Pensions Bill [HL]

Lord Boswell of Aynho Excerpts

Thursday 3rd March 2011 Grand Committee

[Lord Freud]

My Lords, on Tuesday we discussed the possible aggregation of many jobs for credit towards the basic state pension. I admit to being indebted to the ever persuasive arguments of the noble Baroness, Lady Hollis, about the effect of portfolios of many jobs, especially in rural communities, and her concern that as many low earners as possible should be able to qualify for auto-enrolment and an employer contribution.

I also note the wise cautions of the noble Lord, Lord Boswell, on Tuesday about the potential effect on employers—where aggregation is mooted—and on the labour market. As I said on Tuesday, I am sympathetic to the principle of aggregation for basic state pension purposes. I am cautious but optimistic that this could be possible in the new world of the universal credit. This is because, if Government systems can track information for universal credit, it may not be a huge leap from there to having national insurance contributions or making credits on a state pension record. However, we are now about to discuss a somewhat different issue—that of the aggregation of earnings from many jobs in relation to auto-enrolment into workplace pensions. I need to emphasise again that it is important to encourage part-time jobs and to look for a way of aggregation. However, there are greater barriers in this area than there are in the area of the state pension in terms of aggregation. That it is more complicated was stated by the noble Baroness, Lady Hollis, in her speech.

The main and unique barrier is a need not only to aggregate earnings across employers but also to apportion pension contributions between those different employers. This is quite a problem in terms of employer burden cost and complexity, which we would need to find a way to resolve. The automatic enrolment duty falls on each employer for the people they employ. There is no sharing of the duty between employers. If a person has two jobs, each of their employers is responsible for enrolling them as the legislation is presently set up. Workers who do not earn enough to qualify for automatic enrolment clearly may opt in. Those who have the qualifying earnings have the right to employer contributions, which is ground we went over just now.

The first amendment raised by the noble Baroness, Lady Hollis, seeks to increase voluntary pensions saving for people who do not earn enough to be automatically enrolled by enabling the aggregation of the many jobs and any earnings from self-employment for a person who also works on their own account. This would allow people who earn under the automatic enrolment earnings trigger, and opt in, to have their earnings for more than one job taken into account for calculating pension contributions. This looks like a straightforward proposal. However, there are considerable practical problems that would, in practice, increase employer administration burden.

Let me turn to the two amendments from the noble Baroness, Lady Drake, and the noble Lord, Lord McKenzie, which seek to enable aggregation by solving one of these practical difficulties about information sharing between employers. These amendments enable earnings from separate jobs for separate employers to be added together where the person can demonstrate to the employer that they have another job with other earnings in that week or month and that they are therefore entitled to be auto-enrolled. This is a very neat amendment that shifts the burden of proof from the employer. However, it is not quite as modest as the noble Lord suggested because it does not entirely solve the issue of the employer administration burden.

It is not immediately obvious how the employer contribution could be easily calculated or divided up. No mechanism currently exists to do that. Would multi-employers share the cost of the employer contribution? If so, how would that be done? Which employer takes responsibility for paying contributions to the pension scheme? If they share the cost, how would one employer recover the cost from the other employer? If they do not share the cost, is it fair that one employer bears the entire cost and the other none of it? Overall, we cannot see how it could be done without placing a significant and unfair burden on employers. I sympathise with the intention behind these amendments in terms of those with multiple jobs, and it is certainly an issue to keep an eye on as we go forward. It clearly—and noble Lords all acknowledge this—is not feasible with our present technology; but even if it became feasible, which it very well may, moving the burden of proof on to the worker is not the way to do it.

Standing back just a little, our first priority at this point must be to ensure that employers understand, and are able successfully to implement, their duties under automatic enrolment. That is the priority. This is not the right point to contemplate introducing significant changes to those duties, and I think noble Lords today recognise that. Introducing new and significant burdens would disrupt that process. However, noble Lords have successfully put down a marker for 2017. On that basis, we do not accept the amendment and invite noble Lords to withdraw it.

[Lord Boswell of Aynho]

My Lords, I wonder whether I might make my contribution before the Opposition spokesman. First, I apologise to the Committee for having been late; my excuse is probably the best I have ever been able to tender, because I have just been attending a meeting of pension trustees.

[Baroness Hollis of Heigham]

Are they solvent?

[Lord Boswell of Aynho]

Well, they are, and it is the Conservative Party agents’ superannuation scheme, but I promise not to detain the Committee on that. I hope I would have given the same attention to anyone else with whom I was in a trustee relationship.

May I just make two points? I fully understand that the Minister was kind enough to quote my slight reservation in our earlier exchanges on related matters. The first is a note of concern: it would certainly be unfortunate if one employer were somehow to be delinquent because of the failure of another employer to declare, which had created excess over the qualifying limit. I just make that point; I am sure my noble friend will have it in mind.

The second point is intended to be more positive and it might help to inform trains of thought. One always has to be careful about these sorts of things, not least for data protection reasons. I happened yesterday to have gone to a completely unrelated meeting in this building about occupational health, which is an interest of mine. We were looking at the new construction workers’ smart card scheme. Of course, once there is something that is able to identify the individual with known characteristics—dates of birth, for example, or presumably one could incorporate an NI number—and that is portable, it is possible for that to be tendered, or even required to be tendered, through various places of work. It might be possible to aggregate electronically in that way. I just offer that to my noble friend as a way forward. I am pleased to see the noble Baroness, Lady Hollis, also nodding; at least it is a thought. We always have to be careful with these things, because there will be some people on manual, some people who do not understand and minority interests and industries. But if we can possibly start working toward some sensible protocols people could use, it would be generally beneficial.

[Lord McKenzie of Luton]

I wonder whether the Minister would allow me to intervene, because he challenged the description I gave of my amendment as being modest. He may have misunderstood the intent of part of it. All it was seeking to do initially was to say that if someone had qualifying earnings, with a particular employer, but not earnings that reached the trigger, and if there were a process of the employer being made aware that the trigger had been reached, the employer would automatically enrol and be responsible for contributions in respect of the earnings in that employment between the start of the qualifying earnings band and whatever that band reached. That would in a sense be stand alone for an employer. That gives exactly the same result as employees now have in being able to opt in, because if you have earnings above the threshold, but not at the trigger, you can simply opt in and get the employer contribution.



Along the way, the hope would be that, rather than relying on the activity of the employee—because we are always trying to deal with the inertia problem—you could somehow make it more automatic. It would be automatic, though, only in the sense of the employer being aware that the trigger had been reached. It would not require any aggregation of earnings by any employer. I instance how HMRC deals with notices of coding. If people have two or more jobs, on one basis or another the personal allowance is divvied up across their notices of coding—don’t ask me how. In a sense, an employer would be aware that other earnings may be involved. That sort of process could be a trigger for automatically alerting the employer that the trigger had been reached and simply then requiring them to deal with auto-enrolment on the earnings that the employee is being paid by that employer. My amendment would do no more than that.

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[Lord Freud]

Yes, the lower trigger. It is not from pound one.

[Lord Boswell of Aynho]

My noble friend the Minister said that she would have nothing from the employer. I suppose, to be pedantic, that that would be so unless the employer chose to make a contribution, but there would be no obligation on the employer.

[Lord Freud]

Yes, I can confirm that, although we are going to be giving everyone their pension soon if we carry on giving examples.

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[Lord Stoneham of Droxford]

My Lords, we have had a discussion on some of the main reasons for the move in the threshold. We are understanding of that move. There are a number of reasons for it. The documentation that we have received from a number of organisations questions the rate of return on the savings of people at these levels of earnings.

We have heard mention of the replacement-to-income argument. It is almost certainly true that at these levels of earnings a lot of individuals are less prepared to save. Of course, there is also the burden of administration. I take the noble Lord’s arguments on the threshold being linked to the tax threshold. You would expect us to be committed to raising the tax threshold to £10,000. We want neither a deterrent to doing this nor a deterrent to those who are trying to improve their savings and pensions. I hope therefore that we will have a commitment to look at this each year and that it will not be related necessarily to the raising of the tax threshold, as that would take a lot of people out of the net, which is not what we are trying to do.

I accept that there is an increase in these thresholds, but I want to go back. I apologise for repeating some of the earlier arguments, but I want to make the point that there are a number of things that we need to do—or the Government need to look at—which would be helpful to people who could be vulnerable to these changes. I have mentioned the tax threshold and I hope that we will have a firm commitment on that.

Secondly, we will discuss later the pots of savings and what people will be able to do with them. If they can be brought into NEST, and if we can encourage that process, that would be a most helpful change. It would make the overall change more acceptable.

I was very supportive of the arguments on multiple earnings. It is a big issue that will grow. I am pleased that there was a commitment to 2017. We underestimate the number of women in this position and, even though we may not be able to act now, we could be saying that it is an issue that we will try to address as the new system beds in. We also want to see a degree of commitment to encouraging people to stop opting out. We will address that matter in later amendments. In the context of raising the threshold, these are a number of points that we think are important to make that acceptable. I accept that, ultimately, running through this Bill is a trade-off with the Treasury on all kinds of aspects. We must make sure that we get a good trade-off.

[Lord Boswell of Aynho]

Perhaps I may briefly invite my noble friend to consider one particular point about the raising of the threshold. There is no need for a commitment at this stage, although it has been implied that it will be considered. Can my noble friend give some thought to, and discuss with his Treasury colleagues, the way in which this might be introduced annually into the national consciousness? I hesitate to dangle another red herring before the Committee in the shape of the national minimum wage, on which I have some prior form. However, if we are beginning to look at the impact on labour markets of a number of items, and some of the misguided or inappropriate claims that are made, or the fact that people say, “I don’t think I can afford that anymore and I want to pull out”, it would be useful to have a national economic snapshot. Although this is strictly about the labour market and within the Minister’s remit by definition because he is legislating on it, it is part of a national economic snapshot. Some people may have noticed today in relation to the national minimum wage a suggestion with which I do not agree—that we should announce it and defer it for 12 months. I merely make the point that probably on the occasion of a Budget it would be useful to have an annual appraisal that was keyed in and could be related by the commentators to tax rates, take-home pay and so forth. It would add to clarity and transparency.

[Baroness Greengross]

At Second Reading, I stressed the point that one good aspect of the trigger was that it would help prevent employees and employers from making very small contributions. This is still an important point.

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[Lord Boswell of Aynho]

My Lords, briefly before my noble friend replies and in the spirit of the questions that are being fairly put by the noble Lord, Lord McKenzie of Luton, I wonder whether the Minister could give some thought to the position of people who have not changed what they are doing—they are still doing it at the same place—but whose employment status has changed. Quickly, off the top of my head, I am thinking of two sets of people. One includes those who come in as self-employed and are then taken on by the firm as employees to do substantially the same thing. Clearly, that cannot be backdated and should not be backdated from their time as self-employed persons, but they have been there. The second case, which may be even more difficult but is at least worth rehearsing, is the question of agency workers. The employer may choose to take them on from the agency and pay a take-on fee, but they are, again, doing substantially what they were doing before in the same place as before. It is clear that they are not covered by the existing provisions, but it is not entirely clear why they should not be, at least in terms of equity.

[Baroness Hollis of Heigham]

That is a very interesting contribution and I hope that the Minister will follow it up. I want to put to the Minister a very simple but not obvious point. I understand why employers prefer a waiting period—obviously one is glad that it is not two years, as in some conventional schemes—but even with three months we must recognise that, given the figures on job turnover on page 103, with which I am sure the noble Lord is familiar, the median number of jobs that men and women have is 11. My previous research shows that the pattern of job turnover is different for men and women: men have more turnover in their earlier years and settle in their 40s or 50s, while women have a higher job turnover than most men by virtue of being much more frequently in and out of the labour market and more likely to re-enter into a different job. The report makes the point—although it does not back it up with research—that statistically there is not that great a difference between the two. It is worth pointing out that if somebody has 11 job changes, which is the median according to the report, having a three-month waiting period represents three years’ loss of pension contributions. Interestingly, 26 per cent of the population on this model have between 12 and 15 jobs in their working lifetime, which would mean, on average for them—if my sums are right—a loss of five years’ pension contributions. Furthermore, 15 per cent have 16 jobs or more—up to 23—which would be an average of something like eight years’ loss of pension contributions.

This is highly significant. Even reducing that by one month to two months would help; reducing it back to one month, as my noble friend has argued, would make a significant contribution for those who have staying power but none the less a rapid job turnover for whatever reason. It may be because of a cycle between self-employment and employment—take a hairdresser, for example, for whom the conditions of employment are often very obscure, whether you are self-employed or, even if you work in a salon, whether you are employed or not. None the less, the waiting period of three months can represent over your lifetime a significant loss of working contributions matched by the employer into your pension. For that reason, as well as others adduced so far, I hope that the Minister will reflect on whether he could make any movement in this direction.

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[Lord Boswell of Aynho]

My Lords, before the Minister responds, perhaps I may briefly share with the Committee a slight concern that I have, which is very much subsidiary to the powerful point that the Minister has already made about the need to maintain simplicity and make the scheme doable by employers. Behind earlier remarks that I made, which I shall not rehearse, concerning agency work and self-employment, and behind the slight concerns that I have here is an anxiety about employers who are perhaps less well intentioned than those of us who were employers had hoped to be. Therefore, I stress to the Minister that it is extremely important that we monitor any devices that are used, in effect, to subvert these waiting periods. The Minister is absolutely right to introduce them to simplify the scheme but, at the same time, we need to come down very hard on people who use them as an opportunity to avoid their obligations.

[Lord Freud]

My Lords, I thank noble Lords for their observations and repeat how the structure works. The cycle would be starting again. However, I emphasise that we think that the group involved would be extraordinarily narrow. We could overcomplicate this issue, because in practice many employers will probably just enrol those people the following month, which they are quite free to do. They can opt in. As I said, we will be monitoring this very closely. If it becomes a substantive issue and we can see some peculiar games going on, we will have to move in and sort it out, and we will do that.

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Moved by

[Lord Boswell of Aynho]

34A: Line 7, at end insert “or, in cases where the value of an individual fund does not exceed £1,000 and is not otherwise repayable, but cash consideration if the beneficiary opts for this”

[Lord Boswell of Aynho]

My Lords, I rise to move my sub-amendment, to use European parlance, as corrected by the noble Baroness’s perceptive intervention, and to speak to my noble friend Lord Stoneham’s substantive amendment and around the parallel thoughts of the noble Baroness, Lady Hollis of Heigham, on this matter. My amendment is slightly different in character, but all these amendments are about essentially the same problem. I quote, with approval, the words of the Minister only this afternoon, which I jotted down for greater accuracy:

“It is very expensive to manage small pots”.

That is exactly what the problem is about. There are a number of complexities in the consequences of this. It is expensive for employees and employers, or pension administrators. It is extremely expensive for the Inland Revenue and gives rise to lots of often misleading tax codes, which overlap and never seem to get synchronised and sorted out. It causes difficulties for taxpayer compliance and taxpayer understanding when these bits and pieces come in from sources that are probably long forgotten and do not add up to very much.

On Second Reading I quoted examples. I will be a little more pointed than I was then. They were actually my wife’s two pots of about £20 per annum and about £30 per annum. Goodness knows what the administrative cost of carrying that burden is. I am pleased to see the Minister chuckling. As I recall the situation, my wife had already consolidated a number of pension entitlements and had one go at this. She had some entitlement under the teacher pension scheme but no actual pension and she had had that out. You cannot consolidate more than once. I may have got that wrong, such is the complexity of this. In other words, there was nothing that she could really do about them. The proposals, as I understand it from my noble friend and the noble Baroness, are basically that NEST should be an optional repository to handle them. I can understand that the Minister may be a little diffident about taking it all in while he is getting this extremely imaginative scheme under way, but there is at least the potential for a default mechanism to take this over. Were my energies not to have faded, I would have sub-amended my noble friend’s Amendment 34 to read “may make regulations” rather than “must make regulations”, but let us not debate that at this hour. The idea would then be that NEST would be a place where these could be sorted out.

An alternative approach would be to enable people to have a slightly more relaxed view about taking these in cash, which is what my sub-amendment in effect proposes. One always has a whiff that the Inland Revenue has a certain concern here. I am quite sure that some elaborate scheme could be devised of tax avoidance where people could have hundreds of miniature pots and somehow take it all out in cash with the full benefit of the accrued tax reliefs, ending up with a fortune. Perhaps this has never happened, but I am quite sure that the Inland Revenue would be there alert to make sure that it did not.

I also feel, in relation to the suggestion made by the noble Baroness, Lady Hollis, and the thinking behind it, that it is not absolutely essential that this should be done by NEST. It could be that, if the rules were made more flexible, existing administrators could take this on. I am pleased to hear her acknowledging that. I do not wish to create an unnecessary controversy in the Committee, but I have a feeling that the words “any willing provider” might even be considered. If, for example, in a case such as that of my wife, where there was an entirely trivial and ridiculous entitlement that could have been bolted on to her existing private pension arrangements, somebody could say, “This is the value of the scheme; will you take it over?”, and pay it possibly as an agent—I am not concerned with the legal basis of this—I think that we would be making some progress.

I feel strongly about two things. The debate in this Committee has rightly focused on mini-jobs. We are now talking about mini-pensions, which are often, but not always—and it is not contingent on income or anything else—a by-product of mini-jobs, and good luck to people. They may in certain cases, though not in the case of the lady whom I mentioned, be quite central or disproportionately important to the income or the top-up of income of the individuals involved. We should be moving towards a system that is less complicated, more flexible and less obsessed with the possibility of theoretical minor difficulties with tax. We should somehow cut through the legal thickets and deliver something that is cheaper, easier to understand and worth having in the hands of the beneficiaries who have properly earned it.

[Baroness Hollis of Heigham]

My Lords, I have high hopes for the thrust behind these amendments, given that all sides of the Committee today share a similar take on the problem. I know that the Minister shares this view and I hope that he can give us some positive indications of ways forward. I am particularly happy to follow the noble Lords, Lord Stoneham and Lord Boswell, on this.

We discussed earlier the question of the number of job changes and we know that, as I said, the median number of job changes is around 11—25 to 26 per cent will have between 11 and 15 job changes and others will have even more than that. That means, depending on the rules of individual schemes and how long people are required to work before they can join a scheme—it could be two years or up to two years, or your contributions could be returned to you and you might decide to hold them in a pot—that it is likely that low-paid employees and some not necessarily low-paid employees, but people who have moved a lot in their first five, 10 or 15 years of earning, will build up some pension entitlement in five of those jobs. At, say, £11,000—half women’s average earnings—with a fairly conventional DC scheme, which I know applies in a lot of the charitable or voluntary world, a five plus five would mean that such a woman would have something between £1,000 and £1,200 a year in her pot for each year in her job. That could mean that she had five or six pots of anywhere between £1,000 and £3,000, depending on the rules of the scheme. The question then is what happens to those pots.

I am cross with myself because I missed a trick and I should have put it down as an amendment, because one way to approach this, obviously, is to follow in a slightly larger form the thrust of the argument of the noble Lord, Lord Boswell, which is to raise the trivial commutation limit, which at the moment is £18,000— 1 per cent of the lifetime savings allowance. A trivial commutation limit of, say, £25,000 or £30,000 would pick up quite a lot of these very small pots without having to hassle about whether they were at or above a certain level. Of course, some providers—some banks and so on—will allow you to bring together five or six small pots and consolidate them, because they are then worth handling.

In addition, the Government propose in due course to remove annuitisation at the age of 75. However, the Treasury—bless it—has insisted on a quite absurd de minimis figure of £20,000 income. That is quite unnecessary; it merely needs to be about £8,000. Of course, if the new state pension comes into play at £140, you will not need any de minimis for failing to annuitise, because it will float you off all public funds, apart from housing benefit. Therefore, with, I hope, the new state pension of £140, not only would NEST be safe but so would all other small savings schemes. You would not then need things such as trivial commutation rules because the choice would be left entirely to the individual. We would be kicking out a lot of silly mess and tangles that have been imposed by the Treasury, which is more concerned to avoid £1 being lost through manipulation of the tax system than it is to encourage £10 being gathered into the savings system. I consider that to be really rather sad. I am sorry that I missed that point, but we will come back to the trivial commutation issue later if it seems worth doing so.

If the person in question cannot trivially commute and she is handling pots of, say, £3,000 each, she will be getting somewhere between £1 and £4 a week from each of those small pots. The Pensions Advisory Service—I should declare an interest as a board member of TPAS—has been very concerned about what noble Lords have called “orphan assets”. At the moment, a poor woman can use these small pots altogether, but she may end up with, say, £20,000 or £25,000 in her NEST pot, have three, four or five other pots of £3,000, £2,000 or £1,000 and lose all those small pots, which are above the trivial commutation figure, are too small to be annuitised and cannot be bundled together. She would effectively lose a third of her lifetime savings, even though she is on a very low income. No one would regard that as decent. Therefore, I think that she should be able to bundle or consolidate her various pots. For this purpose, I am talking about NEST but I am perfectly happy for it to be any willing provider. The important thing is that she can access all her savings.

What would be the advantage of my proposal? It is very simple. First, above all, the person in question retains the full value of all her savings, rather than possibly losing some of them. Secondly, it represents simplicity for her in retirement, as she could be handling just one flow of pension income rather than multiple flows of small pots. Thirdly, there is a sort of best-value option going on here—a version of the open-market option. In this Bill we have not yet talked about disinvestment strategies, but I suspect that she would get a better return on disinvestment were she to purchase an annuity if all these small pots were bundled together and consolidated into one scheme, rather than if she were trying to play around with various small pots to avoid losing them.

In my amendment, I stipulate that the transfer should be able to take place the year before retirement simply to recognise the concerns—they may be exaggerated but they certainly exist—among some pension funds that existing scheme providers will not want a wholesale flood of money from their schemes under management going earlier into NEST, possibly because NEST will appear so much more attractive in terms of the reduced fees that will be charged and therefore the amount that will be available for accumulation. I do not mind that, but they might, and therefore it may be a price that has to be paid.

Given the support around the Committee today, given that I know that the Minister is sympathetic to the issue that has been raised and given that we have produced two or three different ways in which we can approach this problem, I hope that we will get a sympathetic hearing from the Minister.

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[Lord Freud]

My Lords, I accept the point that the noble Baroness makes that people lose money because of this. They have been losing money for many years. This problem has not suddenly emerged. Regrettably, because of the amount of work now under way, it would be premature for me to give any time indication about whether one could envisage some certain quick fixes that would go along with an overall strategy. It just depends. Noble Lords will understand that I am simply not in a position to say that we could apply some quick fixes along way. They may be possible but I certainly cannot indicate that that will be the case or the timing of it. I would love to be able to announce a wonderful transformation so that with one bound we broke free. But I can assure noble Lords that there is a major process in train to get a holistic solution to the issues of savings and these pots, and we are moving at a rapid speed to get that done.

[Lord Boswell of Aynho]

My Lords, I never mind saying this, but the Minister has given us an almost entirely satisfactory response. I can understand the noble Baroness’s desire to get on with this, so perhaps I might counsel the Minister to look at two interim approaches in parallel. First, if he could do anything along the lines of my amendment, it would help. Secondly, we should try to avoid these schemes accumulating further. If he can stop the rot and prevent any more of these little pots being created from now on or fairly soon, it would be very helpful. However, I fully understand, not least because of the comments made by my noble friend Lord Flight, that these are complicated matters. I suspect that we will have only one go at this—it probably will not be in the Pensions Bill with which we are now dealing—and we need to get it right. All power to the Minister’s arm on the overall concept, but I hope that he will remember at the same time to look either at whether existing arrangements and payments can be smoothed or at stopping the rot by preventing any additional schemes being created. However, in the spirit of what has been a very constructive debate, I beg leave to withdraw my sub-amendment.

Amendment 34A (to Amendment 34) withdrawn.