Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2014

Lord Bates Excerpts

Tuesday 11th March 2014 Grand Committee

Moved by

[Lord Bates]

That the Grand Committee do consider the Occupational and Personal Pension Schemes (Automatic Enrolment) (Amendment) Regulations 2014.

Relevant document: 21st Report from the Joint Committee on Statutory Instruments

[Lord Bates (Con)]

My Lords, I am pleased to introduce this draft instrument, which was laid before the House on 3 February 2014. I am satisfied that it is compatible with the European Convention on Human Rights. The instrument makes amendments to two of the 2010 automatic enrolment regulations. These are technical amendments but the consequences of the changes are not insignificant. Broadly, they seek to ensure two things: first, that employers using good-quality career average pension schemes are able to do so without any unnecessary impediments; and secondly, that all employers using hybrid pension schemes under automatic enrolment are treated alike in terms of phasing in minimum contributions.

First, I will set out the reasons for the more substantial changes to the regulations, which relate to the revaluation of benefits in career average pension schemes. To be used as a qualifying scheme for automatic enrolment, in addition to satisfying the quality requirements for defined benefits schemes, a career average pension scheme is required to revalue accrued benefits by at least a minimum level while the member is in employment. This is so that the value of the benefits is given a degree of protection against the effect of inflation. Final salary schemes do not need this revaluation in service because historically salaries have tended to at least keep pace with, if not outstrip, inflation.

The minimum level required by the regulations is an annual increase by reference to the general level of price inflation—either the retail prices index or consumer prices index—up to a ceiling of 2.5%. There are problems with this requirement, which, without the amendments we are proposing today, would prevent good-quality career average schemes from being used as qualifying schemes. Schemes that revalue accrued benefits by reference to the change in average earnings rather than prices cannot guarantee that they will meet the minimum level required going forward, so would currently be excluded from qualifying by regulations.

The amendments would allow a longer-term view to be taken. Schemes in the scenario I have described—those that revalue by the change in average earnings or potentially by reference to another measure—will not be excluded from being qualifying schemes so long as the scheme’s funding and statement of funding principles assume that revaluation will be at or above the minimum in the long term. This provides consistency within regulations with schemes that revalue by reference to a discretionary power where funding assumptions can already be considered. It also allows schemes maximum flexibility over the method of revaluation they use, so long as it can be assumed from the scheme’s funding that the minimum level will be provided.

New public service career average schemes could have been excluded from qualifying under the current regulations; for example, if they revalue by average earnings. The new schemes are, of course, of sufficient quality to be used for automatic enrolment, and revaluation in service for all the schemes concerned will be by at least the change in prices or earnings uncapped. New public service schemes that revalue by reference to the planned annual Treasury order are explicitly provided for. If they revalue at the rate specified in the order, they will not be prevented from being a qualifying scheme. Explicit reference was needed in this way because such schemes are not able to consider funding assumptions in the same way as funded private sector schemes, which are required to have a statement of funding principles or an equivalent.

The technical issue regarding hybrid schemes was brought to our attention last year by stakeholders. We are grateful to members of the Society of Pension Consultants for raising it. Employers using hybrid schemes that provide money purchase benefits are intended to be able to phase in contributions during the transitional periods under automatic enrolment. The policy aim here is to allow employers to stagger their costs in the initial years of the workplace pension reforms. However, currently, where the money purchase element of hybrid schemes is certified against one of the sets of alternative requirements, schemes have not been able to do this. Schemes that certify against one of the sets of alternative requirements do so because, for example, the definition of pensionable pay in the scheme is not the same as qualifying earnings. The policy intention is that they be treated just the same as those schemes that explicitly meet the quality requirement. The amendment would ensure that hybrid schemes are able to phase in contributions regardless of how they demonstrate that they meet the money purchase quality requirement. This means that all hybrid schemes will be put on the same basis going forward. I commend this instrument to the Committee. I beg to move.

[Baroness Sherlock (Lab)]

My Lords, I thank the Minister for that explanation and I do not propose to detain the Committee long on this order.

For many years Governments of all complexions have looked at ways to encourage the UK workforce to save for their retirement. There have been several changes to pension legislation but none as big as the Pensions Act 2008 and the pension reforms that will affect every employer in the UK. Since October 2012 new regulations require every employer in the UK to enrol automatically their eligible workers—which will be almost everyone—into a workplace pension scheme.

I want to say how much I appreciate that this Government have given such strong support to auto-enrolment, which was begun by the previous Government but taken forward by the present one. We also welcome the Government’s policy intent in these regulations to allow schemes providing career average salary benefits to be used as qualifying schemes for the purposes of automatic enrolment. This is a positive step and has the support of the Opposition. The Opposition will continue to support the Government to ensure that auto-enrolment is a success and the move to ensure that both average salary benefits schemes and hybrid schemes are a part of auto-enrolment is also positive.

[Lord Bates]

I am grateful to the noble Baroness, Lady Sherlock, for that support. Auto-enrolment is very much a success story. The credit for the figures that are coming in transcends parties and Governments. It is also very encouraging for people providing for their retirement. With that support, I commend the regulations to the Committee.

Motion agreed.