Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2014
Baroness Sherlock Excerpts(10 years, 9 months ago)
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Baroness Sherlock (Lab)
My Lords, I thank the Minister for his explanation of this order, and I apologise for missing the first few seconds of it. Like my noble friend, I was caught out by the omission of this order from today’s lists, and I apologise to the Committee. I also thank my noble friend Lady Drake for her very detailed and extraordinarily learned analysis of the impact of this order and the ones that have preceded it. I hope very much that the Minister will be able to give it the answer it deserves, and I look forward to hearing that.
A helpful note on this subject from the House of Commons Library dated 17 December 2013 reminds us that the original idea proposed by the Pensions Commission chaired by the noble Lord, Lord Turner, of which my noble friend Lady Drake was such a distinguished member, was that the qualifying earnings band should start at the primary threshold for national insurance purposes and should finish at the NI upper earnings limit. The previous Government said in their 2006 pensions White Paper that they would adopt broadly this approach, so the lower and upper limits of the qualifying earnings band were set at £5,035 and £33,540 respectively, and provision was made for both limits to be increased in line with earnings.
The real jump came with the Government’s Pensions Act 2011, which introduced an earnings trigger for auto-enrolment set at a level higher than the lower limit of the qualifying earnings band, on which contributions are paid. As we have heard, for 2011-12 the trigger was set at £7,475 rather than the planned threshold of £5,035 in 2006-07 terms, and the effect of that was to exclude 600,000 individuals, 75% of them women. My noble friend went through some of these figures but I think it is worth rehearsing them because the Minister will have to give us an answer about the effect of these changes.
Since then, the exclusions have mounted up. In 2012-13, the trigger rose to £8,105, excluding 100,000 people, 82% of them women. In 2013-14, it rose to £9,440, excluding some 420,000 people, of whom 300,000—72%—were women. Now, as we have heard, by going up again from £9,440 to £10,000, the Government will exclude another 170,000 people, of whom 120,000—69%—are women. I would be very interested to know if the Government agree with the figure offered by my noble friend Lady Drake about the cumulative number of people who have been excluded from auto-enrolment by these changes.
The DWP paper titled Review of the Automatic Enrolment Earnings Trigger and Qualifying Earnings Band for 2014/15: Supporting Analysis—I commend the officials on its title—issued in December 2013, offers the defence that the reason that so many women are affected is that women are more likely to work part-time and to earn less than men, so they will be disproportionately represented in the group excluded from auto-enrolment. Well, yes, of course. That is not a defence, it is a reason, but that still leaves the problem. Now another 170,000 are to be excluded from the benefits of auto-enrolment into pension saving.
Of course, not only are women more likely to work part-time but there are those who work in more than one mini-job, neither of which takes them above the trigger point for being brought into this. Those women could, in fact, be earning significant sums of money on which contributions would be payable but because neither job takes them above the trigger they will not be auto-enrolled in either job. I would be interested if the Minister could comment on that.
As so much has been said already, I will ask just a small number of questions of the Minister. The DWP document I mentioned noted—and the Minister reinforced a version of this in his speech—that the Government used three principles in reviewing the automatic enrolment thresholds. The first of these is whether the right people are being brought into pension saving. Can the Minister tell the Committee how the Government reached the conclusion that excluding another 170,000 low-paid workers from the benefits of auto-enrolment met the condition that the right people are being brought into pension saving?
Secondly, with a trigger of £9,440, the target population for auto-enrolment is around 10 million individuals, of which only 37% are women; going up to £10,000, that falls slightly to 36%. When the Minister considers that figure, which came from the DWP’s excitingly named document, and the high proportion of those excluded who are women, is he satisfied that the Government’s approach to auto-enrolment is serving women workers well?
Finally, the paper argues that workers paid below the earnings trigger are likely to be able to achieve their target replacement rates through the single-tier pension if they remain low earners, and it may therefore not be beneficial to direct income from working life into workplace pension savings. If an individual earning £9,999 a year has an option to contribute to a DC scheme, should she take it?
Lord Bates
My Lords, first, both the noble Baronesses referred to the speed with which we have gone through the Order Paper. In fact, that caught all sides on the hop, and apologies are due all round. The responsibility, of course, lies in the preceding orders going too speedily. However, I am grateful to both noble Baronesses, who, in the exchanges we have had over many sittings on the Pensions Bill, have demonstrated their incredible grasp and knowledge of these complex areas, and have spoken passionately about the impact upon women in particular. I will come to these points, and respond to them as best I can.
One of the key things I said in the concluding remarks of my speech was that we recognise that setting these thresholds is a balancing act and that there is no right or wrong answer. It is therefore right that there should be a debate and that it has become an annual debate. It is an affirmative instrument and therefore any changes that are made annually have to come before your Lordships’ House for consideration. That is the right way to do it.
The other point of context we need to acknowledge, which the noble Baroness, Lady Drake, was good enough to make, is that the figures for auto-enrolment, which I accept came out of the Turner commission, which in turn came out of the Pensions Act 2008 under the previous Government, have been impressive. Significant progress has been made in encouraging the right people to save for their retirement. In pursuing that, we are absolutely on common ground.
It might be helpful if I went through some of the figures that we have for the number of people affected. Raising the 2014-15 value of the automatic enrolment trigger from £9,440 to £10,000 will exclude around 170,000 individuals, of whom around 120,000—69%—are women. Raising the 2013-14 value of the automatic enrolment trigger from £8,105 to £9,440 excluded around 420,000 individuals, of whom 300,000—72%—are women. I am going back through these numbers because it is a rough way of getting back to the calculation made by the noble Baroness, Lady Drake, which the noble Baroness, Lady Sherlock, asked me whether I agreed with. Raising the 2013 value of the automatic enrolment trigger from £7,475 to £8,105 excluded around 100,000 people, 82% of whom were women. Finally, raising the 2011-12 value of the automatic enrolment trigger from £5,035—in 2006-07 terms—to £7,475 excluded 600,000 individuals, 78% of whom were women. If one calculates those figures, one begins to recognise the numbers that the noble Baroness, Lady Drake, presented to us.
However, it is not so simple as to say that 70,000 women would be in automatic enrolment if their part-time earnings were brought together. I realise that there is a big education job to be done here, because many women who are underneath the threshold need to realise that if they are above £5,772 in terms of the lower earnings limit, they can opt in and therefore get the benefits that would accrue from that.
Baroness Drake
I do not want to be too difficult. However, the Secretary of State has stated clearly that this is driven by his view that people should not be auto-enrolled into pensions until they start paying tax. That is not doing a balancing act; that has been the Government’s consistent position since 2010. The Hansard record shows that I keep asking the question, “Are you going to keep tracking the tax threshold, because if you keep doing that you will exclude more and more women?”. That is not a balancing act. If you did a balancing act, you would say, “What is the balance between that approach and the number of women excluded?”.
The Government have locked themselves in, both by the Secretary of State’s statement and by their behaviour since 2010, when they said that people who do not pay tax should not have the advantage of auto-enrolment. The benefit of releasing them from a certain level of tax is reduced by the fact that they lose the employer’s contribution, and we are now getting to a point where the gain from the increase in the tax threshold is less than the loss of the 3% of the employer’s contribution. So over their lifetime, the low-paid person is actually worse off.
Baroness Sherlock
My Lords, before the Minister answers that, I asked him whether he felt that the way in which the Government have designed the service served women well. His defence appeared to be that there has to be a line somewhere. The point I was trying to put to him is that the Government have designed this scheme in such a way that only a third of its target population are women; in other words, they have designed a scheme that will benefit two men for every woman. Does he feel that the way the Government have chosen to design the scheme benefits women?
Lord Bates
No more or less than raising the personal tax allowance thresholds is a policy that is designed to disproportionately benefit women compared to men. When the tax threshold goes up from £7,475 to £10,000, that is a massive benefit to women, particularly in lower income positions. That is money coming into their households, so they can decide what to do with it. Anyone with earnings over £5,772 will retain the right to opt in, as I have already said, with employer contributions.
The Pensions Act requires the Secretary of State to review the thresholds each tax year. That is a discussion which takes place. There is a strong argument that says there is synergy there between personal tax allowances at the £10,000 level, helping employers and employees to understand where that mark falls, but in no way does that guarantee what the policy will be going forward. It will be for the policy to be announced and the review to take place and the instruments to come forward next year.
I am trying to work my way through the many questions that the noble Baronesses have put to me. I am not sure whether I have answered all the points.
Baroness Sherlock
I will let the Minister off the first two, if only on the grounds that I am unlikely to elicit an answer that I will find helpful. But my last question was very specific: if an individual earning just less than £10,000 a year had an opportunity to contribute to a DC scheme, does the Minister think that she should take it?
Lord Bates
The view is that this will be a personal choice for the individual faced with that challenge. It is a specific point. I know that the noble Baroness feels very strongly about this.
Baroness Sherlock
I am not asking this question because I feel strongly about it; I am trying to test the Government’s argument that the reason low earners should not be auto-enrolled is that it is not worth saving small sums of money. Do the Government assume that same stricture should apply to private pensions as well as to auto-enrolment?
Lord Bates
Each individual’s situation will be different. In some cases, they will have partners who will be earning more and therefore they will take a household decision to take advantage of the same scheme. For some people, that will not be the case and therefore they will not. We are saying that we want there to be a scheme. We want it to be as simple and straightforward as possible so that as many employers and employees as possible can get full benefit from it, and so that people can get into the habit of saving. It will be up for annual review. There needs to be much more education to ensure that all people who earn below that threshold realise that they can opt in should they wish to and should their personal circumstances make that the right choice for them.
I have tried to address as many as possible of the questions that have been put forward by the noble Baronesses, for which I thank them.
Statutory Sick Pay Percentage Threshold (Revocations, Transitional and Saving Provisions) (Great Britain and Northern Ireland) Order 2014
Baroness Sherlock Excerpts(10 years, 9 months ago)
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Baroness Sherlock (Lab)
My Lords, I thank the Minister for that explanation. I woke yesterday morning to hear on the radio an announcement about a wonderful new scheme the Government are planning to introduce called the health and work service, which would cover England, Wales and Scotland. I wonder what happens in Northern Ireland. I am not sure I caught that. This scheme would offer voluntary medical assessments and treatment plans for employees. There was nothing in that bulletin to inform the listener that this would be paid for by scrapping the percentage threshold scheme, or PTS, which enables employers to reclaim some of the costs of statutory sick pay, or SSP, from the state. I will be charitable and assume that this is because Parliament has not yet approved this order. I know that Ministers are loath to let anything slip out to the media before Parliament has had the opportunity to scrutinise it in great detail—although I confess that, somehow, the BBC had got hold of that side of the story on its website a little later.
These regulations abolish the percentage threshold scheme, and we are assured that stakeholders welcomed the change, apart from one employer representative group which was concerned about the impact on small employers of removing the remaining element of SSP reimbursement. We were told that the average amount claimed under the scheme in 2009-10 was £500 per year, per claimant—that is, per employer claiming. That may not sound a lot, but the impact assessment also tells us that micro-employers, those with fewer than 10 workers, receive 70% of the recovery, and £500 can be a lot of money to a micro-employer.
I know of a church in Durham, where I live, the sole employee of which is a rather wonderful youth worker; the vicar, of course, is paid by the diocese. Sadly, the youth worker has been off sick for some months. It was a big decision for the church to hire her, but it decided to dip into its reserves to hire a youth worker to work not just with the children in the church but children in the local community. Unfortunately, she has developed a condition which means that she has been off sick for some months. She is brilliant and the church does not want to lose her, but money is tight. Thanks to the PTS, it has been able to get some of the SSP back, so it can afford to pay a locum to do at least some of the work. At the moment, a locum youth worker is running a wonderful club for a few weeks for year 6 children in the neighbourhood to help them prepare for moving up to secondary school. However, my point is that £500 to that church is a lot of money. Can the Minister tell the Committee whether the Government have talked to micro-employers about the likely impact of this change on their operations? According to the Black review of sickness absence, micro-employers represent 82% of employers; obviously, they represent a smaller percentage of employees, but that is a lot of employers.
The argument made in the Black review is that PTS compensates mainly small employers for “higher-than-average sickness absence” but fails to promote attendance management; I think that was the point the Minister was making. That seems to me to fail to distinguish between two things that were rammed home to me in business school in assessing sickness absence in an organisation: the number of periods of sickness and the number of days of sickness. If you have a lot of periods of sickness, a lot of employees off for a small number of days, that can tell you something about whether people are taking sick leave a lot and it can tell you something about morale. The total number of days can be completely skewed in a small organisation by one person having a very serious illness. I did not see that distinction made. A good example would be this church, which would look as though it had a terrible sickness record but that is because one youth worker happened to develop a condition.
I am trying to draw this out, because I wonder if the Minister could help me to understand. The assumption is that those who get most of the money are small organisations with higher than average sickness absences, which therefore fail to promote attendance management. I wonder whether the evidence backs that up. Can the Minister help me to understand that rationale? The impact assessment says that the abolition of the PTS removes a transfer of some £50 million from the Exchequer to businesses and that the new health and work advisory service will generate a net value of around £70 million for employers—£120 million in benefits minus £50 million in intervention costs, I gather. There will also be a presumed benefit to the state.
The Minister can correct me if I am wrong, but my understanding is that that means that all the current spend on the PTS of £50 million is being recycled into the new scheme. Can the Minister confirm that? The assumption is therefore that businesses are not losing out. However, if that is true, what calculations have been made as to how evenly the gains and losses will be distributed? After all, if 70% of the benefit of the PTS goes to micro-employers, is it assumed that 70% of the benefits of the new service will be enjoyed by micro-employers? The impact assessment says that smaller employers are expected to benefit disproportionately, as they are less likely to have their own rehabilitation and occupational health services, but it did not quantify that. Can the Minister tell the Committee if any assessment was made? If so, what is the distinction? Within smaller employers is a large group: micro-employers are those who have fewer than 10 workers. Was any distinction made between those two categories?
A crucial question is whether the fact that in future employers will bear the full cost of SSP is likely to have any effect on their willingness to hire or retain staff whom they may judge likely to need it. In other words, will they discriminate against staff who have a potential health issue or have had a health record in the past that gives them cause for concern? The impact analysis does not address that directly, but under the heading “Key Assumptions/Sensitivities/Risks” it includes the following assumption:
“The removal of the PTS doesn’t precipitate (illegal) discrimination by employers against employees with poor sickness absence records”.
Can the Minister tell the Committee what evidence underpins that assumption? I am not saying that that will happen but I would be glad to know why the noble Lord, Lord Freud, felt sufficiently confident that it would not to sign off the impact assessment without that assumption spelt out in it.
My other question about these regulations relates to whether there is any risk that employees will be less likely to receive SSP under the new system. In consequence of the abolition of the PTS, the Government have also produced a set of regulations which have not yet taken effect, which propose to abolish the requirement on employers to maintain records for each employee relating to sickness absence and the payment of SSP for three years after the end of the tax year where SSP was paid. I refer to the Statutory Sick Pay (Maintenance of Records) (Revocation) Regulations 2014.
Can the Minister tell us what risk assessment the Government have undertaken as to the likelihood of employers not paying SSP correctly or at all once the record-keeping requirement is abolished alongside the order we are discussing today? The Explanatory Note which covers both orders tells us that HMRC will retain the power to require an employer to produce records to show them that SSP has been paid appropriately. What discussions has the department had with HMRC to satisfy itself that there will not be an unintended consequence of some employees not getting the money to which they are entitled? The Explanatory Note also says:
“Stakeholder engagement found that employers maintain records of sickness absence for payroll, tax and other staff management reasons”.
Can the Minister confirm that those stakeholders include individuals from or representing micro-enterprises?
Finally, the 2011 Black review on sickness absence recommended that the Government should carry out further research into the reasons behind the significant number of people claiming ill health benefits who come straight from work, especially from smaller employers. That is the earlier Black review. It recommended that the Government carry out further research into the reason why significant numbers of people claiming ill health benefits who come straight from work appear not to have been paid sick pay by their employer beforehand. Has that been done?
My very final question is that the impact assessment notes that HMRC periodically visits businesses to see if their payroll is running smoothly and it reviews payroll documentation including SSP and sickness absence records. Can the Minister clarify whether on those visits HMRC will still routinely review SSP records? I look forward to the Minister’s reply.
Lord Bates
I thank the noble Baroness for her questions and for the case study she gave us from the diocese of Durham, which of course I have a strong affinity with and want to see everything possible done to help. In considering that, the best thing that could happen to any small employer in that situation is that the employee returns to the workplace. The question is whether, through this reallocation of the resource from the threshold scheme to the health and work service, it is more likely that the person concerned will find a pathway back to the employer and the workplace, which is the best solution all round. Our view is that it will and that it is a better use of the resource.
The noble Baroness asked how the £50 million that is currently paid under the threshold scheme will be allocated. It will be used to fund the health and work scheme and the tax exemption for interventions which was announced in the Autumn Statement. Where interventions are recommended to get somebody back to work which incur a cost—for example, the provision of physiotherapy or a particular piece of equipment or a change in working practices—the employer will be able to offset that cost. Many large national or multinational companies have sophisticated HR departments which seek to address all these issues to get employees back into the workplace as soon as possible. However, micro-employers do not have that facility. They will be able to take advantage of the new scheme and make some savings as a result of it. That is one of the reasons why it is widely welcomed by them. Micro-employers will benefit more than larger employers for the reasons I have outlined.
Less than 10% of micro-employers make claims under the percentage threshold scheme, which raises another point that the scheme is so complicated and complex that many micro-employers who could benefit from it do not take advantage of it at present because they do not appreciate that it is there. We hope that with the publicity surrounding the new way of working through GPs and employers and employees, more will take advantage of the service, and that will be to the benefit of all. Micro-employers currently receive around 70% of the money paid out under the scheme. The average claim under the scheme is less than £500 a year, but this masks considerable variation. For example, around 25% of micro-employers claimed less than £200 in 2008-09.
The noble Baroness asked about a particular church employee. The health and work service will support the employee and the employer in the diocese to try to find a plan to enable the person concerned to return to work under the new scheme. She also asked why the scheme will not apply to Northern Ireland. However, this is a fully devolved matter for Northern Ireland and therefore it will make its own decisions on how the scheme will operate. The health and work scheme will apply just to England and Wales.
The noble Baroness asked about the abolition of associated SSP record-keeping. Employers will still need to maintain SSP records for pay-as-you-earn and tax purposes. There is no evidence to suggest that employers will not meet their SSP obligations as a result of record-keeping abolition. The HMRC statutory payments disputes process will continue to ensure that employers meet their obligations. There will be ongoing monitoring of disputes and the actions which are taken.
I think that that covers many of the points which were made. However, the noble Baroness may be about to tell me—
Baroness Sherlock
I would hate to disappoint the Minister and I thank him for going through so many of my questions.
I have a couple of specific points. His answer to my concerns about the record-keeping point was that the Government assume that since employers keep records anyway, there is no reason to assume they will cease to keep them. They say that in its routine visits HMRC currently inspects payroll records, including SSP records. Is it the intention of the Government that it will continue to inspect SSP records on these visits, even though companies are not specifically required to keep them in the form that is described here? The suspense is killing me—I look forward to hearing that answer.
Can the Minister explain again the position of micro-employers? My understanding was that 70% of the benefit was going to micro-employers, but I think he said it would be only 10% of the claims. Perhaps he could help me to understand that. The point I was trying to draw him out on, about the fact that the new service will more than compensate for the loss of the PTS, was that I can see that across populations that is true but if, as a micro-employer, you have only one or two employees and they cannot be got back to work because of the nature of their conditions, they will lose out. Was any thought given to whether they might be protected from that in some way?
Lord Bates
The noble Baroness asked about the HMRC visits. I am delighted to give her the answer, which is yes. She also asked for clarification on the 10% figure. I said that less than 10% of micro-employers make claims under the percentage threshold scheme, which I think was the point she was asking for clarification on.
I hope that noble Lords will agree that the abolition of the percentage threshold scheme is important so that savings can be reinvested in the new health and work service, which will benefit both employers and employees in reducing lost working days and increasing economic output. I commend the order to the Committee.
Employment: Young People
Baroness Sherlock Excerpts(10 years, 9 months ago)
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Lord Freud
My Lords, I could not agree more with my noble friend. There are only four things one can do to help youngsters into the workforce: directly get them a job; training and education; apprenticeships; or work experience, which is a stepping stone. That is what Alison Wolf told us, and that is what the Government are aiming to do.
Baroness Sherlock (Lab)
My Lords, I think the Minister said that the Government inherited high long-term youth unemployment from the Opposition. However, the ONS publication Labour Market Statistics shows that long-term unemployment for 18-24 year-olds is 232,000. The same data set shows that in the period spanning the last election it was only 188,000. Labour has made it very clear that we would guarantee a job for every young person out of work for more than a year and make them take it. What will the Government do?
Lord Freud
My Lords, the figures the noble Baroness quoted are very distorted by the training allowances, which got people off the long-term measure. I will not go into a long song and dance about it, but those figures were the result of a very distorted comparison. I have quoted the real figures—the ones that matter—to this House on a regular basis. When you look at youngsters who are both workless and outside full-time education, that figure rose through the longest boom we have seen in our history because of structural inability to get those youngsters into the workforce. There was neither adequate education nor routes into the workforce. We are turning those figures round—and they are the real figures.
Child Support Fees Regulations 2014
Baroness Sherlock Excerpts(10 years, 9 months ago)
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Baroness Sherlock (Lab)
My Lords, in speaking to these regulations I declare an historic interest as a former non-executive director of the Child Maintenance and Enforcement Commission until 2010, and a very historic interest as a former chief executive of the National Council for One Parent Families, which is now lost in the mists and merged with Gingerbread.
I thank the Minister for his explanation of these regulations, and I am grateful to other noble Lords who have spoken on this for the illumination they have added. Most of the time, when I face the Minister across the Dispatch Box, I would happily change places, but when he faces down the noble and learned Lord, Lord Mackay of Clashfern, he is welcome to that seat, at least for the duration of these proceedings. I wish him well in answering the points raised by the noble and learned Lord.
I thank all those organisations which sent in briefing, including Gingerbread and the Resolution Foundation and, indirectly, Families Need Fathers. We on this Committee are also indebted to the noble Lord, Lord Goodlad, and his Secondary Legislation Scrutiny Committee, which did an extraordinarily thorough job on these regulations. It identified gaps and question marks and pursued Ministers gently but persistently, drawing information from them bit by bit until it got answers. I put on record my appreciation of its intelligence, analysis and perseverance.
These are significant regulations, and despite the lengthy impact assessment, we all know that we do not really know what will happen as a result of both the new scheme and the charges being imposed on both parents. The Government’s aims for these reforms, which were set out clearly in the Green Paper, Strengthening Families, Promoting Parental Responsibility, were twofold: to achieve cost savings for the taxpayer and to create an incentive for parents to work collaboratively to make family-based arrangements rather than enter a statutory scheme.
The Secondary Legislation Scrutiny Committee’s excellent 23rd report of the current Session draws these instruments to the special attention of the House on the grounds that they may imperfectly achieve their policy objectives, so it is important for the Minister to reassure the Committee on this point. Specifically, the Select Committee says:
“we conclude that although the transfer scheme may make savings it may imperfectly achieve the overarching objective of providing financial support to children”.
The committee engaged in a correspondence with the relevant Minister in another place, which eventually drew more information out but in my view was not ultimately satisfactory in providing assurance on that point.
I shall ask the Minister to reassure the Committee on those broad points and then ask some specific questions. First, a number of noble Lords have raised behavioural issues. The impact assessment assumes that fewer cases will enter the statutory scheme as a result of the change, but also suggests that the proportion of arrangements affected will rise from the current 60% to 70%. The assumptions seem to be rather optimistic. The present pattern of compliance in family cases is one thing, but that is not necessarily a guide to what we may expect to see in future. As my honourable friend Kate Green put it in another place, at the moment we have parents who may be choosing positively to co-operate, but in future parents with family arrangements will be those who simply see it as the lesser of two evils. There will therefore be a different set of arrangements going on in family arrangements from those that prevail at the moment, so how confident is the Minister of those figures?
On the cost objective, the Government are clear that they expect to score substantial financial gains from the new scheme being introduced, especially as the result of charging fees. Fees both bring in income and reduce running costs, as parents are deterred from using the system. However, I looked in vain for a parallel level of ambition to increase the amount of child support that would actually reach children, a point made by the noble Lord, Lord Kirkwood. What are the Government’s ambitions in that connection? After all, the point of a child support scheme is not to be efficient. It should be efficient, but its point is in fact to get money from the non-resident parent to the parent with care. Presumably the Government have some ambitions for increasing the amount of maintenance that is going to be transferred to children as a result of the reforms. Could they help us on that point?
I also have some questions about the implementation of the new scheme, some of them touched on by the noble Lord, Lord Kirkwood, and some by the noble Baroness, Lady Howe. This is crucial as the Government always said that they would not introduce fees until phase one of the new system was working well. The Minister told us that the scheme started in November and that they aimed to move people on from next summer. Can he tell us a bit more, as the noble Lord, Lord Kirkwood, also asked, about how the new scheme has been performing so far? I will certainly be interested to hear the answer to the noble Lord’s question about how many cases have been paid in full.
How is the interface with HMRC working? I am particularly interested in self-employed non-resident parents. There is the issue of who is responsible for enforcement. I am assuming that that will lie with the CMS but it would be helpful if the Minister clarified that. A common complaint is when a self-employed NRP declares very low levels of profit on, for the sake of argument, his business but the parent with care believes, or has evidence based on his apparent lifestyle, that in fact a much higher level of income is coming in than might be suggested by the latest set of accounts made available to the taxman. At the moment, if she has that evidence she can go to the CSA and it can investigate that. If that should happen in future, does the CMS have the powers to investigate that or will it be left to HMRC? If the CMS has the powers, will it exercise them? If it is HMRC, what assurances has the Minister had that it will do this and prioritise it over the other workloads placed on its shoulders?
When does the Minister expect to be in a position to publish a full range of statistics on cases being dealt with by the CMS? Will these stats show how many cases transfer from direct pay to collect and pay? See—I have got the jargon. It would be helpful to know what was happening to cases going into the scheme.
By what precise criteria will the Government decide when to commence the full new regime? A Written Answer to my honourable friend Kate Green in another place on 23 January said that the Government will determine when the new scheme is operationally ready for the transfer of cases in accordance with the criteria of,
“the Department for Work and Pensions Project Change Lifecycle Framework”.—[Official Report, Commons, 23/01/14; col. 263W.]
I apologise that I am not immediately able to translate that for the Committee, but perhaps the Minister can do it for me. What does that mean and how will it be applied?
Baroness Sherlock
I thank the Minister for going through all those questions—I am very grateful. I still have a couple which perhaps he missed out.
The Minister has explained to us that the Government believe that there will be more children in receipt of maintenance and more effective arrangements. However, he did not pick up on the amount of money that will change hands. For example, it would be perfectly possible for someone who was currently getting the full statutory amount through the statutory system to have in future a family-based arrangement in which they agree to take half of that amount to keep each other happy. Will the Government also be monitoring, and set a target for, the amount of child maintenance that is changing hands, and will they monitor in particular whether the amounts for individual families go down? In other words, one could see a change in the mean—by, for example, people who are currently nil-assessed joining the system—but that might disguise a fall in other cases. How well would that be monitored?
I think that I asked a question about the media campaign that Steve Webb had promised in early 2014. Does the Minister have any information on that?
There is a piece of nuance for which I apologise from this side as a pedant. On the question of domestic violence, the Minister said that he is confident that a non-geographic option will be available. Could he reassure the Committee that where domestic violence is alleged or admitted, a parent with care will not be required to accept direct pay unless and until such a scheme is available to them?
Lastly, I want to be sure that I understood his question about enforcement and HMRC. I think that he is saying that it will become more difficult for a parent with care to raise the question of where they believe earnings have been underdeclared. HMRC may deal with the general question of whether enough tax has been paid but at the moment, as I understand it, and I would be grateful if he would tell me whether or not I am right, a parent with care can go to the CSA with evidence showing that the non-resident parent has higher income than has been declared to the CSA—for example, if the lifestyle in terms of a house, a car or money spent would not appear to tally with the relatively small amount of income declared—and it can investigate and address that. Is he saying that that will not happen unless HMRC decides in general terms to conduct a tax investigation?
Lord Freud
On the question of the amount of maintenance, our estimate at this stage is that more children will get maintenance. That is what I have said. How much that maintenance is in money terms is less clear at this stage. It is one of the things that we will find out. I need to remind noble Lords that assistance may take many forms to children—more shared care—so the question is not just about money. It is about the level of support. That is an area that we will be looking at closely.
On bank accounts, the parent with care will be able to dictate to which account the non-resident parent must pay. If that fails to happen, it will result in a return to the collection service, which I think in practice deals with the noble Baroness’s question.
At the moment, the CSA gets a complaint from the parent with care. The place where it goes to check is HMRC. That main checking area becomes irrelevant when there is a direct feed. Where she is suspicious—it is a suspicion—of, effectively, tax fraud, that is what we are talking about.
Baroness Sherlock
So the CSA does no investigating of its own? I am sorry; I must have misunderstood that point.
Lord Freud
No. Currently the CSA checks with HMRC. As now, it will be able to provide information to support its suspicions that all might not be well. This is a difficult issue more generally.
On the question about the campaign, we are planning a media campaign using social media and paid-for channels such as radio. We are still finalising those details. The intention is to raise awareness of case closure and to promote parental responsibility. We will get more details of that out in coming months.
With all the issues dealt with—perhaps not to everyone’s absolute satisfaction—I will commit to continuing to provide transparency in the delivery of this programme of reforms. We published a strategy for the publication of information about the 2012 scheme on 18 July last year. We plan to release official statistics once we are assured of the appropriate quality of the data; we expect this to be after April 2014, as I said. Ahead of this, we have used the management information that is available to release limited relevant data on a one-off experimental basis, published on 25 November last year. As I mentioned earlier, we will review the effects of the fees and regulations, and lay a report before Parliament following 30 months of operation. I commend the regulations to the Grand Committee.
Housing: Underoccupancy Charge
Baroness Sherlock Excerpts(10 years, 9 months ago)
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Lord Freud
My Lords, less than half the overcrowding takes place in London. More than 30% of properties are actually one-bedroom and 108,000 have come up. We are adapting to the transition by using the discretionary housing payment system. The recent data on discretionary housing payments show that that is exactly how local authorities are using that money.
Baroness Sherlock (Lab)
My Lords, the Minister mentioned discretionary housing payments. The LGA survey says that 81% of authorities said that the number of applications for DHPs had increased greatly between April and November 2013 and that the social sector size criteria topped the list of reasons for this. The LGA has made the point that there are some areas where there is simply not enough accommodation, and therefore the amounts of money the Government have made available are not enough. The tenants are suffering and the local authorities are picking up the tab. Will the Government commit to reviewing this policy and giving local authorities and tenants the help they need?
Lord Freud
My Lords, we have a high level of discretionary housing payments, running at £180 million. More importantly, £20 million of that is to be bid for. I have currently had 67 bids and we are paying out. I am not sure whether local authorities will actually be using up all the discretionary housing payment at their disposal. As noble Lords know, a review is going on. I will be able to publicise the interim findings in the spring and the final version will appear next year.
Employment: New Jobs
Baroness Sherlock Excerpts(10 years, 9 months ago)
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Lord Freud
I am pleased to say that the regional position is pretty balanced. During this quarter, employment rose in virtually every UK region, with one exception. The north of England and the Midlands are doing particularly well. If one looks at the balance between the north and the south, since the election there have been 360,000 extra private sector jobs in the north—to take those four regions together—and 420,000 in London and the south-east.
Baroness Sherlock (Lab)
If that information is right, can the Minister explain the report from the Centre for Cities, which shows that four out of five private sector jobs are now created in London? For example, private sector employment grew by 2.8% in London year on year, but it fell in Sunderland and in Bradford it fell by more than 5%. Do the Government have a strategy for jobs north of, say, Witney?
Lord Freud
I hope that I made it very clear to noble Lords that this is a very widely spread recovery, that the north is doing very well and that the noble Baroness is misrepresenting the actual figures.
Pensions Bill
Baroness Sherlock Excerpts(10 years, 9 months ago)
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Baroness Sherlock
“(5) Regulations under this section shall not be made to exempt entire classes of business or businesses, such as small and medium-sized businesses, from automatic enrolment.
(6) Regulations under this section shall be laid before and approved by resolution of both Houses of Parliament.”
Baroness Sherlock (Lab)
My Lords, Clause 37 is headed: “Automatic enrolment: powers to create general exceptions”. I am tempted to rest my case there but I will press on a little. I hope that this will be a relatively uncontroversial amendment that the Minister can accept.
If the Committee looks at Clause 37, it will see immediately that it is drafted very broadly—too broadly, I suggest. In effect, it gives the Government the power by regulation to create exceptions from the employer duties under auto-enrolment in a way or to an extent that could undermine the intention of Parliament in establishing auto-enrolment in the first place.
When this clause was discussed in another place, the Pensions Minister said that the Government needed the powers to make regulations in order to ensure that employers do not automatically have to enrol people whom it will be a waste of time to enrol because they will be immediately removed; for example, people who have resigned, are retiring or have used their lifetime tax allowance. Apparently the clause is broadly worded because, the Minister said in the other place, we cannot predict the future need for exceptions. I suspect that our Minister’s brief contains similar assurances.
Clause 37(2) inserts a provision into the Pensions Act 2008 which enables the Secretary of State by regulation to provide for exceptions to the employer duty that may,
“be framed by reference to a description of worker, particular circumstances or in some other way”.
We accept that there will be circumstances in which it will be inappropriate to auto-enrol someone who is likely to want to be removed immediately, but it is our view that the clause is unnecessarily widely drafted—a view that is shared by others, including the TUC and the CBI.
In Committee in another place, the shadow Pensions Minister, my honourable friend Gregg McClymont, quoted from a letter from the CBI in which it expressed support for the intention of the clause but said it was too broadly drafted because:
“The inclusion of ‘in some other way’ would provide too broad a power to government to change the scope of automatic enrolment at any time it saw fit. For instance, it would provide the Secretary of State with a secondary legislation power to exempt some businesses. This is a move the CBI could not support, as it undermines the consensus that was reached on pensions reform by giving exempted firms a cost advantage”.—[Official Report, Commons, Pensions Bill Committee, 9/7/13; col. 352.]
If the Government want to exempt a category of business, they should come back to the Floors of both Houses and amend their legislation. This is not fanciful. It is not long since the Beecroft report recommended that micro-employers be exempted entirely from auto-enrolment.
This amendment makes it clear that Clause 37 shall not be used to exempt entire classes of business, such as small or medium-sized employers. This will ensure that the Government’s apparent intention for auto-enrolment to apply to all categories of employer and business will be honoured. If the Minister is of the same view as the Pensions Minister on this point—in other words, if it is the Government’s intention that no such general exemption should be made—there can be no reason to resist this amendment. If he does, he has some explaining to do.
Lord McKenzie of Luton (Lab)
My Lords, I support my noble friend’s amendment. Auto-enrolment has, initially, clearly been a success and the Government deserve credit for implementing the policy. But we should recognise that we are just at the beginning: although it has been up and running for 18 months, we are just approaching the point in April this year when smaller and medium-sized employers, those whose largest PAYE scheme covers between 50 and 249 employees, have to commence their duty.
There have already been a range of changes to the process, implemented by regulations, resulting from a review of early live running. Those changes mostly came into force last November, although some are due this coming April. The consultation on the draft regulations also canvassed views on other changes, including the proposition of excluding a certain category of worker from auto-enrolment. It sought more information on three situations, identified that it had a substantive response to the use of an exception, and committed to publish the results, with government proposals and a further consultation. When will the results be published? Will it be before Report? At the very least, can the Minister provide us with a list of the circumstances being considered, if those extend beyond the three identified in the briefing note, which states:
“The initial evidence suggested that there is a case to re-examine the appropriateness of the employer duty in some, very carefully specified, circumstances”?
However, as my noble friend has clearly set out in the amendment, the power taken in Clause 37 is a very wide one.
The circumstances covering someone handing in their notice, where the notice spans the automatic enrolment date, and where an active scheme member gives notice of retirement and stops making contributions could, it is suggested, be the subject of specific amendment. As for those individuals with fixed or enhanced protection for their lifetime allowances, the Minister might tell us how an exclusion might be framed so that the employer could operate without input from the worker. That those circumstances need to be addressed to avoid detriment to workers is clear, but at present the encouragement from HMRC is to do so by opting out. If the system for exemption depends on the worker lodging the existence of enhanced or fixed protection, perhaps with some validation from HMRC, I am not sure that that is a more effective route than the worker simply opting out.
If the rationale for Clause 37 is based on just those three circumstances, I am bound to say that it is not overly convincing. If we are to understand that a range of other circumstances have been identified which justify the clause, we must be entitled to know what they are. The Government must be aware of them from representations that they have already seen. The briefing note sets down some core policy principles against which suggested exclusions are to be tested. One of these is:
“Are the individuals unlikely to benefit from pension saving?”.
This has echoes of some of the challenges to auto-enrolment when the policy was first originated and being developed, particularly around older women just approaching retirement.
It is entirely reasonable that there will be changes to the operation of auto-enrolment arising from practical experience, but we should be cautious of wide powers to remove the employer duty of enrolment. That is the cornerstone of the policy. Of course, we are mindful that the duty has already in practice been narrowed by aligning the starting point with the level of the income tax personal threshold, thereby removing thousands of the low-paid from its benefits. We are also mindful that there is a subtext to the overall Bill about generating savings for the Treasury, so my noble friend is right to be cautious about this clause.
Lord McKenzie of Luton
Nobody disagrees that there could be some limited and carefully targeted exclusions in particular circumstances, but I am trying to understand the circumstances that the Government have currently identified. They have laid out three of them in the briefing document, which suggests that they might have had representations on a whole range of other areas. I reiterate my question: can we know what circumstances, other than the three identified, the Government are focusing on that warrant an exclusion from the provisions?
In particular, one of those that has been identified deals with enhanced or fixed-protection provisions. I accept that there is a financial detriment for people who get auto-enrolment in those circumstances, but HMRC has advised them pretty clearly to opt out in that case. How, specifically, would the Government draft an exclusion to encompass that group of people? The enhanced or fixed-protection status of individuals would not be readily known to employers. Would an employee have to report it to an employer? How is that a better arrangement than the employee simply opting out?
Fundamentally, I am trying to understand how many circumstances the Government have identified where they think there might need to be an exceptional exclusion from auto-enrolment. I accept the Government’s good faith on that remaining the cornerstone of the policy, but how many other circumstances, given all that has gone on and all the representations and discussions to date, have been identified which warrant this power?
Baroness Sherlock
I have a question to add to that. I am grateful for the Minister’s explanation as to why the Government feel they need to have some flexibility to deal with circumstances as yet unknown, but I do not think that the Minister addressed what the problem is with the specific amendment I moved. After all, the amendment does not seek to prevent the Government from having those powers; it simply says that the Government may not make regulations in such a way as to exclude categories of business such as small and medium-sized businesses from auto-enrolment. What is the Government’s particular problem with this amendment?
Lord Bates
I will come to the noble Lord, Lord McKenzie, in the first instance. We have said that there are three categories, which he rightly referred to: tax protection, leavers and retirees. Those are the issues that we have identified. We are, of course, having a consultation. One of the challenges we invariably have is that we phrase a piece of legislation and make certain statements on the record in terms of the progress of that legislation through the House. We give certain assurances and then put something in to say, “This is to cover for unforeseen circumstances”, to which the legitimate question is: “What are those circumstances?”. The legitimate response to that has to be that they are unforeseen at present.
Responses to the consultation are currently being processed. They will be dealt with and published later this year and could reveal examples that we have not actually identified at present. This is a new policy and a new area and we therefore need to look at this. As I made my remarks about unforeseen circumstances, I gave examples of areas where it would be unacceptable to exclude people from the terms. We have rejected these exemptions and certainly would not want to introduce them. We have identified casual staff and teachers with second jobs, for instance, as being examples of people for whom we would not want this provision to apply. However, there will be further consultation on this issue and I ask noble Lords, if not quite to trust the Government, at least to accept that sufficient assurances have been put on the record. We recognise that there is broad consensus, but this needs to apply to everybody. However, this is a young policy in general terms and therefore flexibility is still required.
Lord Bates
The short answer is that it is not easy. As the noble Lord will well know, given his experience as a distinguished Minister in the previous Government, it is not easy precisely to craft provision in those areas. We will seek to produce further examples by Report, following the responses received to the consultation. However, I can certainly assure the noble Lord that none of the responses has suggested that small employers should be excluded from the scheme. I know that is at the heart of the concern and, I hope, is at the heart of the reassurances which I have sought to give.
Baroness Sherlock
My Lords, I thank the Minister for that response, but confess that I am still a little uncertain about what the Government’s position is. I understood him to say that it is the Government’s policy that all categories of employer should be included and that the Government are still consulting and categories of person may emerge who they do not yet know about who they may wish to exclude in the future, and therefore they need to keep this open. So the question I am left with is: are the Government open to the possibility that somebody may make a compelling case for excluding a category of employer by size? If they are not, there is no reason for them not to accept this amendment. If they are, then, frankly, their assurances are not worth the time that they have been given today. I am disappointed that the Minister has failed to address the specific amendment. However, as we are in the Moses Room, and I do not have the option to do anything other than withdraw the amendment, I beg leave to withdraw it.
Lord Bates
My Lords, these amendments allow for two simpler alternative tests for a scheme to demonstrate that it is of sufficient quality. These were developed following last year’s consultation on technical changes to automatic enrolment, asking for views on whether there is a simpler way to determine whether a defined benefit scheme is good enough for automatic enrolment.
As well as calling for a general simplification in these rules, responses to the consultation highlighted that once the contracting-out period ends in April 2016, all those schemes that are currently contracted out, and so considered good enough, must satisfy the test scheme standard. This is considered unnecessarily complex and burdensome, particularly as, until the end of the contracting-out period, the schemes will have satisfied the higher standard of the reference scheme test. The alternative tests provide for a scheme to be used for automatic enrolment if the cost to the scheme of the future accrual of benefits for active members would require contributions that are at least equivalent to one of two prescribed percentages of relevant earnings. The first will apply at the aggregate level, looking at the scheme as a whole, and the second will apply at the individual level and must be satisfied for at least 90% of relevant members. Moreover, in order to provide assurances about the quality of schemes satisfying this alternative test, the amendment ensures that the prescribed amounts will not be lower than 8% of relevant earnings, in line with the minimum level for total contributions into a qualifying money-purchase scheme.
We are mindful of the need to strike the right balance between increasing simplicity and flexibility and ensuring adequate member benefits across all qualifying schemes. This balance will be one of the key issues to explore as we consult stakeholders on the detail of the alternative tests, and will also be reviewed in 2017 to ensure that the legislation is working as intended. I beg to move.
Baroness Sherlock
My Lords, I thank the Minister for his explanation of these amendments. I have two questions. He may have answered them but, although I listened hard, it is hard to be sure. First, will he confirm whether the Bill, with these amendments, will qualify the existing accrued rights protections in any way? Secondly, will he assure us that, given the variations in definitions of pensionable pay, the new defined benefit scheme qualifying tests will be of no lesser standard than the certification alternative requirements used at the moment for employers using money-purchase schemes but using an alternative definition?
Lord Bates
I certainly give the noble Baroness the assurance that she rightly seeks with her second question: there will be that minimum standard. In answer to her question as to whether the amendments will qualify in any way the existing accrued rights protections, nothing that we are doing in this clause or in the regulations that we plan to make under it will have any impact on accrued rights.
Lord Whitty (Lab)
My Lords, in a Bill of extreme complexity, with a large number of amendments that are equally complex, this must be the simplest amendment on the Marshalled List before the Committee. Therefore, I assume it is one which the Government could easily accept or, alternatively, make a slightly different proposition in respect of. Most of my interventions in Committee have been on behalf of the interests of beneficiaries of pension schemes, which I think is right, but this amendment is on behalf of a subset of employers; namely charities, although it would extend more broadly to the non-commercial private sector.
Charities are providers of occupational pensions—in fact, the top 50 charities have pensions liabilities of more than £5 billion. Clause 45 provides some degree of protection for all employers engaged with the Pensions Regulator in restoring the affordability of pension schemes, long-term deficit reduction plans and related matters. It requires the Pensions Regulator to take into account the effect on the employer’s “sustainable growth”. That is obviously a very important issue for commercial private sector employers, but the aim of charities, and of certain other organisations that provide pensions, is not growth. The aim is to work on the object of the charity and, in some cases—for example, with the alleviation of poverty or the eradication of disease—the charity’s aim is to reduce that object and therefore to run down its actual activities in the long run.
“Sustainable growth” is not the appropriate term to give the equivalent protection to private sector employers and to charities and other bodies for which growth is not the objective. I am therefore suggesting that the broader term of “sustainability” should be substituted for “sustainable growth”. Alternatively, if the Government are not prepared to go along with that entirely, I suggest “sustained growth or sustainability”. Otherwise, charities which face equal and, in some ways, greater financial pressures than private sector commercial employers, because of the legal and trustee-type restrictions on how they can use their own money, will have difficulty running pension schemes in many respects. They need this protection, but appealing to this clause, which amends the Pensions Act, would not automatically give them that protection.
I hope that the Government can consider this amendment and accept it, or at least make it clear, in an amendment of their own, that the broader objectives of organisations are also covered by this otherwise very valuable clause. I beg to move.
Baroness Sherlock
My Lords, as my noble friend Lord Whitty has explained, the purpose of this amendment is to ensure that the objectives of the Pensions Regulator, as set out in the Pensions Act 2004 and as to be amended by Clause 45 of this Bill, can be applied appropriately to charities.
We on these Benches are sympathetic to the aims of Clause 45 and recognise that there is a balance to be struck between the requirement on the Pensions Regulator to ensure that there is enough money in pension funds to meet their liabilities and the need to ensure that burdens are not placed on employers, with requirements so tough that they are effectively forced out of business and thus rendered unable to make any future contributions to said pension funds. However, as my noble friend pointed out, there are real concerns among those responsible for managing the finances of charities and other non-profit organisations over whether the clause, as drafted, is fit for purpose.
Charities have charitable objects that effectively circumscribe their purpose and activities. I declare an interest as the chair of some charities now and having been formerly chief executive of three different charities. I also remind noble Lords of the interest I declared previously as a non-executive director of the Financial Ombudsman Service.
As my noble friend has pointed out, charities do not necessarily aspire to grow as companies do. They may happen to grow, if demand is there and money is available to fund their activities. They may aspire to grow, to increase the number of people that they work with in line with their charitable objectives. However, they may not. In my time, I have presided over charities that grew but I have also taken decisions that effectively reduced charities by refocusing them on core objectives and ensuring that they were sustainable. While charities generally do grow, they also need to be sustainable, and that is what my noble friend is addressing here.
This is not a negligible issue. Registered charities employ around 850,000 people. The voluntary sector, according to the Charity Finance Group, contributes £11.6 billion to UK gross value added, compared, for example, to the contribution made by agriculture, which is just £8.3 billion. As my noble friend pointed out, there is a significant issue with charity pension funds. The Charity Finance Group estimates that the top 50 charities are carrying almost £5 billion in liabilities. I am advised that those liabilities, and the actions that have been required to flow from them, are driving a significant number of charity mergers. This is having an effect on the architecture of the sector, not just on the individual charities and their employees. Those charities are understandably nervous about any shift in direction or emphasis that is not appropriate to their circumstances.
I have personal experience of the fact that charities have often suffered at the hands of legislation or public policy that was based on the assumption that most organisations were either public or private and did not take into account the often quite different structure and funding arrangements of charities. The noble Lord has had significant involvement with charities and will understand that point.
If the Government are not minded to accept this amendment, can the Minister tell the Committee how the Government envisage “sustainable growth” being applied by the regulator to charities? What reassurance can he give to worried finance directors of charities? Can the Minister remind the Committee of what relationship, if any, there is between his department and the regulator when it comes to deciding how best to interpret their objectives as set out in statute?
Lord Bates
My Lords, this amendment relates to the proposed new objective for the Pensions Regulator. The Pensions Regulator oversees the scheme funding regime for defined benefit pension schemes. This regime requires, among other things, the regular evaluation of a scheme’s funding position and a formal recovery plan to plug any deficit identified.
In undertaking this evaluation, the Pensions Regulator is guided by a number of objectives set out in the Pensions Act. It is therefore important, in reference to the remarks of the noble Lord, Lord Whitty, and the noble Baroness, Lady Sherlock, that when we talk about this new requirement, it is placed in the context of the six or seven different measures that the Pensions Regulator will take into account in determining the funding rate that is necessary for the scheme to make up any deficit. While some consideration of sponsoring employers is implicit in these objectives, the new objective will make it explicit that the regulator must consider them, alongside members and the Pension Protection Fund, in deciding upon the suitability of deficit recovery plans and other decisions related to scheme funding.
The new objective responds to concerns expressed by sponsoring employers which felt that they needed to be recognised in the regulator’s statutory objectives, given their importance to defined benefit schemes. The current wording of the objective refers to sustainable growth, as the Government believe that the best protection for scheme members is a strong, healthy employer standing behind its scheme now and in the future. Whether that is a charitable organisation or a commercial organisation, its health must be the first objective in order to keep a sustainable body behind the scheme. Sustainable growth can benefit both the organisation and pension scheme members via a potentially stronger employer covenant underpinning the pension promises made.
Lord Bates
My Lords, the four amendments I will speak to fall into two groups of two. The first two, Amendments 64A and 72A, relate to the application of the PPF compensation cap to individuals who have entitlement to both an occupational pension and a pension credit arising from a divorce or civil partnership dissolution settlement. It has come to light during the drafting of the Bill that the way in which the PPF currently applies the compensation cap to this group, while in line with the policy intent, does not comply with legislation. When compensation is calculated, these two entitlements are kept separate. It was the intention that the compensation cap would also be applied separately and this is what the PPF is currently doing. However, the legislation, as currently worded, requires the two amounts to be added together and the total capped, leading to a significantly lower payment. These amendments simply bring the existing legislation into line with the policy intent and the actual practice of applying the cap separately. They also allow the change to be applied retrospectively to cover past calculations and for them to come into effect from Royal Assent to reduce the period in which the practice and the legislation are out of alignment.
The second set of amendments—Amendments 67A and 67B—relates to the provisions in the Bill that establish a long-service compensation cap in the PPF. Those provisions in Clause 47 already make provision for how the long-service cap will apply in the calculation of PPF compensation for individuals in the PPF when the long-service cap legislation is commenced. The amendments deal with how the long-service cap should be applied when a scheme is either undergoing assessment by the PPF or winding up when the long-service cap is introduced. When the legislation commences, a scheme could be in the PPF assessment period—that is, being considered for entry to the PPF, or the scheme could be in wind-up.
Members of schemes in the assessment period will see their payments increased to reflect the long-service cap. However, any valuation of the scheme’s liabilities as part of the assessment period will continue to be based on the current cap structure. Any scheme that winds up outside the PPF, after being in assessment or not, will allocate its assets against the current cap structure. I hope that is absolutely clear. I beg to move.
Baroness Sherlock
My Lords, I thank the Minister for that very helpful explanation of these amendments. He may have answered the question that I am about to ask in his final sentence but I did not quite catch it, and I apologise for asking him to repeat it. In relation to the cap, for schemes currently in assessment, do the current PPF rules and levels of benefits or the more generous rules apply?
Lord Bates
The answer is that the current provision applies if a scheme is wound up outside the PPF. Schemes will increase payments where appropriate to reflect a long-service cap. However, the scheme’s liabilities will continue to be measured against the old cap. This is to prevent the actuary having to recalculate the scheme valuation, leading to delays and extra costs. I hope that that is helpful to the noble Baroness and thank her for raising the point.
Baroness Sherlock
“National Employment Savings Trust transfers
(1) In relation to NEST, the Government must by 30 August 2014 notify the European Commission that it wishes to lift the ban on transfers and the contribution cap.
(2) The Secretary of State must make a statement to Parliament within 14 days of the Government notifying the European Commission in accordance with subsection (1).”
Baroness Sherlock
My Lords, the amendment in my name and that of my noble friend Lord Browne would require the Government to lift the restrictions on the National Employment Savings Trust, or NEST, on transfers made before 30 August 2014, and to notify the European Commission that they wish to lift the ban on the transfers and the contribution cap. Following this, and within 14 days of the notification, the Government would be required to make a Statement to Parliament.
The Government’s decision to legislate now but not to lift the restrictions on NEST until 2017, and to refuse to lift the ban on transfers in and out until pot follows member commences, is cause for real concern. Crucially, it cannot be in the public interest for the Government to proceed in such a way. Incidentally, I am sure that the Minister has noted the recommendation from the Work and Pensions Select Committee that the restrictions be lifted without delay.
I agree that there was a good case for having restrictions before it was clear how the market would progress, but these restrictions are no longer justified. The auto-enrolment market is now well under way and NEST has not taken all the business, which had once been a concern among some. Indeed, the restrictions have meant that NEST has been able to get less of that low and medium-earning segment than it otherwise would have done, which will contribute to the increase in the number of small dormant pots.
While the contribution limit will be lifted from 2017 by legislation, the restriction on individual transfers in and out of NEST will be left to coincide with the beginning of pot follows member. Whether the income cap is such a problem up to 2017, the continuing ban on transfers in and out will be. The DWP’s own research found that more than 80% of employers want one provider. However, the ban means that any employer who is thinking about using NEST but currently has a pension scheme of any type will be discouraged from using NEST because they cannot transfer in the pension assets in their current scheme. The Government are encouraging employers to use NEST but, by refusing to lift the ban on transfers in and out right away, they are discouraging those employers who currently have a scheme elsewhere. In this way, NEST is being disadvantaged against many of its market competitors.
Our amendment would enable employers who currently have an existing pension scheme to take their employees with their existing savings into NEST. While there remains a ban on transfers in and out, those employers cannot use NEST, or can use it only by leaving any existing pension pots in a stranded place, with a different scheme. Has the Minister considered that aspect of the Government’s decision?
It appears that what the Government are actually doing is ensuring that the restrictions on NEST remain until every employer has staged. By the time the NEST restrictions are lifted, auto-enrolment will be complete. There are a number of significant problems with the Government’s position. First, as the pensions industry acknowledges, NEST provides best-practice standards, which has obliged the insurance companies to improve their standards. Yet NEST is disadvantaged in competing for many of the low and medium-earning savers for whom it is designed. That may well result in customer detriment for many of those workers. Secondly, the Government’s proposals fail the public interest test. If large numbers of low and medium-earning employees cannot use NEST, it is thereby being prevented from delivering its public interest obligation. Thirdly, restricting NEST impacts on its financial position and makes it harder to pay back the state aid earlier and thereby allow it to reduce its charges even further. This again undermines NEST’s public interest obligation and its mission to deliver a low-charge, high-governance pension proposition. Finally, the rest of the industry is reported in the pensions press as increasingly not having the capacity or, possibly, desire to cope with all the employers who are still to stage in. Having had, it is said, the advantage of the NEST restrictions in place while larger employers move in, the rest of the industry is perhaps less interested in the smaller end of the market.
I trust that the Minister will be able to explain why the Government have so far refused to lift the restrictions. However, whatever has been said in the past, I urge the Minister to accept this amendment; but if he cannot do so today, I hope that he will take it away and reconsider before Report the strong case for these restrictions to be lifted—not in a few years’ time but now, before auto- enrolment is complete. I beg to move.
Lord Bates
My Lords, I thank the noble Baroness, Lady Sherlock, for giving me the opportunity to update the Committee on all things NEST.
As noble Lords know, the National Employment Savings Trust was established to support automatic enrolment, providing access to a quality, low-cost scheme for a target market of low-to-moderate earners and smaller employers. We are now just over one year into automatic enrolment and NEST has around 800,000 members and 2,500 participating employers. Opt-out rates are low, with only 8% of individuals enrolled into NEST choosing not to save for their retirement. NEST is already very successfully doing what it is there for—supporting automatic enrolment.
However, we are approaching a peak in the staging profile. Between April and July this year, 27,000 medium-sized employers will start to enrol their workers, and from April 2015 more than 1 million small employers will do the same. We anticipate around 65% of these small and medium employers will use NEST. By the end of staging we expect NEST to have admitted around 750,000 employers and to be providing a pension saving vehicle for between 2 million and 4 million members.
This implementation challenge is what we need NEST to focus on. We need to ensure that the millions of people currently not saving sufficiently for retirement are provided with an opportunity to do so, and that NEST plays its part in starting to make pension saving the norm rather than the exception. For this reason, during the implementation of automatic enrolment, it is critical that NEST focuses on the key task of getting employers and workers on board without distraction. That is why we announced that we will be lifting the annual contribution limit and transfer restrictions currently placed on NEST by April 2017, when implementation for all existing employers is complete.
I am pleased to advise the Committee that, following an invitation from the European Commission, the Government submitted a formal notification earlier this month of their plans to lift these two constraints. The Commission will provide its response in due course. Once this has been received, the Government intend to consult on draft regulations and bring forward secondary legislation later this year to lift the constraints in 2017.
These regulations will provide certainty that beyond 2017 NEST will be on a similar footing to other providers and its members in the wider pensions market. It will enable NEST to support the successful implementation of automatic enrolment but will send a clear message to employers that these constraints will not have any bearing on them in the longer term, helping them to make an informed decision about automatic enrolment scheme choice for their members.
The Government are committed to ensuring that the introduction of automatic enrolment is a success. Effective implementation is important for building and maintaining consumer confidence in the reforms. Removing the annual contribution limit and transfer restrictions by April 2017 is the right approach.
The noble Baroness asked if the ban on transfers stopped employers from choosing NEST. NEST already has 800,000 members and 2,500 participating employers. Given that the overwhelming majority of employers that have staged so far are large employers, the evidence suggests that the constraints have not unduly deterred employers from choosing NEST.
This is an operational capacity issue for NEST. The restrictions on transfers in and out of NEST were designed to enable NEST to focus on its primary objective of supporting the introduction of automatic enrolment. Between April and July this year, an anticipated 10,000 to 15,000 medium-sized employers will start to use NEST to meet their automatic enrolment duty. It will not stop there, with more than 1 million small employers starting to enrol their workers from 2015.
I hope that those comments and updates, and the responses to the questions that the noble Baroness rightly raised, will enable the noble Lord to withdraw his amendment.
Lord Bates
The noble Baroness makes a important point in relation to this and I would not dissent from it. NEST has a vital role to play and we want it to be a success. However, it is new, and a new system is coming online, so this ought to be done through learning from experience in a gradual and incremental way rather than as a big bang, of the sort which has had its problems in the past.
Baroness Sherlock
My Lords, I thank all my noble friends who have contributed to the debate and am grateful to the Minister for his graciousness in revising his position. It is quite possible that my noble friends are in a better position to decide what the Labour Government intended by these measures than he perhaps is, despite his knowledge and his current position, since they were involved in shaping it.
Lord McKenzie of Luton
I look forward to the letter and its contents in due course. We were relaying the origins of NEST in the first place. These issues—the restrictions—were not intended by the then Government that introduced it to avoid NEST being distracted.
Baroness Sherlock
I thank my noble friend for that. First, I am disappointed that the Government decided to go ahead and stick with their current position. I would have liked the House to have the opportunity to discuss this further, as I do not think the Minister took on seriously the arguments made from this side. There was no reference at all to the question of scale. If the reports one hears from the industry are correct, it is possible that some of the big players may, this year or next, shut their doors to new members. We should do everything possible to enable NEST to build an appropriate level of scale and to enable it—far from distracting itself—to do precisely what it was set up for: to fulfil its public service obligation by delivering a high-governance, low-charge offer to those who can benefit from it.
The Minister made reference to employer choice but of course, by definition, the constraints actually reduce employer choice. Employers who want to go into it are unable to because the restrictions remain in place. I am disappointed that, despite the pressure from this side of the House, the Government have not revised their position. However, given that we are in Grand Committee and I can do nothing else, I beg leave to withdraw the amendment.
Housing: Underoccupancy Charge
Baroness Sherlock Excerpts(10 years, 9 months ago)
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Baroness Sherlock (Lab)
My Lords, the Minister has failed to address the core point made by my noble friend Lady Hollis and the noble Lord, Lord Best: why are the Government penalising people already in social housing, who took out their contracts when the current system was in place and before the bedroom tax came in? Why could they not protect people, as this House asked them to do during the passage of the Welfare Reform Act? If all else fails, will he join us in our costed commitment to abolish the bedroom tax?
Lord Freud
My Lords, the costings of the Labour Party in this area are fairly extreme because it seems to have used the same money many times over. This is a savings measure introduced in the emergency Budget, which applies to the existing case load and gives 33 months’ notice. The comparison is with the LHA changes introduced at the same time, for which there was less notice: 21 to 33 months. We have put in as support the discretionary housing payment system, as opposed to transitional protection.
Pensions Bill
Baroness Sherlock Excerpts(10 years, 10 months ago)
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Baroness Sherlock (Lab)
My Lords, all noble Lords who have spoken have laid down a significant challenge to the Minister on this part of the Bill. I do not propose to add a great deal, but there are a few questions that I would like to clarify. First, in his opening remarks, I think the Minister said that one of the problems being addressed was that there were significant levels of incorrect awards of pension credit because various assets and income were not being taken into account if they happened after an AIP was set. Does he mean incorrect? Presumably, he does not mean incorrect if they were in line with the rules. If someone is not required to declare it then they do not affect the award, but maybe I misunderstood that point.
Secondly, there is a question about the additional changes of circumstances. I am struggling a little to understand what the department does and does not know about this. The impact assessment states:
“We have limited evidence for the additional number of changes of circumstance that are likely to be reported each year as a result of the change in policy”,
but the impact assessment provides an estimate of £17 million a year as the cost of processing additional changes of circumstances and reviews. What assumptions is that figure based on in terms of the number of changes of circumstances?
Picking up a point made by my noble friend Lord McKenzie, what estimate has the department made of the likely increase in fraud and error as a result of the abolition of AIPs? Will the Minister remind the Committee what sanctions will be imposed on pensioners who fail to report a change in retirement income or capital that is relevant to their award? I would also be interested to hear what kind of support will be given. Will he also take the opportunity to remind the Committee how pensioners will be informed of this, how they will be reminded and what discretion can be exercised in choosing whether to sanction them, and of course what appeal mechanisms are there. That would be very helpful.
There is then the crucial question of the likely effect on the level of pension credit awards to those who have, or would have had, an AIP. The impact assessment was encouraging at first because it states:
“Analysis suggests that many customers are not currently reporting changes which would lead to an increase in their entitlement so they may actually benefit from the simplification of the policy”.
Can the Minister explain the use of the word “simplification”? At the moment, if I have an AIP and an income only from pension and capital, I do not have to tell the DWP about any changes in income, but in future I will. How is that simpler?
On the question of level, the briefing said that despite the fact that many customers may be better off, most people will not be better off as the Minister and my noble friend Lord McKenzie have pointed out. It is obvious that they could not be if £80 million a year is to be saved. Also, my understanding is that not only will there be twice as many losers as gainers, if I have read this correctly the average gainer will gain £6.70 a week but the average loser will lose £13.10 a week, which is twice as much. Will the Minister clarify whether that is right and if so what average means in this context? Is it a mean or median figure?
On the impact by age band of abolishing AIPs, the briefing from the department says that it is not possible to break down savings by age band, but that the younger cohort of recipients who are more likely to be affected by the change in policy are less likely to have capital above £10,000 or other pension income. Will the Minister help me understand that distinction? Assuming that they are spared, these younger pensioners will go on to be over-75s, who would have been entitled to an indefinite AIP. Is the assumption that that cohort, when they reach 75, will still be less likely to have savings over £10,000 or other pension income and thus less likely to face a change in pension credit entitlement? In other words, is the distinction one of age or cohort?
Just out of interest, did the department make any assessment of the effect and cost of, for example, maintaining indefinite AIPs for pensioners above 80 or 85 or any other age level? There is then the question raised by my noble friend Lady Hollis on equity release. I have no intention of standing between my two noble friends on the question of how they should be treated, being a woman with an ambition to live to at least 75 myself. But this is a serious question, to which the Minister responded at Second Reading simply by saying that,
“equity release may not necessarily result in a reduction in eligibility for means-tested benefits and will depend on overall income and capital”.—[Official Report, 3/12/13; col. 193.]
Of course, that is obviously true; for some people it may, and for some it may not. The briefing on the subject that came from the department had a note attached to it that may have come from the Department of Health, entitled, Reforms to Care and Support: Financial Product Review. That said, on equity release:
“Some people do use this to fund the cost of domiciliary or home care. No data is collected on the number of people who take out equity release to pay for care but it is currently very limited”.
At the risk of being a pedant, if no data are collected, how do the Government know that the number is very limited? I wonder if they are perhaps relying on the Age Concern survey referenced in the DWP briefing note, Abolition of Assessed Income Periods—Equity Release? I think probably not, however, because it suggests that the sample size was too small to be used for extrapolation. So I am sure that is not the source of it. But they must be able to make an estimate to be able to declare that the number is very limited, so can the Minister tell the Committee how many people the department estimates take out equity release to pay for care?
The importance of this question is to understand its implications. Even if the Minister takes the view that he does not regard this as being anything other than administrative easement, as explained by my noble friend Lord McKenzie, the Committee needs to understand whether there will be consequences for the treatment of income that may be needed to pay for care and, if so, how those costs will otherwise be addressed. I look forward to the Minister’s reply.
Lord Freud
My Lords, I shall deal with the equity release issue first. Assessed income periods were never intended to enable people to shield their income and capital from interaction with the means-tested system. Pension credit is a safety net benefit providing support for daily living needs for the poorest and, as such, should be a last resort.
Lord Freud
My Lords, my experience of cat skinning is that it takes quite a long time, so I am not sure that I can promise the aforesaid cat in its dematerialised form in the right time.
Baroness Sherlock
I am sorry, but I am pressing the Minister on the comment about the assessment of how many people use AIPs for equity release. The phrase I think he used at the beginning of his remarks was that this may be a minority of claimants, which is about as vague as it is possible to get in terms of a formulation. Can he shed any light on this?
Lord Freud
No, my Lords. We do not have any precision on this, and that is one of the reasons that we want to look at it in the context of social care. Clearly, one will need to build a better evidence base rather than me extrapolating from a very thin one. The cat is small; it is possibly a kitten.
On the question from the noble Baroness, Lady Hollis, about potentially retaining AIPs until the age of 75, while the noble Lord, Lord McKenzie, talked about the age of 80, we do not have a breakdown of age from the sample of AIP reviews that we have taken, but we have no evidence to suggest that older pensioners have more stable incomes than younger ones. Retaining AIPs for older pensioners would prevent us driving many of the inaccuracies out of the system and would lead to a two-tier system, whereas we want to see a single, understandable regime for everyone. Older pensioners are more likely to have indefinite AIPs already in place in April 2016 because they are being retained, so they should not experience any significant changes to their reporting requirements.
On the more detailed question about numbers raised by the noble Lord, Lord McKenzie, on the breakdown between guarantee credit and savings credit, I do not have it to hand behind me right now, but I am happy to offer a letter providing that. I can confirm to him that someone who applies for pension credit can make a claim for housing benefit, but people will be encouraged to seek council tax support. As the noble Lord is fully aware, that scheme was localised in April of the current financial year.
Lord Freud
As the noble Baroness is fully aware, the dividing line is actually much more spread given the complicated transitional arrangements between one system and another. There is not the sharpness of a dividing line—I know the noble Baroness is fully aware of that because we have debated it in great detail. I am conscious that we are pressed for time.
Baroness Sherlock
There are three questions that the Minister did not answer. I am happy for him to write to me: I wanted to get them on the record so that they could be picked up before Report. I asked about the estimate of £17 million in the impact assessment for the cost of processing additional changes of circumstance. What assumptions was that figure based on in terms of the numbers of additional reviews or changes of circumstance?
I asked what estimate, if any, the department had made of the likely increase in fraud and error as a result of AIPs going. Also, the departmental briefing says that the younger cohort of recipients who are more likely to be affected by the change in policy are less likely to have capital above £10,000 or other pension income. Is it that cohort or because they are young and therefore when they become old that will no longer apply?
Lord Freud
My Lords, I will arrange to write to the noble Baroness. I think I can deal with the second point straightaway. We simply do not know whether it is an age or a cohort effect, so I cannot be clearer about that.
Baroness Sherlock
Baroness Sherlock
My Lords, as we move on to Part 5 of the Bill on private pensions, I want to take the opportunity to remind the Committee of my interests in the register. I have a remunerated interest as the senior independent director of the Financial Ombudsman Service.
This group of amendments looks lengthy, but its aim is remarkably precise. Amendment 62ZC to Clause 32 is actually very simple; it retains the power of the Secretary of State to put in place the consolidation of small pension pots but removes the part of the sentence that limits this to the pot follows member form of consolidation. I will focus my contribution on Amendment 62ZC, as the other amendments in the group address the consequences arising from that specific change. The Government believe that action is needed to address the large number of dormant small pension pots which will arise under auto-enrolment when employees move to new jobs, as they do on average 11 times in their careers. We from these Benches agree that action is needed, but not the form of action proposed.
The impact assessment confirms that the Government considered two default transfer options. The first option would be pot follows member, where small pension pots follow the member to the new employer’s pension scheme. The second is an aggregated scheme in which the small pension pots are transferred to an aggregator such as NEST. The Government had two choices, and I believe strongly that they made the wrong one.
As it stands, the clause allows only for pot follows member. Our amendments would allow the possibility of using a default aggregator model without the need for new primary legislation. I propose to comment on the problem in order to demonstrate why I believe that the Government’s proposed solution is flawed, to put forward an alternative, and then pose some questions to the Minister. I promise to do it as quickly as is practical.
I turn first to the context. The core issues of trust and confidence which we have discussed previously are still centre stage in getting people to start and to continue saving for their retirement. We were reminded afresh by my noble friend Lord Hutton that we do not have a savings culture in this country in Committee last week. This Bill and auto-enrolment need to give people the confidence that they need to save for their old age. but how can we demand that people save if they do not trust the saving vehicles and they do not trust the pensions market as offering value for money?
The pensions market is not a typical retail market where the consumer chooses the product. Under auto-enrolment, the consumer does not choose the product at all—the employer does. The employee choice is either to stay in or opt out and lose the employer contribution completely. There are also many intermediaries in the pension supply chain. Pensions are a complex product; they lack transparency, and while large employers may have the resources to pay for good advice and assessment of fund performance, SMEs may not. The demand side is weak.
The pensions market also has some very big players who offer pension fund products, asset management, and annuities. The OFT says that the four largest players have between them 68% of the assets, 76% of the schemes and 61% of the members. The results are predictable; the combination of a concentrated supply side and a weak demand side is bad for savers and allows conflicts between the two to go unresolved, which is not in savers’ interests. Those characteristics of the pension market combine, as the OFT report puts it, to make the market “dysfunctional”. The OFT concluded that,
“competition cannot be relied upon to ensure value for money for savers in the DC workplace pensions market”.
Future clauses and amendments deal with the criticisms raised by the OFT in its report, but this clause and our associated amendments deal specifically with the challenges of small pension pots created by auto-enrolment. The Government estimate that 50 million pension pots will be created by auto-enrolment by 2050, 12 million of them under £2,000. Already, one in six people have lost track of their pension pots, and there are 1 million unclaimed pension pots out there. The evidence is clear that the Secretary of State needs power to make regulations automatically to transfer and consolidate small pension pots. We all agree that a default consolidation mechanism is needed for those people who do not make an active choice to transfer their pensions. The point of contention is how this should be done.
Lord Bates
Yes, and our hope and belief is that there will be higher standards. That cannot be issued by diktat and has not been covered. We are simply giving the powers and setting out the framework as to how we will go about that, but that discussion has to be had with the pensions industry. The conversation is ongoing and we will certainly be reporting on that progress.
I turn to some of the specific points that have been raised. The noble Baroness, Lady Sherlock, talked about the level of support and seemed to be fairly sceptical about whether there was any.
Lord Bates
The noble Baroness always asks an honest and genuine question, and I am trying to give an honest and genuine response, which is to say that we are not necessarily comparing like with like here. Although people understand how the pot-follows-member scheme might work—in other words, they will have just one pot, and everything will be transferred into it—they do not necessarily understand what the noble Baroness is proposing in terms of alternatives, whether they are single, multiple or virtual aggregators. Therefore, to give a clear-cut position on that is somewhat difficult.
It was drawn to my attention today that Adrian Boulding of Legal and General, one of the largest pension providers, in today’s Pensions Expert, formerly Pensions Week, says:
“the concept of your pension pot following automatically to a new employer is now not far off. The long-term benefits of people having ‘one big fat pension pot’, as the minister likes to call it”—
I think the Minister he is referring to is my right honourable friend Steven Webb—
“will be greater consumer engagement, more informed decisions, greater buying power and better pension outcomes. All well worth striving for”.
Baroness Sherlock
I thank the Minister for that response and am also very grateful to all noble Lords who have contributed to this discussion. The noble Lord joked at the beginning that the Turner commission had been quorate. I think when he reads Hansard he may find that slightly less funny than it seemed on the face of it. If I was sitting where he was sitting and two-thirds of the members of the pensions commission told me that I had got this wrong—auto-enrolment and all that flowed from it was based on their recommendations—I would be thinking very hard indeed at this point.
I am very grateful to the noble Lord, Lord Turner, for what seemed to me a pretty damning indictment of the fact that, although we may share an objective, the way the Government are going about trying to achieve this will not tackle the very grave consequences of market failure in the pensions market for savers who are depending on the results of those investments for their retirement income. As my noble friend Lady Turner pointed out, that is one of the most significant issues facing not just the Government but, frankly, this Committee.
I am sorry. I have a great deal of respect for the Minister but I am afraid that he was unable to answer the major questions that came up today. I do not blame him for that. He did not invent the policy: it was invented in another place and he is doing a good job of defending it. But the fundamental questions are out there unanswered. The noble Lord, Lord Turner, pushed home the consequences of that market failure on high costs and charges and what that does to savers’ incomes, and the fact that, despite the Government's best intentions, pot follows member simply does not contain within it the means for addressing that.
The noble Lord also pointed out the consequence of what happens to savers’ incomes in retirement of not getting that right now. Those effects will run for a long time. I was very grateful for the intervention of the noble Lord, Lord Stoneham. Given the origins of this Bill, I thought it was a brave and helpful intervention. But the questions that he posed about how pot follows member can deal with old pots and multiple moves are still sitting on the table. It will be interesting to hear whether there is some small movement on auto enrolment pots, but we will still have the issue of significant numbers of dormant small pots.
We still do not have an answer, as my noble friend Lady Drake pointed out, to the problem of people who are leaving the labour market altogether either to become self-employed or simply to leave the labour market. What happens to those pots?
We did not really get an answer as to why, when so much of the Bill is remarkably loose, the Government suddenly get very prescriptive in this area and solely specify PFM on the face of the Bill. As my noble friend Lady Drake pointed out very powerfully, there are some major difficulties of implementation. The Minister is calling for speed and action now. He must know that the barriers to implementation described by my noble friend Lady Drake are such that he is not in a position to press that button now. If he is, he might want to respond to the questions that she posed about the IT challenges, the standardisation challenges, the huge issues of implementation and the need to build consensus across the industry to prioritise savers’ interests. If he feels that the Government have all those cracked, I encourage him to stand up and intervene and tell me now. Otherwise, there is a lot more work to be done. All this amendment is trying to do is to make sure that that work does not abandon the alternative option—which may in the end be the saving of our shared objective—when there is no need to do so at this stage.
I am also concerned about some of the points that the Minister raised in response to there being no single model. I would be very happy to work with the Government to see if we can build consensus around a single model of an aggregator. If that is what the Minister offers, let us work together to try to do that.
The Minister said that there would be more consolidation in pot follows member. Leaving aside for one moment the serious concerns about the judgment made in the impact assessment raised by my noble friend Lady Drake and the noble Lord, Lord Turner, if pot follows member does not tackle the full range of risks that have been described, then that simply does not answer the question. The Minister again gave an argument that most annuity providers would require a minimum level of pot and the point of decumulation, but again he did not take on the point made by my noble friend Lady Drake, which is that being able to buy in bulk in the market, which an aggregator could do at the point of decumulation, actually opens up whole opportunities in that area.
He made the point about good and bad schemes and that there should not be any bad schemes. I completely agree with him, but there are 200,000 pension schemes in this country. The chances of getting all those up to an optimum level before this is introduced are frankly unrealistic. Given that, the point made by my noble friend Lady Drake stands even more strongly. Even if the Government could guarantee to get all those schemes up to what they would regard as an acceptable minimum standard in the context of the criticism of market failure made by the noble Lord, Lord Turner, and even if they could do that fast, there will still be a significant difference between the best and worst returns. For reasons I will explain in a moment, that seems to be very difficult in the context of auto enrolment.
I was pleased that the Minister managed to find some backing for his scheme from a survey. Did he say that the survey was conducted by the ABI?
Baroness Sherlock
That is marvellous. So the ABI backs a scheme and the survey conducted by the ABI backs the scheme. That is excellent. I think it still leaves out some possibility that there may be other people out there who do not back the scheme. Perhaps it was the other way round. Either way, I think it is the same point made differently. None the less, I take the point and thank him for sharing that with us.
The Minister also made the point that there will be real attractions—and he quoted someone from Legal & General saying that it was clear that the direction of travel from the Government was for pot follows member. There are—but, of course, this is a Bill, not an Act. It is open to Parliament to make a decision if it does not agree with what the Government are proposing, and so far this Committee clearly does not agree with what the Government are proposing. Not one person who has spoken backed the Government’s plan; all backed the alternative. So we still have an opportunity. He also went on to say that many advantages have been mentioned of people having one big, fat pension pot. Of course, there is no reason why that big, fat pension pot could not be sitting in a well performing, well regulated, successful aggregator.
That takes us to the fact that we have two significant public policy dilemmas or issues. The challenge that we have here is made all the more significant by the fact that it comes on the back of auto-enrolment. This is not an individual employee making a choice to go to a pension fund, place their money in it and take their risks in the market. This is somebody who is not choosing, but is simply choosing a job, and by doing so will be forced by default, if they make no other choice, automatically, without their express consent, their pension pot will be moved from their previous employers to their new employers. That is in the context whereby already the state has auto-enrolled them. So step one, without any active consent, we have auto-enrolled them in a pension scheme. Step two, when they move jobs, without any active consent we default moving it with them to the new employer. Doing that in a context where the level of return that they might have expected to gain with the old employer could, potentially, be significantly higher than that which might be enjoyed with the new employer, creates the possibility that the state is creating consumer detriment on a significant scale. That is a very serious challenge, and in that context I suggest that the Government’s proposal of pot follows member has a very high bar to pass.
Finally, the other public policy point is that, if one of the consequences of this is that significant numbers of savers end up with lower retirement incomes than they might otherwise do, that is bad for them, but it is also bad for us as a country. I think that my noble friend Lady Drake quoted from the impact assessment, which suggested that the gains and losses would balance out across the piece. Even if that is true, and I do not know the impact assessment well enough to be sure—I do not have enough confidence in it yet to be confident of that—that does not help us individually. On average, the life expectancy may be X, but if mine is significantly below and yours is significantly higher, the difference matters quite a lot to me, because although on average we may both die at 84, if I die at 60 and you die at 100, that does not make me happy. So the consequences for individuals are really quite significant.
Given all that, there is also the fact that the distribution will mean that, if savers do not go into retirement with the kind of incomes that the Government expect them to have, the whole strategy for retirement on which this is predicated begins to be called into question. So this whole Bill is predicated on an assumption that future generations of savers will have higher retirement incomes because of all these actions taken. It is, therefore, absolutely incumbent on all of us to make sure that the Government get this right. All this amendment does is to put the aggregator option into the Bill. I urge the Minister to accept it and to work with us in doing that. We will definitely return to this matter at a later stage but, since this is the Moses Room, I beg leave to withdraw the amendment.
Pensions Bill
Baroness Sherlock Excerpts(10 years, 10 months ago)
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Baroness Turner of Camden (Lab)
My Lords, Clause 25 increases the pensionable age to 67. It is a key clause, but I wish to oppose the question that it should stand part of the Bill, as I hope to get the Government to think again about it. I know that in legislation that has an impact on millions of people, as this Bill does, it is useful to have arrangements that are the same for everyone—the same benefits and the same retirement age—as that makes things much easier to administer. The problem with that is that we are not all the same. Even more important, jobs are not all the same.
As I said at Second Reading, some people are happy to work for longer. They like their jobs and the social aspect of working with others is important to them. Such people do not look forward to retirement; they like to go on working if they can. These people are often employed in administrative jobs, but for others things are very different. Some industries involve strenuous and often hazardous work—the construction industry is one such. Those who work in such industries do work that is necessary for the rest of us. Without them, we would not have the comfortable lives that we now have. Yet such industries often have a record of industrial accidents and disease, which we should all find unacceptable. It may be dangerous for older workers to work with others in such a working environment. Therefore, an earlier retirement may well be necessary. This simply cannot be left to the private sector. We cannot have legislation that says that all people must work longer before retiring.
It is not only industries that are hazardous where this is a problem. There are many low-paid workers in dreary jobs who are only too happy to retire, as long as they have enough money to do so. People who work in hospital cleaning and dreary jobs of that kind are only too happy to retire if it is possible for them to do so and to receive reasonable benefits when they are retired. Such people long to retire. It is not enough for us to say, “Oh well, you have to work for longer”.
We are often told of the evidence that we are all living longer, but it is not always sensible to use that as a reason for extending working life—not for everyone, anyway. We are not alone in thinking this. A number of my colleagues have tabled amendments to subsequent clauses to seek a review of retirement ages. I certainly think that that is necessary. Have the Government thought through what all this means? What is the impact on people working in particular jobs and their health? What happens when people live longer? What is the effect on their health? Therefore, it seems to me that this simple provision in legislation to ensure that people work for longer is not a good idea. I hope that the Government will be prepared to look at it again, in the light of some of the things that have been said both at Second Reading and in Committee today.
Baroness Sherlock (Lab)
My Lords, as this is the first discussion of Part 2 of the Bill, it may be worth setting out a couple of principles from these Benches at the outset. First, we agree with the principle of raising the state pension age to reflect longevity, as people are living longer than when the current arrangements were put in place, largely in post-war reforms. As I indicated at Second Reading, we also accept the need for periodic reviews of the state pension age, but we differ from the Government on how best to do that—we will return to that issue in the discussion of our later amendment.
Fixing the state pension age is never easy, and an issue of fairness is always at stake. There needs to be a balance between the interests of the generations on the funding of retirement incomes in a pay-as-you-go system, where today’s taxpayers fund today’s pensions. As we will discuss in later groups, our view is that having a careful, evidence-based review before taking any future decisions on changes to the state pension age is a crucial element of ensuring fairness between generations.
However the arguments made by my noble friend Lady Turner require careful attention from all of us. Sometimes fairness also requires at least a consideration of difference, and my noble friend has highlighted some crucial differences, particularly in relation to longevity and health. We all know that life expectancy is increasing, but that fact conceals as much as it reveals. Mortality rates vary widely, as do morbidity rates. There is a huge amount of socio-demographic data available to inform our debate—and I am sure we will hear a great deal of it in the groups to come—from the Wanless and Marmot reviews to government figures and other outside research. There are also some very interesting data from the TUC. I will say more on this later, but I do not want to pre-empt what I think could be a very substantial discussion coming up shortly.
There are no easy solutions to these problems. The biggest challenge to the Government is to address the question of differential mortality and morbidity rates through urgent attention to public health, but we also need time to reflect on how best to deal with these questions in relation to the state pension age. It is our view that the best way to do that is to ensure that the mechanism for reviewing the state pension age includes a review panel which has on it representatives of a wide range of interests in society, including employer and employee representatives and representatives of different parties and, indeed, our own Cross Benches. I shall move an amendment later today to that effect, but in the mean time, I hope very much that the Minister will take the concerns of my noble friend seriously. I look forward to his reply.
Lord Freud
My Lords, the purpose of Clause 25 is to bring forward by just over eight years the point at which the state pension age completes its rise to 67. The latest evidence shows that we are living longer and, on average, healthier lives than ever before. To illustrate this point: a man in the UK reaching the age of 65 30 years ago—in 1983—could expect to spend 14.5 years in retirement. Today, a man reaching that same age can expect to spend about 21.5 years in retirement.
The noble Baroness, Lady Turner, raised the key issue of differential life expectancy. I do not propose to go into that in great detail at this point because we will have the opportunity to address that full-on in the next amendment; so, if she will forgive me, I shall concentrate my remarks on raising the age to 67.
The Pensions Act 2007 was informed by the Office for National Statistics’ 2004-based life expectancy projections. Those projections suggested that a man aged 67 in 2028 would survive for a further 19.9 years. However, on our latest understanding, this same man is projected to survive for a further 21.5 years, fully 1.6 years longer than we thought when setting the original timetable in the 2007 Act.
We continue to believe that it is only fair that those enjoying the benefits of longer life expectancy pay a share of the associated costs. Bringing forward the increase in pensionable age to 66 through provisions in the Pensions Act 2011 ensured the short-term sustainability of the UK’s state pension system. Now, the measures contained in this clause to accelerate the increase to the age of 67, combined with the regular review mechanism as set out in Clause 26, will help ensure the fairness and affordability of the system into the medium and long term. The savings projected to result from this proposal are significant—some £73 billion in net savings between 2026 and 2036—but not only are there net spending reductions, but this measure is projected to increase employment rates and boost GDP by around £100 billion over the same period.
Bringing forward the rise to 67 by some eight years will affect around 8 million men and women born between 6 April 1960 and 5 April 1969: people who are now aged between about 44 and 53. As with previous increases in state pension age, the transition to the higher age will be phased in gradually: men and women born between 6 April 1960 and 5 March 1961 will have a state pension age of between 66 and 67, and those born between 6 March 1961 and 5 April 1969 will have a state pension age of 67. Those born after 5 April 1969 will not be affected by this change because they already have a state pension age of 67 or 68, or somewhere in between the two, as legislated for in the Pensions Act 2007. The proposals in this clause mean that the maximum increase that any individual will experience in their state pension age, in relation to the Pensions Act 2007, is one year. By starting the transition to age 67 in 2026, no one who was affected by the Pensions Act 2011 will have their state pension age changed again by the measures in this Bill. To help people prepare for the change, we announced these proposals back in November 2011, giving the first cohorts affected more than 14 years’ notice.
Finally, noble Lords will be aware that an ageing society is not a phenomenon unique to the UK. That is why other countries in Europe and beyond are moving to adjust the age at which retirement benefits become available. Indeed, even by moving to a state pension age of 67 in 2028, we will still be behind many other countries—Ireland will get there in 2021, the Netherlands and Australia in 2023, and Denmark and the US in 2027. In bringing forward the rise to a state pension age of 67 we are ensuring that the system as a whole remains fair between the generations and sustainable and that we are doing so in a way that is on a par with elsewhere in the developed world. I beg to move that Clause 25 stands part of the Bill.
Baroness Sherlock
My Lords, there are times when one feels rather redundant in these proceedings—and, after a range of extraordinary speeches from my noble friends, this is one of them. I thank very much all those who contributed to this debate.
Perhaps I might start by briefly responding to the noble Lord, Lord Stoneham. I think I may have misheard him, and I hope that he will correct me if I did. He said that inequalities had not got worse, but perhaps I might refer him to the brief sent out by the DWP on equality in life expectancy and in healthy life expectancy. It said that while life expectancy has risen substantially for all social classes, this has resulted in a widening of inequalities, and that the smallest growth in life expectancy at age 65 was experienced by those in the lower socio-economic groups. What has been happening is that life expectancy has been rising for all classes, but because of the differential rate at which it has been rising, the gap has been widening. In fact the inequality problem is significant. That is a question for public policy to address.
We have heard today about trying to find a way to do two things: First, the analysis was made very clear by my noble friends Lady Hollis and Lord Whitty that people are living longer, but the proportion of years spent in full health is not keeping track at the same rate. We have significant inequalities in health within the UK, and significant variations in mortality and morbidity rates as a result. Also, we have people who are not able to work safely through to retirement age. Those are the issues that somehow public policy has to grapple with.
The fact is that mortality rates start rising slowly when people hit their mid-50s, and rise significantly from 65 onwards. That has significant implications for workers and employers. First, we have the implication—to which a number of noble Lords alluded—of having an older workforce. There will of course be employees who find, as my noble friend pointed out, that they cannot work until the state pension age. I wonder what consideration the Government have given to the risk that we will see a growing number of people who are recognised as sick or chronically disabled, but are having to wait so long for their pensions that they end up eating through the savings that they have set aside for retirement and so move into retirement without the very nest eggs that we want them to build up. Has any assessment been made of whether that will be one of the consequences of the changes to state pension age?
Secondly, what happens to those who know that they are unable to work safely at 67 but cannot retire? We have heard various examples mentioned of people in different professions. This is not simply a case for those in unskilled jobs. I would not want to be operated on by a surgeon who felt that his or her eyesight was no longer up to it, either. The reality is that a number of people in different roles may find that they have to face up to the fact that they cannot continue in the same role until a higher retirement age. The real question is whether their differential experience and resources may give them differential strategies for dealing with that. One of the questions for public policy is how we address the problems of those who do not have the resources or choices available to them in that circumstance.
Then there is the question of employers. We know that many employers welcome the wisdom and experience of older workers, but they have often expressed concern that older workers may get seriously ill and be off work for longer periods. I know that the Government have often reassured them that that is not the case and that older workers do not take more time off sick than younger ones. Have the Government given any consideration to whether that is likely to change as the state retirement age increases? Of course, at the moment, people can choose to work beyond the state retirement age and therefore there must be an element of self-selection among older workers who carry on working. As the retirement age increases, people may have no choice but to continue working, and I am interested to know whether any work has been done on whether that could make a difference to the composition of the older workforce.
We then heard about the issue of inequalities in health in relation to the fairness test. I read very carefully through the DWP document on equality in life expectancy and in healthy life expectancy, but in the end, I almost wrote at the bottom, “Baroness Hollis was right”. I found it hard to summarise it other than with something I have heard my noble friend say repeatedly almost ever since I have known her—one can expect 10 years of healthy retirement, 10 years of declining health and the rest of one’s life with significant levels of infirmity and disability. Yet despite that fact, she has pointed out the tendency of Governments to put so much store by actuarial information on average life expectancy. That of course is precisely what the Bill says in bald terms, whatever assurances we may want to receive about how it will be done in practice. The point has been made that average life expectancy tells us something, including quite a bit about how medical advances can keep us alive, but it does not tell us very much about our health in retirement, or about differential mortality rates.
We have heard a huge amount of information about clear socio-economic differences and the health inequalities that result from them. There is also clearly still a gender divide. Women still live longer than men, although the gap is closing. I also note that we are only now seeing a generation of female pensioners who have worked for most of their lives as well as raised families. We do not yet know the impact of that on female longevity—it will be interesting to see that.
Baroness Sherlock
My Lords, in addition to a gender divide, we have heard that there is a class divide and a geographical divide. To add to the examples from Glasgow, Liverpool and Norfolk, I offer Dorset, which I am reliably informed is the place to live—statistically, you are expected to live longest in the UK. Women in east Dorset can expect to live nine years longer than women in Corby—the area with the shortest life expectancy for women. Men living in east Dorset can expect to live 7.1 years longer than men in Manchester—the area with the shortest life expectancy for men. Then there is the effect of this differential life expectancy on state retirement incomes. Those living shortest post retirement, primarily the poorest and least skilled workers, will obviously receive less in state pension than their better-off counterparts in Dorset. Women in Corby will get £67,000 less and men in Manchester will get £53,000 less. And, of course, those manual workers may well have contributed for longer than those who spent longer in education.
Where does all this take us? It does not take us to any straightforward policy solutions. As I am sure is the case with other noble Lords, many representations have been made to me on ways in which the Government should tackle this—that perhaps they should not raise the state pension age until we have tackled inequalities in health; or that a variable retirement age should be brought in, taking account of life expectancy, work pattern or contribution history; or that there should be flexible retirement proposals or the idea of paying actuarially adjusted pensions early for those retiring in their 60s but before the state pension age. It is quite likely that none of these will commend themselves to the Minister. Given the look on his face, I expect that I am right in that. However, I am sure the Minister will accept that what we have heard today is an analysis that suggests that a significant set of public policy issues needs to be addressed. They are not all pension issues—a point that my noble friend Lady Drake made powerfully—but are effectively spillovers from decisions around the state pension age, which will then impact on public policy-making in a range of other areas.
If the Minister does not feel able to respond positively to any of those concrete suggestions on how to deal with this issue, I encourage him at the very least to go along with the idea of spelling out in the Bill the need to take account of all these factors, because that would then at least put the review process for setting the state pension age in the position of having to tackle all these complicated issues and making some recommendations to government on which we could all, I hope, place some store.
Lord Freud
My Lords, the purpose of Clause 26 is to ensure that every Government consider state pension age in light of the latest life expectancy projections and other relevant data. The legislation sets out that a review must be informed by a report from the Government Actuary on the proportion of adult life spent in retirement and corresponding implications for state pension age.
On the point about pensions as a percentage of GDP raised by the noble Baroness, Lady Hollis, the single-tier impact assessment shows that even with an SPA of 67 in 2028 and an SPA of 68 in 2046, the proportion of pensioner benefit expenditure could rise from under 7% of GDP in 2016 to 9% of GDP by the 2060s. I am addressing her point about the baby boom.
It is true that life expectancy is different between socio-economic groups, and even in the latest figures it slightly widened. However, it is increasing for all groups. Such inequalities have always existed and, as the Minister noted in Committee in the other place, adjusting the pension age is not the right way to address these inequalities. We need to address these issues elsewhere through tackling the factors that lead to these differences in life expectancy. To illustrate the rate of increase, the period of life expectancy at age 65 for males in the lowest occupational class between 2002 and 2006 was 15.3 years. You have to go back only to 1999 for the average period of life expectancy of males from all occupations to be the same figure.
I will not go into detail on one of the amendments regarding adult age because we have not discussed it very much, but I will pick up the point raised by the noble Baroness, Lady Hollis, and the noble Lord, Lord Whitty, on the timing of when people enter the labour market.
The single-tier pension’s key features are simplicity—giving people the clarity and confidence to save—and a value set above the minimum income guarantee standard. Allowing early access would mean that we would have actuarially to reduce the pension, and this would severely undermine both these key features of the new system, complicating outcomes and meaning that, if people’s actuarially reduced state pension was below the minimum guarantee, we would retain an extensive and complex system of means-testing. International organisations have repeatedly advised countries to withdraw incentives to early retirement. Indeed, in recent years, a number of countries have put in place measures to discourage it, including Denmark, Finland and Germany.
The changes to state pension age are primarily about fiscal sustainability and fairness between the generations, such as taxpayers and pensioners, at any given time. It is therefore right that the Government Actuary’s Department focuses on total life expectancy from state pension age and not on healthy life expectancy. Indeed, the Pensions Commission advocated that pension age should rise proportionately in line with life expectancy, thereby maintaining the proportion of adult life spent in retirement. Just last week, the noble Lord, Lord Turner, reasserted this principle. This is what the GAD element of the review is for.
We also think it is crucial that future Governments have access to wider evidence before laying any proposals to change state pension age before Parliament. We have been clear in the White Paper and in the other place that we believe the reviews of state pension age should consider healthy life expectancy but also differences between socioeconomic groups and the wider economic effects of increasing state pension age.
On my original point about flexibility, we do not want to be too prescriptive in setting out factors that must be looked at by each review. We want to foster a more long-term view which would allow each Government to specify factors relevant to the circumstances at the time of commissioning the review. There is the danger that, by setting out a list of things for each review to consider, future Governments will simply have a tick-box approach to the reviews. As my noble friend Lord Stonham said—
Baroness Drake
My Lords, I shall speak also to Amendment 54. Amendments 53 and 54 are tabled in my name and that of my noble friend Lady Hollis. They provide for a report on the periodic review of the rules about pensionable age, having regard to life expectancy and other factors, to be prepared by an independent commission.
There is an important role for an independent commission, while recognising that the Government of the day would determine the policy that is brought to Parliament. The demographic challenge poses unavoidable choices, which are partly for society to make and partly for individuals. However, for those choices to be rational and sustainable, they have to be informed, barriers have to be removed and a broad consensus has to be achieved. One of the useful roles of an independent commission is to present society with those difficult but unavoidable choices. It can spell out the facts and choices clearly and starkly. It can identify the complexities. That process will also assist the parties in reaching a political consensus.
Public debate on policy changes will be better focused and more likely to arrive at consensus if there is a permanent independent body charged with presenting to society the evidence and the issues. A commission can provide the public with a clear and comprehensive narrative about what is happening and what it means. Delivering a sustainable state and private pension system and responding to the demographic challenge are long-term projects that cannot be delivered in the lifetime of any one Government.
A consensus needs to be held over a long policy framework, because optimal outcomes take decades to come through. However, securing and maintaining a consensus will not be easy, because deciding the way forward involves important political judgments, and successive Governments have focused very often on immediate challenges. Trade-offs are the essence of political debate, but achieving some degree of consensus on core principles will be easier to achieve if there is an independent commission supporting that consensus. We know that the long-term management of public finances requires intensive debate now about the state pension age—but, notwithstanding the desirability of continuity in policy being achieved, the detail of pension and associated policies will and should be subject to continuing debate over time, in the light of new information becoming available.
Life expectancy and healthy life expectancy may change significantly from current forecasts, trends in voluntary private pension savings could turn out to be more or less favourable, and the participation rate of older workers in the labour force may prove problematic. As the information available changes, so the precise public policy direction can be refined, even if the overall framework of the system maintains as much continuity as possible. It is important that an independent commission should consider the sort of issues and complexities that we all referred to in the previous debate.
As to the type of commission, it should be small, so that the quality of engagement between commissioners is dynamic and qualitative, but sufficient in number to allow for wider input and for the stimulation of considerations that an individual by definition could not achieve. The commission could become a source of authoritative and independent presentation of the facts, and of the estimates of public expenditure consequences and of what future rises in the state pension age might be implied by the principle of pension ages rising in proportion to life expectancy increases. A commission could maintain a clear and steady focus.
The report could capture the key trends in life expectancy and the differences in morbidity, employment and retirement patterns among older people, by gender, region, occupation and socio-economic classes. This analysis would also allow early and regular identification of whether increases in state pension age are accompanied by increases in productive employment and/or a greater reliance on means-tested benefits and whether major inequalities in healthy life expectancy can make across-the-board increases in retirement ages feasible or unfeasible.
For example, if state pension ages rise and average retirement ages rise, state pension expenditure as a percentage of GDP will be reduced, not only by a pension expenditure reduction but by a rise in GDP. However, if pension ages rise and average retirement ages do not, the reduction in pension expenditure will be offset by other non-pension benefit expenditure and lower GDP. These issues are matters of some moment when we are looking to achieve sustainability in the light of what is a major demographic challenge.
Engaging the public is important. Individuals consistently underestimate their own life expectancy. Research confirms that. Individuals on average are unaware of, or do not believe, the projected increases in life expectancy—in some instances, even when the evidence is presented to them. Such attitudes make it difficult for people, particularly young people, to think rationally about the savings rate/retirement age/pension level trade-off that they personally and society face. An independent commission would assist in changing those attitudes and getting those key messages across in a way that very often government and political parties cannot do successfully.
The commission’s analysis could also identify the latest trends in private pension provision on average and across different gender, socio-economic and ethnic groups, and thus of the overall coverage and adequacy of pension provision. This analysis coming from an independent commission could assist in future debates about appropriate adjustments in employee or employer default contribution rates. This is a not insignificant matter and a key debate—one that people are probably feeling tentative about in view of other, wider considerations, but one which certainly an independent commission would help address, as well as helping the formation of a political consensus.
In the debates on previous amendments we heard much reference to data—the quality of the data, what they show, their integrity, whether they are sufficient and so forth. The quality of choices made and policy decisions taken is directly influenced by the quality, quantity and type of data that are available. An independent commission would be well placed to interrogate the quality of the data available and to make recommendations on the gaps or omissions in the data collected, and on the data needed to inform debate.
As the Minister conceded in an earlier discussion, there is a need to take a long-term view on these issues. In considering those long-term issues, long-term projections also need to focus on the uncertainty inherent in such analysis and on important sensitivity analysis. These are issues that a standing commission could focus on. It could assist in helping the debate and in helping the quality of government and individual decisions.
To repeat what I said at the beginning, one of the useful roles of an independent commission is to present society with difficult but unavoidable choices. It can spell out the facts and choices clearly, and it can identify the complexities and assist government and political parties in making the type and quality of decisions that are necessary in the light of the challenges that we face. I beg to move.
Baroness Sherlock
My Lords, I rise to speak to Amendments 55 and 57A in my name and that of my noble friend Lord Browne of Ladyton. I shall speak also to Amendments 53 and 54 in the names of my noble friends Lady Hollis and Lady Drake.
As we heard in the very clear speech from my noble friend Lady Drake, Amendments 55 and 57A provide that the periodic review of rules on pension age should be prepared by an independent commission. I can think of no one better to suggest how a pensions commission might work than my noble friend Lady Drake, who was such a distinguished member of the Turner commission.
As I indicated previously, we agreed that there should be periodic reviews of the state pension age to reflect changes in longevity and the need for people to fund their retirement and also to achieve a fair balance between generations. The question is how to achieve that, and we have grave concerns about the way in which the Government are approaching this matter.
As it stands, the Bill simply says that the Secretary of State shall review the rules about pensionable age. That leaves us with some significant gaps. There is insufficient information about the kind of review mechanism that there might be. There is also insufficient detail about who will conduct a review or how it is to be done, and there seems, on the face of it, to be insufficient scrutiny by Parliament of any recommendations that emerge. Perhaps the Minister will clarify that for us when he replies.
At the heart of this lies a very important question: how do we enable people to have confidence in the system? If we want to encourage people to save for their retirement and we need them to save more, they need to trust the Government, to trust Parliament and to believe that their pensions are safe in our hands. The public need to know that they will not be at the mercy of political expediency and will be protected from any adjustments that might otherwise be made too quickly. After all, they may be nervous about this. There has been a succession of changes to pensions legislation, pensions levels and the state pension age. To suggest just one example, under the previous Labour Government the number of years of contributions required to get a basic state pension—
The Deputy Chairman of Committees (Baroness Fookes)
My Lords, we have to adjourn the Committee for 10 minutes.
Baroness Sherlock
My Lords, as I said, there has been a succession of changes to pension policy and legislation. One key example is that under the previous Labour Government the number of years of contributions required to get a full basic state pension fell significantly, only for there to be a change of Government and for the number now being proposed to shoot back up again. The Chancellor did not help by giving the appearance of using the Autumn Statement to make an ad hoc announcement about the raising of state pension age. Once the dust settled, that turned out to be nothing more than what was already in the Pensions Bill and was therefore not necessary. However, that ran the risk of reinforcing the impression that pensions policy is made on the hoof, and we need to tackle that.
If we are serious about getting Britain saving for retirement, we need a proper, cross-party consensus on the way forward for settling the state pension age. Rather than simply being a matter for the Secretary of State, as the Bill proposes, we need a proper external panel which has the kind of cross-party and independent representation which will reassure the public and give confidence to parliamentarians from across the spectrum. We need a review mechanism that is clearly understood, a review body that is clear in purpose and function and ways of working, and clear parliamentary scrutiny of its finding—the kinds of things that will come from the report.
I know that the Minister will want to be reassuring about the Government’s intentions. In another place, the Pensions Minister said, in the face of pressure from the Opposition, that he had always envisaged a model such as the Hutton review, where the review is chaired by someone who people respect and who has credibility across the spectrum. That point was underlined by the Minister at Second Reading. I am happy to accept that the current Pensions Minister means that. However, even if that proposal were satisfactory, he will not always be Pensions Minister. I mean no disrespect when I say that I hope very much that in 18 months he will not be Pensions Minister any more. I can recommend my right honourable friend Mr Gregg McClymont, should anyone be looking for an alternative. However, Mr Webb, even when he is Pensions Minister, cannot bind the hands of his successors, even in this Parliament, never mind a future one. That is why this matter needs fixing in legislation.
Our amendment proposes simply that the review body should include representatives of the opposition parties and of the Cross-Bench Members of this House to ensure that Parliament as a whole is at the heart of this process. It would also include representatives of trade unions as those who represent those who are spending their ever-longer working lives saving for retirement. This broader representation on the review panel will give people confidence that a wide range of views will be heard. This amendment does not seek to shape the remit beyond that of having a range of competent and representative people sitting on the review panel. I urge the Minister to accept it.
Lord Freud
My Lords, I start by acknowledging the expertise and experience of the noble Baroness, Lady Drake, as a member of the Pensions Commission, on which she was able to rest when she moved this debate.
The purpose of the review is to inform the Secretary of State. Its job would be to collect and analyse the latest data, compiling a report to give the Government of the day the information they need to make a decision. Of course, we are all keen that the Secretary of State receives a report that is both impartial and credible. We appreciate the attraction of a panel to ensure that a wide range of views are reflected in the compilation of the report. However, we have been clear that we do not think that prescribing a committee is the right way to go. We do not want to restrict future Governments by prescribing exactly what the review looks at and who is doing the looking. There is greater merit in allowing Governments to choose whether to appoint a single reviewer—as with the review of public service pensions by the noble Lord, Lord Hutton—or a larger commission, such as the Pensions Commission. Indeed, the latter, set up by the previous Government, was made up of three individuals, two from the worlds of academia and business, neither of which, incidentally, was mentioned in the amendment.
Both of those cases show that a legislative underpin is not required to set up a review that can win cross-party and wider public support and that there is no consensus on where is the best place to find the right people. We do not think that the proposal by the noble Baroness, Lady Drake, to set up a permanent commission—an NDPB or a standing commission, as she put it—is appropriate. That kind of structure is simply not necessary for a review that will come together and publish a report on a single issue, wide-ranging though it may be.