Pensions Bill [HL]

Baroness Turner of Camden Excerpts

Thursday 3rd March 2011 Grand Committee

It is important that the parameters set for the workplace pension system give the coverage and the confidence to the workforce. It is also important that any fundamental changes to those parameters are driven by the needs of the pension system itself, and that the reasoning for them and the impact of them are transparent and supported by a consensus. That is why we have tabled Amendment 32, which requires a full impact assessment to accompany any order that increases or decreases any of the amounts covered by this clause. I beg to move.

[Baroness Turner of Camden]

My Amendment 33 is in this group. I was prompted to table an amendment to this clause by the TUC. It wrote to me to point out that the trigger of £7,475 at 2011 is in excess of the national insurance threshold, which at present is £5,715. It points out that that is likely to affect a number of part-time workers, mainly women. They are the majority of those earning between the NIC limit and the personal allowance. The TUC believes that if the Government were to take forward the proposals, which they have voiced, to raise the basic personal tax allowance, the numbers excluded from auto-enrolment will grow. We have all said that we are in favour of auto-enrolment, and that we want to get as many people auto-enrolled as possible because they will then get the benefit of the employer’s contribution. As the gap between the contribution and enrolment thresholds grows, there is a danger of a sort of cliff-edge and that the newly auto-enrolled may decide to opt out as they see a noticeable chunk of their earnings going in pension contributions.

There may be various other ways of dealing with it, but the gap is not a good idea. It tends to make the whole thing less simple. People are caught up in the gap and do not receive what is intended to be of benefit to them, which is auto-enrolment. I hope that the amendment moved by my noble friend Lady Drake receives favourable consideration by the Government because there is a serious point to be made. I shall not press my amendment.

[Lord Freud]

Uprating and revaluation measures, especially for pensions, can be challenging to get right and hotly debated. The uprating arrangements for automatic enrolment are proving no exception. However, before going into those arrangements, I need to make clear to the noble Baroness, Lady Drake, that nothing in the Bill introduces a power to change the age criterion of 22. The flexible uprating power in Clause 8 applies only to the earnings trigger and thresholds. It does not apply to age criterion. We agree with her that 22 is the right age for automatic enrolment to kick in.

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[Lord Flight]

My Lords, I support these amendments but express a caveat about something that could lead to the wrong decisions. It may be wrong for people who have relatively small entitlements from defined benefit schemes to take transfer values and move them into a money purchase pot such as NEST, even though small amounts of money are involved, because transfer values have been getting relatively mean under the changed rules. I have always thought that NEST itself could have a problem. Managing large amounts of money in an optimum manner is quite a difficult thing to do. Therefore, although I am sure that NEST will be run relatively safely and sensibly, it will have to be run on a blue-chip investment basis. Therefore, it is likely to underperform some other funds. However, the principle of allowing consolidation and people to take the cash out if it is peanuts has to be right.

[Baroness Turner of Camden]

My Lords, I support the notion behind these amendments. At Second Reading I drew attention to the possibility of people arriving at retirement with lots of little pension pots and not knowing what they would be entitled to. That sometimes happens now; people phone up and say, “Am I in your pension scheme? I just don’t know”. They reach retirement and, if they have been working for around 40 years, they do not know what they have. It seems sensible to have some mechanism whereby one’s pension entitlement is, as it were, collected as a cumulative amount of money. People would then know that they have access to this cumulative amount and the pension that is generated from it. In this sort of system we have the opportunity to do something like that. It would be a very good idea and I congratulate my noble friend Lady Hollis on what she has come up with in Amendment 35. The noble Lords, Lord Stoneham and Lord German, certainly had something similar in mind with Amendment 34. The notion is a good one, whichever amendment is acceptable to the Government.

[Lord Freud]

My Lords, I must start by declaring an interest. I think I have one of these infuriating little stranded pensions. It is the most annoying thing. You look at the file, look at the headline and close the file because dealing with it is unendurable. I am far too polite to complain to the noble Lord, Lord McKenzie, for not doing anything about it. If I thought about it I would resent him deeply every time I looked at the file.

I take the opportunity to let the Committee know, through these amendments, what we are doing to consider how transfers across the industry, particularly of small pension pots, can be made easier. The Making Automatic Enrolment Work review, carried out last summer, recognised that facilitating transfers was critical to the success of the workplace pension reforms. It believed, however, that the issues went beyond NEST. When automatic enrolment becomes the norm, there is a much higher risk that pension savings, particularly for lower earners and people who move jobs frequently, will become fragmented in several small pots—a point made so eloquently by the noble Baroness, Lady Hollis, just now.

The Government are already acting on the recommendation of the review to consider how transfers across the industry can be made easier. The DWP is working alongside the Treasury, HMRC, the Financial Services Authority, the Pensions Regulator, employers and pension providers to understand better the burdens employers and schemes face when administering small pots, and to identify any barriers facing members.

In addition, the DWP recently published—on 31 January—a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. We are seeking to address existing rules which could impact on the success of the reforms, such as rules on early scheme leavers and disclosure. The call for evidence is likely to consider actions better to manage small pension pots. This call for evidence closes on 18 April. Our response will be released later this year after we have considered stakeholder views and evidence of burdens and costs.

Her Majesty’s Treasury recently held a call for evidence on early access. This reflects the Government’s commitment to consider ways to boost individual saving and to foster a culture of personal responsibility over financial choices, particularly in encouraging saving for retirement. The document sets out the available evidence on early access to pension savings, some potential models for early access and the potential benefits and risks, and sought further evidence from interested parties. It included a specific question on ways to improve the transfer process and on whether there is a case for introducing further flexibility in the trivial commutation rules. The call for evidence closed on 25 February. HMT is currently considering the responses and will publish its findings in due course. So, across all three of these areas, we are seeking to identify options to improve transfers so that individuals can get the most out of their savings.

I appreciate the interest that noble Lords have indicated in the overall issue of transfers, which is much wider than the restrictions that are currently placed on NEST. The restrictions on transfers into NEST are intended to focus the scheme on its target market, particularly as the reforms are staged in, enabling its administrative processes to be simple, leading to lower running costs and creating safeguards against levelling down. NEST can already accept certain transfers in—for example, where a member with less than two years’ service has the right to a cash transfer. This allows jobholders who move from an employer not using NEST to one offering NEST to transfer their cash transfer sum into NEST. The Pensions Act 2008 commits the Secretary of State to review the effect of NEST transfer restrictions in 2017. But we are doing work now, before 2017, that will bring together evidence and analysis from a broad base.

As I know noble Lords appreciate, there is no straightforward solution and the outcome of any quick fix may not provide the universal remedy for individuals and pension schemes that we might hope for. Aggregating small pots by transferring them into another pension scheme is not necessarily a good thing to do for individuals, as the noble Lord, Lord Flight, just pointed out, as it will depend on the merits—the risk, charges and growth—of the fund they are transferring into compared to those of the fund they are transferring from. It is not necessarily a good thing for pension schemes either, which, though they would no longer need to pay for the maintenance of a potentially smaller pot, would need to pay to transfer the fund out. Hence, the work we are already doing to see what measures we can sensibly take to minimise industry burdens while delivering the best possible protection of individuals’ retirement outcomes. We want to ensure that any solution will stand the test of time and meet the needs of all pension schemes and their members.

I do not want to prejudge the outcome of our considerations, but I can see the merit in a number of your Lordships’ arguments, including that of the noble Lord, Lord Boswell, that we should take into account giving the individual a choice, where they have very small pension funds, to take the cash. It is, of course, the very smallest pots that cause the biggest problems, as even if transfers can be facilitated, the frictional administrative costs have a proportionally higher impact. The noble Lord talked about sums of £20 and £30—I shudder to think of the proportion of administrative costs involved in doing anything with them.

Our ambition is that NEST will complement rather than replace existing good-quality pension provision. Changing the provisions now to allow NEST to accept transfers in during the critical implementation period could undermine that aim. By 2017 the reforms will have been fully implemented. We will have more evidence on the effect of the reforms as a whole, including the impact of NEST on the market. While I appreciate the principle behind these amendments, I urge the Committee to bear with us while we get to the heart of this difficult and complex matter. On that basis, I urge noble Lords not to press their amendments.