Pensions Bill [HL]
Baroness Drake Excerpts(13 years, 8 months ago)
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Baroness Drake
Baroness Drake
My Lords, I shall also speak to Amendment 21. The new pension arrangements that are to apply from 2012 provide a minimum level of pension contributions, based on a band of qualifying earnings, of 8 per cent, of which at least 3 per cent must be met by the employer and the rest from the employee contribution and tax relief or credit. The required minimum contribution levels are set as a quality requirement for a qualifying pension scheme. Some employers who already operate good workplace pensions base their pension contribution calculations not on earnings but on other definitions of pay such as basic pay. It has been argued that the regulation should be set so as to encourage employers with good-quality schemes to stay with them. Clause 10 seeks to recognise this by introducing an additional provision to the powers in the Pensions Act 2008 that allows the Secretary of State to set an alternative process of certification known as the alternative requirement. That will allow employers to certify that overall their schemes satisfy the quality criterion for pension contributions. This process involves setting a regulatory test which, if met, will allow employers so to certify.
Although the Government have published the test that they intend to set in regulations, the regulations are still subject to consultation, so we do not know what they will finally look like or how they may change over time. The Johnson review asserts that under the regulatory test that is proposed, 92 per cent of workers would still match the statutory quality criterion on contributions under the qualifying band of earnings. This assertion is based on the ONS survey of hours and earnings. The assertion of 92 per cent is based also on the pattern of earnings before auto-enrolment. Our concern is that after the onset of auto-enrolment, an incentive may have been created that will encourage bad employers to arbitrage between the statutory quality criterion of an 8 per cent contribution on a band of earnings and the alternative requirement, to the detriment of some workers. In a nutshell, our concern is that while trying to accommodate good employers, a compliance loophole is created for bad employers.
The purpose of the amendments is to strengthen the protection afforded to jobholders under the alternative requirement. For the purposes of the amendments, I do not seek to debate the detail of the proposed regulatory test for the alternative requirement, or even whether there should be such a requirement. I want to focus on the powers that are enshrined in Clause 10 and what must be satisfied before the Secretary of State can set the alternative requirement.
The Delegated Powers and Regulatory Reform Committee refers to the Secretary of State's power to set an alternative requirement as “significant”, as indeed it is. Clause 10 prescribes the power of the Secretary of State in setting an alternative requirement, but it does not go far enough for the following reasons. In Clause 10, the Secretary of State must, for most schemes, ensure that, for all jobholders or a cohort of the relevant jobholders, the contributions paid into the pension scheme satisfy the quality criterion. However, the clause requires this to be the case only for a majority of the individual relevant jobholders—a majority being 50 per cent plus one. We are concerned that this could lead to a significant number of individual jobholders missing out on what should be their statutory entitlement. In effect, the aggregate requirement could be met by more generous contributions for some jobholders, with less than qualifying amounts, or potentially even none, for others.
The intent of Amendments 20 and 21 is to strengthen Clause 10 such that in all cases—not just most—schemes will be able to satisfy the alternative requirement only if, for no less than 90 per cent of the individual relevant jobholders as distinct from a simple majority, the amount of contributions paid under the pension scheme meets the qualifying amount. As my noble friend Lord McKenzie said in Committee, it is not acceptable that,
“an alternative requirement could allow nearly half of all jobholders”—
with a particular employer—
“to be short-changed”.—[Official Report, 15/3/11; col. GC 2.]
I beg to move.
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I thank the noble Baroness, Lady Drake, for introducing this debate. The amendments to Clause 10 would require the Secretary of State, before making regulations on certification, to be satisfied that in every single scheme at least 90 per cent of individuals would receive contributions no less than if the scheme had satisfied the relevant quality requirement.
I fully understand that the noble Baroness still has reservations about the breadth of the Secretary of State's regulation-making power and individuals losing out under the proposed certification arrangements. The whole purpose of the reforms is to transform the savings culture by improving the coverage of and participation in workplace pension saving. To succeed, we need to incentivise employers to retain their good-quality schemes. Certification gives employers an incentive to keep their good-quality schemes by simplifying the automatic enrolment requirement. It protects members by discouraging levelling down. The flexibility provided by certification is an important counterbalance to the burdens being placed on them by automatic enrolment. Getting the balance of protection right is crucial because introducing complexity will encourage employers to level down by abandoning good schemes and individual savers will be short-changed.
To help employers plan for the reforms, I should like to put on record that employers using certification will be able to phase in their contributions gradually. That question has been of some concern to the industry and I am pleased to clear it up. I believe that employers using certification will welcome that easement to help with the administrative and contribution costs of increasing enrolment into their schemes. We recognise the advantage that such an approach would bring and so have already kicked off discussion on how we might operate phasing within the certification model. We propose to set out the detail in regulations and guidance. The plan is to consult on secondary legislation informally over the spring, with a more formal consultation after the Bill receives Royal Assent.
However, I recognise and share the noble Baroness’s concern about some individuals receiving less than the minimum contributions, for whatever reason, under the certification arrangements. In developing the certification model, we have undertaken some detailed analysis of pay and reward systems using data from the annual survey of hours and earnings. Based on that analysis, we believe that the number of people who could potentially lose out is quite marginal. If all employers were to use certification, the data tell us that around 9 per cent of individuals could experience a shortfall resulting in contributions less than if the scheme had satisfied the relevant quality requirements. Those individuals are concentrated in industries where basic pay can be supplemented by overtime and other non-pensionable income.
We are committed to finding a pragmatic solution to certification which protects individuals without alienating employers. I believe that the certification test which I have previously described is that solution. However, to address the concerns raised, particularly in relation to the breadth of the regulation-making power, I take this opportunity to commit to looking at how we can reasonably circumscribe the scope of the Secretary of State's powers without compromising his ability to deliver the certification model welcomed by employers. We will be analysing the available data sets on earnings and contribution rates to see how that can be achieved. If it is possible, I should like to return with an update at Third Reading in the shape of an amendment to be introduced in Committee in another place.
I hope that, based on the assurances I have given, the noble Baroness will feel able to withdraw her amendment.
Baroness Drake
I note what the Minister said about phasing in contributions gradually. I was not anticipating that. He said that there will be consultation about the regulation on that point, so we will have an opportunity to look at that. I note what he said about the regulatory test. I had stayed off the detail of that test because I was focusing on the powers in the Bill.
I am grateful for the Minister's commitment to look at how the powers of the Secretary of State could be reasonably prescribed in order to address the concerns that we expressed and to return to it at Third Reading. I hope that between now and Third Reading it will be possible to sort out a form of words that would reassure us on that point. If it is not possible, I reserve the right to come back to the matter at Third Reading. On the basis of what the Minister has said this evening, I shall not press the amendment.
Baroness Garden of Frognal
My Lords, I shall speak also to Amendments 29 and 31 in this group.
These amendments relate to Schedule 4, which deals with the Pension Protection Fund. This is a complex area of legislation and further consideration has identified a few small changes that are needed to clarify the legislation. All of them are minor and technical in nature.
Amendments 28 and 29 remove the application of Section 143(9) when the board is obtaining a valuation for a scheme applying for a reconsideration to enter the fund. This reference is not relevant in the case of an application for reconsideration where the board’s power to obtain a valuation is discretionary. It will still apply to an initial scheme valuation or determination under Section 143 of the Pensions Act.
Amendments 30 and 31 result from changes made to Section 152 and Schedule 7 to the Pensions Act 2004, which deal with the duty of the board of the Pension Protection Fund to assume responsibility for a scheme on reconsideration and the pension compensation provisions. They simply update some cross-references to include new provisions that would be introduced by the Bill.
My noble friend Lord Freud has written in greater detail to noble Lords who have taken part in this House’s consideration of the Bill and placed a copy of the letter in the Library. I hope that with the detail in that letter and with this concise verbal explanation, noble Lords will feel able to support these amendments. I beg to move.
Baroness Drake
My Lords, I thank the Minister for her explanation and I thank the noble Lord, Lord Freud, for his prior written communications with my noble friend Lord McKenzie. We are happy with the explanations and can see the logic of the amendments. As a past member of the founding board of the Pension Protection Fund I am deeply fond of that organisation, and anything that improves its efficient operations will always have my support.
Pensions Bill [HL]
Baroness Drake Excerpts(13 years, 8 months ago)
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Baroness Turner of Camden
My Lords, I return to a notion that I raised previously in Committee, although I realise that I did not then formulate my amendment very well and I have made a change to the wording. I still hope, however, to persuade the Government that there is a serious issue here.
I agree, as I think we all do, that longevity, although very welcome, means that we have to look again at retirement ages. There must be some revision. Last year, I spoke to a briefing supplied by Age Concern about the default retirement age. Many people were holding jobs that meant a great deal to them, they did not want to retire and felt they had a great deal to contribute. That argument has largely been won.
However, I have always held the view that jobs are not all the same, and neither are people. Many are not particularly committed to their work, which is sometimes arduous and dangerous, and may not be suitable for older people who may simply be longing for the time when they no longer have to do it. It would be good to think that there would be lighter work to which such people could be transferred. Often, however, such work will not be available, and the people concerned may have manual skills but not the kind of educational background that would make it easy for them to do other work. After a lifetime in their original jobs, it may be better for them to retire and to receive the benefit that they had anticipated.
I recently received a nice letter from a lady who thanked me for what I had said in another debate on health and safety at work. It did not involve pensions, but it has some relevance here. She and her family had been trying for some time to obtain compensation following the death of her husband in a work accident. She sent me a copy of a magazine called Hazards, which campaigns for compensation for people injured in accidents at work, some of which lead to deaths. It does, however, serve to remind us that a great deal of the work that all of us depend on in our daily lives has hazards. We should not insist that the people who do it should simply go on and on. There is a case for treating them very differently from those who are committed to their jobs and want to work.
In the year from April 2009 to March 2010, 1.3 million workers reported that they were suffering from illness caused or made worse by work. It is often alleged that our health and safety at work system is the best in the world and that very few people are hurt at work. Unfortunately this is not completely accurate, although the Health and Safety Executive performs an excellent function in reducing work hazards. However, its resources are apparently being reduced, and that does not look so good. In any event, the HSE says that employers should be aware that there may be some reduction in physical and mental capacities with age and that suitable accommodation should be put in place. However, as I have indicated, this may not be easy. “Work till you drop” is not a good idea and may have dangers for other members of the workforce. I hope that the Government appreciate that there are real problems here. We are not all middle class, despite what the media tell us, and we often require people who have manual skills to work very hard on our behalf. We have a duty to ensure that they do not have to work beyond their capacity to perform their tasks, and that is the reason for my amendment. I wait with interest to hear what the Government have to say about it.
Baroness Drake
My Lords, I rise to speak to Amendments 11 and 14 in this group. In doing so, I have some sympathy with the concerns expressed by my noble friend Lady Turner. These amendments address the position of the poorest men and women in the population who are disproportionately impacted by the acceleration of the timetable to achieve the equalisation of the state pension age. Under this Bill the age of eligibility for receipt of pension credit, which is targeted on the poorest pensioners, increases at the same accelerated rate. This is because, under current legislation, the age of eligibility for pension credit is aligned with women’s state pension age. This means that a particular group of the poorest men and women, who would have been eligible to receive pension credit on certain dates between 2016 and 2020 under the Pensions Act 1995, will now have to wait up to two years longer to receive their pension credit income but with little time, certainly with little capacity, to adjust.
Pension credit in 2011 is £137.35 per week for a single person, so a deferment of up to two years can result in a loss of £15,000 for those affected. Even on a deferral of one year, the loss of income is still substantial to those concerned. Amendments 11 and 14 would ensure that both men and women who are presently in their late 50s and who are likely to be the beneficiaries of pension credit do not experience the markedly higher loss of lifetime pension income that would otherwise occur. This would be done by allowing the age of eligibility for pension credit to track the original equalisation timetable set out in the Pensions Act 1995. That would mean that those eligible to receive pension credit, both men and women and their birth cohorts, would do so on the same date between 2016 and 2020 as they would have done under the original timetable. I believe that these amendments may provide a more focused mechanism than that proposed by my noble friend Lady Turner in her amendment.
There has been much debate on fiscal sustainability when assessing timetable options for accelerating or mitigating the acceleration of the increase in the state pension age, but this amendment in no way undermines long-term fiscal sustainability. The savings from accelerating the age of eligibility for receipt of pension credit do not start to flow until 2016.
Lord Freud
My Lords, this group of amendments in effect aims to provide mitigations to the state pension age timetable. I thank the noble Baroness, Lady Turner, for giving us the opportunity to discuss the issues surrounding those in ill health and those in arduous or dangerous employment. Similarly, I thank the noble Baroness, Lady Drake, for her proposed changes to the pension credit qualifying age timetable.
The amendments were tabled with the intention of helping those people who might be described as vulnerable, as noble Lords pointed out. I very much agree with the principle that we should assist those who require additional support. However, a balance must be struck between doing the right thing for those people and making the system more complex and harder to understand when it comes to delivering that support.
As I said, Amendment 9 allows for mitigations to the proposed change to the state pension age timetable for those in ill health and those in arduous or dangerous employment. While I have great sympathy for the people these amendments aim to help, the arguments against accepting them that I set out in Committee have not changed. The changes would make the system too complex.
I will pick up a point made by the noble Baroness, Lady Drake, about the life expectancy of people on low incomes. There is good news here. Male manual workers saw a two-year increase in life expectancy at the age of 65 between the 1992 to 1996 and the 2002 to 2005 assessment periods. Women manual workers saw a one-year increase. When one drills down into the figures—I was looking at them this morning—one sees an acceleration for manual workers. Perhaps the nature of manual work is easing. In the latest period, life expectancy for both men and women improved more rapidly for manual workers than for non-manual workers. Between the 1997 to 2001 and the 2002 to 2005 periods, male manual workers saw their life expectancy rise by 1.2 years, against 0.8 years for non-manual workers. Clearly in this latest period there is very good news.
As I said, we have already made strides on the value of the state pension by introducing a triple lock. As we discussed, we are looking to reform and simplify the state pension, which has become unbelievably complex.
Baroness Drake
Perhaps I should have intervened a sentence or two earlier, but I was not sure whether the Minister had finished on the longevity point. I accept his point that the life expectancy of certain lower socioeconomic groups has also improved. However, the evidence of the Marmot review and of a recent NAO report also shows that inequalities are increasing in healthy life expectancy, and that this group is less likely to be healthy and therefore less able to re-enter the workforce at short notice in the accelerated timetable. I accept the general proposition about improving the state pension age.
Lord Freud
I thank the noble Baroness, Lady Drake. We could get into a long debate here that perhaps would not be hugely valuable. The figures for life expectancy, healthy life expectancy and disability-free life expectancy are all moving up. They are moving up at slightly different rates for different people, but the general movement is in an encouraging direction. Healthy life expectancy is moving up almost as fast as life expectancy—just slightly slower.
I come back to the point about the state pension age and the amendment of the noble Baroness, Lady Turner. A state pension age that is different for different groups would take us further away from the goal of a new flat-rate, single-tier pension based on contributions, which is simple to understand. It is important for the state to be clear how much someone will receive in retirement, and it should be equally clear about when they can receive it. A variable state pension age will not help this. Now is not the time to bring in further complexity by introducing bespoke state pension ages for individuals.
Adding to the complexity of this concept is the problem of defining prolonged ill health or arduous and dangerous employment. It might seem straightforward to produce a list of health conditions and occupations, but our direction with welfare reform is precisely the opposite, away from categorisation of people towards individualising and looking at how they can function and what they are doing. We are looking towards assessing each person’s appropriate pension age. Then we begin to get into very difficult territory, which we will discuss under the personal independence payment and the capability assessment. I need not spell out for a third time how difficult that is.
People are working longer and are living longer and healthier lives. We need a system that takes into account recent changes. I must accept, with regret, that some people, due to ill health, have to leave work before they reach state pension age. However, it should be acknowledged that support is already available for those people. Although they may not be entitled to a state pension immediately, that does not mean that they are left with nothing. As my honourable friend the Minister for Pensions recently said, it is not a case of going from a £97 pension to zero: working age benefits will continue to be available for those whose state pension age has increased and those who are unable to work because of health problems. They may very well be able to claim employment support allowance. Support through other benefits and credits is available today and will continue to be available in future, whatever the state pension age. Indeed, the introduction of universal credit will make it much easier to see precisely what entitlements are.
We need to ensure the sustainability of the state pension system and our proposals strike the best balance between the impact on individuals and fairness to the taxpayer. I should make one slightly technical point, to which I think many noble Lords will be sympathetic. Changes to the state pension age should be made only following agreement in this place and another place. For the Government to be able to vary the provisions of the schedule through regulation is a significant power, and one which should not be treated lightly.
I turn to Amendments 11 and 14. The arguments remain the same. It is vital that our system strikes that balance. I thank the noble Baroness, Lady Drake, for tabling the amendments and allowing us to consider the role of income-related support for those over a specified age. The amendments would keep the pension credit qualifying age in line with the existing legislative timetable for women's state pension age. Their effect would be that the pension credit qualifying age would diverge from the women's state pension age from 2016, as proposed by the Bill. The amendments, while seeking to ensure that the pension credit qualifying age cannot be higher than the state pension age, also leave the door open to retaining a pension credit qualifying age below the state pension age—possibly permanently. That seems to me to be based on a fundamental misapprehension. The underlying assumption seems to be that by keeping the pension credit minimum qualifying age pegged to state pension age, we seek to attack the incomes of older people. That is just not the case. We think that, for all people of working age, the appropriate form of support is a working-age benefit.
The Government introduced the Welfare Reform Bill, which sets out the proposals for universal credit by 2016. There is widespread support for the principles underpinning universal credit—in particular, the principle that work should always pay. We should define people of working age by using the state pension age, not that of pension credit. We have used that only because state pension age has not been equal between men and women. The upper age limit for universal credit will be set at the pension credit qualifying age. That ensures that the appropriate work-focused and work-related support is targeted at those of working age. Providing an arbitrary age for pension credit which breaks the link with state pension would also compromise that important aspect of welfare reform. If it is not state pension age, when should it be?
Baroness Drake
I must correct the noble Lord, because I think that he is misrepresenting my amendment. It asks the Government only to commit to separating pension credit qualifying age from the women's state pension age for four years, from 2016 to 2020, to mitigate the impact on a particular group. It does not ask them to commit to a policy beyond 2020; that is for the Government to decide. We already have a precedent for separating state pension age from the qualifying age for pension credit, which is that of men. The amendment would not by the back door set a formula for the future; it simply provides that for a four-year period from 2016 to 2020 there is a separation to mitigate disproportionate impact. It does not require the Government to commit beyond that.
Lord Freud
Let me accept that that is the intention behind the noble Baroness’s amendment—although when we costed it, we had to make an assumption about how we then bring it back up to pension age. We need not be technical. It is important when we debate these matters that we debate the underlying intention and not worry about precise things.
I reinforce my point: if we divorce the minimum qualifying age for pension credit from the state pension age, with the exception that the noble Baroness pointed out, the minimum age for pension credit becomes arbitrary, and people would well ask why it is at that age, not one year sooner or one year later. As life expectancy increases, more and more people will want to improve their incomes by working for longer. We should celebrate and encourage that. The amendment goes completely against that principle. We are clear that we want people below state pension age to work if they possibly can. The point of the proposals is not to take money away from people, as some noble Lords have said, but to encourage people to go on working longer, which should leave them with more income. We cannot give up on those people. They deserve our help and support in their endeavours to support themselves.
The other misapprehension is that there is inadequate provision in the universal credit for those who cannot work—people in ill health or people who have worked in manual jobs, who may not be able to continue working as state pension age increases. Again, that is simply not the case. Universal credit is intended to provide appropriate levels of support for those of working age, including those who, for whatever reason, are unable to work or have limited capacity for work.
The amendment will give no comfort to those who want to make entitlements much clearer and more transparent in an effort to ensure that they reach those who need them. It would mean providing complex and confusing information to customers. Unfortunately, it would come into place just when we are introducing universal credit, which is designed to have a pure, simple messaging to people to convince them of how they need to interact with the state. By producing this new, complicated system, we would undermine that simple messaging.
Quite apart from the messages, it would also add significantly to the complexity of the benefits system, confusing the people it is designed to help and the organisation delivering it. In order to deliver that confusion, which would obscure entitlements and potentially discourage people from working in the years before they get their state pension, the amendment would present the taxpayer with an unaffordable bill. For the financial years 2016-25, we estimate that it would be around £1.9 billion, and there would be further costs in the years to follow, depending on when it is withdrawn.
The amendment would add complexity to the system and have the effect of withdrawing valuable in-work support for people below state pension age. It would obscure entitlements for those who need them most and incur a very substantial increase in expenditure. I think I have clearly set out the rationale for the Government’s position. It is simply impractical to assume that the system will be improved by adding further complications to an already complex beast. For these reasons, I urge the noble Baroness to withdraw the amendment.
Baroness Drake
“Qualifying age for pension credit
(1) The Secretary of State must make regulations setting out the qualifying age for pension credit.
(2) The qualifying age for pension credit from 6th March 2011 until 6th March 2020 shall be set so that the timetable in Schedule 6 (Graduated timetable: qualifying age for pension credit) has effect.
(3) After 6th March 2020 the qualifying age for attaining pension credit shall be set at an age that does not exceed the age at which a person qualifies for the state pension.”
Baroness Drake
This amendment has been debated, but I want to restate that the cost of this amendment, based on the department’s figures, is £0.75 billion because we are looking at the period 2016-20. I am conscious of the business of the House, so I do not have the time to go into this, but universal credit does not match the generosity of pension credit for those who cannot re-enter the workforce in the accelerated timetable arising from the more rapid move to equalisation. I do not think that complexity is a defence against protecting the poor. I wish to test the opinion of the House.
Baroness Drake
Baroness Drake
My Lords, I rise to move Amendment 15 and speak to Amendments 16 and 19. The definition of the workforce who will be automatically enrolled into a workplace pension and benefit from the employer compulsory contribution and the tax relief or credit is a very important matter. The reforms captured in the Pensions Act 2008 were intended to achieve very wide coverage of the working population to facilitate them saving from a relatively early age, and for the private pension system to work for women.
Our concern with this Bill is twofold. First, Clause 5 excludes 600,000 people from auto-enrolment into a workplace pension by raising the earnings threshold a worker would need to reach, referred to as the earnings trigger, from £5,715 to £7,475. Secondly, Clause 8 gives too great a power to the Secretary of State to raise that earnings threshold and so reduce even further, by potentially some 1.4 million, the size of the working population who will, or could, benefit from automatic enrolment into a workplace pension. Amendments 15 and 16 seek to retain the earnings trigger at £5,715. The purpose of Amendment 19 is to limit the Secretary of State’s power on the extent to which he can raise the level of earnings threshold, once set, to no more than the higher of the increase in prices or earnings.
I turn to the reasoning behind our amendment. The Johnson review, commissioned by the Government on the automatic enrolment policy, concluded that the earnings trigger for a worker to be automatically enrolled into a pension should be aligned with the tax threshold, which will be £7,475 from April, and will rise to £8,105 from April next year. As we know, the aspiration of the Government is to raise it to £10,190. The Government accepted the Johnson recommendation and had committed to a figure of £7,475. The presumption of the Johnson review was that the earnings trigger would remain allied and track the tax threshold.
Although the Minister has stated that the Government will not necessarily automatically chase the tax threshold when setting the earnings trigger for automatic enrolment, Clause 8 of this Bill amends Section 14 of the 2008 Act and gives the Secretary of State unfettered discretion to do just that and increase this earnings trigger in line with the increase in the income tax threshold. Given the Government’s aspiration, if the earnings trigger chased a future income tax threshold of £10,190—in 2011-12 earnings terms—a further 800,000 workers would be excluded in any one year from automatic enrolment. Seventy-six per cent of these people would be women. Consequently, of the group targeted to benefit from workplace pension reform, 66 per cent would be men, but only 34 per cent women.
So many workers should not be excluded. Excluding a further 1 million people and losing £40 million per annum of employer pension contributions does not support the overarching objective of enabling low to moderate earners to save. It would have a disproportionate impact on those working part-time, of whom 5.87 million are women and 1.94 million are men. Recent labour market figures revealed that some 27 per cent of the workforce is now part-time. These figures also show two peaks in part-time working by women, one which straddles the 30s and 40s age group and one which is post-50. Under the provisions of Clause 8, they could be excluded from the benefit of automatic enrolment for significant parts of their working lives.
Baroness Drake
I thank the Minister for that detailed response. I will reflect on some of the points that he has made.
I have sympathy with the point my noble friend Lady Hollis made that, if one spends time on the evidence compiled in the Johnson review, one can see that it can be deployed for not raising the threshold as persuasively as it can for raising it. That is one of the problems. Certainly, there is some persuasive evidence in that review that the earnings trigger should not rise above the order of £7,475 in today’s terms. Even looking at that evidence and listening to the Minister’s arguments, I can understand—I may not accept—the argument that runs that if one is moving to a single-tier flat-rate pension of £140, then an auto-enrolment figure of £7,465 may be appropriate, but that does not go to chasing an income tax threshold to £10,190, which is designed to achieve something quite different.
When it comes to the issue of replacement rates or who should be smoothing their income over their lifetime, and who needs to firmly hold on to their income over their lifetime because they are not well off enough to let it go and smooth it, we have to be very careful what is said. Again, I go back to the Johnson review; most people are not persistent low earners. Their aspirations on their replacement rates will not be determined by the low earnings they may have at a particular point in time; and those low earnings should not interrupt their persistency of savings. Equally with women, one has to look at household income, because one of the principal points of the pension reforms was that they work for women. As the Johnson review itself said, they may be in a household with someone who is working full-time or earning much more; they may be precisely the people who should be saving and their period of lower earnings as a part-timer may not be at that level over all their working life. Equally, to get the desired replacement rate, one has to have persistency of saving; one will not get there on five or six or seven years of saving. If one sets a trigger for auto-enrolment which interrupts that persistency of saving when someone moves to a lower level of earnings, that is not very efficient. Also, for those on lower and more modest incomes, no reference was made to how the tax credit system can make it pay to save, providing tax relief as high as 50 per cent or 60 per cent for some individuals, which when taken with the employer contribution should not necessarily be income forgone.
We will look with interest at the impact assessment that will be brought forward in each of the next five years, because I have expressed our concerns on this issue. Flexibility for changing circumstances is often driven by short or medium-term considerations: having a successful pension system is a long-term project and it needs people to be engaged in saving over a very long period. Having expressed those reservations, and recognising that there will be an impact assessment, I am sure that others will return to this issue. I beg leave to withdraw the amendment.
Pensions Bill [HL]
Baroness Drake Excerpts(13 years, 9 months ago)
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Lord Freud
My Lords, I shall speak also to government Amendment 45. The backdrop to many of the measures set out in Part 2 of the Bill is to provide employers with greater flexibility and to ease their burdens. These amendments continue that practice.
With regard to Clause 10, Amendment 44 introduces an amendment into Section 32 of the Pensions Act 2008. The purpose of the amendment is to make it easier for employers, in collaboration with their scheme trustees or managers, to make certain improvements to their occupational money purchase pension scheme and some hybrids to meet the requirements of a certification test. The modification powers in Section 32, as amended by Clause 12, enable trustees or managers to make certain improvements to their scheme by resolution with the employer’s consent to comply with the automatic enrolment requirements. Amendment 44 extends this facility to employers using certification.
Self-certification will provide employers with a straightforward way of ensuring that their money purchase pension scheme satisfies the relevant quality requirements. Employers intending to use self-certification will need to ensure that their scheme satisfies the relevant requirements both at the outset and on an ongoing basis. We have just debated the self-certification option. The point is that this amendment will make it easier for employers, in liaison with their trustees, to make improvements to their schemes in order to comply with the automatic enrolment requirements.
Government Amendment 45 is a technical amendment to Section 30 of the Pensions Act 2008. Section 30 allows employers who are using defined benefit and hybrid schemes to defer the automatic enrolment date for jobholders when certain conditions are satisfied. Where certain conditions cease to be satisfied during the transitional period, the employer must ensure that the jobholder is enrolled into an alternative scheme.
At present, the Pensions Act 2008 restricts the employer to using either another defined benefit or hybrid scheme, or a money purchase scheme, as the alternative scheme. The amendment provides employers using defined benefit or hybrid schemes with greater flexibility around their choice of an alternative automatic enrolment scheme. It will allow employers to choose to enrol jobholders into a personal pension scheme. This is in line with the original policy intent of giving employers maximum flexibility.
Under the amendment, we intend to amend the automatic enrolment regulations to ensure that an employer who intends to use a personal pension scheme for this purpose provides the jobholder with information about the scheme. This mirrors the existing arrangements for money purchase schemes and therefore provides parity. As has already been mentioned, the amendment will ease burdens on employers and provide them with greater flexibility.
To address the concern about whether employers might abuse these amendments, we will monitor trends along with pay and reward packages. If we identify that employers are manipulating the test, the Secretary of State has the power to strengthen the test or, as a last resort, to repeal the legislation. I beg to move.
Baroness Drake
My Lords, as anticipated by the Minister, I rise to express reservations about government Amendment 44, which continues to give rise to the anxieties expressed by my noble friend Lord McKenzie. While on the face of it the amendment appears to be somewhat benign, aimed at improving the drafting of the Bill, on more detailed reading it raises anxieties, certainly in my mind. As I understand it, this amendment would allow trustees to change pension scheme rules to enable their employers to meet the regulatory test set by the Secretary of State for the alternative requirement for certifying that their scheme meets the qualifying earnings contribution standard—the alternative requirement regulatory test, which my noble friend Lord McKenzie was addressing in Amendments 42 and 43.
My anxieties are twofold and I will try not to be too technical in addressing them. First, the intention behind the regulatory test for the alternative certification to the normal statutory quality requirement was, I believe, to assist good employers who run good schemes but who use a definition of pay for pension purposes other than earnings. However, either their scheme meets the test or it does not. An assessment against that proposition should stand or fall on its own merits. Having made the concession of an alternative qualification test, surely one cannot allow scheme trustees to change their scheme rules in order that the alternative regulatory test is met. That strikes me as changing the original intention of the alternative test and encouraging arbitrage by bad employers, particularly if that regulatory test is weakened, because if a bad employer—and I know that good employers will not do this—can see the benefit of redistributing pay between base pay and other elements of earnings, they may be able to avoid paying contributions on a segment or proportion of members of their workforce. If we have good employers—and the primary intention of this regulatory test is to allow them to show that they are good employers—I do not see why the proposition cannot stand or fall on that basis and why we need to allow subsequent amendments to the scheme rules.
Secondly, the Bill allows for the regulatory test, as my noble friend Lord McKenzie has said, to make an assessment for an employer’s workforce as to whether it meets the contribution requirement at the aggregate level. However, it allows simply for an assessment for a majority of employees at the individual level and, in that way, the regulatory test can still be met. This amendment appears on the face of it to allow trustees to change their scheme rules, with the effect that some individuals are made worse off, under both the scheme rules and the statutory provisions, because no one has disputed that it is possible for some individuals—maybe up to 5 per cent or more, even on the Government’s own arguments—to be excluded from a contribution to which they might have had access if the statutory provisions had been strictly applied. However, we now find the situation where a group of individuals could be made worse off—not only under the statutory provisions but also under their scheme rules—but where an employer can still meet the regulatory test.
I am also concerned that this regulatory test could be made weaker. The consultation on the regulatory test, as outlined by the Minister, has not concluded. We know that it is ongoing, so we do not know what will eventually be brought forward in the regulations. If the regulatory test becomes weaker, the problem could become worse, because there is an even greater incentive to change the scheme rules to take advantage of that regulatory test. Therefore, I have reservations.
Baroness Drake
(c) the amount available must be no less than that available on the open market option.”
Baroness Drake
My Lords, this is a probing amendment to understand fully the implications for scheme members in cash balance schemes that are not contracted out or where members have not accrued benefits on a contracted-out basis. This clause removes the requirement to index pensions that come into payment at a future date under cash balance schemes.
I have two concerns. In the first instance, cash balance schemes usually fall into one of two types. The first is cash balance with guaranteed conversion terms, whereby the pension pot at retirement is defined, based on the proportion of salary set aside each year and the guaranteed rate of interest earned, and the pot is converted to pension on guaranteed terms that are set by the scheme at an agreed point before retirement. Once in payment, the amount of pension is guaranteed. The second type is a cash balance scheme with open market annuity, whereby the pot is converted to pension on open market annuity rates and, once in payment, the amount of pension is guaranteed.
My concern is that, under the open market option, an individual has a choice between a level and an indexed pension, whereas the effect of the clause—on first reading of the Bill—could require an individual in a cash balance scheme to accept conversion of their savings pot into a pension on terms that were potentially less favourable than those available on the open market option, given that they could not have access to an indexed pension. Hence my amendment, which seeks, on removal of the indexing requirements, to anchor the conversion rates in cash balance schemes to being no less favourable than those available on the open market.
My second concern arises from the removal of the indexation requirements from cash balance schemes that are not contracted out, as the Bill states. Given the Government’s aspirations to accelerate the integration of the basic state pension and the state second pension into a single state pension, which will result in all schemes being contracted in, what would be the implications for scheme members who had not yet converted their assured sums into pension from their previously contracted-out cash balance schemes but had a reasonable expectation of indexation? I beg to move.
Lord Freud
My Lords, the amendment would require that an annuity without indexation bought by a cash balance scheme member or the pension provided by the scheme must be no less than that available on the open market option. In moving the amendment, the noble Baroness, Lady Drake, raises an important issue.
It is important that individuals can shop around to get the best type of annuity for them at the best available rate. This will affect their level of income for the rest of their lives. This clause, which gives members of cash balance schemes more choice about the shape of the income that they take in retirement, will support this. However, in compelling members to take a pension of no less than that available on the open market option, there arises a practical difficulty.
Annuity pricing is now highly individualised. Most providers offer rates by postcode. Enhanced and impaired life annuities also offer significantly higher rates for those with health conditions or lifestyles that are likely to reduce their life expectancy. This makes it difficult to establish what the right open market rate for comparison should be and very difficult for schemes to establish a workable process to find out what a member is likely to be offered on the open market.
In addition, different types of annuity offer different starting payments. For example, an individual might wish to buy an annuity with a guarantee period. This is likely to give a slightly lower payment, but it gives the member a guarantee that the annuity will continue to be paid if they die before the end of the guarantee period. This is unlikely to represent the best available rate on the market, but is it right to deprive the individual of this choice? For these reasons, I believe that any amendment of this nature would be unenforceable and, as a consequence, unworkable in practice.
I would like to pick up one of the questions that the noble Baroness asked with reference to further reforms to the state pension. It is too soon to speculate about those—certainly, it is too soon for me to speculate about them. We believe that it would be too difficult in practice for schemes to separate out periods of contracted-out service. The same scheme member may have periods of contracted-out and non-contracted-out service. There is also a danger of the possible franking of one benefit against increases to another. All those schemes that have been contracted out on a defined contribution basis no longer have to provide an indexed annuity. Schemes that are contracted out on a defined benefit basis, either where a guaranteed minimum pension is payable or on a reference scheme test basis, have to provide indexation to the relevant level. With that explanation, I urge the noble Baroness to withdraw the amendment.
Baroness Drake
I thank the Minister for that response. I have sympathy with what he says because I would be the last person to want to discourage cash balance schemes, as they allow for a degree of sharing and in today’s world one does not want to discourage that. I can see the compelling argument and I understand the point about the annuity pricing market becoming more individualised, which makes it difficult to establish an open market comparator, especially where a scheme may be wanting to set conversion terms. However, I remain concerned, as it is desirable for individuals to have the choice to access indexing, otherwise they are denied an opportunity to lay off some of their inflation risk. Given that in a DC world they bear so much risk, it would be a little sad if the unintended consequence of this Bill was to deprive to a greater extent than currently exists a group of people who would otherwise have exercised an option to go for indexing and to give themselves some protection against inflation.
I did not expect the Minister to speculate on future state pension arrangements, but I flagged up the issue as sometimes these things are forgotten. Those who have worked with me will know that I consistently flag up the impact of removing contracting out from the system, not least in public service pension schemes. Having said that, I beg leave to withdraw the amendment.
Lord Boswell of Aynho
I rise very briefly to support my noble friend Lord German, or at least his line of thinking. I have perhaps one qualification or addition to the presentation that he has given, in relation to the role of trustees. I have already declared to the Committee my interest as a pension trustee. I can assure the Committee that my colleagues and I are taking an interest in the matter of ethical and otherwise acceptable investment schemes as part of our dialogue with the fund managers who represent us and the interests of beneficiaries. I think that a little more could have been said about the role of trustees as a necessary link, in most cases, between the former employees and the beneficiaries on the one hand and the investment managers on the other. This is something that we should all be in, and nobody should cop out of it.
My second and perhaps also substantive point is to support my noble friend’s observations about the business utility of all this. I think that the Committee will know that I have a background in a number of issues connected, for example, with disability and other aspects of diversity. In dealing with the private sector I have found over the years that, on the whole, those businesses that take a mature view and consider their long-term interests actually understand the business case for awareness of these considerations. They are not after the big buck. Their reputation and their business attractiveness benefit, with a long-term beneficial result.
When George Cox was chief executive of the Institute of Directors, I remember doing a number of presentations with him on disability issues. He used to come up with the deathless phrase, “We do this kind of thing because we are the kind of company we are”. That seems to me a very good motto. That is the kind of company that as a trustee I would like to invest in, and that as a beneficiary I would like to feel that my trustees and my investment managers were steering me towards. I do not think that this is a matter of political contention; I think that my noble friend has been right to ventilate it.
Baroness Drake
My Lords, I have considerable sympathy with the amendment moved by the noble Lord, Lord German. Notwithstanding the impact of the events of 2008-09 on regulators around the world, which are no doubt focused much more acutely on governance, with the shift from defined benefit to defined contribution pension provision, which the noble Lord referred to, and the imminence of auto-enrolment, the design of the default investment funds and the investment principles surrounding them are going to gain more attention. The issue of how shareholders, particularly institutional shareholders, approach their responsibilities as owners of assets is coming under increasing scrutiny by the Government, regulators, the members of pension schemes and those who discharge fiduciary duties on their behalf.
Corporate governance, principles of stewardship and interactions between institutional shareholders and companies are increasingly considered as a coherent whole in exercising ownership rights. As the noble Lord said, defined contribution schemes in money purchase and in personal pension schemes in future shift the risk on to the individual. Although the Myners principles have improved decision-making, achieving best practice in the investment governance of pension schemes—both trust-based and, particularly, contract-based, which I will come back to—still poses a challenge.
We have seen evidence of that concern in the Pensions Regulator’s recently published consultation on investment governance in DC schemes, which included a table of accountabilities. The table aims to define and clarify the roles and responsibilities of each decision-maker in each part of the investment governance chain, but I read it again last night and, unless I missed this, it does not refer explicitly to social and ethical considerations or to exercising voting rights. Close to my heart, NEST, and its predecessor PADA, published their own document on exercising responsible ownership in a low-charge scheme. Discharging this governance in the context of maintaining low charges is equally important.
As the noble Lord, Lord German, referred to, the Financial Reporting Council published the UK stewardship code in July 2010, which is designed to lay out the responsibilities of institutional investors as shareholders and provide guidance as to how those responsibilities might be met. Pension fund trustees are strongly encouraged to report how they have complied with that code. As a conscientious pension fund trustee, I have attempted to do just that, and my own experience suggests—here I concur with the noble Lord, Lord German—that if the code is to bite, trustees will need a great deal more guidance on how to comply with it if box-ticking is not to continue to be the method of compliance with these standards.
The Occupational Pension Schemes Investment Regulations, which the amendment refers to, say clearly that when setting out their statement of investment principles, trustees should identify,
“the extent (if at all) to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments; and … their policy (if any) in relation to the exercise of the rights (including voting rights) attaching to the investments”.
It is clear that this is an area where guidance and best practice are growing in importance. Because of the political risk that Governments face, with the biggest experience of asymmetrical paternalism that we are about to see, I bet my bottom dollar that this will grow and grow. If you transfer responsibility to the individual, politically Governments have a responsibility to ensure that government frameworks are up to the job.
Clearly, there are issues around how trustees can fulfil these responsibilities. One issue that we must address—I will not dodge it—is how one can be an effective, active asset owner while maintaining low charges, and how one can effectively monitor stewardship policy when one selects passive funds. Although I am absolutely committed to the highest level of governance at every stage of the investment chain, and believe that the ability of trustees to discharge their disclosure requirements in electronic form will help, these things must always be proportionate, because in a DC world it is the individual who bears the charges. I would not want a scenario in which we say that the good news is that we have gold-plated system of governance on disclosure, but the bad news is that it will cost X per cent. Therefore, we need to look at how all the players, including the fund managers, can raise the overall level of governance.
I come back to the providers of contract-based pensions. With the shift away from DB to DC, we are seeing a big shift away from trust-based DC to contract-based provision. Therefore, if we talk only of a model for how the trustees will discharge their governance function in this area, we will miss an ever-growing part of the pension provision market. A big issue, with which I know others are concerned, is who in a contract-based provision world should accept the fiduciary responsibility of designing the default fund or deciding how investment governance should be discharged. This takes us into areas where the Pensions Regulator has no reach. The guidance and regulatory framework must catch up with the shift from trust-based to contract-based provision, because in a contract-based provision world there are no trustees, unless there is a master trust, on whom to place clearly the fiduciary duty. It is clear that the Government will need to look both to the Pensions Regulator and to the FSA or their successors to raise the governance standards in the way that the noble Lord, Lord German, seeks through his amendments.
Lord Freud
My Lords, I thank the noble Lords, Lord German and Lord Stoneham, for tabling these three amendments. They encourage trustees and managers of occupational and stakeholder pension schemes to engage more fully with environmental, social and ethical considerations in the selection and retention of their investments. These are important issues. They resonate with me personally. I remember writing many a happy Lex column in the 1980s on the structural issue. The issue is the separation of the responsibilities of ownership and the attraction of investment returns in the marketplace. Trying to get them back together has proved very difficult. A lot of effort has been thrown at it in the past decade, with the Myners principles and the IGG.
The amendments would have a similar effect on the trustees and managers of occupational and stakeholder pension schemes. Therefore, we should look at the amendments together. There has been a consensus in many previous debates on social and environmental issues that companies perform better when their activities are monitored by shareholders. Therefore, it is important for pension funds and their investment managers to be transparent in publishing their approaches to such issues in their statements of investment principles. That is why this Government, like the previous Government, have been open to suggestions on how to improve this process. In the end, it is a matter for managers and trustees to determine the level at which they engage and what is appropriate for them. It is a statement of the obvious that small schemes, in particular, may not be able to take account of governance issues to the extent that large schemes can.
Baroness Drake
My Lords, I am very sympathetic to the amendment, which draws attention to the need to bring a practical resolution for those individuals who have not been able to benefit fully from the Gender Recognition Act 2004. I compliment the noble Lord, Lord Boswell, on raising the matter, because the issues facing transgendered people are considered too infrequently. They will appreciate the fact that their concerns are being recognised in the amendment and in the debate.
As noble Lords said, the welcome introduction of the gender recognition certificate in 2005 meant that individuals for the first time could have their acquired gender formally recognised. However, as with all changes of this type, some individuals are caught in the transition process and risk losing out. As the noble Lord, Lord Boswell, indicated, there are no official data on the size of the transgender population, so it is difficult to quantify the number of individuals who would benefit from a resolution in the manner of the amendment. However, it is clear that the number of individuals is likely to be very small. Therefore, it is unlikely to make a substantial financial difference to government expenditure, although it will do for the individuals concerned.
The Gender Recognition Act 2004, which was introduced in 2005, brought in the official process to recognise gender change. For those who transitioned prior to 2005, there was no official recognition of their change in gender, although the DWP, to the extent that it could use its discretion, was often sympathetic in allowing the change to be recognised in some circumstances. Since the introduction of the gender recognition certificate, an individual with such a certificate is are treated as though that is their natal gender. The amendment seeks to ensure that those who transitioned prior to the implementation of the provisions, and those who did so immediately after the Act came into effect, are not disadvantaged.
The primary beneficiaries of the amendment would be male-to-female transgendered people who reached female state pension age before 2007. At present, they are unable to claim their state pension for that initial period. For example, a male-to-female transgendered person who turned 60 in 2005 but got a gender recognition certificate only in 2007 would not have received the state pension until they gained the certificate in 2007. Therefore, they feel that they lost two years of state pension provision given their acquisition of the female gender. Also, as we know, the women's state pension would have been based on a lower number of working years—39 years for women as against 44 for men. The amount that would have been accrued and credited, as well as the time at which it was paid out, would have been different.
The noble Lord recognises in his amendment that there could be losers. Female-to-male transgendered persons would face the reverse issue to the one that I described for male-to-female transgendered people. The aim of the amendment is to ensure that there are no losers. It seeks to implement the provisions to the detriment of no one. I do not know whether the Minister will pick up on that point. It is a not unreasonable position because those most affected, who will be small in number, would have been near to pension age and would have had less time to adjust to the implications of that.
There will be other issues, such as those relating to divorce. When one partner wishes to transition with a gender recognition certificate, the couple cannot legally remain married. They must divorce and become civil partners. That could create winners and losers. The noble Lord, Lord Boswell, is right to say that what he aspires to achieve in the amendment should not be done in a way that is detrimental to the entitlement of anyone affected. I commend the noble Lord for addressing the sense of unfairness to a small group of individuals, and I join him in urging the Minister to address it.
Lord Freud
My Lords, the amendment seeks to provide a remedy for a group of older transsexual people who have missed out on full state pension rights because the Gender Recognition Act does not allow for retrospective legal recognition of a person’s acquired gender. This is a very complicated area, as my noble friend Lord Boswell pointed out. He spared us some of the detail when he introduced the amendment, but I should take a little time to outline the issue and give him the up-to-date information on the current position.
A transsexual person is someone who desires to live their life permanently in the opposite sex to that which they were assigned at birth; although “assigned” might be the wrong word. This desire often stems from a medical condition called gender dysphoria. The Gender Recognition Act, effective from April 2005, allows transsexual people, through the granting of certificates, to gain recognition of their acquired gender for all legal purposes. It covers only people who have suffered from gender dysphoria.
It is a general principle of our legal system that the laws relating to legal status should have only prospective effect. This ensures legal certainty and clarity. There was no reason to depart from this principle when the Gender Recognition Act was introduced, as my noble friend will be fully aware. Although the Act established future rights, a question remained over the past.
The position on the equal treatment rights of transsexual people for periods before 2005 was tested in the domestic and European courts. In 2006, the European Court of Justice held that it was discriminatory not to have had a means of recognising a person’s acquired gender, for social security purposes, prior to the introduction of the Gender Recognition Act. However, importantly, the court left it up to the UK Government to set the conditions for granting equal treatment for periods prior to the introduction of the Gender Recognition Act in 2005. The European Court clearly considered that it provided adequate cover for periods after that date.
Perhaps I may give my noble friend more up-to-date figures than those he might have. Records held by HMRC suggest that around 750 people in the UK are likely to gain from the European Court ruling, compared with the figure of 50 that he imagined. Under that ruling, where a person is successful in their equal treatment claim, we would need to make increased state payments on the basis that they had foregone all entitlement from the age of 60 or the date of surgery, if that was later. The costs of making such payments would amount to somewhere between £9 million and £38 million over the lifetime of the award. One can recognise the level of uncertainty surrounding that wide spread.
Pensions Bill [HL]
Baroness Drake Excerpts(13 years, 9 months ago)
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Baroness Hollis of Heigham
My Lords, this amendment is about voluntary earnings. Who do we think NEST is for? It is basically for poorer people, mostly women, who are not able to save in conventional ways and have hitherto had no access to an occupational pension. The other two members of the Paul Johnson review team that produced the report Making Automatic Enrolment Work are very experienced people, but they come from the industry and employment side. Their report recommends that auto-enrolment begins not at the LEL of £5,204 but at the earnings threshold of just under £7,500. This means that 1 million people, mostly women, who would have been automatically enrolled will now not be. The expectation is that ET will rise potentially to £10,000, at which point 2 million people, mostly women, will not be automatically enrolled.
The report runs two arguments in favour of raising the threshold. I think that both of them are fallacious. The first argument that the report runs is that—it is, of course, true—very low earners have high replacement rates in retirement through benefits and so on, so that NEST is not necessary, unlike for higher earners, for whom state benefits by definition represent a lower replacement rate and who might therefore wish to take advantage of NEST. The second argument that the report runs—as you would expect from the industry—is that they do not want to handle such small sums. That is the basis of their argument and the Government have followed their advice.
The first of these is about replacement earnings. It is, of course, true that, if you have a low enough income from earned work, even the basic state pension backed by pension credit will come to much the same level as your wage and therefore you will have a high replacement rate. The statistics and percentages on this are all very well, but these women are still very poor. That is why their state benefits in retirement will perhaps just about equal their wage. They are still very poor, whether in work or in retirement.
A pension, however small, even if it is below the trivial commutation level, which it probably will be, gives the woman, through pension savings, a two for one to match her own—because she attracts the employer’s contribution and, to a minor degree, the tax relief, depending on where she is earning—which, perhaps for the first time, might allow her to retire with a small capital sum below the trigger commutation rate of perhaps £10,000 or £15,000, depending on how long she has saved.
I do not accept this argument. It is right that there are high replacement earnings in retirement, if you have a very low wage. However, that means that—this is the key fact behind it—both in work and in retirement you are likely be very poor indeed. This is why we need an option for NEST.
The industry’s second argument, which I also think is fallacious, although I understand it, is that employers do not want the hassle of handling small sums that, they say, would not be worth much to the employee once the means-tested benefits come into play. However, there is a profound flaw in their argument here, too.
The reason why the sums are small is that, wherever you set the auto-enrolment start line, whether it is LEL at £5,200 or ET at £7,400, the first £1,000 or £2,000 of earnings above any line that you set will by definition produce only a very modest increment in pension. That would be true whether you were on £10,000, £15,000, £20,000 or £22,000. The first £2,000 produces little additional revenue. That is why, while the argument is true that you might as well put it up to £7,500 because the difference between £5,200 and £7,500 is tiny, it is also the case for the first £2,000 of earnings above £7,500. It is true for wherever you set the threshold, so it does not apply to the figure of £5,200 as such; it applies to the fact that you have a threshold at all, which is not based on the first zero pound.
The whole of the report is fallacious, in so far as it hinges on that argument. Otherwise, if the woman is auto-enrolled at £5,200 with earnings of £7,400, her pot over 25 years, I estimate, with a levy on the £2,000 increment, will be about £10,000 greater than if she was enrolled at £7,400. But if she is enrolled at £7,400, and has earnings of £2,000 above that—say £9,400 or £9,500—she will still have the same size pot on the first £2,000 or so of income, give or take £100 or £200.
The additional pot argument, in other words, applies wherever you pitch the threshold—unless, of course, you are up in the £30,000 or £40,000 region, where by definition you have a much higher increment. Therefore, the argument that the pots are too small to be worth bothering about either is valid for wherever you set the threshold for low earners or is not valid at all. The problem is not whether it starts at the LEL of £5,200 or at the ET at £7,400; it is that it does not cover the earnings below the threshold—the first £5,200 or £7,400. Auto-enrolment on those would make the difference that matters. That is what this amendment is about.
I am pleased that the Government have agreed that, following the Johnson report, wherever a woman wishes voluntarily to enrol between the LEL of £5,200 and the ET at £7,500, the employer must contribute. As I have suggested, although that is useful, it is not enough to make a really significant difference unless it is extended to embrace the whole of the earnings from pound zero.
My amendment adduces no new principle. The Government have already agreed—unless they have changed their mind and I have not picked that up—that young people below the age of 22 can voluntarily enrol. I welcome this. The Government have also agreed—I also welcome this as a concession following the report—that low earners earning between LEL and ET can also voluntarily enrol before they hit the auto-enrolment figure of £7,500. This amendment would allow the earner voluntarily to enrol on all her earnings from pound zero, provided that she was at or above the threshold—a threshold that I would like to be the LEL for the sake of consistency.
Therefore, no new principle is involved in this amendment. It would merely bring into NEST those employees who, if they were in a standard occupational pension, would have their earnings covered from pound zero. It would merely align NEST with best practice already in occupational pension schemes—nothing new or novel. Only NEST has the LEL threshold for voluntary entry at £5,200 and ET at £7,500 for auto-entry.
What does all this mean? Take a woman on half average earnings—say £11,000 a year. Only in NEST would a third of her earnings, between £7,500 and £11,000, be automatically pensioned. If she were in an OP, her entire earnings would be automatically pensioned. I emphasise that it would be voluntary for her to make the choice as to whether she welcomes and wants this form of savings going back to pound zero, given her family circumstances.
Why is it necessary? Some 40 per cent of women at retirement may not be married; they may be cohabiting and they may or may not be financially interdependent with their partner. As a result, they need to carry their own pension. I am sure that the Minister and everyone in this Room would agree with me on that. As it stands, only a third of her income would be automatically pensioned. Should ET rise to £10,000 and she is on earnings of £11,000, almost none of her earnings—a paltry £1,000—would be pensioned unless she chose voluntarily to go back down to the LEL. Not surprisingly, this would result in the small sums which the industry finds a hassle and the employee finds disappointing and which trap employees into benefit tapers.
I will repeat the statistics that I offered at Second Reading. Under these proposals, a woman has the right to enrol voluntarily below the LEL, so a woman on £11,000 after 25 years who voluntarily saved on all her earnings could end up with a pension pot of £40,000 over 25 years. If she relied on auto-enrolment and it were to kick in with an ET of £10,000, which is what the Pensions Minister, the honourable Steve Webb, is promising us, she would retire with a pot of virtually nothing. So the difference is between £40,000 or £1,000 or £2,000.
This amendment adduces no new principle. It is about voluntary enrolment in which the employer must contribute. That principle has already been established for young people and for the gap between LEL and ET. There would be no additional small pots. On the contrary, it could well double the pots and more, to the gain of all parties concerned, and make it worth saving, which is what we all want. I beg to move.
Baroness Drake
My Lords, to my mind there are two reasons why Amendment 16, tabled by my noble friend Lady Hollis, is attractive. First, it would enable people outside the lower limit on the band of earnings who want to save to be able to. Those of us who followed the debate know that a reason for the lower limit on the band of earnings, as distinct from the earnings trigger that is now proposed, was the consideration of the persistently very low-paid workers and whether it was appropriate for them to be nudged. However, as my noble friend said, this amendment is not auto-enrolling. It allows for the active choice of the worker—an active decision of someone on low earnings for a particular job. If they choose positively to make that decision, there seems to be a good and fair reason for the employer to make a matching contribution of 3 per cent, particularly because their incomes are low. The individual would still be a worker and the 3 per cent employer contribution would also assist with the arguments about de minimis levels of contribution and the consequential impact on costs and charges.
My second reason for finding this amendment attractive is that it extends the principle that the reforms should work for women because, although women are most likely to have earnings below the qualifying band, their household income may be such that they still want to make a pension contribution. That is very important. I declare an interest because of my involvement with NEST. NEST is designed to allow someone voluntarily to contribute once they have a NEST account, although I acknowledge that there are de minimis requirements because of the need to keep costs and charges low. However, I am sure that in most instances the combination of the employer contribution and the employee contribution would go above those de minimis requirements. It could also start to address the multi-job problem where women have several mini-jobs, because individual contributions per job look low but in aggregate could be much greater. Although I fear that many women in such mini-jobs will not have the confidence to overcome the barriers of inertia and voluntarily opt in—their needs will require more systemic change, as we discussed yesterday—none the less there will be women who will want to make the active choice and who will be in circumstances where that makes economic sense and where it will assist the asset accumulation for a pension in their own name. So the proposal certainly has attractions.
Lord Freud
I do not need to write. I can confirm that. It does not have to be NEST. The pensions may or may not be NEST in each case.
Baroness Drake
If it was NEST, it would not be two pots; it would all go into one NEST account. But if the employer choice in each instance was a different pension scheme, by definition there would be two pots. To clarify on the previous debate, my understanding was that those earnings that came within the band—forget all other triggers—attracted an employer contribution. That is the critical thing. To get the employer contribution, the earnings must be in the band. If your earnings are below that band, you can opt in but you cannot trigger the employer contribution.
Lord Freud
That is exactly what I said, so I thank the noble Baroness, who is an expert in this area, for giving me the relief of not making a horrific solecism.
Baroness Hollis of Heigham
This is an important amendment, not just for this but for all the other areas where we are looking at voluntary enrolment. I hope, therefore, that the Minister will reassure us on the employer making sure that the employee in the waiting period can voluntarily enrol into a NEST scheme before it becomes automatic. I hope that he will also reassure us that employees earning above the LEL, but below the automatic enrolment threshold will be made aware of their rights. That could involve quite a considerable number in jobs where, for example, very many women work part time; I am thinking of retail, where women might work two days a week and so on. I hope he can give us some reassurance as to how he is going to operate a nudge, where there is opt-in, as opposed to where there is auto-enrolment.
Baroness Drake
My Lords, I express my support for the sentiments and views of the noble Lord, Lord German, in moving this amendment. I, too, noted the Minister’s comments on regulation on this matter. As we move nearer to the commencement of auto-enrolment in 2012, I am also conscious that both the Department for Work and Pensions and the pension regulator will need to prepare for a major programme of communication and guidance to workers and employers. Can the Minister assure us that sufficient funds will be made available for this scale of communication and guidance programme? As the Minister said, this is the biggest ever example of asymmetrical paternalism, and, given the constraints on public expenditure, the old phrase about not spoiling the ship for a ha’porth of tar, is extremely important in this instance.
I, too, agree with the noble Lord, Lord German, that, if individuals are to be given the right to opt in during the deferral period, it has to be a meaningful right, understood both by the employer and by the employee. A meaningful right to me means three things: do you know you have it; do you know how to exercise it; and do you not suffer a detriment in exercising it? That is quite important if the three-month waiting period is to have integrity for the reasons given as to why a three-month period is needed and the individuals none the less can opt in. It is quite important that guidance and culture meet those three requirements. I hope there is guidance to both the employer and the employee that makes the opt-in opportunity meaningful.
Lord Freud
My Lords, I thank my noble friends for this amendment, which would require us to make sure that guidance is issued to employers and jobholders explaining their rights during the waiting period under Clause 6, including their right to opt in. Let me try to describe what our plans are in this area and explain why putting it in the Bill could potentially be counterproductive. We aim to specify in regulations how quickly the employer must give a notice to the individual about the waiting period. We will also set out in regulations what information that notice must contain, and any other accompanying information the employer must provide. In particular, this will include information about the right to opt in during the waiting period.
We recognise the need to provide certainty as quickly as possible, as my noble friend Lord German pointed out. We intend to put out the draft regulations after what we call a “soft consultation” period in April. We intend in this way to inform employers of the requirements around waiting periods as soon as possible. To use the waiting period provision, employers will have to provide information to individuals about their right to opt in. It is essential that employers understand the operation of the waiting period and their obligation to provide information to affected workers. That will be done through the Pensions Regulator, who is developing clear guidance for employers explaining their duties under the reforms and including information about the waiting period. The Pensions Regulator plans to publish the guidance in the current year.
Lord Freud
We have committed to monitor this situation quite widely, in particular how the waiting periods are working. It is essential to get it right. We have not developed the specification of that monitoring, but we will do so. We will watch closely that and other issues.
Baroness Drake
The three-month waiting period gives rise to concerns over bad employers. However, on the monitoring point, the Pensions Regulator has an obligation to monitor and look for non-compliance. One of the ways in which they will do so is by looking at the number of employees in a firm who have been auto-enrolled, because they will at least get a sense from the numbers involved whether there is a flashing red light over compliance. The problem is that the Pensions Regulator will focus on where the biggest risks are and look at the bigger employers first. If the compliance hazard is around small employers, there has to be discussion with the Pensions Regulator, because compliance monitoring is resource-intensive. Even if one was running the argument that the problem can be picked up in compliance monitoring, the requirement on the regulator to be risk-focused and therefore to target where they think the greatest non-compliance issues would be, or to get scale of coverage on non-compliance, could be a problem.
Lord Freud
I repeat that we are committed to looking at waiting periods and there is a general duty on the Pensions Regulator to look at compliance. If we suspect any kind of systemic abuse, our aim will be to find it in our monitoring. For example, we might look at it from the other end and survey individuals, perhaps those in the low-paid environment, who are at risk. However, this is an issue that we are alive to, and this debate has made us even more so. I therefore need to thank the noble Lord for raising it.
Baroness Drake
Baroness Drake
My Lords, I shall also speak to Amendments 29 to 32. Please forgive me if I take a little of your Lordships’ time on this matter, because I feel strongly about it. The policy of auto-enrolment—or asymmetrical paternalism, because we should give the friend of the noble Lord, Lord Freud, his due recognition—has the broad support of all the main political parties and stakeholders. That broad support and consensus are important. However, let me capture our concerns which led to the tabling of this and the associated amendments.
The definition of the workforce who should be auto-enrolled into a workplace pension and benefit from the contingent employer compulsory contribution and the tax relief or credit is the product of both thorough analysis and the iterative process required to deliver such a widespread consensus. The definition of the workers to be covered by the new employer duty to automatically enrol, the band of qualifying earnings and the minimum contributions are all captured in legislation. The intended outcomes include the need to achieve a very wide coverage of the working population, including low-income to moderate-income earners, to facilitate them saving from a relatively early age given the long years of saving needed to achieve an adequate income in retirement, and for the design of the private pension system, as well as the state system, to work for women.
On taking office, the Government commissioned Paul Johnson and his colleagues to review the auto-enrolment policy and its provisions. I commend and thank the Government for holding to the main thrust of the policy that was enshrined in that consensus and captured by the previous Government through the Pensions Act 2008. I am sure that maintaining that position did not come without its challenges, not least, no doubt, in exchanges with the Treasury, so I would be the first to acknowledge my thanks to them for holding to the main thrust of the policy.
Our concern, however, is that Clause 8 gives to a Secretary of State too great a power to significantly change the population of workers who will be the beneficiaries of auto-enrolment—in particular, the power to raise the age requirement for a qualifying worker above the current age of 22 and the power to raise significantly the earnings threshold at which a worker would qualify for automatic enrolment.
The purpose of Amendment 28 and those associated with it—Amendments 29 to 32—is to probe why and in what circumstances the Government would wish to raise the qualifying age. It is also to limit the Secretary of State’s powers on the extent to which he or she can increase the level of the earnings threshold at which the automatic enrolment of a worker would be triggered and to require the Secretary of State to provide an impact assessment to accompany any order to increase or decrease any of the amounts that he is empowered to increase or decrease under this clause.
Lord Freud
All this is saying to me that, right now, uprating measures for entry and savings levels need to be flexible. Therefore, we want to maintain flexibility to consider a wide range of economic measures. Pensions cast long shadows. Pension law has to last for the long term. We believe it is prudent to build in maximum flexibility for all eventualities, as regrettably we do not have 20:20 foresight.
I sympathise with the intention behind the amendment and I understand the concerns about any unfettered discretion or an unrestrained dash to a £10,000 trigger. However, the primary aim here is to ensure that we target the people who should be saving, while excluding those who should not. If, at the same time, we can align with a threshold that employers are already familiar with and minimise administration burdens, so much the better.
Automatic enrolment has to be sustainable. My worst fears are that we set rules which scoop up people who cannot afford to take a hit on their pay packet. If we get the trigger wrong—if we set it too low—we risk high levels of opt-out. Once we do that, we turn people off pension saving, even if we have applied asymmetric paternalism to get them to save. To get the trigger right, we need flexibility.
Today’s debate is further ample evidence that the automatic enrolment earnings trigger is a matter of deep interest and concern to this House. For that reason, we want to ensure that the House has an ongoing opportunity to debate this issue. We recognise that including such a flexible power to amend figures that appear in primary legislation represents a very broad power, and that is why the uprating order will be subject to an affirmative resolution procedure. It will mean that this complex issue, and the exact rates set for the launch of automatic enrolment, will be the subject of a full debate to ensure complete transparency.
It would be unusual to commit to an impact assessment in the Bill, as requested by the noble Baroness, Lady Drake. However, I make a commitment to provide an impact assessment for the next five years, up to the 2017 review and shortly afterwards. This will allow time for the reforms to bed in and for us to understand the wider landscape. Therefore, there will be full information on the uprating order as a basis on which the House can conduct the debate.
I hope that I have been able to set out the case for flexibility and the need to future-proof these provisions. I also hope that I have provided the reassurance on transparency that noble Lords are seeking with their request for an impact assessment. However, I regret that I cannot give a guarantee that the trigger for pension saving will in future be set in complete isolation from prevailing personal tax thresholds. I am afraid we are unable to accept the amendments and I ask the noble Baroness to withdraw this amendment.
Baroness Drake
I thank the Minister for his response but I am not persuaded by his arguments to feel confident. I come back to the point that I made in moving the amendment: the UK has a history of making what it feels are good incremental adjustments to the design of the pension system for short-term considerations. Inevitably, 10, 20 or 30 years downstream, there will be a sub-optimal outcome in the strategic sense, and there will then be a rush around to try to find plasters to deal with that. I worry that the ease with which the earnings threshold could be raised so significantly is a potential example of the same error being made in the future.
The Minister said that the Government wanted to retain flexibility. I do not think that I am arguing about the Government not retaining flexibility; I was seeking to put a limit on the extent of that flexibility that can be addressed through an order, because I think that the threshold for earnings is so significant. The Minister said that he had listened to employers and pension providers. That is good, because employers are very important in this new settlement. However, there are also consumers and citizens whose views and interests in this matter are equally important. These reforms represent a contract with citizens, whereby the Government are expecting them to take greater responsibility for providing for their own income in retirement, and also for removing the state from any responsibility for any earnings-related second-tier provision. It is therefore very important that the employers’ views are engaged because they are part of the tripartite delivery of this. I do not demur from that at all. Equally, the view of the citizens, or those who are able to speak for them, is also to be represented. Something as significant as the trigger for the earnings threshold will be very important for them and for the outcomes of their saving activity.
In the amendment, we were seeking to give the Government the flexibility which at least kept broadly constant the proportion of the population covered by automatic enrolment, with some degree of variation either way. But if there is to be a major change in the threshold, I do not believe that that should be done by an order—even by an affirmative order. It is of such significance to the outcomes to the pension reform programme over time and there should be a high level of awareness of the consequences. People should understand the impact and all interest groups should be involved in that decision.
The Minister referred to a possible change in the state pension system in the future. Speculating, the change will be accelerating the flat-rating of the state second pension and integrating and bringing forward the two into a replacement single state pension. Presumably that would strengthen the argument that raising the earnings trigger, other than by reference to earnings or comparable situations, should not be raised significantly.
I remain concerned because the arguments deployed by the Government for wanting to retain the level of flexibility that will allow them to raise the earnings trigger so high are not very persuasive. I beg leave to withdraw the amendment.
Baroness Drake
My Lords, I share the concerns of the noble Lord, Lord German, and I am pleased that he has tabled this amendment, as it allows us to debate a matter which is of increasing concern to consumer groups, such as Which?.
There is a real issue of how the Secretary of State exercises his powers under the 2008 Act in terms of setting qualifying standards. Here, we are seeing two tensions coming into play. With higher levels of scheme membership, which automatic enrolment will bring, increasingly employers will not want to retain former employees—the leavers—in their trust-based DC schemes. They will prefer to transfer them out or default them into some form of personal pension. That is not necessarily an irrational position for an employer to take but the former employee—the leaver, the deferred member, the not-contributing-to-that-pot member—will move away from the preferential charges structure that their employer may have negotiated into a personal pension scheme with a much higher level of charge.
Where the employer workplace pension is delivered by a contract-based provider, both the employer and the contract provider may have an interest, for different reasons, in defaulting a departing employee or leaver into a personal pension which will very likely have higher charges, the employer motivated by not wanting to be responsible for a former employee and the insurance company because it does not want to maintain the lower charges for a non-contributing former employee. As the noble Lord, Lord German, has said, we have already seen instances of insurance companies offering active-member discounts, which, like Which?, I always say can be described as inactive-member premiums in terms of the charges raised. I know that this is something preoccupying the National Association of Pension Funds because it wants to set a quality mark and it knows that this is a particular problem.
In a world of auto-enrolment with an average of 11 job changes over a lifetime and the prospect not only of the difficulty of achieving a transfer but sometimes the costs involved in transferring and consolidating pension pots, there will over time be an increasing number of individuals who will have pension pots into which they are not actively contributing. It is this status of not actively contributing to the pension pot which leaves people vulnerable to the high or higher charges and the consequent returns on their pension contributions.
Therefore, whether the Secretary of State uses the opportunity of an amendment such as the one tabled by the noble Lord, Lord German, or the powers reserved to him in the 2008 Act, he will need to think about what he chooses to do to control the vulnerability of workers to escalating charges on pension pots where they are not actively contributing because they have changed their employer. I am confident that that problem is not going to go away. Which? is seized of it, as is the NAPF, and it is something that the Secretary of State is going to have to address. It is not just a case of looking at the charges when somebody is actively contributing and accruing; there is the question of what is happening to the charges when people are no longer actively contributing into that pot because they have gone to another employer and may be saving into another scheme. It is a growing and important issue, and certainly consumer bodies are very alert to it.
Lord Freud
My Lords, my noble friend Lord German has tabled an amendment to give the Secretary of State powers to make regulations to issue guidance on the level of charges made by defined contribution pension schemes to deferred members. These deferred member charges, as he called them, are called “active member discounts” by the industry. Effectively, they offer lower charges to active members as an incentive, and perhaps a reward, for continuing loyalty.
The DWP has done some robust research on defined contribution schemes sold in the 2008-09 financial year. That showed that—somewhat to our surprise—charges typically do not exceed 1 per cent across the market, including trust-based and contract-based schemes. Where different rates were applied to active and deferred members, this tended to be in the form of even lower rates for active members, which begins to suggest that a true discount is emerging for active members, rather than a penalty for deferred members. It may be that consumer groups are saying that, as the pressure on charging comes down, the gains are taken by active members rather than deferred members. That might be one way in which we would like to look at it.
Baroness Drake
Even though the evidence that the Minister refers to shows that he is referring to 1 per cent, on a base load contribution of 8 per cent we aspire to charges of the order of 0.3 per cent and 0.4 per cent. A charge of 1 per cent is not a statement of success. We are trying to deal with two things. The inactive or non-contributing member should not suffer a disproportionate penalty, which they would not suffer in NEST. Equally, at the same time, charges should be brought down overall. I would not be very content if we were willing to settle on something of the order of 1 per cent. One would hope that, with mass auto-enrolment, the market generally would move to 0.3 per cent. If not, perhaps the provider should not be in the market providing products.
Lord Freud
I thank the noble Baroness, Lady Drake, for her market insight here. I choose my words carefully. It is clear that the capping has had an effect on charges. We are concerned that the pressure on charges should be maintained. That is why we have committed to monitoring levels of charging in the marketplace as automatic enrolment is introduced. We will publish guidance on default investment options in automatic enrolment schemes later in the spring. This sets out guidance for suitable charging structures. The guidance encourages appropriate charges, which match members’ interests, and protects individuals from charges that are excessive in relation to the product they are paying for.
Let us not forget, as the noble Baroness has just pointed out, that we are introducing a major change to the pensions landscape. NEST is being set up to offer low-cost pension provision to individuals on low to moderate earnings. We expect this, as does the noble Baroness, to act as a benchmark across the pensions industry, as well as to help millions of low to moderate earners to save. We are also looking seriously at how transfers can be facilitated across the industry so that savers can shop around for better charge rates more easily. As I described in my response to a previous amendment, HMT recently held a call for evidence on early access, including a specific question on ways to improve the transfer process. The DWP, as I have already described, has recently published a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. In this, we are seeking solutions to address existing rules that could impact on the success of the reforms. Those include rules on early scheme-leavers and disclosure.
We are actively seeking to identify ways to facilitate the best possible deal for savers across the areas of charging and transfers. Therefore, I do not believe that regulations to make guidance are necessary at this time. I urge the noble Lord to withdraw the amendment.
Baroness Drake
I am conscious of the time and do not want to hold anybody up, so I shall try to be brief. I understand the issues that the Minister is trying to address, but I repeat that low levels of charges—for example, 0.5 per cent or below—are fundamental to the success of this asymmetric paternalist product. Somehow accommodating business models for suppliers whose charges hover around 1 per cent will not deliver the necessary strategic outcomes.
Lord Freud
I reassure the noble Baroness, Lady Drake, that if the research shows that charging levels are creeping up, we have the power under the Pensions Act 2008 to regulate to set a charge cap for qualifying schemes and auto-enrolment schemes. NEST will offer low-cost provision to individuals on low to moderate earnings. As the noble Baroness knows better than anyone else in the world, the annual management charge will be 0.3 per cent. If the contribution charge is taken into account, the overall annual charge is the equivalent of about 0.5 per cent. That will provide a clear benchmark for pension providers.
Given the safeguards that will be in place, and in light of the assurances that I have been able to give on Amendment 40, I urge my noble friends Lord Stoneham and Lord German not to press their amendments.
Pensions Bill [HL]
Baroness Drake Excerpts(13 years, 9 months ago)
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Baroness Drake
My Lords, I support Amendment 1 and others in the group in the name of my noble friend Lord McKenzie. As so many speakers have already said, the amendment is not an argument in principle about whether the state pension age needs to rise to keep fiscal sustainability in the state pension system. It is not an argument in principle about whether or not the timetable for the move to age 66, 67 or 68 should be revisited. On the point made by the noble Lord, Lord Boswell, I do not even argue that one cannot disturb settled expectations; in the face of the longevity trends, it is not sustainable to make that assumption. This is not even an argument about whether or not women’s state pension costs or poor people’s pension credit costs should make a contribution to reducing the fiscal deficit in this Parliament, because the Government’s proposals mean that the savings would flow from 1916—sorry, not 1916; oh that that were true. I mean 2016.
The amendment, however, is an argument about an important principle that is valid not only in this instance but whenever one revisits accelerating the state pension age, which might be the case on the subsequent increases—that is, that the manner and the timing of any state pension age increase has to give people fair and sufficient notice to adjust and minimise any disproportionate impact on particular groups of people. The acceleration of the equalisation timetable does not meet that principle.
I asked myself three questions. Who is impacted by the accelerated timetable? Are particular groups disproportionately impacted? Can those impacted reasonably adjust to their loss in the time given? I invite the Committee to look at those questions as well. In terms of those impacted, I do not want to rehearse all the figures that we have shared about the position of a particular group of women in their late 50s, but it is worth confirming that it is not a small number—500,000 will have their state pension age deferred for at least 12 months, and 300,000 for 18 months to two years.
With regard to the amendment of the noble Lord, Lord Boswell, it is important to see the distributional impact. I would not want the situation to be like the water in a balloon, where you think you have dealt with it moving one way but you have just created a consequence in another. If progress can be made, though, progress is valuable.
Baroness Turner of Camden
My Lords, I am attempting to follow on from what I said at Second Reading, when we discussed the Bill in its entirety. I said at that time that there were many people, mostly men, who wanted to work on and who enjoyed the jobs they were doing, and did not object at all to working on. I made the point, however, that not all jobs or all people were the same. There were instances where I thought that there should be provision for some flexibility, and that is what my wording seeks. It may not be particularly marvellous wording and I am not committed to it, but I have some concern about the issues raised by it.
There are numerous people—mostly those who have manual skills but both men and women—who perform work that, if it is not done, we would notice and we would no doubt complain about it. We complain if our hospitals and schools are not properly cleaned and if we cannot get work done on the maintenance of our homes, if we want somebody to do it. These are the sort of people who, generally speaking, do not have a great deal of educational attainment, and whose skills are manual. They often, at the end of their working lives, look forward very much to being able to retire at what was the standard retirement age, but they now find that they are expected to work for longer, and in many cases they do not want to do so. In many cases they feel that enough is enough. They have had enough working time doing the sort of arduous, not particularly interesting and perhaps even back-breaking job that they have been doing, and they want the opportunity to retire. We want to make provision for people like that to be able to retire earlier. Often they have health problems of one sort or another. That is made clear in my amendment, where I say,
“case of illness or infirmity”.
My noble friend Lady Hollis has already drawn attention to the fact that there are many instances of, and much information available about, the ways in which some poorer people at the end of their lives are subject to ill health of one sort or another, and who should therefore not be expected to continue to work in order to acquire entitlement to their state pension, and certainly not when more years are required. That applies equally to women. Again, as I have said, if you have been doing a job cleaning, you may not want to go on and on until you are 66 or whatever. Certainly, although lighter work might be available, they might not be able to do it. I remember talking to a cleaner who said, “I have not got much education. I am not very good at reading or writing. I could not do another sort of job; I can only do this sort of work”. These people are valuable to us. We notice it very much, and do not like it, if they are not there to do the work that we expect in order to keep our lives reasonably comfortable. I therefore think that arrangements should be made for some flexibility in relation to people doing arduous and sometimes dangerous work. We do not want elderly people clambering up ladders in order to do construction work. That is not a good idea, and it might not even be safe for them to do it. We ought to have a degree of flexibility. I am not wedded to this wording, but that is what I am after, and it is worth considering.
Baroness Drake
I express my sympathy with the sentiments that concern my noble friend Lady Turner in her amendment. As we can see from the previous debate, the acceleration of the equalisation timetable is disproportionate in its impact on the poorest and on those with disabilities, many of whom will have worked in manually demanding professions. I look to speak to that issue in my Amendment 7. Although I have great sympathy with her concerns, I am not sure whether the state pension age is the right mechanism for recognising the disparity in life experience that people have, and it may take some time to reduce that disparity of experience or outcomes as a result of working life experiences. Certainly, initiatives aimed at improving health generally and reducing the disparities between socioeconomic groups and geographies—because that can be quite distinctive as well—are important, because I have a great deal of sympathy with the point made by my noble friend Lady Hollis, who said that when you look closely at the figures, certainly for lower socioeconomic groups, the healthy life expectancy rate of improvement is not as great. One does not absolutely know how that will evolve over time, which is why it is important that the Government retain initiatives aimed at reducing existing health disparities.
Flexibility in working arrangements is also extremely important because, regarding scrapping the default retirement age—of which I approve—and other stated policies to improve the working position of older people, it is one thing to have a policy but it is quite another challenge to deliver the changes and cultures in working practices at the work face to deliver the flexibility in working arrangements that you need for older people. Certainly, changing employers’ practices and attitudes is important. Those may be more effective mechanisms in reducing that disparity over the long term.
Having said that, if ill health disparity persists between socioeconomic groups, and one does not know how that will evolve—in terms of ill health the early signs are that those disparities could persist—a Government may well want to look at the qualifying age for pension credit to deal with those issues, where it is not possible for someone with ill health to address the disadvantaged-income position that they will be in. The Government should certainly remain open to that, depending on how the figures evolve.
Lord Boswell of Aynho
I wish briefly to comment on the amendment of the noble Baroness, Lady Turner. She is on to a substantive issue of concern: that there are clear occupational differences which, in a sense, mirror some of the concerns that many of us across the parties would have in relation to differential health outcomes between people with different occupations. In a sense, that supports some of the points that have been made about relative gender disadvantage. We understand why the Bill is conceived as it is, but those are issues that are entirely proper to raise in Committee.
I am not enthused by the text of the amendment, not least because I am not a Treasury official, and I notice that it provides a power to revise but does not explicitly state that there should be a power to revise downwards. Knowing one or two Treasury officials, they might have a go at the opposite. More seriously, there are concerns about whether we should differentiate the pensions and benefits system by different occupational groups, in the way that some of our continental neighbours have done. I may be old fashioned, but I would be reluctant to do that. Whether we could define the categories in any coherent way that did not give rise to further anomalies or whether this is the right approach, I am sure there is a problem which the noble Baroness is right to draw to the Committee’s attention. For example, I am sure that there are lots of issues in the construction industry or agriculture, which I know well, whereby we can try to mitigate and improve occupational health. We should do that, but I am not sure that a vehicle that is about the state pension age is the appropriate one to do it.
Baroness Drake
“Qualifying age for pension credit
(1) The Secretary of State must make regulations setting out the qualifying age for pension credit.
(2) The qualifying age for pension credit from 6th March 2011 until 6th March 2020 shall be set so that the timetable in Schedule (Graduated timetable: qualifying age for pension credit) has effect.
(3) After 6th March 2020, the qualifying age for attaining pension credit shall be set at an age that does not exceed the age that a person qualifies for the state pension.”
Baroness Drake
My Lords, I shall speak also to Amendment 11. I return to the principle that the manner and timing of any increase in the age of state pension payments must give people fair and proper notice and should not be disproportionate in its impact on particular groups. The Government’s proposals for accelerating the timetable for state pension age equalisation and commencing the move to 66 for men and women from 2018 provides a five-year or seven-year notice period, depending on whether you are a man or a woman. Under the Government’s proposals, however, the age of eligibility for the receipt of pension credit, which is targeted on the poorest pensioners, follows the women’s state pension age. Both the short and shorter notice for the acceleration of the equalisation timetable impacts the poorest men and women, who will have to wait longer to receive their pension credit income but with little time to prepare.
Pension credit in 2011 will be £137.35 per week for a single person, so a further increase in the state pension age of two years, for example, results in a corresponding increase in the age for eligibility for pension credit and will result in a loss closer to £15,000 for those affected. To get some sense of scale, in 2010 there were approximately 954,000 claimants for pension guarantee credit, of whom over 540,000 were women.
The amendment is intended to reduce the disproportionate loss that would be experienced by those who are the poorest and on the lowest incomes, and are the least able to adjust to the short notice from the accelerated timetable. The amendment would provide for a way of mitigating that disproportionate impact by allowing the age for eligibility for pension credit to track the original equalisation timetable set out in the Pensions Act 1995—that is, for it to rise more slowly. Those eligible to receive pension credit would do so on the same date between 2011 and 2020 as they would have done under the original timetable for state pension age equalisation. In this way, the beneficiaries of pension credit—men and women currently in their late 50s—would not experience the markedly higher loss of pension credit income that would otherwise occur. Amendment 11 reinstates that timetable for wholly pension credit purposes.
I repeat, because it is important, that the Government’s current proposal that the age for receipt of pension credit should track women’s state pension age, in line with their accelerated timetable, does not make a contribution to reducing the fiscal deficit in this Parliament, because of the flow of savings from 2016. Again, this amendment does not undermine fiscal stability in the long term. The state pension age will still rise in response to increasing life expectancy, although my noble friend Lord McKenzie and I would argue that the increase from 65 to 66 should commence in 2020, which would still maintain the course for the long-term fiscal sustainability of the state pension system. This amendment is about fairer treatment for the poorest and least well off who are in their late 50s and nearer to pension credit age.
I turn now to the justification for the amendment. The Government, in their impact assessment, identified key criteria against which they assess the timetable options for accelerating the increase of the state pension age for women and men, and consequently the impact on the eligible age for pension credit. One criterion was the effect on the fiscal sustainability of the state pension system and another was inter- and intra-generational fairness. This amendment does not undermine long-term fiscal sustainability or prevent progress on inter-generational fairness. However, it seeks to inject some intra-generational fairness in that it seeks to mitigate for the concentrated impact on the poorest group of people who had the misfortunate to be born in particular months in the 1950s.
Perhaps I may pause here to anticipate the point made by the noble Lord, Lord Freud, in response to Amendment 1, which I am sure will be influencing his thinking on this amendment too; namely, that once one has reduced the level of debt in this Parliament, one cannot afford to relax because there is still the long-term sustainability challenge. I agree that one cannot relax over that, but there are more changes in the pension system to come. The timing of the phases of other increases—to 66, 67 and 68—I am sure will be a debate of some substance. The adjustments that will be made to increasing longevity in private pensions are happening and will continue to happen because of the impact that will be felt in annuity rates. We know that, even where there are DB schemes, normal retirement ages are rising and we await the report of the noble Lord, Lord Hutton, on longevity and the Government’s exposure to fiscal liability over the long term.
These are the big battalion contributions to fiscal sustainability over the long term. It is not the treatment of women in their late 50s, or of the very poor who happen to have a birth date in some period in 1954, that is going to deal with that major challenge, which I completely accept, of long-term sustainability. We can banter about which political party or group had the better timetable—I still hold to my principle on any timetable—but I pay credit to the noble Lord, Lord Turner, because he relayed the narrative to the country that the state pension age had to rise. He took the flak and he drew the sting, which allowed politicians to debate it and to produce the policy changes that were required in that situation.
So there is an important argument about long-term fiscal sustainability. I continue to struggle with the fact that with those big battalions, which are important—we have some big debates to come—somehow a group of women born in a particular period in the 1950s has to be treated in a deeply unfair way for this country to be in a sustainable position.
The Government's figures confirm that the pension income loss for those men and women who face a more aggressively accelerated increase in eligibility age for pension credit is even more marked for those for whom receipt of pension credit is deferred for more than a year than would be the case under existing plans. If allowance is made for their lower life expectancy, because they are more likely to be in the lower socioeconomic groups, that loss rises even further to as high as 10 per cent of state pension income. I accept that the evidence shows that those in lower socioeconomic groups have also benefited from improvements in their life expectancy—although, as we have just discussed and as my noble friend Lady Hollis was sharp correctly to point out, not necessarily so greatly in their healthy life expectancy. That improvement is an argument in support of the general proposition that the state pension age needs to rise. It is not an argument to deploy to defend giving those on the lowest incomes so little time to adjust.
The men and women who will be impacted by the accelerated rise in the qualifying age for pension credit will have little opportunity to adjust to their loss in the time available. For men and women without private savings and dependent on pension credit, working may not result in any improvement in post-retirement income, because any resulting gain in state pension accruals could be offset by reduced pension credit entitlement. For women who will be dependent on pension credit, we have only to look at the difference in median pension savings between those of a 56 year-old woman of £9,100, which translates to £11 per week on a level basis, and those of a man, at £52,800, which translates to more than £60 a week, to confirm on those median figures how little prospect low-income women have of saving sufficient to cover their loss from the delayed receipt of pension credit. That is particularly so given all that we know about their labour market participation level, earnings, membership of pension schemes and caring responsibilities. We partly debated this under the previous amendment, but men who are dependent on pension credit face similar challenges.
Lower-income groups are likely to be less healthy and, if working, to have lower incomes and to be less able to adjust to the short notice by working longer and saving more. The Government's impact assessment shows that men and women born between 1953 and 1955 on lower earnings, with interrupted careers and dependent on pension credit throughout retirement, will suffer the greatest percentage loss in lifetime pension income as a result of the accelerated timetable.
The Government’s modelling shows that people who rely mainly on pension credit in retirement will lose proportionately more than higher earners, who can also carry on contributing to their private pension saving. A lot of those figures are taken from the impact assessment. If we relate them to different ethnic groups, people of black and black British origin have the lowest level of private pension and investment income: £46 per week compared to £155 for white people.
Lord Freud
I need to come back to the point that working-age support systems are much better systems of supporting people, particularly by universal credit, than artificial manipulation of when pension age and pension credits click in. There is very little difference between the position of people who are just below state pension age and those just above it. We just happen to use this age as a useful justification of where we can draw the line. Just as there is little difference between the line at state pension age, so there is little difference between those who are 63 and 62 or 62 and 61. In benefit terms, the only difference is what help people might receive to get into or stay in employment. We are quite certain that we want people below state pension age to work if they possibly can. We cannot give up on these people. That has been going on too long. The right place for people below state pension age is on a working-age benefit, and universal credit, which will be available in 2016—although it is starting in 2013—will be the most suitable benefit.
It is important that we target means-tested help in the most appropriate way. State pension age is a fair way of separating out support for those of working age and of pension age. Ensuring that people get the appropriate work-related support and making work pay are essential to enable people to move out of poverty and build up sufficient resources for their retirement. For these reasons, I urge the noble Baroness, Lady Drake, to withdraw her amendment.
Baroness Drake
I shall try to pick up some of the points put by the noble Lord, Lord Freud. This amendment breaks the link between the state pension age and the pension credit qualifying age only until 2020 because the associated amendment puts a time limit on that. It seeks to replicate the 1995 timetable for equalisation because it is trying to address a problem created by the acceleration of the original timetable. It is not seeking to bind the Government’s hand once that problem has been dealt with. The amendment would allow the Government to restore the link between the state pension age and the pension qualifying age. In another place, in another debate, I might want to argue the merits of not doing that, but that is not what this amendment seeks to do. We have sought to avoid the complication of that debate. It is merely for a defined period to address this disproportionate income impact point from this accelerated timetable.
Baroness Drake
I would like to comment on Amendment 8, tabled in the name of the noble Lords, Lord German and Lord Stoneham, which has my sympathy. I concur with the comments made by the noble Lord, Lord German, that we are clearly all concerned with the consequences of the accelerated timetable. The noble Lord, Lord Boswell, referred to us all looking for different architectures with which we can address this matter, and one should never close one’s mind to architectures if one can get the outcome that one desires, or at least progress towards it.
With regard to the legs to the amendment—(a), (b) and (c)—on the basis of what I said on my Amendment 7, I wholeheartedly agree with making some pension credit adjustment but it would need to be made for both men and women, otherwise you would simply address the issue of poor women, not poor men.
On the question of providing for women with serious illness, those who are seriously ill clearly believe or feel that they have a payment that they have built up and are entitled to under the state pension system that has been withdrawn with little notice. They will have absolutely no prospects of adjusting to their loss, and are unlikely to benefit from the argument that they will live longer. I imagine that there would be some complexities in trying to administer a provision that focused on those with a serious illness, and I take my noble friend Lady Hollis’s point about who, and how much, should be paid.
It may be that the easiest solution is still to look at decelerating the timetable. As my noble friend Lord McKenzie said in responding to the amendment of the noble Lord, Lord Boswell, we are all keen to make progress and should stay open to looking at timetables. My noble friend and others have revealed how the timetable has an accelerating effect. There are those who lose for a year, those who lose for up to 18 months and those who lose for up to two years, so there is an accelerating impact in terms of numbers of people affected. Still, I would not want to fall out over architecture if there was a way of moving forward to get the kind of outcome that we all seem desirous of achieving—those of us moving amendments, anyway.
Lord Freud
I thank my noble friend Lord German for tabling the amendment. We have covered a lot of the ground in relation to it already, so I shall try not to be repetitious. We are talking about what has been variously described as an acceleration bubble, a moving horizon or a squidgy balloon—as the noble Baroness, Lady Drake, said. We are effectively looking at concessions for women born between July 1953 and September 1955.
I am not in a position at this stage to provide any additional information about discussions on a single tier, which I referred to at Second Reading, but one of the issues here is clearly that when one looks at the complexity of the architecture, one has to have an eye to whatever might or might not emerge from those discussions. We have already talked about freezing or delaying the increase in the pension credit qualifying age for people affected by the changes in state pension age. We are not going to make a song and dance about technical drafting here, although the noble Baroness, Lady Drake, made the point about the application of the amendment to women, when it would actually have to apply to men. However, let us put that to one side.
The issue that I aimed to emphasise in the previous discussion was that pitching the pension credit qualifying age at a point below the state pension age for a specific group would undermine fundamental welfare reforms. However, it is not about just the structure—and I accept that this is about a temporary change—or purely the money; it is complex for customers and complex to administer. That is one of the reasons why that solution is difficult, if not undesirable.
In response to the request of the noble Baroness, Lady Hollis, for me to write to her on the costs of paying people in between the old and the new pension ages, I am happy to look at those costs and to write to interested noble Lords. I imagine that that includes most of us in the Room.
I move on to the issue of serious illness and emphasise that we have great sympathy for those with ill health, including those in this particular cohort of women. However, I must point out that help and benefits are already available for people with health problems and I do not therefore accept that we need to provide additional financial support, whether that is in the form of a payment above what we already pay out or some bespoke pension age arrangement.
The final option suggested by the amendment is slowing the acceleration of the pension age increase for these women.
I can assure noble Lords that, when we were considering how to bring forward the increase to 66, we looked at whether we could start that change for men slightly earlier than for women, to avoid altering women’s state pension age before 2020. The reason that we have not done this is because it would be unfair to increase the difference in treatment between men and women. It would also be unfair to prolong the difference in treatment beyond the period already agreed. I will take this opportunity to explain why, and I am picking up the question raised by my noble friend Lord Boswell earlier in the afternoon. The equal treatment directive allows the setting of the state pension age to be a limited exception to the overarching rule that men and women must be treated equally in social security matters. This exemption, or exception, is only temporary to give member states time to adjust their state pension ages so as to bring women’s state pension age into line with men’s. As we know, the legislation in 1995 set out a timetable for equalising the state pension ages between 2010 and 2020, so anything we do now will be measured against that timeline. That is why we decided that we must increase the state pension age to 66 only after women’s state pension age has reached 65. I therefore urge the noble Lord to withdraw his amendment.
Pensions Bill [HL]
Baroness Drake Excerpts(13 years, 10 months ago)
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Baroness Drake
My Lords, I thank the noble Lord, Lord Freud, for introducing the Bill and I acknowledge his willingness to discuss matters. We are pleased that the Government are pushing ahead with the automatic enrolment of workers into workplace pensions, thereby continuing the reform programme, introduced under the Labour Government, which commanded widespread consensus across political parties and stakeholders. We want to work with the Government to maintain that consensus and to build on it. However, we believe that they should not proceed with the accelerated timetable for equalising the state pension age; that the proposals for the threshold of earnings which trigger the automatic enrolment of workers into a pension have the potential to detract from enabling low to moderate earners to save; and we have concerns about the employers’ self-certification and occupational pensions indexation.
In the face of increasing life expectancy, I accept that raising the state pension age is part of the solution to maintaining a sustainable state pension system that supports private pension saving. I accept that when improvements in life expectancy accelerate at a greater rate than anticipated, it becomes necessary to revisit existing plans. As a principle, however, the manner and timing of any increase in the state pension must give people fair and proper notice and sufficient time to adjust, and ensure that the impact is not unfair and disproportionate for particular groups. The acceleration of the timetable to achieve the equalisation of pension age for women and men, from April 2020 to November 2018, does not meet that principle and breaks the promise made in the coalition agreement not to start increasing the state pension age to 66 for women before 2020. The Government should honour the 2020 timetable for equalisation and focus the acceleration of the timetable for the state pension age to rise from 65 to 66 for both men and women to between 2020 and 2022
Let me state the nature of the unfairness. Under the Government’s proposals, some half a million women will receive their state pension at least 12 months later than they had previously been advised. For 300,000 women born between December 1953 and October 1954, this delay will increase to between one and a half to two years. For 33,000 women born between 6 March and 5 April 1954, it increases to two years. For them, the loss in state pension is around £10,000; for those on full pension credit, the loss is closer to £15,000. These women, with five years’ notice of the timetable change, have little time to prepare for their income loss, which is neither fair nor reasonable. The impact of the accelerated timetable is too harsh on women in their later 50s, the poorest of whom will have to wait longer for their pension credit. The argument that women live longer than men, so draw their state pension for longer, is not mitigation for women in their late 50s being given so little time to adjust to their loss of income. It is simply not realistic for women in their later 50s to be able to save sufficiently to address the loss. The introduction of the employer duty to enrol workers into a pension scheme will not conclude until 2017, just 12 months before the start of the move from 65 to 66 in 2018 and 12 months after the start of the accelerated timetable in 2016.
Women in their later 50s are less likely to be in a pension scheme and more likely to be working part-time, earning low incomes. Many are inactive because of looking after family. Even the Government, in their report A Sustainable State Pension, concede that speeding up the pension age equalisation timetable will not significantly reduce the gap in the proportion of women aged 55 to 65 who are out of the labour market compared to men. Women in their later 50s have fewer savings: the median pension saving of a 56 year-old woman is just £9,100, almost six times lower than that of a man, which stands at £52,800. Although as a result of reforms introduced by the Labour Government, most women reaching state pension age in late 2018 will be entitled to a full basic state pension, they will still have a lower entitlement to additional state pension. Nearly 40 per cent of women approaching retirement are not part of an ongoing marriage so many cannot rely on their partner's income to cushion the financial loss.
In summary, women in their later 50s, for historic reasons of gender discrimination, will have lower state pension and private savings than men, will have earned less over their lifetime, may have been unable to join a workplace pension, had interrupted careers and are more likely to be carers. This inequality will remain and is exacerbated by the accelerated timetable, which does not give them sufficient time to prepare for their income loss. The fiscal benefit from the acceleration of the equalisation timetable will not impact on the deficit reduction in this Parliament. The savings will start to flow from 2016, when net borrowing is forecast to have fallen significantly.
We are pleased that the Government are pushing ahead with automatic enrolment, but the changes to the earnings threshold, which triggers a worker’s enrolment into a pension scheme, cause deep concern. The Government have set the threshold at £7,475 in 2011-12 earnings terms so that it is aligned with the threshold for income tax. However, the Government’s aspiration for the income tax threshold is to raise it to £10,190. If the threshold to trigger auto-enrolment were to rise to £10,190, it would exclude nearly 1 million workers per year from workplace pensions, 76 per cent of whom would be women, with the loss of £40 million of employer pension contributions. Consequently, of the group targeted to benefit from the workplace pension reform, 66 per cent would be men and only 34 per cent women. The earnings threshold for auto-enrolment should be set and maintained in relation to the national insurance threshold, not the income tax threshold. Raising it to £10,100 would not, if I may say so to the Minister, be a slight increase, but directly undermine the objective of enabling low and moderate earners to save, which is confirmed by the Government’s own impact assessment and the Paul Johnson review. Nearly half of those in the lowest earning group are in couples, where one works part time and the other full time. The Johnson review says:
“Many or most very low earners are women, who live in households with others with higher earnings and/or receive working tax credits. These may well be exactly the people who should be automatically enrolled”.
Yet we have a set of proposals that would exclude them.
A key principle of pension reform is to enable women to build up a pension in their own right. The higher the threshold for auto-enrolment, the less the reforms will work for women. Evidence also shows that earnings are not static and that for many workers, men and women, they can change significantly over their lifetime. Most low earners go on to earn more, so saving will still be very beneficial, because of the continuing contribution to their pension over their working life. The Johnson review presented a variety of evidence to show that relatively few people have persistently low earnings over their lifetime. If the threshold is raised to £10,190, it is not sufficient to say that the impact can be mitigated by those earning below this being allowed voluntarily to opt in. Inertia prevents people from saving, which is why we have these reforms. So it is really not credible to say that the lower paid still have to overcome these barriers but that those earning higher incomes would benefit from auto-enrolment—or asymmetric paternalism.
A higher threshold disregards how working-age benefits can make it pay to save. Individuals’ pension contribution is disregarded from income when calculating entitlement to tax credits. Just over one-third of those earning between £5,000 and £10,000 are in receipt of tax credits. That, for some, can produce an implied tax relief of 50 per cent to 60 per cent, which provides a very positive incentive to save.
The Bill provides for an employer to certify, subject to a regulatory test, that their company arrangements meet the requirements on minimum pension contributions. Although the Bill prescribes the powers of the Secretary of State in setting the test, our concern is that, in trying to accommodate the good employers, a compliance loophole is created for bad employers. The test is still subject to consultation, and there may be pressure to change further. Although the Johnson review asserts that under the proposed test, based on ONS figures, 92 per cent of workers would match the qualifying earnings, post auto-enrolment an incentive may have been created to reduce basic pay and arbitrage between the 8 per cent on the band of earnings test and the certificate of alternative test.
I must take the opportunity of this Bill to refer to the decision to use CPI as a measure of increase in the general level of prices, which is estimated to deliver—in estimates revised upwards by the Government—an £83 billion reduction to occupational scheme members’ pension benefits over the next 15 years. This change effects a switch of assets and benefits from scheme members to scheme sponsors but does not directly impact the public deficit. While one can see the merits in a change for a limited period, the permanent change will be felt even after the fiscal deficit is long gone. I say this against a background of concern over whether the CPI index is appropriately constructed, given the basket of goods that it captures, notwithstanding the merits or otherwise of an argument on the way in which the mean and the substitution effect is calculated.
The Bill allows employers to defer enrolling eligible workers into a pension for up to three months and consequently reduces annual employer pension contributions by some £150 million. Given that individuals have, on average, 11 different labour market interactions during their working life, this could add up to nearly three years of pension savings or a 7 per cent reduction in an individual’s fund. Will the Government be monitoring the impact of the three-month waiting period and how widespread the usage of that facility will be by employers? Finally, stakeholders need timetable and policy certainty so that they can understand and prepare. The Bill leaves a significant amount to regulation. Can the Minister therefore confirm in writing when the regulations will be available in draft?