Lord Freud
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“6th January 1954 to 5th February 1954 : 6th May 2019
6th February 1954 to 5th March 1954 : 6th July 2019
6th March 1954 to 5th April 1954 : 6th September 2019
6th April 1954 to 5th May 1954 : 6th November 2019
6th May 1954 to 5th June 1954 : 6th January 2020
6th June 1954 to 5th July 1954 : 6th March 2020
6th July 1954 to 5th August 1954 : 6th May 2020
6th August 1954 to 5th September 1954 : 6th July 2020
6th September 1954 to 5th October 1954 : 6th September 2020””
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I beg to move that this House do agree with the Commons in their Amendment 1. I shall speak also to Amendments 2, 1B, 1C and 1D.
However, before I discuss the amendments, I wish to place on the record my appreciation for one of the department’s officials, Evelyn Arnold, who is retiring after 36 years in the department. In fact today, by some coincidence, we are here on her final day. I am sure that with many an ex-DWP Minister present today noble Lords will share my thanks as we bid farewell to Evelyn and, I hope, to this Bill.
Today we have a further opportunity to discuss what has proved to be the most contentious aspect of this Bill. I hope on this occasion we may emerge with something like consensus. All sides of the House accept that projected average life expectancy has increased significantly since we agreed in 2007 to raise the pension age to 66 by 2026. The latest projections published only last week confirm that with no change to the 2007 timetable, men retiring at 66 in 2026 would receive their pension for an additional 18 months and women for an additional 19 months.
This demonstrates the very challenge we are facing, for we have been on quite a journey with this clause. That we have this opportunity further to debate the Government’s transitional arrangements is to no small extent due to the considered and thoughtful arguments made during our debates on Clause 1. I thank the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, for tabling the alternative timetable, which has continued to reappear both here and in another place. However, it is £11 billion—and this fact will remain irrespective of the number of times that the proposition is tabled, since £11 billion is simply too much, even in terms of the inflated figures that we quite often bandy around when debating the heady world of pensions.
I pay sincere tribute to the noble Baroness, Lady Greengross, who recognised that this sum of money is too great a burden for the system to bear and sought to propose an alternative timetable at a fraction of the cost. Her suggestion provided a more reasonable financial cost while assisting those most affected by the original Bill timetable. Our amendment takes her amendment as the starting point and provides the same notice for the first women affected by a one-year rise, five years and four months from Royal Assent. Our amendment smooths the rise from 65 to 66, taking six months longer than we originally proposed, and provides a revised pension age for men and women born between 6 January 1954 and 5 October 1954. It benefits a similar number of people—about half a million, under the noble Baroness’s amendment, and around 485,000 under ours, although in the case of our amendment nearly half of those are men. That is because we equalised the pension ages first before starting the rise to 66. We have found that there was no alternative to equalising first that would not risk breaching the European equal treatment directive by delaying equalisation beyond the date that we set ourselves in 1995. That is why men will also benefit—but that is, of course, incidental to our primary goal, which is to mitigate the impact on those women who would otherwise face an increase of more than 18 months.
We have listened, we did reconsider, and we have done what is right for these women and the country—and it has not gone unnoticed. Michelle Mitchell, the director of Age UK, welcomed the Government’s amendment, saying that Age UK appreciated that,
“it is a significant financial commitment from the Government at a difficult time. This will give a much needed six-month respite to all the women who would have had to work an extra two years”.
Although Age UK would have liked the changes to go further, it has none the less acknowledged that the Government have listened to concerns. In its briefing sent to noble Lords for this debate, it said:
“We ask all Members of the House of Lords to support the government amendment to Clause 1 of the Pensions Bill”.
These are not my words but those of Age UK.
The issue has never been whether the original timetable is to be brought forward. The issue is about the precise timing and whether it is appropriate to rewrite the timetable, set more than 15 years ago, for levelling the pension ages at 65, to bring about 66 in 2020. We have always been clear on the matter. My right honourable friend the Secretary of State said in another place that,
“we are committed to the state pension age being equalised in 2018 and rising to 66 in 2020”.—[Official Report, Commons, 20/6/11; col. 51.]
These amendments do not alter our timetable for pension age equalisation and maintain our original intention to implement the rise to 66 in 2020, but we have reduced the impact of our original plans by up to six months for those facing the biggest increase. This is what we call a compromise.
This transitional arrangement has a significant price tag attached. Net spending on pensions and benefits will increase by £1.1 billion compared to our original proposals over the two years 2019-20 and 2020-21. Under our amended proposals, we will therefore deliver £30.6 billion of savings. This is not small change that falls down the back of the sofa, but vital savings for the long-term fiscal sustainability of our economy. We must not forget the bigger picture. Savings are not just important but necessary. The independent Office for Budget Responsibility has some very helpful forecasts. They show that by 2060—50 years’ time—age-related public expenditure is set to increase by more than 2.5 percentage points of GDP, with the largest proportion of spend on older people being on health and state pensions. This 2.5 per cent is the equivalent in today’s economy of £40 billion.
The point I am making is that it is tough to save money and this country faces a significant near-term challenge to do so. It was suggested by some Members in another place that the public sector net debt of £1.4 trillion in 2015-16 forecast by the Office for Budget Responsibility is so monumental that £10 billion or so here or there will not make much difference. I would like to think that in this House we take a more realistic view. With figures like this, even £1 billion is an important sum of money to spend, and this is only one-tenth of the cost of the proposals advanced by noble Lords opposite.
The fact is that the fiscal impact of their amendment falls on six years not 10 and within that period—2016-17 to 2021-22—nearly £2 billion would need to be found in 2018-19 and nearly £3 billion in each of the years 2019-20 and 2020-2021. In the context of the Office for Budget Responsibility figures, ours is the fiscally responsible approach.
I accept that some will continue to argue that our amendment does not go far enough. However, I would urge noble Lords to reflect upon the process that has got us to this point. Noble Lords scrutinised the Bill many months ago and the Government listened to concerns. The elected House has had its turn, as is the process, and has responded with these amendments, which balance the concerns of those women most affected with longer-term fiscal responsibility. I beg to move.
Amendment to the Motion
The Parliamentary Under-Secretary of State, Department for Work and Pensions (Lord Freud)
My Lords, I thank noble Lords for speaking with the expertise and knowledge that we have grown accustomed to in this Chamber. I am particularly grateful for the mathematical expertise of my noble friend Lord German.
As I have already mentioned, the Government have acknowledged that the original timetable was too harsh on some women and have amended this. We have listened. We have amended. This is the very point of the legislative process. The elected Chamber brought forward and agreed Amendments 1 and 2 after significant and lengthy debate. Due consideration has been paid to the issue and I believe that we have reached an agreeable and responsible conclusion.
Indeed, I confess that I am slightly perplexed. We find ourselves considering a timetable that has already been proposed and defeated in a vote by both Houses. We appear to be back at square one. This should not be the case. The Government have reconsidered their original proposal and brought forward a reasonable amendment. Yet, the noble Lord opposite has still reinserted his familiar friend. I feel that we have offered a hand here and the noble Lord, like Beowulf, treats me like Grendel and tries to rip my arm off.
We have heard many of the issues today, but we have been here before and the facts have not changed. We are still talking about an £11 billion reduction in savings that the Opposition are proposing. In terms of fiscal sustainability, I hope that noble Lords can agree that this is simply not feasible.
Several issues have been raised and I want to touch on some of them. One that is of great concern was raised by the noble Lord, Lord McKenzie, and by the noble Baronesses, Lady Howe and Lady Drake, in respect of the burden on women who are carers. Only around 3 per cent of women in the 55 to 59 age group are currently entitled to carers’ allowance.
Baroness Hollis of Heigham
There are 6 million carers and only about 500,000 of those qualify for carers’ allowance because of the very high hurdles: you have to care for at least 30 hours per week for one person in order to receive the carers’ allowance for somebody who is on middle or higher rate DLA. Those are very tough hurdles. Very many other women—hundreds of thousands—are, I know, actively caring in ways that do not permit them to be full time in the labour market or build a pension, but they do not meet those very high hurdles.
Lord Freud
My Lords, we do not have the figures on more informal care; we do not know how many are in this age group. That is not broken down—I certainly do not have the figures to hand. I am providing the figures for the women most affected with full-time caring responsibilities.
Baroness Howe of Idlicote
Could the Minister answer the point that I was trying to make concerning the earlier period in women’s lives, when they were caring? That also will have had a huge effect on their capacity to find employment; certainly these days it is not an easy task.
Lord Freud
My Lords, I am plucking the figures slightly from my memory, but I am fairly confident that the number of women in this cohort who have already retired is 4 per cent. I know that there are arguments about how many are part time or full time and adjusting their lives, but that gives you a context for that particular issue. Of course, our concerns for the women that the noble Baroness has just described have driven us to make this amendment. That is our concern as a Government, to take away what we regarded as too harsh a provision and to offer up this amendment.
I would like to spend a little time on the point raised by the noble Baroness, Lady Hollis, about the charm of our lawyers, which she has obviously experienced rather more than I have. We have spent a lot of time with the lawyers on this issue and we have not just accepted the first or even the second proposition from them. As noble Lords will acknowledge and realise, we have spent a lot of time—many months—on this particular amendment and we are confident that there are significant levels of risk in doing it the way proposed by the original amendment tabled by the noble Baroness, Lady Greengross, which was to try to concentrate on the group of women alone. Trying to tough it out would expose us to the risk of the European Commission bringing infraction proceedings, which clearly would be unwise. If we were found in breach, we would at a minimum have to rectify the pension position for those already affected and leave the pension position for many people in limbo for several years as proceedings made their way through court. Clearly we could also be fined; the fine could be substantial and it is very difficult to put any kind of estimate on it.
My noble friend Lord German asked about future changes to the pension system. We are still considering responses to our consultation paper, which were in general very favourable to making a major reform along the lines of the single tier. We are aiming to bring forward our proposals in due course. A number of noble Lords raised the issue of the future. I am grateful for the questions asked by my noble friend Lord Boswell and the noble Baronesses, Lady Greengross and Lady Drake, about what is to happen in future. There was broad agreement in this House that increasing life expectancy needs to be reflected in the state pension age. I think this House acknowledges that the state pension age needs to rise so that we have a sustainable state pension system which fulfils its primary purpose—to provide a decent threshold income in retirement. Following our recent consultation, A State Pension for the 21st Century, we are currently considering how best to achieve this. Therefore, I urge noble Lords to agree with the Commons in their Amendments 1 and 2.
Lord Freud
That the House do agree with the Commons in their Amendments 3 to 17.
Lord Freud: My Lords, with Amendment 3 it will be convenient to consider Amendments 4 to 17.
Today we enter the final stages of an ambitious programme of legislation to transform the saving habits of working people in this country. Before we begin the debate, I pay tribute to the noble Lord, Lord McKenzie, and the noble Baronesses, Lady Drake and Lady Hollis, who throughout this detailed process have brought such value, wisdom and breadth of experience of proceedings to get us this far. Governments have benefited from a significant degree of consensus during the passage of this legislation. Our consensus has sometimes been stretched, but I hope that during this debate we will retain that consensual approach and a common goal to reshape retirement provisions fit for the next decades.
Many of my contributions to our pension debates have started with the words “Automatic enrolment”, and today is no exception. However, I stress one core feature. Automatic enrolment into a workplace pension scheme is an enduring duty: employers must put workers who satisfy age and earnings tests into a pension savings scheme and keep them in a scheme unless the individual chooses to leave. Employers may, of course, choose to close or change a scheme but, if they do, or the scheme ceases to qualify, there is a clear duty in the Bill to maintain scheme membership for all the jobholders affected by providing a replacement qualifying scheme if necessary. Employers may not induce someone to leave a scheme so that it can be closed unless they put them into another one. This is the core enduring duty.
Amendments 3 to 8 and Amendment 10 are technical amendments to make those continuity of membership provisions work as intended and make some minor technical corrections. They ensure that the automatic re-enrolment duty applies straightaway in situations where an employer, or any other third party, causes an individual to lose their membership. It also aligns this obligation to all active members irrespective of age. As a consequence we need to realign the key compliance provision in the Act that prescribes inducement with the automatic re-enrolment duty.
We also take the opportunity, with Amendments 5 and 6, to remove a redundant reference to the old style postponement provisions in the Pensions Act 2008 and amend a cross-reference in the uprating clauses which had inadvertently linked uprating to the jobholder age test rather than the automatic re-enrolment trigger. I remain grateful to the noble Baroness, Lady Drake, ably assisted by the noble Lord, Lord McKenzie, whose eagle eyes identified this mistake in Committee.
Noble Lords will recall that self-certification for defined contribution schemes was subjected to detailed consideration in this House. I am pleased that we were eventually able to reach agreement. Amendment 14 extends self-certification to employers using defined contribution schemes that have their main administration in another European Economic Area member state. EEA schemes are subject to the same European directives as UK schemes so members’ benefits should be similarly protected. We believe that putting EEA schemes on a comparable footing with UK schemes complies with our European Union treaty obligations.
Amendment 13 is minor, purely technical and consequential. It amends the title of Section 28 of the Pensions Act 2008 to reflect changes to the certification requirements introduced by Amendment 14, which extends the facility to EEA schemes.
Amendment 12 is a technical amendment which provides for a new test scheme standard for defined benefit schemes. This has been wrongly categorised as hybrid in the original clause. The new test standard does not alter the quality requirements for schemes but provides for them through the legislation relating to defined benefit schemes.
Amendments 15 and 16 are technical amendments to clarify the duty for employers with an existing defined benefit scheme to protect individuals. They align the rules on back payment of contributions when an employer moves a jobholder from a defined benefit scheme to a money purchase or personal pension scheme. Employers who have an open defined benefit or hybrid scheme may defer the automatic enrolment date for up to four years provided that the scheme remains open and the jobholder is still entitled to join it. Where this changes, the employer must enrol the jobholder into an alternative scheme and pay up to four years of back contributions. As drafted, the Act does not allow the employer to use a workplace personal pension as an alternative. These amendments fix that omission and ensure that the jobholder is not charged for the back payments.
Amendment 11 extends the reserve power in the Pensions Act 2008 to regulate to cap charges for deferred members in qualifying schemes. The current power to cap charges, should the need arise, applies only to active members who are paying contributions into the scheme; it does not apply to deferred members who have a dormant pension pot administered by the pension provider. It would not be fair to deferred members to be charged inappropriately high charges simply because they have moved jobs. Evidence suggests that the vast majority of schemes currently have low fund charges. However, savers may not understand the full impact that charges can have on their retirement pot. The risk that high charges could erode pension savings and bring pension saving itself into disrepute could increase as we make saving the default decision. The amendment provides a safety net for both active and deferred members in qualifying pension schemes. If we see charges creeping up after automatic enrolment, we will be able to intervene to set a cap to ensure that people’s savings are not eaten up by unreasonable charges. If such an intervention becomes necessary we will of course look at the impact across the pensions industry.
It is critical to the success of the workplace pension reforms that possible barriers to employer compliance are addressed before automatic enrolment starts. There is a potential overlap between the cross-border regulations, which deal with the provision of services by a pension scheme based in the UK with respect to an employee who is subject to the social and labour laws of another EEA state, and the automatic enrolment duty. This overlap could compromise the employer’s ability to comply with the duty. It can be complex and costly for schemes to accommodate pension rights acquired by individuals working in another EEA state and there is no obligation for schemes to do so. Amendment 17 provides for regulations that would exclude individuals who fall under the cross-border regulations from automatic enrolment. Without such a power we may find, when it is too late to address, that some employers will be unable to comply with the employer duties. Draft regulations would of course be subject to formal consultation and we would provide detail on the application of the exemption.
Additionally, the Pensions Regulator already provides guidance for employers and schemes covering the circumstances in which employees may be subject to the social and labour laws of other EEA member states and how this may make the employer a “European employer”. Should the Government make regulations, in practice the employer would need to take a view as to whether or not he is a “European employer” in relation to the employment of an individual and accordingly as to whether he should enrol that individual. I beg to move.
Baroness Drake
My Lords, in the consensual approach that we are invited to take by the Minister, I rise to support government Amendment 11. I am absolutely delighted and welcome the opportunity to return the compliment to the Minister in acknowledging that the Government are extending the powers in Section 16 of the Pensions Act 2008 to allow the Secretary of State to set a cap on charges to deferred members. That is significant progress, to my mind. I see that the Minister, Steve Webb, is here today, and I take the opportunity to say, “Well done”. I am taking this opportunity, too, to press him further.
As we know, with the advent of the new employer duty in October 2012, we will see millions of new savers being auto-enrolled into pension schemes. These workers will change their jobs on average 11 times over their lifetime and, in some occupations, that will be even higher. This means that, when workers leaves their job and their employer’s pension scheme, they are likely to leave a pot of pension saving that is still being administered by the pension provider but is not under the employer’s scheme. The pension pots of these deferred members, which are often modest in size, can be complex, costly and difficult to transfer and will be vulnerable to higher charges and poor governance over investment decisions.
I urge the Government, when they take the power to cap charges to deferred members, which Amendment 11 will allow them to do, not to wait to see what happens, because this is already an area that needs to be addressed. The capping or controlling of charges on deferred members by the Secretary of State should be undertaken through the microscope of the saver. If a provider cannot look after a deferred member’s pot of savings at low charges, it is for the Government to impose protection and, ideally, to facilitate the transfer of modest pension pots to NEST, where they will be looked after at a 0.3 per cent annual management charge, with very high standards of governance. Using the stakeholder cap on charges—the 1.5 to 1 per cent formula—is far too high a charge level for moderate to low income earners and should not be seen as an acceptable level for deferred members. That level of charges eats up far too much of the pension savings of low to moderate income earners. When millions of workers are automatically enrolled, the majority are unlikely actively to engage with their pension arrangements. Therefore, it is important that the Government have a very clear view of what a good pension scheme should look like and important that the Secretary of State uses the powers given under the Pensions Act 2008 to ensure that quality standards are set and met.
As to charges on pension savings, there are few barriers to entry to the market of private pension provision, and the Government need to make clear their expectations to monitor the situation to see whether those expectations are met and be prepared to respond quickly to address adverse developments. When a worker leaving a job leaves a pot of pension saving to be administered by the contract provider and is no longer in that employer’s scheme, who will exercise a duty of care in managing the worker’s investment? Who has the duty of care to ensure that the worker is not subject to high or excessive charges? This is territory within the framework of pensions reform that is much in need of further attention.
Another important area is the ability of workers who are deferred members to aggregate their different pension pots through a simple transfer process and that any charges for doing so are low or negligible. The administrative process of transfer must be made as simple as possible without significant charges being levied, and the ban on transfers to the National Employment Savings Trust should be lifted. I cannot see any gain for workers with moderate pots from that ban on transfers; I struggle to find any suggestion that it does—it can support only the industry, not the employee. I am not contradicted in that view by Paul Johnson, who was appointed by the Government to undertake the review of auto-enrolment policy. As for employers dealing with the issue of charges, transfers and the restrictions on NEST, it is not putting a burden on them. On the contrary, it will reduce the complexity they face when they are trying to do the best by their workers.
Lord McKenzie of Luton
My Lords, I thank the Minister for his explanation of this group of amendments, the helpful background he has given us and his kind words. As the Minister said, the amendments focus on the auto-enrolment provisions, and we put on record our support for the Government’s commitment to take these forward. My noble friend Lady Drake asked the question that I was going to ask, about timing. Could the Minister confirm that it is on track? I do not know whether the Minister can update us on issues around self-certification arrangements, and whether any progress has been made, but maybe that is a matter for correspondence outside the debate.
We remain unhappy with some of the changes to the scheme introduced by the Bill, particularly the hike in the earnings threshold, but now, frankly, is the time to make progress. Turning to the specific amendments, there are just a few points. Amendment 3 deals with continuity of scheme membership and achieves this by requiring automatic re-enrolment to take effect from the day after the day on which the jobholder ceases to be an active member of a qualifying scheme. However, the alternative of allowing a period of time for re-enrolment is preserved whereby the Secretary of State can allow for that period. Given the “day after” requirement, when is the alternative approach likely to be invoked? A similar point arises in connection with Amendment 7.
We support the extended protections dealt with by Amendments 4 and 8. My noble friend Lady Drake has given her welcome to Amendment 11, which has my welcome as well. She talked authoritatively about how important this issue is and about the changes happening in the marketplace. That is therefore a particularly important amendment.
We have no problems with Amendment 12, which deals with a test scheme for certain types of defined benefit schemes, or with Amendments 13 and 14, which deal with certification of schemes where the main administration is within the EEA.
A clarification on protections of back payments for jobholders enrolled into workplace personal pension schemes obviously has our support, but perhaps the Minister could provide us with a little more detail about the scope of Amendment 17, which provides a regulation-making power to exempt employers from auto-enrolment duties where a person is a European employer. What assurances do we have that employers would not be able to organise in such a way as to bring themselves within those “European employer” provisions and therefore be outwith auto-enrolment? An assurance on that point would be helpful but, subject to anything arising from these points, we are content and will support these amendments.
Lord Freud
First, I thank noble Lords for their stamina in listening to this debate on a very technical set of amendments indeed. They are about making sure that the legislation works, as the devil is in the detail. I repeat my thanks for all the help and support that I have had across the House on some of that detail. The important principle underpinning these refinements to automatic enrolment is that we ensure that individuals are preparing and saving for their retirement. Automatic enrolment will mean that 5 million to 8 million people will start newly saving, or saving more. This is a positive move, on which I know there is consensus across the House.
Turning to the specific questions, I will start with timing, which was raised by the noble Baroness, Lady Drake. She asked when the new duty for employers will come in. I am happy to confirm that automatic enrolment will begin, as planned, next year. On self-certification, which was raised by the noble Lord, Lord McKenzie, we recently finished a formal consultation on draft regulations, which are on track to be in place for next year.
On the issue raised by the noble Baroness, Lady Drake, of the deferred member charge cap, we are extending a reserve power which we have to set a charge cap for pension schemes used for automatic enrolment. This reserve power is intended to be a safety net and to allow the Government to step in and protect all members of automatic enrolment schemes from inappropriate high charges. I am sure noble Lords will agree that it is not right that members are charged higher fees just because they move jobs. We remain vigilant about charges in the pensions industry. We see the market as broadly competitive at the moment, with the majority of workplace pension schemes having annual management charges of less than 1 per cent. We expect NEST and competitive forces to keep the downward pressure on charges but this power will enable us to intervene if necessary and make sure that members are not charged excessive fees. The stakeholder group Which? has strongly supported this amendment. I thank the noble Baroness for her support on this important issue and am confident that it will gain support across the House.
The noble Baronesses, Lady Drake and Lady Hollis, raised the issue of small pension pots, which perhaps goes slightly wider than this set of amendments and on which we spent a lot of time in Committee. On average, individuals will change employers 11 times during their working lives. DWP modelling suggests that after 2017 this will lead to in excess of 200,000 small pension pots of less than £2,000 being created each year. We want to ensure that people can get control of their pensions, build up a single substantive pot and be able to purchase a good annuity. In the interim government response to the call for evidence on regulatory differences that we have published, we have committed to setting out a decision on short-service refunds and addressing small pension pots. We know that this will be difficult, which is why need to work with employers, the pensions industry and consumer organisations on tackling this. For this reason, we intend to publish the full set of proposals in the autumn and to consult widely on possible options. These will include considering whether an individual’s pension pot could follow them from job to job as they move employers. The action for this would be behind the scenes and would require little action from the individual. Perhaps it is too early to say whether this will be possible, but this is an important issue, as the noble Baronesses pointed out, and one that we need to get right.
I turn to some of the more technical issues on which the noble Lord, Lord McKenzie, sought assurances. Continuity in automatic enrolment is covered by Amendments 3 and 7 to Clause 4. They create the default position that, in continuity of scheme membership cases—where an individual ceases to be a member of a qualifying scheme through no fault of their own—an employer must automatically re-enrol the jobholder from the day after the day on which they ceased to be a member of a qualifying scheme. The clause, as amended, still allows for a period to be prescribed during which the enrolment must occur. We do not intend to prescribe a period. This is purely a precaution in case it becomes clear that circumstances exist in which it is not possible for an employer to comply within the one-day timescale.
The noble Lord, Lord McKenzie, was also looking for an assurance on cross-border provision around Amendment 17. The amendment provides for a power to make regulations. It does not change our policy on automatic enrolment. If the power is exercised, the regulations will exclude a jobholder from automatic enrolment only if they are an individual in relation to whom their employer is a European employer, as set out in regulations under the 2004 Act. An employer is a European employer only if he has worker who, by virtue of his contract of employment, is sufficiently located in another EEA state for the social and labour laws relevant to the occupational pensions of that state to apply. The risk of a jobholder being in this position is relatively small. The definition does not cover workers who are posted to another EEA state for a limited period to work in that state for their UK-based employer.
Lord McKenzie of Luton
I think the Minister said that auto-enrolment was due to start on time next year? Could he confirm that the proposed and published timetable for staging will remain as it is?
Lord Freud
My Lords, yes, I can confirm that we currently plan to move along the timetable as set out.
Lord Freud
My Lords, in discussing Amendment 18, it is convenient also to discuss Amendments 19 to 28. These amendments are about the revaluation and indexation of pensions—that is, revaluing deferred pensions at the point at which they are put into payment and indexing pensions once they are in payment. The first five amendments relate to the change to using the consumer prices index as a measure of inflation and the others are about the indexation of cash balance schemes. The changes to Clause 15 are a positive response to the consultation on the change to using the CPI as the measure of inflation. The consultation ended in March and we published the Government’s response on 16 June. There were more than 150 responses, many of which were technical and detailed.
The areas that attracted the most comments were the CPI underpin and revaluation. There were also concerns about the CPI underpin provision already there for indexation. Respondents suggested that this was too restrictive and unhelpful for corporate restructuring. Removing the CPI underpin for the revaluation of deferred pensions was not originally covered because the different ways indexation and revaluation work means that the likelihood of the CPI acting as underpin for revaluation is small. However, we have listened to the consultation responses, which indicated that even a small risk has consequences for administration and investment costs. The amendment adds a new method of calculating a revaluating addition to Schedule 3 to the Pension Schemes Act 1993. Some schemes will be able to continue calculating revaluation additions using the retail prices index. They will not be obliged to undertake additional calculations using the CPI as well.
We also made easier the application of the CPI underpin exception for pensions in payment. The test now targets whether RPI-based increases have actually been paid rather than whether the rules require RPI-based increases. The amendments also make sure that the application of the CPI underpin exception survives transfers. We do not want the possibility of a CPI underpin to become a barrier to scheme restructuring. The amendment ensures that the provision to address the underpin problem survives a transfer if the result is that the member has received RPI-based increases since the start of 2011 and will continue to do so.
I turn to Amendments 24 to 28 to Clause 17, which removes the requirements for cash balance scheme annuities to have a limited price index. Amendment 24 does not represent any change in policy; it simply makes a technical change to clarify that schemes that are or were contracted out on a defined benefit basis are still subject to indexation requirements. Amendments 25 to 28 remove the potential for confusion. They ensure that schemes that pay a pension commencement lump sum, or allow a survivor’s benefit of a set percentage of the member’s benefit, can be included in the definition of cash balance schemes and can benefit from this easement. They also ensure that the existing indexation requirements continue to apply to career average schemes or schemes that guarantee a member a pension calculated as a percentage of the lump sum. It was never the intention to exclude these types of scheme from the indexation requirement. I beg to move.
Baroness Drake
My Lords, I can see the purpose of Amendments 18 to 23, particularly the need to address the consequences of the Government’s decision to use the CPI for the statutory revaluation of pension benefits, yet not proceeding to introduce a statutory override to pension schemes whose rules explicitly provide for the revaluation additions to be calculated by reference to the RPI. I recognise that where the statutory method uses the CPI, there is an inconsistency for schemes that apply the RPI in the very infrequent event that the CPI exceeds the RPI in a particular year. In such a situation, schemes paying the RPI would, without these amendments, be faced with a statutory underpin of CPI. In effect, the rules of schemes that apply RPI would be interpreted to mean that revaluation is calculated by reference to the CPI or the RPI, whichever is the greater.
This amendment would remove that underpin requirement and allow schemes to continue to revalue by reference to the RPI, which would seem sensible and reasonable. While the Government are to be congratulated on not imposing a statutory override on pension scheme rules to apply the CPI rather than the RPI, where the rules so explicitly provide, the need for these amendments occur in part because of the open-ended decision by the Government to substitute the CPI for the RPI in the uprating of most benefits. It is with some regret that the Government did not put a time limit on that switch from RPI to CPI. There is scope for a review because I am sure that over the long term, when the economy returns to strong growth and earnings outstrip prices, and the price of key items is excluded from the indexation, the Government will need to revisit this matter.
That is particularly so for pensions, although I doubt that the Government will revisit this now. The change to the CPI from the RPI for evaluation effects a switch of assets and benefits from scheme members to scheme sponsors and does not directly impact the public deficit. None the less, it is clear that these amendments are a necessary flow-through from the Government’s decision, and I can see no reason to oppose them.
Amendments 24 to 28 are technical in nature and address matters relating to the indexing of the guaranteed minimum pension. Again, I see no reason to disagree with them.
Baroness Turner of Camden
My Lords, during our discussions on the Bill, one of the issues that raised a lot of controversy was the report that the Government intended to tell occupational pension schemes that in future they must apply the CPI rather than the retail prices index. That certainly led to a lot of opposition from people in occupational schemes. It also led to a lot of opposition from people in public sector schemes, because I gather that the Government are applying the CPI to public sector schemes instead of the retail prices index, which of course produces—currently, anyway—much larger increases than the CPI. I should therefore be grateful for confirmation from the Government that if an occupational scheme desires to continue with the RPI it will not be forced to apply the CPI, and that if it wishes to apply the retail prices index it will be able to do so, even though that is likely to produce—and will continue to be likely to produce—larger increases than the CPI.
Lord Freud
My Lords, this group of amendments cover Part 3 of the Bill. I am most grateful to the noble Baroness, Lady Drake, for her remark that the amendments are technical in nature and that she has no problem with them.
Perhaps I may pick up the point made by the noble Baroness, Lady Turner, on private occupational pension schemes. I can confirm that these underpin arrangements are about the ability of such schemes to maintain their own arrangements. There is no legislative pressure on them in that way.
(2) After section 181A of that Act insert—
Money purchase benefits: supplementary (1) This section applies for the purposes of the definition of “money purchase benefits” in section 181(1).(2) A benefit other than a pension in payment falls within this section if its rate or amount is calculated solely by reference to assets which (because of the nature of the calculation) must necessarily suffice for the purposes of its provision to or in respect of the member.(3) A benefit which is a pension in payment falls within this section if—(a) its provision to or in respect of the member is secured by an annuity contract or insurance policy made or taken out with an insurer, and (b) at all times before coming into payment the pension was a benefit falling within this section by virtue of subsection (2).(4) For the purposes of subsection (2) it is immaterial if the calculation of the rate or amount of the benefit includes deductions for administrative expenses or commission.(5) In this section references to a pension do not include income withdrawal or dependants’ income withdrawal (within the meaning of paragraphs 7 and 21 of Schedule 28 to the Finance Act 2004).”(3) In section 99 of the Pensions Act 2008 (interpretation) in the definition of “money purchase benefits” for “which are not average salary benefits” substitute “which fall within section 99A”.
(4) After that section insert—
Money purchase benefits: supplementary(1) This section applies for the purposes of the definition of “money purchase benefits” in section 99.(2) A benefit other than a pension in payment falls within this section if its rate or amount is calculated solely by reference to assets which (because of the nature of the calculation) must necessarily suffice for the purposes of its provision to or in respect of the member.(3) A benefit which is a pension in payment falls within this section if—(a) its provision to or in respect of the member is secured by an annuity contract or insurance policy made or taken out with an insurer, and (b) at all times before coming into payment the pension was a benefit falling within this section by virtue of subsection (2).(4) For the purposes of subsection (2) it is immaterial if the calculation of the rate or amount of the benefit includes deductions for administrative expenses or commission.(5) In this section references to a pension do not include income withdrawal or dependants’ income withdrawal (within the meaning of paragraphs 7 and 21 of Schedule 28 to the Finance Act 2004).”(5) In paragraph 1(2) of Schedule 10A to the Building Societies Act 1986 (disclosures about directors etc), in the definition of “money purchase benefits”, for “which are not average salary benefits” substitute “which fall within paragraph 1A”.
(6) In that Schedule, after paragraph 1 insert—
“1A (1) This paragraph applies for the purposes of the definition of “money purchase benefits” in paragraph 1(2).(2) A benefit other than a pension in payment falls within this paragraph if its rate or amount is calculated solely by reference to assets which (because of the nature of the calculation) must necessarily suffice for the purposes of its provision to or in respect of the director.(3) A benefit which is a pension in payment falls within this paragraph if—(a) its provision to or in respect of the director is secured by an annuity contract or insurance policy made or taken out with an insurer, and (b) at all times before coming into payment the pension was a benefit falling within this paragraph by virtue of sub-paragraph (2).(4) For the purposes of sub-paragraph (2) it is immaterial if the calculation of the rate or amount of the benefit includes deductions for administrative expenses or commission.(5) In this paragraph references to a pension do not include income withdrawal or dependants’ income withdrawal (within the meaning of paragraphs 7 and 21 of Schedule 28 to the Finance Act 2004).”(7) The amendments made by subsections (1) and (2) are to be regarded as having come into force on 1 January 1997.
(8) The amendments made by subsections (3) and (4) are to be regarded as having come into force at the same time as section 99 of the Pensions Act 2008.”
Lord Freud
My Lords, on 27 July 2011, the Supreme Court handed down judgment in Bridge Trustees v Houldsworth and another. This was the first occupational pension scheme case considered at the Supreme Court and dealt with the meaning of “money purchase benefit” in pensions law. This definition is a fundamental concept underpinning the design of the regulatory framework for pensions, and it is vital that trustees, employers and members are all clear about the meaning of the term.
Despite accepting that Parliament and Ministers had legislated over a number of years on the assumption that a money purchase benefit could not develop a funding deficit or surplus, the Supreme Court decided that certain benefits that could develop funding deficits or surpluses could still fall within the definition of money purchase benefit. This means that the judgment will result in some schemes being regarded as money purchase benefits under the current legislation, even if it is possible for funding deficits to arise in respect of those benefits. For example, under the judgment, even when benefits are subject to a guarantee in the build-up phase, they should be considered to be money purchase benefits, or where schemes use money purchase rights to provide a pension from the scheme itself, rather than to purchase annuities from an insurer, the pensions should be considered to be money purchase.
The judgment will place some benefits outside the scope of a wide range of legislation that was put in place to safeguard members’ benefits. Money purchase benefits are not covered by scheme funding or employer debt requirements; nor do they have access to the Pension Protection Fund or the financial assistance scheme. If the judgment stands, the members will not be protected for certain sorts of benefits in the event of the scheme not being able to pay out; yet these workers thought that their rights were protected. For example, if you get a pension from the scheme rather than from an annuity provider, you expect to continue to get that pension, irrespective of what happens to your former employer. This position has been put in doubt by the judgment and it is important to act quickly to provide clarity and certainty for those workers.
Following the judgment, the Government announced the intention to legislate as soon as possible to provide clarity for trustees, employers and members. I appreciate that noble Lords may consider it unusual for the Government to bring forward such amendments at this stage in the Bill, but we consider it necessary that we legislate to protect members immediately. The pensions industry expected this amendment, and it wants certainty so as to be able to operate and advise schemes. Indeed, the Society of Pension Consultants urged us to make an amendment to this Bill. It said:
“We can understand the government's decision to legislate in the way it intends. However, we would ask that the government passes the necessary legislation as soon as practicable, perhaps as an addition to the Pensions Bill”.
These amendments clarify the definition of “money purchase benefit”. They also take associated regulation-making powers. I take this opportunity to assure noble Lords that these powers will be subject to public consultation and the affirmative procedure—both stakeholders and Parliament will have the opportunity to scrutinise the regulations.
Law is based on words, and having a common understanding of what the law means is essential not just for law-makers but for society as a whole. If trustees, employers and members are unclear about what sort of benefits their scheme is providing, that simply produces uncertainty and confusion.
Section 181 of the Pension Schemes Act 1993 defines money purchase for the purpose of that Act. This is the core definition of money purchase benefit on which subsequent law builds. Amendment 29 amends Section 181 to restore the definition of money purchase benefit to the meaning that it was widely believed to bear before the Bridge litigation. The revised definition makes it clear that only a benefit that is calculated solely by reference to the relevant assets—or, where the benefit is a pension in payment, that is backed by a matching annuity contract or insurance policy—is a money purchase benefit.
If there is any additional form of “promise” in relation to a benefit, it cannot be a money purchase benefit. For example, if there is a guaranteed investment return in the build-up phase, that is not a money purchase benefit; or if a scheme has promised to pay a set rate of annuity that is not backed by a matching asset such as an insurance policy, that is not a money purchase benefit. It is simple; if there is a promise, there needs to be something to back it up.
A money purchase benefit is one derived solely from the relevant assets. In other words, the member gets the value of the contributions, plus the real investment return, less any administrative expenses. The previous definition stated that average salary benefits were not a money purchase benefit. This reference has been removed because, following these amendments, it is not necessary explicitly to exclude one type of non-money purchase benefit from the definition.
The proposed new clause also amends similar definitions of money purchase benefit at Section 99 of the Pensions Act 2008 and in Schedule 10A to the Building Societies Act 1986. Amendment 30 enables the Secretary of State to make transitional arrangements for specified types of schemes.
Baroness Drake
My Lords, I shall speak also to Amendment 32. The purpose of Amendment 29A is to give absolute clarity to the legal meaning of a money purchase benefit in so far as it relates to pensions in payment. As the Minister said, the Government’s Amendment 29 is addressing the consequences of the Supreme Court’s decision in Bridge and restoring the legal meaning of money purchase benefits to that narrower meaning it was understood by most observers to have before the litigation. In doing this, it is restoring what was understood to be the extent of protection to scheme members and beneficiaries when their pension benefits could face funding deficits and preserving their potential access to the Pension Protection Fund. It is the Government’s intention that a pension in payment is a money purchase benefit if its provision is secured by an annuity contract or insurance policy. I do not disagree with that intention.
My concern is that the legislation should make it absolutely clear that any annuity purchase for a pension in payment must explicitly be in the name of that member and ring-fenced for them. I am not confident that the wording of subsection 3(a) of the new Section 181B inserted by the Government’s Amendment 29, which is before us, does that. My amendment simply adds the words,
“in the name of the member”,
to make crystal clear that the annuity must be ring-fenced for that member. The Government’s view, with which I have no disagreement, is that normally pensions in payment within a scheme are not money purchase benefits as the amount of the liability of that pension is unlikely to be matched exactly by assets held by the scheme. That being the case, there will always be scope for a deficit or a surplus in the funding of those pensions in payment. The exception, which the Government’s amendment allows for and which they propose to include within the definition of money purchase benefit is pensions in payment secured by annuity. Again, I have no disagreement with that proposal.
I repeat that my concern is that, in purchasing those annuities and insurance policies, schemes might not necessarily have ring-fenced such policies for the members concerned. They may have been secured as assets of the scheme as a whole and not for the named pensioner in receipt of a pension, which would not be unusual. Should that be the case, it would mean that those with a pension in payment would not have an automatic right to those assets in the event that there was an employer default on an underfunded scheme. Members could lose out if the scheme was wound up or underfunded.
I know that the Government’s intention is that the definition of money purchase is such that members should have the benefits of these annuities ring-fenced to them, but I am concerned that the Government’s amendment still leaves room for ambiguity because it does not, to use layman’s words, nail the point that the annuity must be held in the name of the member. My amendment simply seeks to provide that nail and so adds the phrase,
“in the name of the member”.
Current legislation has allowed the Supreme Court decision to arise notwithstanding the intention of policymakers, so if we are to avoid Lady Bracknell’s descriptive distinction between two comparable events, I believe it is appropriate to tighten the wording of the definition of money purchase benefits to reduce the likelihood of a similar problem in the future.
My amendment does not question the intention of the Government’s Amendment 29. I agree with them. All I am trying to do by the deployment of a few words is to make absolutely clear that a pension in payment is a money purchase benefit only if it is secured by an annuity or insurance policy in the name of that member.
Amendment 32 confers upon the Government the power to change the definition of money purchase benefit in the future, and one can see the common sense reason for this. Having been faced with a Supreme Court decision which ran contrary to what most observers thought was the definition, it is better to reserve powers to address a simple or comparable problem should it arise in the future—and other complexities may arise. The definition of a money purchase benefit is important because money purchase benefits are not subject to the regulation designed to mitigate deficits in a pension fund and to extend particular protections to pension scheme members.
What I am concerned about is the breadth of the power conferred on the Government or the Secretary of State by Amendment 32. I am particularly concerned that it could be used retrospectively to remove access to Pension Protection Fund protection from scheme members and beneficiaries by broadening the definition of money purchase benefit. I have similar concerns in respect of people having access to the financial assistance scheme.
The Pension Protection Fund exists to offer a level of protection to members of occupational pension schemes, unless they are excluded for certain reasons, the main ones being the existence of a crown guarantee; the trustees having compromised a fund debt; and that it is a money purchase scheme.
I am sure that the Government have no intention to use the power conferred by their Amendment 32 to remove Pension Protection Fund protection from schemes or members as currently defined. None the less, it would appear that the powers extended to the Government in Amendment 32 would allow such a possibility in the future. It is not clear to me what other existing statutory provisions, if any, would overlay the Government’s ability to use these powers. Put simply: what would limit a Government’s freedom to use the power conferred by Amendment 32 in a way that meant pension scheme members and beneficiaries would lose out?
I ask the Minister, if this amendment is made to the Bill, what, if any, limits would there be on the Government’s power retrospectively to remove protections from members and beneficiaries of funded pension schemes facing deficit and/or default. In respect of the other amendments in this group, they are largely technical in nature and I see no reason to disagree or query them. I beg to move.
Lord Freud
My Lords, I pay tribute to the noble Baroness, Lady Drake, for her precision analysis in this area, which—I say this as a compliment—has had the team seriously thinking about the issues involved. I also pay tribute to the noble Baroness, Lady Thomas, and the Delegated Powers and Regulatory Reform Committee, for applying such scrutiny to the powers contained within the Bill. I trust that noble Lords are as content with the Government’s amendments, even though they have some broad powers within them, as the committee was after its consideration.
Let me turn now to Amendment 29A. The noble Baroness, Lady Drake, highlights a key question. How do we ensure that those people whose benefits are classified as money purchase benefits in payment, because their scheme has bought an annuity to match the liability, actually benefit from that annuity? The Government share the noble Baroness’s aim in laying this amendment, but the issue is how one ensures the right outcome. I have concerns that the way this amendment is designed could have desirable consequences and place an unnecessary regulatory burden on schemes.
Baroness Hollis of Heigham
I think that perhaps the noble Lord meant “undesirable” consequences.
Lord Freud
My Lords, when I look down at my notes, which perhaps I should do more frequently, I do notice that the word is “undesirable” and not “desirable”. I am most grateful that we have the record absolutely correct on this.