Pensions: Automatic Enrolment

Baroness Noakes Excerpts

Thursday 10th June 2010 Lords Chamber

[Baroness Noakes]

My Lords, for the avoidance of doubt, I draw the attention of the House to my interests as shown in the register. I do not believe that any of them constitutes a relevant interest for the purposes of my participation in today’s debate, but in these difficult times it is always better to be safer and certain. I congratulate the noble Lord, Lord Kirkwood, on securing this debate so early in this new Parliament. I also congratulate my noble friend Lord Freud on his appointment as Minister and I look forward to his response.

As my noble friend Lord Fowler pointed out, pensions are one of those topics that attract only a small group of usual suspects, who usually know rather a lot about the subject, and so it has turned out again today. It was certainly the case when we considered the Pensions Act 2008, which I am sure is engraved on the heart of the noble Lord, Lord McKenzie of Luton, who so ably led for the Government on that Bill. I support what the noble Lord, Lord Kirkwood, said about the noble Lord, Lord McKenzie of Luton, and his handling of the Bill—indeed, the whole of his portfolio—as Minister.

When I took part in the debates on the Pensions Act 2008, sitting in the seat now occupied by the noble Lord, Lord McKenzie of Luton, I was grateful for the briefing provided by a number of outside bodies, but in particular that from the Confederation of British Industry and the Association of British Insurers. I am grateful to those bodies for briefing me again today for the purposes of this debate. It is a pity that the noble Lord, Lord Lea of Crondall, is no longer in his place after intervening earlier and implying that the attitudes of industry were inimical to auto-enrolment. I can certainly confirm that the Association of British Insurers and the Confederation of British Industry support auto-enrolment and are trying to work on the practicalities of making it a success.

As has already been said in the debate, there was a broad consensus around the Pensions Commission’s proposals for auto-enrolment as the basis for achieving a significant increase in the number of those saving towards their retirement. My party always registered some caveats about the scheme, in particular in relation to costs, to which I should like to return later. I understand that the coalition’s Pensions Minister in another place, Mr Steve Webb, has said that the Government will go ahead with auto-enrolment but that they will review the specifics of the scheme. Like the noble Lord, Lord Kirkwood, I hope that my noble friend can give some more details today about that review. He must be aware that employers and the pensions industry need to know what this review will entail, who will undertake it, when it is expected to be completed and who will be consulted. If there is any substantial uncertainty about the way ahead, that will inevitably affect the willingness of the business community to devote significant resources to continuing to prepare for something that may change. I hope that we can have more clarity on this today.

In my view, the previous Government’s approach had one fundamental flaw. They built their scheme of auto-enrolment around the proposition that every employee earning above the threshold should be included. I believe that this is an unrealistic approach, which in practice has produced real difficulties. The prize for society as a whole is to get a significant number of people saving for their retirement and saving more than was the case in the past—but not every last one. Policies that try to do too much often run into problems, as we have seen with many grandiose projects in the public sector. In the world from which I come, achieving an 80/20 solution—that is, 80 per cent of the benefits for 20 per cent of the costs—would be regarded as an excellent outcome. However, the former Government pursued the last percentile of benefit regardless of its cost.

Auto-enrolment is due to start in 2012, which does not leave much time to sort out the remaining details. The business community believes that the Government should look again at the draft regulations. The previous Government’s first shot at the draft regulations was pretty dreadful and business bodies and the pensions industry have been working with the department to try to get them into a shape that is acceptable. While this has largely been achieved, there remain aspects that cause disproportionate cost and complexity for employers. Will the new Government’s review be looking again at these regulations in order to see whether greater simplicity and lower costs can be achieved?

The noble Lord, Lord McKenzie, will recall our discussions about qualifying earnings, which have been alluded to. These had a particular impact on employers who already had good pension schemes but who used definitions that, although they are common in the private pensions industry, are quite unlike those used in the Act. The noble Lord was helpful and facilitated some amendments to the Bill, which allowed the regulations to accommodate the different ways in which employers are structured as regards their pensions, but that has simply deferred the problem to the regulations. I understand that the regulations in draft still do not recognise the difficulties for employers. The business sector has developed a self-certification approach that is practical and delivers a high degree of conformity, but that has not yet found favour with the Department for Work and Pensions. I ask my noble friend to ensure that his department will start to operate in a pragmatic way that supports employers who are trying to deliver good workplace pensions rather than penalises them for not guaranteeing the last percentile of benefit.

In addition to the qualifying earnings problems, the timing arrangements for auto-enrolment into personal accounts are also a problem. It is inefficient if, as currently planned, the rules require the enrolment of people who are likely to opt out—short-term workers, for example. Business would like enrolment to be delayed for, say, 30 days, which would avoid most of the unnecessary paperwork. To date this has been resisted, so will my noble friend ensure that the department looks at this again? The Government also need to look again at the impact on very small businesses. Again in their zeal to pursue the last percentile, the previous Government included even the smallest employer, including someone employing one person, such as a nanny or a housekeeper.

The previous Government also rejected using HMRC to administer the scheme alongside PAYE and, in so doing, they created an administrative cost for the scheme and a burden for small employers that are disproportionate. I hope that my noble friend will say that the new Government will look again at taking micro-employers out of the ambit of auto-enrolment.

The previous Government never faced up to the very real threat to workplace pensions of employers levelling down to the personal accounts scheme. Every time the Department for Work and Pensions insists on an employer-unfriendly rule, it makes it harder to maintain an existing workplace pension scheme and increases the likelihood that employers will simply default into the personal accounts scheme. This will hurt employees because most workplace schemes contribute more than is required under the 2008 Act. Our Government need to recognise that encouraging workplace pensions means encouraging employers, not hitting them with administration and regulation. This is part of a bigger theme of government action harming workplace pensions. It started in a big way with the ACT raid of 1997 and has got worse over the past 13 years. I hope that we can return to those broader issues on another day.

I emphasise that there is one area in which the business community does not want change—the timetable for implementation. I know that when my party was in opposition we criticised the previous Government’s draft timetable, which will delay full implementation of the employer contribution until 2017, but I believe that it is a pragmatic approach that allows a reasonable time for employers to plan for the cost implications of auto-enrolment. I hope that my noble friend can confirm today that the new Government will not shorten the timetable.

I turn now to costs. In opposition, my party did not believe that the personal accounts scheme could be delivered for the 0.3 per cent annual charge that the Pensions Commission calculated, and so it has proved. While there will be an annual charge of 0.3 per cent, there will be a whopping 2 per cent upfront charge in order to cover the set-up costs. In addition, according to a Written Answer that I received from the noble Lord, Lord McKenzie of Luton, just before the Dissolution of the previous Parliament, the personal accounts scheme will start this summer with a debt of more than £60 million and over the following five years will borrow another £400 million from the Government. There is no sign that when we get to 2015 the appetite for public money will have run out.

While the 2 per cent upfront charge may be necessary to keep these huge borrowing figures from ballooning even further, no date has been set for its removal. The CBI is concerned that the 2 per cent charge will increase opt-out rates and thereby defeat the purpose of the policy. The perceived returns on saving will simply not be sufficient, particularly for older workers being enrolled. Is my noble friend satisfied that the costs that underpin the need for this upfront charge and the massive borrowing are reasonable and that the scheme has not been overengineered?

Perhaps more worrying is that the previous Government announced in March that they proposed additionally to subsidise the scheme to an unspecified extent on the basis that it would have to accept all comers, which the commission had not thought necessary when it produced its 0.3 per cent costing. Can my noble friend say today what this proposed subsidy will cost? Do the new Government sign up to the subsidy on top of the high lending that has to be provided to the scheme?

Lastly, there will also be costs to the Pensions Regulator for policing auto-enrolment. I understand that those costs, too, will be met by further public money. Will my noble friend say how much that will cost? Why is the cost of regulation not borne by pension savings, as happens with other forms of pension saving?

I do not have to remind my noble friend that we live in an age when public expenditure must be cut and that we cannot afford, as the previous Government planned, to carry on spending regardless of the consequences. That may mean that the scheme for auto-enrolment and personal accounts has to be trimmed in order to fit what can be afforded. We cannot have everything that we want. I support auto-enrolment, but not at any cost. I have major concerns about the cost to employers and the cost to the public purse. I hope that my noble friend will be prepared to take radical action when the Government review their inheritance on auto-enrolment. When they do that, I hope that they will also abandon the notion of chasing every last percentile.