary of State the power to retrospectively change the terms of existing pension contracts to embrace any new quality or governance requirement? It is a pretty key point because it goes to the heart of what the Government can or cannot do unless they take those powers to themselves. A lot of people are quite interested in whether the Government are taking those powers so that when they decide what the quality and governance requirements are, they have the power to retrospectively apply them to existing pension contracts.
Lord Bates
Perhaps I can seek some clarification from the noble Baroness on the nature of her question; I apologise for not responding to it directly. The whole point of what we are introducing is that we are seeking to tackle the issue of the quality of schemes. Therefore it would stand to reason that if one is seeking to improve the quality of schemes, it would be wrong to disbar those who were in previous schemes from getting the benefits of those improved quality standards. That provision is therefore there: it will be necessary to enhance the quality of schemes. I might be missing something; I am sorry if I am.
Baroness Drake
The Minister has got the sentiment of my point. I was looking for firm clarification that the Bill gives the Secretary of State the power to put in place those quality and governance standards, once they are decided, to existing pension contracts, because they are contracts.
Lord Bates
The noble Baroness has a high degree of expertise in this area, which is respected on all sides of the Committee. I wonder if I could write to her on the specific point on which she is pressing me, with a response on the record. If she wishes to press it further, she can of course come back to the issue on Report.
Baroness Drake
I thank the noble Lord for his offer to write to me on the matter. Maybe having it in writing will be better, because the efficiency or ability of any requirements under the Bill will be heavily influenced by the extent to which they can retrospectively apply to existing pension contacts. However, if the noble Lord is going to write to me on that point, I will also deal with other matters.
We need to get a sense of perspective on this. Auto-enrolment potentially affects 20 million people in this country. The whole of the private sector workforce, when it is engaged in employment above a certain income level, is a huge community of people; it is a great statement of trust between the working population and the Government. People are saying that they accept the argument that the people must take responsibility for providing for our income in old age, but they have the right of a reciprocal entitlement to know that the Government are doing what is necessary to ensure that those who have discretion over their savings and are managing them do so in a way which is in their interests and to high standards of governance.
I am afraid that I do not buy “balance of interests” at all on this issue. If you come into the market to provide a pension product under auto-enrolment, you cannot sell or manage a product that does not meet the needs of the savers. You would not say, “Well, I will leave the brakes off a car in the interests of not making the employees redundant”. You have to sell a product that meets the interests of the members and is designed and managed with the interests of the saver at heart.
The independent governance bodies, or committees, are very weak as they are proposed. There are lots of people commentating to that effect. As proposed, they have fewer new powers—or no powers—for resources, for information, or for appointment of members to the board. It is in the gift of the companies themselves. As currently advised, they have no powers or capacity to address conflicts of interest. I know that this issue of governance is a work in progress. The Government are considering the matter and are due to report further. The OFT says that it has more work to do on its recommendations. The Law Commission is looking into this.
What cannot be dodged at all, in my view, is that any governance structure, requirements or arrangements for a private pension system that does not put the identification and resolution of conflicts of interests in the interests of the saver at its heart will be flawed. Successive Governments will keep picking up the consequences of that. There must be some—cross-party or whatever—biting on the principle that if you give the market a huge demand side that it could never have created itself under a voluntary system, that carries with it the requirement for a high standard of governance. The Government must say that those who enter the market under auto-enrolment to provide pension products must operate on the basis that any conflicts of interest are resolved in favour of the beneficiary or saver.
Lord Bates
I do not have any information to hand on that. However, we have got the point that I was perhaps overegging this by saying it was the only thing, and I need to recognise that other factors were perhaps considered when it came to putting this restriction in place. There was no sinister purpose, it was simply to say that there was a huge task to be undertaken and to ensure that NEST’s systems and operations could actually handle this. We do not want to put excessive burdens on NEST so that it fails when so many are dependent on its success.
Baroness Drake
Will the Minister also accept that volumes are critical to the success of NEST and to its charges, and that there is a fine balance between accommodating the concerns of other operators in the industry and not maintaining constraints so long that it undermines the efficiency of the NEST project as a whole?
Lord Bates
The noble Baroness makes a important point in relation to this and I would not dissent from it. NEST has a vital role to play and we want it to be a success. However, it is new, and a new system is coming online, so this ought to be done through learning from experience in a gradual and incremental way rather than as a big bang, of the sort which has had its problems in the past.
Pensions Bill
Baroness Drake Excerpts(10 years, 11 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Stoneham of Droxford (LD)
My Lords, the previous two speakers have covered the main arguments that I was planning to raise, because there is concern—even from those close friends of the Minister, Steve Webb—on this issue. It is valid, therefore, to register that—there are certainly concerns in our group here this afternoon. The issues have been raised, including the issue of the inefficient market. The issue does not cover the consolidation of old pots. It considers the consolidation of the mobile or live pots. It does not raise the issue of what you do with those people in the labour force who are constantly changing jobs and the costs and the impact on their pension pots every time they do that. It also needs to address the fact that there is a smaller number of aggregators. I agree there is a problem with competition, but it is much easier to supervise them and make sure that the quality of those aggregators is adequate.
The final issue that needs to be raised is that there is a concern that without that supervision, people will be transferring into poor schemes or run the risk of doing so. They need to be protected. For all those reasons, it is right—and the noble Lord, Lord Turner, raised this point—that this is a time for reflection before we make any final decisions.
Baroness Drake (Lab)
My Lords, I will try not to duplicate some of the excellent contributions that have been made. Perhaps I could say that the areas of concern with pot follows member can basically be grouped into three categories. One is confidence in the basis for the Government’s decision to choose pot follows member; the second is differing views on what benefits the saver, and the third is the need to protect dormant pension pots that have already accrued.
When it comes to confidence in the basis for the Government’s decision, the noble Lord, Lord Turner, did a splendid job in identifying the limitations in the impact assessment. I stress that there are significant barriers to overcome before the Government can be confident about the superiority of the PFM model. The consequences of getting this wrong are absolutely huge.
Baroness Drake
My Lords, perhaps I may reiterate for continuity that the areas for concern with PFM can be grouped into three: confidence in the basis for the Government’s decision, differing views on what benefits the saver and the need to protect dormant pots already accrued.
When it comes to the basis for the Government’s decision, where are the significant barriers to be overcome before the Government can be confident about the superiority of the PFM model? The consequences of getting this wrong are huge. Yet the transfer model is in the Bill when there are so many conditionalities still to work through, and confidence in securing lower charges, which is the main benefit claimed for the PFM model, are by no means assured.
PFM requires effective pan-industry collaboration, but what if that is not forthcoming? Are the Government confident that they can overcome industry inefficiencies and conflicts of interest, so well articulated by the noble Lord, Lord Turner? The DWP is working with the industry to find an IT solution to match pots to members. There are significant technical challenges to overcome, standardisation to be achieved and the industry as a whole has to reach a consensus that prioritises the savers’ interests. If and when that is achievable are unknowns, but the Bill locks us into pot follows members.
Some providers will have an interest in getting rid of small, less profitable pots but will also have an interest in setting a pot size cap to defend their more profitable pots. They will have a natural antipathy to an aggregator with a pot cap that increases to a certain level. However, the pot limit chosen for automatic transfer will affect the number of separate pots that a saver builds up over their working life. It is one of the issues that goes to the heart of the efficiency of the aggregator model or the consolidation model chosen. Depending on the assumptions about the aggregator or how many active member and dormant-member pots that it has, the administrative savings can be greater than those that have been estimated in the impact assessment.
The department comments in its impact assessment that, overall, the results of its modelling suggest the aggregator scheme will achieve slightly less consolidation than PFM, but that needs to be set against the greater control that an aggregator scheme could provide in mitigating other risks that come with an automatic transfer mechanism. It would also be interesting to see the results of modelling that includes today’s dormant pots. I would like to come back to this. Equally, pot follows member cannot be implemented without raising quality standards, or the Government risk transferring the savings of millions of ordinary people into myriad schemes over which they currently have little quality control.
Even if the Government succeed in getting all schemes to a minimum quality standard, there will be a wide range between minimum standard and best practice. For example, consider a modestly paid worker who leaves a good scheme provided by a major retailer and goes to work for a two-person employer running a small shop, whose workplace scheme has higher charges, poor governance and a less suitable investment strategy. Would it really be wise to default several thousands of pounds of the worker’s savings into the new employer’s scheme? Regulation could set standards for aggregated schemes above the qualifying standards for automatic enrolment schemes, raising those standards in order to mitigate the risks that can occur on transfer.
Against that, PFM increases the regulatory burden to oversee a myriad schemes into which automatic transfers would be made, rather than focusing on leveraging very high standards in a few aggregated schemes. There is the potential for significant burdens on employers involved in transferring small pots to any number of schemes. Under PFM, every scheme would potentially need to be capable of communicating with every other scheme. Aggregators could pose a lower burden, as there would be—or could be—a much smaller number of such schemes.
Automatic enrolment was intended to carry a lighter regulatory burden for employers, especially SMEs, but this seems to be rowing in the opposite direction. The National Employment Savings Trust, which embraces the most transient low to moderate market, could consequently face higher administrative costs as a result of PFM. What is the consumer detriment to NEST members whose pots are transferred into the schemes of new, small employers, and out of the protection of the high governance standards in NEST?
With pot follows member schemes, the department expects that over the long run average charges would reduce as efficiency savings are made by the industry, but a reading of the impact assessment lacks confidence. Paragraphs 67 to 69 list some of the risks to which I have referred, but paragraph 70 concludes rather sweepingly that,
“the Department would expect the gains and losses from differences between scheme charges and investment performance to cancel out on average”.
When it comes to savers benefitting through lower charges from the administrative savings that providers may make from PFM, paragraph 71 comments that,
“there is a risk that some providers will not experience the resource savings projected”.
Paragraph 72 reminds us of the,
“uncertainty surrounding the assumption over the savings that providers will make”.
This is not the firmest of springboards from which to lock into a solution on the front of a Bill. On the differing views of what benefits the saver, PFM does not currently accommodate people who leave the labour force or become self-employed, as they have no employer scheme into which to transfer their pot. Their ex-employer may nevertheless default them into a poorer personal pension because they do not allow ex-employees in their existing scheme, which I must say is a growing trend. What of women who leave to become carers, move to a new employer, or who work part-time but because of the level of the earnings trigger are not auto-enrolled into the new employer’s scheme?
As has been argued by NAPF and others, pot follows member increases the risk of charges and transaction costs being incurred on the whole pension pot, rather than on the incremental amount saved with the previous employer. If the saver works in an industry characterised by frequent job changes they will be more vulnerable to these risks, which an aggregator could reduce.
Even where individuals choose to transfer to their new employer’s scheme, they face supply-side barriers. Transfers can take weeks if not months, and complexity and lack of standardisation combine to cause delay and increase costs. At decumulation the buying power of a larger pot can be harnessed by the individual, but the buying power is even better if open-market options can be exercised in bulk. Aggregators could facilitate and do this.
I turn to the third element, which is the need to protect dormant pots that have already been accrued. A key weakness in pot follows member is that it excludes existing dormant pots. An aggregator could pool an individual’s dormant and live pots because aggregation would not depend on an active scheme member moving to a new employer. Pot follows member at the point of introduction only consolidates live pots with future live pots. Today’s dormant pots are completely ignored. No start date has been set for pot follows member, as my noble friend Lady Sherlock has indicated, but by 2016 some five years’ worth of dormant pots will have been built up under automatic enrolment, and they will be excluded from the PFM proposition. The summary of the impact assessment points out that those with dormant pots before the start date will,
“remain in their existing scheme”.
That is a key weakness in this solution. Equally, it cannot be right that they should stay with their existing scheme in every instance because some employers will simply default these pots into alternative arrangements anyway if the former employee does not voluntarily transfer. If they are not allowed the option of access to PFM or the aggregator, the employer may well default them anyway into a personal pension.
Finally, the issue of pension pots is not only a future one, it is also one of legacy. Quite a lot of work is being done on standards and reviewing legacy pots by the DWP and the OFT, and there is work to come out of the FCA. I would ask this question: is there to be no synergy on the solution to transferring small pots post-2016 under auto-enrolment, and the solution to the problems that may be revealed in the audit of legacy schemes arising from the OFT investigation? Is it really going to be a set of parallel lines in looking for the solutions to cover the legacy problem, which could also be in auto-enrolment savings pots because of the 2016 dateline and what evolves in the future?
Amendment 62ZC clearly maintains the power of the Secretary of State to make arrangements for the transfer of pension pots, because everyone sees the compelling need to have some way of aggregating or consolidating these small pots. This amendment provides an opportunity to rethink the model to be chosen, but it does not of itself substitute an alternative model. The Government can eventually decide on the alternative model, and new primary legislation would not be needed—but it would not lock us in. The effect of the amendment would not be to lock us in to the PFM model at this stage. The reason for that is, I would say, because the case is not proved, members’ interests are not truly being defended, and there is no synergy with any dormant savings that may exist prior to the implementation of PFM before 2016. I believe that all these issues need much more consideration.
Baroness Turner of Camden (Lab)
My Lords, I have not spoken on this item hitherto except briefly at Second Reading. In my opinion, it is one of the most important issues before the Committee. That is because it is quite obvious that the Government want people to save. Everything they have been telling us about pensions indicates that they want people to save. What happens if people do save, but then they transfer jobs? Nowadays, of course, people do not stay in the same job for their lifetime. They may have several or even many changes of job in the course of a career. What happens to the pension pots that they accumulate? If there is no safety in those pension pots, the whole thing will be a disaster. I support strongly what my noble friends have said. It is clear that this is something that requires a great deal of attention.
Is the regulator to have more powers to deal with this? It is obvious that you cannot have a situation in which pension pots are put at risk because there is no way of handling the market or for dealing with people who will be forced to make choices for which they do not have the necessary skills or experience. They cannot make the right kind of choices and they may end up with a bit of a disaster instead of a reasonable pension, or even a reasonable lump sum to place with another pension provider. Again, I hope that the Government will take seriously what has been said in this debate. It is a very important issue.
Baroness Drake
Will the Minister accept that, whereas getting every automatic enrolment qualifying scheme up to a minimum standard is an excellent aspiration, getting everyone up to a minimum standard is not the same as setting a very high set of standards for a scheme that you are using to default people’s pensions into?
Lord Bates
The Government are not averse to excellent aspirations in a whole range of policy areas but in that particular area we need to look at the issue of the quality. In many ways, this goes back to the introduction of auto-enrolment, when perhaps it should have been the case that scheme quality was dealt with at that time. That would have made an awful lot of sense.
Baroness Drake
I do not want to get into that political debate because there might be some merit in what the noble Lord said. One of the core issues is that a default pension scheme was not chosen but I do not want to drift there. However, it does not matter who should have dealt with the minimum standards for qualifying schemes and when. If the Government are going to take to themselves the power to say, on behalf of millions of people in this country, “We will automatically transfer”, then the governance standards required in the scheme receiving the pots transferred under those terms have to be pretty high, do they not?
Lord Bates
Yes, and our hope and belief is that there will be higher standards. That cannot be issued by diktat and has not been covered. We are simply giving the powers and setting out the framework as to how we will go about that, but that discussion has to be had with the pensions industry. The conversation is ongoing and we will certainly be reporting on that progress.
I turn to some of the specific points that have been raised. The noble Baroness, Lady Sherlock, talked about the level of support and seemed to be fairly sceptical about whether there was any.
Lord Bates
The noble Baroness always asks an honest and genuine question, and I am trying to give an honest and genuine response, which is to say that we are not necessarily comparing like with like here. Although people understand how the pot-follows-member scheme might work—in other words, they will have just one pot, and everything will be transferred into it—they do not necessarily understand what the noble Baroness is proposing in terms of alternatives, whether they are single, multiple or virtual aggregators. Therefore, to give a clear-cut position on that is somewhat difficult.
It was drawn to my attention today that Adrian Boulding of Legal and General, one of the largest pension providers, in today’s Pensions Expert, formerly Pensions Week, says:
“the concept of your pension pot following automatically to a new employer is now not far off. The long-term benefits of people having ‘one big fat pension pot’, as the minister likes to call it”—
I think the Minister he is referring to is my right honourable friend Steven Webb—
“will be greater consumer engagement, more informed decisions, greater buying power and better pension outcomes. All well worth striving for”.
Lord Bates
He might say that but he is one of the providers and I therefore think that that is certainly well worth listening to. Another reason why we have come to this conclusion is because there is a great deal of uncertainty about what is happening out there. Auto-enrolment in pension schemes has been a huge success and the previous Government deserve credit for introducing it in the 2007 and 2008 Acts, based on the recommendations of the Turner commission. The price of the success of auto-enrolment is that it is creating a larger number of smaller pension pots as people move on. Figures have been quoted of there already being 370,000, and the noble Baroness, Lady Drake, has talked about a future figure of 600,000. That means that the need to make a decision is more urgent than ever. The noble Baroness was asking, “What does the industry think? What are people actually thinking?”. Pensions Expert, in its comment and analysis section said:
“If last year was about policy, then this year it is going to be all about making things work. Government have now clearly set the direction of travel. The success of auto-enrolment—in terms of low opt-out rates—means even more small pots are going to be created than were expected. Previous estimates that auto-enrolment would create around 370,000 new pots of less than £2,000 each year now look woefully low”.
They are very clear in what they are saying: they want direction. That does not mean to say that that direction cannot be changed by a future Government—just that they are getting clear direction. We consulted about it in 2011; in 2012 we issued a response; in 2013 we actually said what we were going to do. It seems as if finally, the industry—and, we hope, members—are getting their heads around the fact that this is the preferred option and the route that we are going down to ensure that we actually make it work.
Lord Bates
The noble Lord makes my point: it is more difficult to understand. What are we trying to do? We are trying to make it simpler. We are trying to get people to be able to understand it. That is one of the reasons why it appeals to people. They will only ever have one pension pot; under the other scheme they may have several; they will be able to keep track of that and follow it through. Anyway, we can discuss and debate that, but in all of the consultation that was undertaken, it was clear that there was a strong view in favour—not only from the respondents of the consultation, but also in the opinion polls that followed from the industry.
The noble Lord, Lord Turner, raised the important issue that pot follows member fails to deal with high charges. We strongly agree that driving up scheme quality is of paramount importance. This is an issue wider than just a scheme used for transfers in the aggregator model, but actually should be something that applies to all, to set minimum standards across a broader range of schemes. Therefore, in doing so, it would benefit not just those affected by these pension pot transfers, but also the existing members of those schemes.
The noble Lord, Lord Turner, said he did not accept the pot size comparisons that were being put forward. He spoke about the £2,000 limit: why was it £2,000? We actually consulted not just on £10,000: we consulted on £20,000, £10,000, £5,000, all the way down to £2,000 and even £1,000, which is similar to the amount that is currently used in the Australian model, which is often cited in this context. In all of those different levels, pot follows member came out ahead of the aggregator in terms of individual responses.
Baroness Drake
I would not presume to speak for the noble Lord, Lord Turner—I learn from him, not the other way around—but the point he was making was that one of the Government’s arguments against aggregator was that they would have to limit the pot size, which would introduce inefficiencies, because if they did not do so, it would distort the market. He was saying, I think, that he did not necessarily accept that that was a compelling argument against aggregator.
Lord Bates
It is a shame that the noble Lord, Lord Turner, is not here to respond to that himself or to clarify the point, but I take the clarification from the noble Baroness about where he was going. On the issue of how to drive down costs, the noble Lord referred to the potential and mentioned some horrendous numbers—25% or 30% of accrued pension disappearing in charges and how low it was possible to get that. There are some very interesting findings, which we are consulting on at present, about how technology would be a key ally in this. The noble Baroness, Lady Sherlock, asked about this too, wondering whether we preferred a paper-based system or an electronic system. Our preference, based on the current evidence, is invariably towards electronic, because there are associated costs every time you push a bit of paper around. I was interested to read in various articles that you might be able to get the figure for the entire transaction of a transfer down to £105 for both transmitting and receiving the amount if you do it electronically. There needs to be an electronic element to this and that probably points in the direction of a database. We are still consulting on that. We are open to advice, but that is probably something on which the industry will have to offer views.
Pensions Bill
Baroness Drake Excerpts(10 years, 11 months ago)
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Baroness Drake (Lab)
I thank the Minister for taking the opportunity to address some of the issues we were concerned about—we ran out of time, in effect—in our previous Committee session. My major concern in this debate has been the sufficiency of protections when a statutory override is given or is exercised. It sets a precedent and I am sure that this will not be the last statutory override we are going to see in the pensions arena over the next three or four years, given some of the agenda items we know are coming our way.
I am genuinely concerned that what is proposed or what we can see is weak. The Minister said that he expected that the override would be used in exceptional circumstances. To an extent that is true, because if the sponsoring employer does not need, as a requirement of the scheme, to get trustee consent, there is no need for a statutory override. I had conceded that point in my opening comment. Of course, there will be a need for statutory overrides where the scheme’s rules do not allow what is being proposed on the recoup arrangements, or where trustee agreement is required and the trustees do not want to give their consent.
There are expressions of hope that somehow this consultation will take place and everybody will act appropriately and only in extremis—having gone through due process but finding barriers in the way—will the employer be able to invoke the statutory override. Of course, the Minister has no idea how employers will behave in practice in individual schemes. One hopes that they will all consult, but some may be in a hurry and some may simply see that they are not required to consult or gain trustee consent. A statutory override is being put in the Bill without, as far as I can see, an explicit requirement to consult—merely an expression of hope from the Government that it will take place. That worries me deeply.
The other area about which I remain concerned is the fact that the regulations will still be subject to a negative procedure. Again, we face key issues about the value of what the employer can recoup, and this would be setting a precedent on a significant issue. The Minister conceded that these are complex issues, and that is right. In multi-employer schemes, if the decision is taken to amend the protected order status for certain employees if there are shared cost arrangements, one can see the multiplicity and complexities that could arise. They would arise anyway, but they will arise.
We have no clear indication from the Government about how they will value what it is that can be recouped. As I asked when speaking the other day, is it the net or the gross loss? Will it be crystallised in terms of the 2016 value of the rebate? These are quite significant issues. On one level, setting out some actuarial assumptions in the regulations may be a good thing, although we would perhaps want to see the actuarial assumptions first. But we have no way of seeing them and when we do, the regulation will be subject to the negative procedure.
I know that the Minister said that there would be a full consultative exercise. Consultative exercises are important and I do not wish to detract from the importance of their taking place, but we all know that they can be dominated by organisations that have the capacity, the means and the interest to dominate them. I just hope that in the consultation exercise fair regard is given to the views of employees and trustees.
Baroness Drake
I was drawing to a close. I have a final point on the negative procedure. In response to my suggestion that there could possibly be time limits on consultation in order to meet the spirit of what I aspired to achieve before the constraint of April 2016, the Minister said that seemed too prescriptive and asked why one would want to put constraints on the consultative process. It seemed rather contradictory to say that one cannot go for negative procedures because affirmative procedures take too long and could push up against the efficient way in which employers could adjust in time for April 2016. If the balance were a trade-off between defined periods or timetabled periods of consultation with the employers and the opportunity to deal with the regulation by affirmative procedures, it would be fair.
Lord Browne of Ladyton (Lab)
Like my noble friends, I am grateful to the Minister for engaging more generally with the issues of statutory override in his remarks in support of Amendment 44. That has been of some assistance to the Committee. It is obvious from the engagement he has already had with my noble friends that they believe that to be the case. I, too, wish to be associated with the words of thanks to the Minister for the offers of further briefing and engagement. They will be taken up.
Before I take advantage of his generosity to ask him a few additional questions, one of the advantages of anticipating that he would do this—because he was gracious enough to indicate that he was prepared to do it—was that I was able to read the official record of the previous debate we had in Committee, and there are one or two things that occurred to me that he could expand upon.
Before I turn to that, I shall deal somewhat formally with government Amendment 44, which I accept is a consequential amendment. I have to say—I do not expect the Minister to engage very fully with this—that reading the statutory provision which he seeks to amend, the section of the Pensions Act 2004, I am slightly at a loss to understand why the amendment is necessary. It makes the precise provision more elegant, but I am not sure that it changes much of the content. It is genuinely consequential. Section 258(2)(c)(ii) already contains these words, although they are further qualified.
In the more general debate I shall try to be complementary to the points already made and not go back over the issues that my noble friends have addressed, although I have some notes here which are similar to some of their observations. I turn first to the issue of whether it is appropriate to deal with the regulations anticipated by these provisions by affirmative procedure in your Lordships’ House and in the House of Commons, or by negative procedure, and consequently whether it would be appropriate to deal with the limited issue of the extension of the period by negative or affirmative procedure. It seems to me, first, that it is improbable in the extreme, given the way the Minister has described these regulations in terms of their comprehensive nature, their complexity, and the difficulty associated with understanding them, that they will not be debated in some form in both Houses. It is unlikely that there will not be a desire to engage with some aspects of them to—at the very least—achieve some further clarification.
My second point to the Minister is that it seems to be counterproductive to the argument that negative procedure is appropriate to go to such length to explain just how complicated the regulations are. It seems to me that the more complicated the regulations are, and the more the primary legislation has to be supplemented by complicated regulations, the weaker the argument for doing this by negative procedure becomes. I suspect that that is why, reflecting on the Minister’s words, he referred again to the issue of parliamentary time. With respect to the Minister, getting parliamentary time in our current Parliament is the weakest argument possible.
I am struck by the number of times the House of Commons rises before what I consider to be its normal rising time. I do not know whether that is a function of the fact that the coalition Government have run out of agreement about what they can legislate on —that may happen; it is a perfectly natural thing with coalition government—but I am also struck by how much time is spent in the House of Commons debating what is now called “Members’ Business”. As far as your Lordships’ House is concerned, I am struck by the fact that we are all expecting—and I think we will see—that an extraordinary amount of time will be found to debate a Private Member’s Bill over the coming weeks.
If regulations are debated in the normal way, it seems to indicate an expectation that there will be no great competition for parliamentary time between now and the general election. In fact, I go so far as to suggest that the business managers of the respective Houses may have difficulty in filling the time they already have, so I do not think the argument about parliamentary time is all that strong. If the Minister is to continue to promote the idea that these regulations—complicated, difficult, comprehensive and substantial as they are—are still best dealt with by negative procedure, then, with all due respect, I think he will need better arguments than those he has already deployed.
Secondly, perhaps I may take advantage of the opportunity to debate these issues and ask the Minister to give some clarification about information that he gave us when we last debated these issues about the effect that the abolition of contracting out will have on people’s expectations. Early on in his contribution to our last Grand Committee, he came to engage with the issue of trustees and pension funds and their responsibilities. I will quote him fully, not in short. He stated:
“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”.—[Official Report, 8/1/24; cols. GC 430–431.]
That is an argument that was deployed by the Pensions Minister in the House of Commons, too, when addressing that issue. It is clearly designed to allay, and does allay, the concerns of a significant number of people about the denial of their expectations. However, in col. GC 433, when the Minister was discussing the issue of protected persons under statutory override, he deployed a similar but different argument. I shall quote it to him, because I am interested in the difference, and what it actually means. He said:
“We also have to factor in that the design of the single tier reforms means that those with a long history of contracting out will in most cases build up significantly more state pension. Around 75% of people in the private sector who pay higher national insurance contributions and reach state pension age during the first two decades following implementation will receive enough extra state pension over their retirement to counterbalance the increase in national insurance contributions”.
He went on to say:
“This is a very complicated issue with many different and conflicting interests”.—[Official Report, 8/1/14; col. GC 433.]
But we know that.
Were these different ways of saying the same thing, or were they different things—and, if so, what is the difference? Why does he say “two decades” in one case and one decade in the other, and why is there a reference only to counterbalancing the increase in national insurance contributions in one while there is a reference to eventual benefits in the other? It may not be easy for the Minister to answer that immediately, and I apologise if it is not, but I would be interested to know whether he intended those two things to mean the same—and, if not, why there is a difference.
On the issue of protected persons, in col. GC 433, the Minister addressed my question about the defeated expectation that the decision that the Government promised following the consultation would be made clear to Parliament. He told the Committee that a decision following the consultation about protected persons would be made as soon as possible, and that when it was made, Parliament would be informed. But what he did not say was important. The Pensions Minister in the other place said at one stage that it would be done in the summer of 2013—and we know that that is now long gone. No matter how generous one might be with Governments who use seasons to give an indication as to when something might be done—and having been a Minister myself I know how wise it is to do that sometimes—in no one’s view are we still in the summer of 2013.
The Pensions Minister gave both the Standing Committee and the whole House of Commons to believe that, at the very worst, a decision may be made when the Bill was still before Parliament. That is not a phrase the Minister used. Was that deliberate or can he repeat the phrase? It is important for the 60,000 people who consider themselves to be protected persons. Their expectation is that the decision and therefore some engagement with the consequences of that decision will still be a live issue while the Bill is still before Parliament.
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.
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?
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.
Baroness Drake
My Lords, I shall speak to Amendments 52, 55 and 58. I acknowledge that increasing the state pension age consistent with increases in life expectancy is part of delivering a sustainable state pension system. For the regular reviews of the state pension age rules, however, we also need to ensure that a clear and wide range of relevant factors is considered and that there is clear and authoritative public presentation of the evidence to inform that debate, while recognising, of course, that the Government of the day will determine the policy that is brought to Parliament.
Intergenerational fairness requires that each generation should enjoy a roughly similar proportion of adult life in state-supported retirement, and we may well see newer and higher projections for life expectancy in the future which will bring huge challenges to how our society operates. For example, who knows where advances in modern medicine will take us in terms of life and health expectancy? State pension policy clearly has to be robust, in the face of not just increasing life expectancy but major uncertainty about how fast that increase could proceed. However, I am also concerned that increasing the state pension age should not be seen as the silver bullet for automatically delivering sustainability without considering some of the complexities and collateral consequences which need to be addressed at the same time.
This requires a range of factors to be considered in the periodic review of the state pension age. My noble friend Lady Hollis has clearly identified these factors, and I shall add arguments about why it is important that they are in the Bill. On average, life expectancy is increasing and yes, on average, ageing appears to be healthy, but averages do not tell the whole story. There are major inequalities, as has been articulated. Life expectancy varies significantly by socioeconomic class and while it has risen significantly in all social classes, there are widening absolute inequalities. Lower socioeconomic groups live for fewer years post-retirement, a smaller percentage of which appears to be free of sickness or disability, and they are far more likely to leave the workforce early for health reasons. In part, this reflects differences in key lifestyle predictors of future health.
The key implication is that there may be limits to the feasibility of across-the-board increases in the age of retirement from the workforce, particularly if the increases are more than proportionate to the increase in life expectancy of particular socioeconomic groups. Similarly, for those who are healthy, since the state pension accounts for a larger share of their total retirement income, this suggests that an increase in the state pension age would be most likely to induce lower income workers to work longer and less likely to induce higher income ones.
It is important to understand how trends in life expectancy and health by socioeconomic class will develop in the future. Certainly, figures indicate some significant differences in life expectancy and healthy life expectancy between regions. The recent figures, kindly provided, show that there is a widening gap between local authority areas with the lowest and highest life expectancies at age 65. Of course, one can speculate on the causes of these differences—major industrial shocks, unemployment rates, specific health problems and cultural and behavioural issues. However, if one looks below age 65, lower socioeconomic groups are also not participating equally in the significant reductions in death rates between the ages of 45 and 65.
An optimist could argue that the major occupational sources of ill health that played a large role in previous generations, such as coal mining or heavy industry, and whose impacts can still be seen in the regional incidence of unemployment, will decline in importance. Conversely, a pessimist would stress that the increasing divergence of some lifestyle factors, continuing differences in working conditions and new labour market features may offset some of these positive developments. The issue therefore is whether policy levers can be deployed to mitigate the disproportionate impact of a rising state pension age on lower socioeconomic groups.
Variable state pension ages may not be an appropriate response for addressing the significant differences in morbidity, life expectancy and early departure from the labour market. However, where differences exist a response is needed. Simply ignoring them is, in itself, a default public policy response with potentially negative consequences for many people. Measures need to target reducing health inequalities but the welfare system needs also to be sensitive, efficient and protective in supporting those for whom working longer is problematic because of their class and health. If these inequalities persist or widen should, for example, the age of eligibility for pension credit be lower than that for the state pension itself?
The UK state pension system, even with these reforms, will not be particularly generous in relative terms. Its focus is poverty prevention rather than an income replacement system. The value of the single tier will be only a little above the guaranteed credit. Yes, it will be the foundation for private saving to enable people to achieve a reasonable level of replacement income but it will be some years before auto-enrolment delivers the necessary savings levels. We are still only staging and phasing its introduction. Meanwhile, lower socioeconomic groups will still be facing a greater likelihood of ill health and earlier exit from the labour market as they get older.
Understanding the extent to which increases in life expectancy are accompanied by increases in healthy life expectancy, monitoring inequalities between socioeconomic classes and regions and identifying the implications for policies associated with the evolving policy for state pension ages will remain an important part of any review. The key responses should include a strong focus on health service and occupational health policies and on the measures to reduce the life expectancy gaps and to compress morbidity. The long-term aim must be to narrow health inequalities rather than treating them as permanent barriers. We should aspire, for example, for the men in Glasgow and Liverpool to have as good an average life expectancy as the men in Kensington and Chelsea, or even those in East Dunbartonshire. Policy needs to be designed to be both equitable and affordable in the face of whatever rise in life expectancy actually occurs. Higher pension ages are essential but are not in themselves a sufficient response.
Increasing labour market participation by older workers is, equally, an integral part of sustainability. Analysis of trends in average age of retiring from the labour market and in employment rates among older people by gender, region, occupation and socioeconomic class is required to understand the extent to which increases in state pension age are accompanied by increases in employment. Unless increases in state pension age are accompanied by higher labour market participation by older workers, then the effective contribution of those pension ages to public expenditure pressures will be weakened, GDP will be lower and other benefit expenditure could well increase. However, major inequalities in life expectancy and health may make across-the-board increases in retirement ages unfeasible unless these differences disappear over time.
The policy of raising the state pension age needs to be accompanied by measures that facilitate higher labour market participation by older workers, because barriers certainly exist. Take, for example, the position of some women. Although women have a higher average life expectancy than men, the figures also reveal that the gap between them is narrowing. The gap between women in higher and lower socioeconomic classes is increasing and women’s participation in the labour market has reached a plateau, partly because of care requirements and the cost of care provision, particularly childcare. Older women are increasingly looking after their elderly parents or grandchildren. An older woman’s earlier age of retirement from the labour force may, for example, be the price paid so that her younger daughter or son can be economically active.
The cultural biases against older workers are often embedded in personnel practices and employers’ assumptions. Take training as an exemplar. The evidence suggests that employer-provided training is skewed towards younger workers, with an assumption that some workers are too old to train. Yet the experience of workers in their 50s plays an important role because beyond the age of 65, participation in the labour market is driven by participation up to the age of 65. Once older people exit the workforce, they are much less likely to work again. The challenges facing business in embracing older workers will be very real. I recall quite vividly 10 years ago the CBI, anxious about that challenge, simultaneously arguing for an increase in the state pension age to 70 but a default retirement age under discrimination law of nearer 65. I described it at the time as a five-year gap between loss of employment rights and receipt of pension. The debate has moved on but that indicates what tensions will be there as industry responds to increased longevity and increased state pension age.
The extent to which increases in state pension age are accompanied by increases in labour market participation will inform government of what initiatives they need to take, be it tackling discriminatory cultures, financial incentives for later retirement, incentives to employers to employ and train older workers, flexible employment practices, cultural attitudes and health policies and changes to welfare policy and welfare payments themselves. Whatever decisions are made in response to the periodic reviews of state pension age, and however much desirable continuity in policy can be achieved, delivering both a fair and sustainable pension policy and level of public expenditure will and should be subject to fully informed debate continuing over time, in the light of new information on a series of relevant factors becoming clearly available and systematically considered.
Baroness Drake
Baroness Drake
My Lords, I shall speak also to Amendment 54. Amendments 53 and 54 are tabled in my name and that of my noble friend Lady Hollis. They provide for a report on the periodic review of the rules about pensionable age, having regard to life expectancy and other factors, to be prepared by an independent commission.
There is an important role for an independent commission, while recognising that the Government of the day would determine the policy that is brought to Parliament. The demographic challenge poses unavoidable choices, which are partly for society to make and partly for individuals. However, for those choices to be rational and sustainable, they have to be informed, barriers have to be removed and a broad consensus has to be achieved. One of the useful roles of an independent commission is to present society with those difficult but unavoidable choices. It can spell out the facts and choices clearly and starkly. It can identify the complexities. That process will also assist the parties in reaching a political consensus.
Public debate on policy changes will be better focused and more likely to arrive at consensus if there is a permanent independent body charged with presenting to society the evidence and the issues. A commission can provide the public with a clear and comprehensive narrative about what is happening and what it means. Delivering a sustainable state and private pension system and responding to the demographic challenge are long-term projects that cannot be delivered in the lifetime of any one Government.
A consensus needs to be held over a long policy framework, because optimal outcomes take decades to come through. However, securing and maintaining a consensus will not be easy, because deciding the way forward involves important political judgments, and successive Governments have focused very often on immediate challenges. Trade-offs are the essence of political debate, but achieving some degree of consensus on core principles will be easier to achieve if there is an independent commission supporting that consensus. We know that the long-term management of public finances requires intensive debate now about the state pension age—but, notwithstanding the desirability of continuity in policy being achieved, the detail of pension and associated policies will and should be subject to continuing debate over time, in the light of new information becoming available.
Life expectancy and healthy life expectancy may change significantly from current forecasts, trends in voluntary private pension savings could turn out to be more or less favourable, and the participation rate of older workers in the labour force may prove problematic. As the information available changes, so the precise public policy direction can be refined, even if the overall framework of the system maintains as much continuity as possible. It is important that an independent commission should consider the sort of issues and complexities that we all referred to in the previous debate.
As to the type of commission, it should be small, so that the quality of engagement between commissioners is dynamic and qualitative, but sufficient in number to allow for wider input and for the stimulation of considerations that an individual by definition could not achieve. The commission could become a source of authoritative and independent presentation of the facts, and of the estimates of public expenditure consequences and of what future rises in the state pension age might be implied by the principle of pension ages rising in proportion to life expectancy increases. A commission could maintain a clear and steady focus.
The report could capture the key trends in life expectancy and the differences in morbidity, employment and retirement patterns among older people, by gender, region, occupation and socio-economic classes. This analysis would also allow early and regular identification of whether increases in state pension age are accompanied by increases in productive employment and/or a greater reliance on means-tested benefits and whether major inequalities in healthy life expectancy can make across-the-board increases in retirement ages feasible or unfeasible.
For example, if state pension ages rise and average retirement ages rise, state pension expenditure as a percentage of GDP will be reduced, not only by a pension expenditure reduction but by a rise in GDP. However, if pension ages rise and average retirement ages do not, the reduction in pension expenditure will be offset by other non-pension benefit expenditure and lower GDP. These issues are matters of some moment when we are looking to achieve sustainability in the light of what is a major demographic challenge.
Engaging the public is important. Individuals consistently underestimate their own life expectancy. Research confirms that. Individuals on average are unaware of, or do not believe, the projected increases in life expectancy—in some instances, even when the evidence is presented to them. Such attitudes make it difficult for people, particularly young people, to think rationally about the savings rate/retirement age/pension level trade-off that they personally and society face. An independent commission would assist in changing those attitudes and getting those key messages across in a way that very often government and political parties cannot do successfully.
The commission’s analysis could also identify the latest trends in private pension provision on average and across different gender, socio-economic and ethnic groups, and thus of the overall coverage and adequacy of pension provision. This analysis coming from an independent commission could assist in future debates about appropriate adjustments in employee or employer default contribution rates. This is a not insignificant matter and a key debate—one that people are probably feeling tentative about in view of other, wider considerations, but one which certainly an independent commission would help address, as well as helping the formation of a political consensus.
In the debates on previous amendments we heard much reference to data—the quality of the data, what they show, their integrity, whether they are sufficient and so forth. The quality of choices made and policy decisions taken is directly influenced by the quality, quantity and type of data that are available. An independent commission would be well placed to interrogate the quality of the data available and to make recommendations on the gaps or omissions in the data collected, and on the data needed to inform debate.
As the Minister conceded in an earlier discussion, there is a need to take a long-term view on these issues. In considering those long-term issues, long-term projections also need to focus on the uncertainty inherent in such analysis and on important sensitivity analysis. These are issues that a standing commission could focus on. It could assist in helping the debate and in helping the quality of government and individual decisions.
To repeat what I said at the beginning, one of the useful roles of an independent commission is to present society with difficult but unavoidable choices. It can spell out the facts and choices clearly, and it can identify the complexities and assist government and political parties in making the type and quality of decisions that are necessary in the light of the challenges that we face. I beg to move.
Baroness Sherlock
My Lords, I rise to speak to Amendments 55 and 57A in my name and that of my noble friend Lord Browne of Ladyton. I shall speak also to Amendments 53 and 54 in the names of my noble friends Lady Hollis and Lady Drake.
As we heard in the very clear speech from my noble friend Lady Drake, Amendments 55 and 57A provide that the periodic review of rules on pension age should be prepared by an independent commission. I can think of no one better to suggest how a pensions commission might work than my noble friend Lady Drake, who was such a distinguished member of the Turner commission.
As I indicated previously, we agreed that there should be periodic reviews of the state pension age to reflect changes in longevity and the need for people to fund their retirement and also to achieve a fair balance between generations. The question is how to achieve that, and we have grave concerns about the way in which the Government are approaching this matter.
As it stands, the Bill simply says that the Secretary of State shall review the rules about pensionable age. That leaves us with some significant gaps. There is insufficient information about the kind of review mechanism that there might be. There is also insufficient detail about who will conduct a review or how it is to be done, and there seems, on the face of it, to be insufficient scrutiny by Parliament of any recommendations that emerge. Perhaps the Minister will clarify that for us when he replies.
At the heart of this lies a very important question: how do we enable people to have confidence in the system? If we want to encourage people to save for their retirement and we need them to save more, they need to trust the Government, to trust Parliament and to believe that their pensions are safe in our hands. The public need to know that they will not be at the mercy of political expediency and will be protected from any adjustments that might otherwise be made too quickly. After all, they may be nervous about this. There has been a succession of changes to pensions legislation, pensions levels and the state pension age. To suggest just one example, under the previous Labour Government the number of years of contributions required to get a basic state pension—
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
Baroness Drake Excerpts(10 years, 11 months ago)
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Baroness Drake (Lab)
I think that the Minister is right not to give advice as to whether or not it suits an individual to defer. It depends on their personal circumstances.
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.
The Lord Bishop of Chester
My Lords, very few people on the Committee will know that the last time that I had tea with the Minister was in his rooms in Merton College when we were both first years in 1969, so it would be good to have another cup. Given the nature of this discussion, I wonder whether the Minister could at least agree to take the issue away and think about it. There are issues here that may need a bit of teasing out other than in the circumstances of this Committee.
Lord Whitty
My Lords, I have amendments in this group that broadly support the line that my noble friend has been taking. She was right to try to prise open what the Government’s strategy actually is.
Everyone recognises that there are consequences of contracting out, but under this clause and schedule the Government are effectively giving carte blanche to employers to change established means of paying occupational pensions among private sector employees. Government Amendments 48 and 49 actually make that worse by making it pretty explicit that the full cost of that will, or at least can, fall on the employees so that not only are the employers given the right not only to avoid the consequences of that cost and place it on to the employees, which is likely to have the knock-on effect of people opting out of the schemes, but they are overriding the long-established system whereby such schemes are governed by trustees representing the employers, the contributing members and often the pensioners in those schemes. To override the whole system of pension trustees that we have had in place for the past 40 or so years with regard to private occupational pensions is a very serious step. There are particular consequences in the area where statutory protections are built in. Past Governments have given guarantees that can be overridden by this clause.
All this can lead us only to the conclusion that the Government have a strategy and are using the excuse of the other provisions of the Bill on state pensions to go further in destroying private occupational schemes. We discussed the knock-on effect in public sector schemes at our previous sitting but here we have, as my noble friend says, more than 1.5 million people still in defined benefit schemes who have benefited from them and have every expectation of continuing to benefit from them. On top of everything else, the Government are attempting to ensure that those schemes now fail.
There are other reasons why some schemes have been curtailed and there are other reasons why the future of such schemes, in some cases, looks fragile. However, this is a deliberate attempt by the Government to make matters significantly worse. The Government must think very seriously about that. This is why my amendments and those of my noble friend would delete the bulk of Clause 24 and Schedule 14. We recognise that we have to face up to the consequence of that, but it would force the Government to rethink this and do it in the context of an overall strategy towards occupational pensions, their governance and their future, which is not there at the moment.
This clause provides the possibility of the Government reassuring us that they have a strategy but, frankly, we need to see the outlines of that strategy before we finish the proceedings on this Bill. Otherwise, I think that the message to those outside will be that, if you are in an occupational pension scheme in the private sector, we will make it cost you more and the benefits will be less and, if you are in the public sector, the Government will not compensate for the costs that they are imposing on well funded public sector schemes, as we discussed last time.
There is an occupational pension dimension to the whole pension issue. In principle we support many of the changes that the Government intend to make to the state pension, but the other part of the equation also needs to be faced up to. Frankly, I have seen no sign of a government strategy to do that. These clauses and much of this schedule will only make matters very significantly worse.
Baroness Drake
My Lords, I shall speak to Amendments 38ZA, 39, 45, 46, 47 and 50. The amendments in this group pose three propositions: the first is not to give the power to employers; the second is to give it only to employers with trustee consent; and then there is the amendment that I propose, which would give the power to employers only if it was subject to an explicit requirement to consult with the trustees.
Quite clearly, abolishing contracting out means abolishing DB schemes. The national insurance rebates to both employees and employers currently run at 1.4% and 3.4% on a band of earnings, so they are not insignificant amounts of money. The Bill will give this statutory override to the employers effectively to recoup that loss of their NI rebate by a choice of one of two options: increasing the employees’ contributions or reducing the value of the future benefits to be accrued. Not all employers need this statutory override to make that adjustment. It is quite clear that the closures and benefit changes of the past 10 years are evidence enough of that. However, there will be some schemes where employers cannot do that without trustee consent. The Government are clearly seeking to provide an override where that trustee consent is required so that employers can proceed without it.
If one looks at the impact assessment, it is quite clear that there is now a green light as a consequence of this clause for employers to recoup the loss of their NI rebates through an increase in employees’ contributions. The assumption made in the impact assessment is that all employees active in DB schemes, who are impacted by this, will bear the cost of increased employer’s national insurance contributions.
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.
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
Baroness Drake Excerpts(11 years ago)
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Baroness Hollis of Heigham
My Lords, this is an amendment about multiple jobs below the lower earnings limit, LEL. There are about 40,000 women and 10,000 men who we know about with two or more jobs each, each of which is below the LEL but which, aggregated, bring them above the LEL and should, I argue, bring them into NI and the state pension.
Who are they? Let me tell some of their stories: all people whom I have met, talked to and canvassed. They are rural women in their 40s with their youngest child over 12, who are patching together what we grandly call a portfolio, the components of which vary over the seasons in rural Norfolk. It might be six hours caravan or boat cleaning on the Saturday—handover day—during the summer, three small house-cleaning jobs during the week for the affluent incomer retirees on the northern coast, some mushroom or fruit picking for a few weeks and, during the winter, two or three evenings working at the nearest pub or newsagent.
One woman averages about 20 hours paid work a week, most of it at minimum wage—as much as she can manage given the danger of five to 10 hours a week travel time between jobs. She has no private car, there is extremely limited public transport in rural counties and she has teenage children to care for and feed. In any case, there are few if any decent 20-hour part-time single jobs, let alone full-time jobs, in rural Norfolk for unskilled middle-aged women without their own transport and with a family to care for. This could be her life for 10 or even 20 years.
Half the jobs in Norfolk, for example, are located in my city of Norwich, which is a 30-mile to 40-mile bus ride away for many people living near the coast, and buses are few. She will never be able to access those jobs, with their better pay and hours. She needs and deserves a pension, and if she cannot build one for herself she will not—this is key—be able to rely in future on any from her husband through the married women’s 60% pension.
A second person whom I met was a divorced Norwich woman in her 50s working as a receptionist for an alternative medicine practice, who told me that her employer would not allow her to work more than 15 hours a week, although she would like to because she enjoys the job, so that he can avoid paying national insurance. He pays three women each for 15 hours a week—because he works a long week—in order to avoid paying NI on any of them. At the time, she was topping up her income, although not her eligibility for BSP, by working extra hours in a florist’s shop. She was desperately worried about her pension situation but did not see what she could do about it.
Another woman’s work patterns are shaped by her caring responsibilities. She does not qualify for carer’s credit, but she fits some pieces of paid work around supporting three elderly relatives in my former ward, plus some cleaning and working in the local launderette.
All those women are working sufficient hours to bring them into the NI system for a pension but because they cannot aggregate them, they do not qualify. When some of us campaigned on this in the past, we were told, first, that you could not reasonably divvy up the employers’ national insurance if there were two or three such jobs, secondly, that the women would not want to pay class 1 contributions and that, in any case, they were few in number, only 15,000, and they were passing through. We were next told that it was a temporary problem for them and they had plenty of time to make up their missing years; finally we were told that they could always buy voluntary NICs and, if all else failed, there was pension credit.
The Government’s supporting papers rebut every one of those arguments and show them to be wrong. We now know that we have 50,000, not 20,000 people caught in this dilemma; two or three times as many. If we do not bring them into NI, they may well cost almost as much on pension credit down the line. That keeps more people in the means-tested legacy system, which we surely want to avoid. The second argument run by the Minister in the other place was that this was a temporary period of their lives. We simply do not know. The Minister is guessing. Some, certainly, may become entitled to a credit or move house into, say, the city of Norwich, and thus have a wider choice of jobs, and as a result may be able to come into NI, but others are stuck. Their patchwork life goes on for years because that is all that is available. We do not have the statistics for them, but 40% of the self-employed have been self-employed for more than 10 years. They include some of the poorest self-employed. The women I have described likewise tell me that they expect their position to continue for many years, often because they need the flexibility that it offers around their caring responsibilities or because they lack realistic alternatives, especially in more rural areas.
They can certainly buy voluntary NICs but, frankly, at £13 a week that is not usually feasible or realistic. It is five times more than we expect a self-employed man to pay. Bluntly, she probably cannot afford it. Is it fair? If she were working those 20 hours on the minimum wage for a single employer, she would get her national insurance but she would be below the PTT and probably would not pay a penny. She would come into national insurance without paying because she would come between the two thresholds. If she were on JSA or a disability benefit and not working a single hour, she would, again, get her NI and not pay a penny. Where she is conventionally self-employed, she will pay £2.70 a week and get NI. If she is employed with one employer, she will pay nothing and get her NI. If she is unemployed, she will pay nothing and get her NI, but because she works 20 hours a week, splintered, she will get nothing at all. Perhaps someone can explain to me why that is fair.
I accept that it has been hard to find a way through in the past, even for those who were sympathetic and did not dismiss mini-jobs as pin money. The Minister has never done that when we have been talking about UC and I am grateful to him. The Bill—bless it—gives us a way through. At last, it is now very simple. HMRC—and the Minister will know infinitely more about this than I do—is building real-time information. Rightly, we are giving the new state pension to all those who are self-employed: 4 million self-employed people will, I understand, gain significantly. Surely we are not going to say to them that we can afford to help 4 million self-employed people, largely men, but not 40,000 people with mini-jobs, mainly women.
Let us now class this woman as self-employed. If she pays the flat rate £2.70 a week, she can, by choice, buy herself a pension for the current year and opt in. We can discuss any backdating rules on retrospective purchase. Equally, we could, say, by regulations, agree that by working a certain number of hours—say, 16 or even 20—she conforms to JSA work search conditionality. She could, if necessary, discuss this with Jobcentre Plus—I have no problem with that—so that she meets the threshold. However, it would be absurd to say that to get an NI contribution she has to stop working 20 hours a week in real, convenient jobs and go and work in Poundland as part of an internship to meet work search conditionality. She is already doing 20 hours a week in work that fits around her caring responsibilities. In this way, she will qualify for a credit just as does someone on JSA who is not working at all.
UC may or may not be available to help her in due course. We do not know how many people it would apply to and by what route. In any case, it would be wrong to rely on it, given the current delays in rolling it out. Realistically, it may be several years beyond April 2016, although not too many, I hope—all years in which she continues to miss out. What number of women in a patch of mini-jobs does the Minister expect to still be unable to build their NI by 2020?
I want to make one final point. I have been describing older women, family women and often rural women, but I ask noble Lords to look around them. I think—it is only an estimate—that 5 million people are estimated to be on zero-hours contracts with uncertain hours, largely in the service sector and usually on the minimum wage. They work perhaps 10 hours one week and 20 the next, and they cannot run a regular job, as we understand the phrase, alongside it, as they always have to be available, so this involves evening and weekend top-ups. It is a major and growing problem in my view. Some may, over the year with one employer, come above the LEL. How many, I do not know. If the Minister has figures, that would be good. However, others on zero-hours contracts will not do that.
Employers love such a flexible, low-paid, semi-casualised labour force—what is not to like for them?—with staff patching together a living wage as best they can around their zero-hours contracts. The price paid is in tax credits from us. There is a burgeoning tax credit bill which, despite the wildly erroneous statements of the Secretary of State, does not come from those who do not get up in the morning but from the working poor, many of whom are on these contracts, as the Minister and this Committee know very well. That cost is paid by us in tax credits and by the worker in poverty, low wages and insecurity in their working lives, and poverty, insecurity and a relatively low pension in their retirement years.
The Bill gives us a way through, either by classifying them as self-employed or possibly by saying that they now conform to JSA conditionality. There are other ways I can think of by which we can do this, but this is a decent opportunity to rectify a problem that has gone on for far too long—that women who are doing their best for their family while contributing to the economy find themselves penalised. We can rectify that. It could be the decent and right thing to do, as I hope noble Lords will agree. I beg to move.
Baroness Drake (Lab)
My Lords, I support Amendment 11. It is always a great pleasure to follow my noble friend Lady Hollis. The disadvantage is that she mobilises the argument so compellingly that one feels rather depleted before one even starts to come in to support her. I will try, in a slightly depleted way, to give support on the very important issue which she has identified.
In the numerous iterative debates on the UK pension system in recent times certain criteria key to the design of that system and appraising outcomes have held constant. One of these has been that it must work for women. We cannot wholeheartedly say yes to that, notwithstanding the reforms that we have seen in the Bill. Clearly there is still room for improvement, and two weaknesses are frequently referred to. First, the level of the earnings trigger set for auto-enrolment is too high and excludes too many part-time workers, mainly women. Secondly, women who undertake mini-jobs—each of which delivers earnings below the lower earnings limit of £5,668, the access point for the national insurance system, but which if added together would put them above that level—do not have access to the state pension system under the contributory system because there is no provision for people with mini-jobs to aggregate their earnings in a way that would allow them to enter the NI system.
If we strip that back to its essentials, a woman with two part-time jobs, earning £100 per week from each job, will not be accruing pension rights unless she is covered by some alternative credit arrangement. Someone who may be working fewer hours but earning £110 per week from one job would accrue pension rights. However, £100 equals about 16 hours on the national minimum wage, so if one was doing more than one mini-job, one would be doing a lot more than 16 hours. Yet in the way that the system operates, they are not allowed access to the NI system.
As my noble friend Lady Hollis so clearly explained, this amendment would allow women and men to aggregate income from two or more mini-jobs and opt to have a year treated as a qualifying year for state pension purposes, and to pay national insurance as though they were self-employed. Having said that, I note from the Peers’ briefing pack that the rate of national insurance payable by the self-employed will be a matter for the Government to decide closer to implementation. If the Minister is able to give us indications of the Government’s thinking on that, which would go to the efficiency of the solution, that would be helpful.
As my noble friend confirmed, the DWP analysis found in 2012-13 that 50,000 people—40,000 women and 10,000 men—had two jobs with a combined income above the lower earnings limit, but were not accruing qualifying years towards their pension. Those may be relatively modest numbers—although the real figure may be higher, given that these things are difficult to measure. However, fairness is not simply a function of the number of people affected, because the disadvantage for these people is very real. As my noble friend Lady Hollis pointed out, the changes in the contemporary nature of the labour market may indeed increase the incidence of what the noble Baroness refers to as a “portfolio of mini-jobs”. We are increasingly seeing an intensity of flexibility requirements within contracts when it comes to the hours of work that employers want in any one week. Certainly, therefore, we need an NI system and a state system able to reflect the developments in the labour market so that it stays fair for people who are working.