Pensions Bill [HL]

Lord German Excerpts

Thursday 3rd March 2011 Grand Committee

Moved by

[Lord German]

26: After Clause 6, insert the following new Clause—
“Deferral period
The Secretary of State shall by regulations issue guidance to employers and jobholders explaining the rights of employees during the deferral period, including the right to opt in to the scheme during this period.”

[Lord German]

My Lords, I will not keep the Committee long, given that the Minister has, in his response to a previous debate, accepted this amendment in that he has said he will introduce a requirement for the correspondence that is sent to employees to include a statement of the rights of that employee under this provision. Therefore, the only argument that I wish to retain in this discussion is about whether the rights of the employee should appear as an item in the Bill, rather than simply relying on the important statement that the Minister has just made.

At the moment, the protection for this matter in the Bill relies entirely on proposed new Section 4(1)(b) in Clause 6(2), which says that,

“any prescribed requirements in relation to the notice are met”.

That is obviously as broad as you could get. However, the purpose of this amendment is to ensure that those jobholders whose waiting period is being enacted are informed of the rights to which they are entitled, particularly the right to opt in to the scheme as soon as they wish. I understand that this information will be provided by regulation. I am absolutely certain that that will happen, given the Minister’s commitment. However, I have always been of the view that in any Bill, where the rights of an individual are at stake, it is important to uphold those rights in the Bill itself. That means that it should be a very simple statement. It means establishing that those rights will be communicated and that there are rights to be had. It is a very important agreement, which one should have in front of an employee at the time.

I know that we have to ensure that everyone is aware of their rights, and that it is important that what is enshrined in the Bill is communicated properly. However, we must remember that this will all be very new. It will be new for employees and new for employers. The very fact that this will be enshrined from the beginning—from the date that the Bill becomes an Act—means that it is important that a signal is sent to every employer and employee that they have rights in this matter. It is important not just to have it in the Bill but to ensure that we get it right from day one. There is a great expectation that this will happen. It will be difficult for many very small employers to adjust to the changes that are coming. What I am looking for is a form of letter, with a standard set of words, which an employer can hand to their employee and that will remove any extra bureaucratic burden.

There is no additional bureaucratic burden established by this amendment, but it gives a clue as to the preparation that will be essential. If I were a small employer, having heard about this in whatever way in the coming weeks and months, I would want to know fairly quickly what I am going to have to tell my employee If an employee can say to an employer, “What about me?”, I would want to know that there was somewhere where I could download the appropriate piece of information about rights, particularly in this respect. As we wish simply to express in the Bill the rights of the individual, I beg to move this amendment.

[Baroness Hollis of Heigham]

This is an important amendment, not just for this but for all the other areas where we are looking at voluntary enrolment. I hope, therefore, that the Minister will reassure us on the employer making sure that the employee in the waiting period can voluntarily enrol into a NEST scheme before it becomes automatic. I hope that he will also reassure us that employees earning above the LEL, but below the automatic enrolment threshold will be made aware of their rights. That could involve quite a considerable number in jobs where, for example, very many women work part time; I am thinking of retail, where women might work two days a week and so on. I hope he can give us some reassurance as to how he is going to operate a nudge, where there is opt-in, as opposed to where there is auto-enrolment.

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We therefore feel that there is no need to legislate in the Bill for provision of guidance and information on waiting periods, so I urge the noble Lord, Lord German, to withdraw his amendment.

[Lord German]

My Lords, my amendment would simply have enabled the guidance to be provided. The Minister has described what will happen, so I shall avoid dancing on the head of a pin. However, anyone here who has been in any way involved in questioning Ministers will be wary of the words “we will bring forward regulations as soon as possible”. I remember “summer” turning into “late summer” and then “early autumn”. The seasons will just vanish. I wonder whether at some stage we might come back to a precise timetable for enacting the guidance. However, on the basis of the very detailed description of what will be provided, I beg leave to withdraw the amendment.

Amendment 26 withdrawn.

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Moved by

[Lord German]

27: After Clause 7, insert the following new Clause—
“Automatic enrolment date
The automatic enrolment date will be no later than a cumulative period of three months’ earnings above the threshold, whether consecutive or not.”

[Lord German]

My Lords, this is a relatively straightforward amendment to provide some certainty in a situation where an employee could have their auto-enrolment deferred more than once because they failed to reach the earnings threshold in one or more months in the three-month waiting period. Perhaps it might be sensible if I gave an example. A jobholder works for two months and their pay is above the threshold, but in month 3 their pay falls below the threshold. Then, when month 4 arrives and their pay perhaps goes back to being above the threshold, it is not clear whether that triggers a new three-month starting period or adds to the two months when it previously happened. Whether the waiting period begins again in month 4 or concludes is the key question here. Should the three months’ earnings be cumulative or consecutive?

This could be the case for many workers in the leisure and tourist industries where work is perhaps seasonal and in the catering trade where it is often related to the number of customers and people are called to work more or fewer hours according to the demand on their services. So a situation where people may not reach the threshold in one month but have reached it in the previous two months is not unlikely. It seems quite unfair if, as soon as they fall below, they have to start again. I remember somebody who formerly worked for me who then went off to train as a barrister and it took him many months to get his final qualification because he could not get to the number of dinners that he had to achieve in the right order. Every time he missed one, he had to start again from dinner number one. It seemed a strange mechanism and we do not want this archaic methodology in this Bill. I beg to move.

[Lord McKenzie of Luton]

My Lords, the noble Lord, Lord German, has raised an interesting point, which I hope the Minister can clarify. I assume that the situation is that, if you have got to month 3 and you do not have qualifying earnings, there is nothing at that point to trigger automatic enrolment. When you next have your qualifying earnings is presumably when you would be automatically enrolled. Certainly, if you had to start again, that would add injustice to something about which we are already not very happy.

[Lord Freud]

My Lords, I thank my noble friend Lord German for this amendment, which would restrict an employer to using one waiting period per worker and would ensure that automatic enrolment would take place once a worker’s earnings had reached the earnings threshold for three months, whether those three months were consecutive or not. Thus the single three-month waiting period could be accrued over a far longer period of time where the individual’s earnings fluctuate. I should take this opportunity to clarify for the noble Lord, Lord McKenzie, how it would actually work. If you had low earnings for the first two months and hit the target at the third month, you would be auto-enrolled. However, if you did not hit it in that third month, you would effectively be back to your dinner problem and have to start again. That is how it would work.

As I explained, Clause 6 introduces the concept of an optional waiting period into the automatic enrolment process. This is central to our commitment in this Bill to rebalance the administrative burdens on employers while ensuring workers’ access to pensions saving. The waiting period is designed to meet employers’ requirements by being simple and easy to understand and use. This is clearly crucial to its success. At the point at which the employer applies a waiting period, they will not be required to undertake a check on whether the worker is eligible for automatic enrolment. The employer must check eligibility at the end of the waiting period and we are keen to avoid them having to check it twice or more.

The waiting period consists of a single block of time, regardless of whether the individual’s eligibility for automatic enrolment fluctuates during that period. If the worker satisfies the automatic enrolment eligibility criteria at the end of the period, they will be enrolled into the employer’s scheme on that date. If not, the employer will monitor the worker’s status until they satisfy the eligibility criteria. At that point, the employer may apply a further waiting period if they wish. It need not be for the full three months.

We recognise my noble friend’s concern that workers with fluctuating earnings could miss out on pension saving due to the use of multiple waiting periods. While it is difficult to estimate the likelihood of this occurrence, our analysis suggests that few people are likely to have fluctuating earnings around the level that they traverse in and out of automatic enrolment eligibility. Are we, therefore, devising something very complicated for a problem that is pretty small, which is what our analysis suggests? It is also the case that, for those on sustained low earnings throughout their working life, state benefits can replace most income in retirement. Common sense suggests that it would not be rational to lever such people into private savings. It is important to remember that they will have the right to opt in at any point during the waiting period.

This amendment would add a substantial additional burden and complexity to the waiting period process and would not be easy for employers to understand and use. It would require the employer to monitor an individual’s automatic enrolment eligibility continuously throughout the waiting period and to keep a record of the period of eligibility accrued during the waiting period.

Employers requested the waiting period as an administrative easement. To make the process so burdensome would negate its value. At this stage, it is crucial that we get the reforms bedded in and that we ensure that employers find it easy to comply with these new duties. It is therefore critical that the processes are simple for employers to understand and use. In the absence of any persuasive evidence of a problem, we feel that it would not be right to introduce greater complexity and a significant burden to a process whose very purpose is to offer administrative easements to employers.

I offer noble Lords my assurance, however, that we are committed to fully evaluating the effects of the reforms and how they are delivered. As part of this, we intend to monitor employers’ use of waiting periods and the effects on workers’ savings. I urge the noble Lord to withdraw this amendment.

[Lord German]

My Lords, I am still a little confused over the explanation. I understand fully the point about somebody hitting the relevant target in the third month. However, my question was the other way round—where someone hits the target in months one and two but does not hit it in month three. In seasonal worker terms, this could happen if someone was picked up and employed in May, perhaps worked through May, June and July and found a bad—wet or something—August, for which they could not get the money in. The important issue is simplicity but also understanding. It may be that a three-month period applies, but it was not absolutely clear from the Minister’s reply when, once you have a first waiting period, the second test would occur. What if you fail to meet the criteria that he has just described in that first three-month period? You will then need to have another piece of information made available to the employee to say, “You have not quite done it but this is the way you go next”. It seems to become far more complex if you cannot have it in some way accumulatively worked out. I will obviously withdraw the amendment. However, I hope that the Minister will come back at some stage with some further explanation of the anomaly of the people who are in the position that I have described, in which they pass the threshold in months 1 and 3 but not in month 2, yet wish to maintain their position within the company.

[Lord McKenzie of Luton]

Before the noble Lord withdraws his amendment, I wish to follow up on that point. I was somewhat surprised by the answer that the Minister gave. There is a simpler process. Somebody becomes employed; they have their three-month waiting period and, at the end of the three months, you look to see whether they have qualifying earnings and need to be auto-enrolled. If they do not, presumably they are in the same position as everyone else who has been around for a long while—you continue to monitor them at an appropriate date to see whether they have qualifying earnings or if they have reached the age of 22. It will be the same for everyone. Is that not the simpler way to do it? I do not understand why there is the need to start the cycle again, which is what the Minister said. That seems to be fundamentally wrong and not the simplest route.

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[Lord Freud]

I repeat that we are committed to looking at waiting periods and there is a general duty on the Pensions Regulator to look at compliance. If we suspect any kind of systemic abuse, our aim will be to find it in our monitoring. For example, we might look at it from the other end and survey individuals, perhaps those in the low-paid environment, who are at risk. However, this is an issue that we are alive to, and this debate has made us even more so. I therefore need to thank the noble Lord for raising it.

[Lord German]

My Lords, I would normally be swayed by the persuasive eloquence of my noble friend the Minister, but the more that I ponder the issue, the more it seems to me that there are routes for escape that do not err on the side of the rights of the employee. My amendment proposes a simple solution: that, in relation to the threshold, the three months of the waiting period should be cumulative. It is as simple as that. It would then be quite easy for a jobholder who believed that they should be enrolled to prove it, because the information would be there in front of them. We are going into a cycle of repetition. On this issue, I am afraid that I am not quite as convinced as I should be by the Minister’s argument—although I am convinced that he will reflect on it further, because the discussion around the Committee has raised more questions than answers.

The whole point of the auto-enrolment process is to challenge inaction, to get people saving and to make it the right thing for everyone to do, both employers and individuals. In withdrawing the amendment, I express the hope that my noble friend will reflect on the words that have been spoken around the Committee today and perhaps give us some sense of security when he comes back with any further changes that he wishes to make to the Bill at the next stage.

[Lord Freud]

Perhaps I could just interrupt. What I have not made adequately clear, for which I apologise, is how big this problem might be. The universe of people who earn between £7,000 and £7,475 is 140,000 people, so we are talking about very small numbers. Moreover, they would have to be fluctuating at the wrong time. We could be setting up a very complicated system to look after a very small number of people. We cannot quantify this exactly but I give an order-of figure to give noble Lords a feel for it. We are talking about between 8 million and 9 million extra people going into pensions, so this may be just too much of a burden relative to the potential number of people whom we are protecting.

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[Lord German]

On that basis and in the spirit of asymmetric paternalism, I am grateful to accept the Minister’s review of this matter and his confirmation of a simple fix if one can be achieved. I beg leave to withdraw my amendment.

Amendment 27 withdrawn.

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[Baroness Hollis of Heigham]

I think that many of us would like the annual cap of £4,200 on contributions to NEST to be removed. However, I again understand the industry’s worries about losing funds under management from the better-off. I accept that a person would have to be a reasonably high earner to hit that cap of £4,200 each and every year. The amendment would simply allow the making-up of missing years—I am rather keen on making up missing years whether in the basic state pension or in NEST. The person concerned may have enjoyed a small legacy, perhaps on the death of a parent and the sale of the parent’s home. They may have had a small lottery or premium bond win. He or she may have traded down their home to somewhere smaller while in their fifties and have thought that it made very good sense to add some of the modest equity available to their pension fund as a form of saving. They may have divorced and received from it a modest financial settlement of a few thousand pounds or so, some of which they would like to put in their pension to make up for the years that they missed. I make it clear that there is no suggestion of there being any parallel employer contribution; the amendment would simply allow an employee, if they wished, to add to their pension pot. The money would not come from any other savings, nor would it be a transfer. It would be, so to speak, new money. Although I doubt that it would occur very often, being able to add to their pension pot in this way would still offer women in particular, whose financial and, frankly, personal and private lives are highly unpredictable, some extra flexibility in the way in which they build their NEST pension. I beg to move.

[Lord German]

My Lords, I want to say a brief word about Amendment 38, which is in the group. Clearly, the Johnson review looked at this issue and having weighed up both sides of the argument, recommended that the Government should proceed to legislate. The words of the recommendation were quite ambiguous. It said:

“We are therefore recommending that the Government legislate for the removal of the contributions cap in 2017”.

One could read that as recommending legislating in 2017 for removal of the contribution cap, or as recommending legislating now. Actually, the text of the Johnson review does use the word “now”—in other words, it should be part of this Bill—but because neither the Minister nor the Government are on record yet as saying why they have not chosen to follow that advice, it would be very helpful if this amendment could be probed in that manner.

[Lord McKenzie of Luton]

My Lords, perhaps I may comment briefly. I can see the thrust of my noble friend’s amendment. I remember that, when we debated the cap, we debated whether there should be an additional lifetime element as well. I think that, at one stage, we debated whether there could be a two or three-year period when one carried forward the unused amount. My recollection is that, other than the annual cap, which is as it now is, all that fell by the wayside, but the Minister may be able to update us on it.

It seems a good idea to me to be able to use the headroom in respect of unused bits, although I do not think there is anything that precludes someone who is, or might become, a member of NEST making a voluntary contribution up to the limit. The limit is not, as I understand it, an employee and an employer limit; there is a limit in respect of contributions for an individual. Certainly, for the reasons that my noble friend advances, if there were opportunities to use some headroom to get more into NEST, that would be good, so far as the removal of the cap supports the thrust of that. Again, given the consensus that was there and the existence of the cap, everything that has the potential to disturb that in the interim makes life a bit more difficult, although it would be good if it could go at the earliest opportunity.

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Moved by

[Lord German]

39: After Clause 9, insert the following new Clause—
“Deferred charges
The Secretary of State shall by regulations provide guidance on the level of deferred pension member charges.”

[Lord German]

My Lords, this amendment relates to deferred charges, and it deals with the part of the benchmarking of quality of schemes into which jobholders will be automatically enrolled.

As we have discussed on many occasions, a major segment of the workforce for whom auto-enrolment is aimed are likely to be frequent movers between jobs or, indeed, those holding multiple jobs during the year. One practice that is current in some personal pension schemes is increasing charges when people change jobs. An example of that might be where the current employee who is an active member of a pension scheme is actively contributing to a pension scheme, paying perhaps about 0.5 per cent in management charges. However, a former employee—that is, a deferred member of a scheme—is charged 1.5 per cent, which is much more than NEST will charge. Interestingly, the pension companies operating in this manner describe this as an “active member discount”, but the consumer association Which? describes it, more appropriately, as a “deferred member charge”.

These charges clearly penalise people who regularly switch employers, and it is particularly appropriate for many of the employees for whom auto-enrolment is targeted. Therefore, the concern here is that there should be a set of guidance, instructions or regulations to ensure that, in assessing the quality of schemes which may be alternatives to NEST, these issues are benchmarked appropriately.

Alongside this, there are concerns relating to the FSA proposals to allow employers to negotiate a consultancy charge with their advisers and then deduct those charges from the employee’s pension pot. The general purpose and thrust of the amendment is to guard against excessive charges and to ensure that the Government benchmark the sort of quality that they want in schemes which are to operate alongside NEST in the open market. I beg to move.

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[Lord Freud]

I thank the noble Baroness, Lady Drake, for her market insight here. I choose my words carefully. It is clear that the capping has had an effect on charges. We are concerned that the pressure on charges should be maintained. That is why we have committed to monitoring levels of charging in the marketplace as automatic enrolment is introduced. We will publish guidance on default investment options in automatic enrolment schemes later in the spring. This sets out guidance for suitable charging structures. The guidance encourages appropriate charges, which match members’ interests, and protects individuals from charges that are excessive in relation to the product they are paying for.

Let us not forget, as the noble Baroness has just pointed out, that we are introducing a major change to the pensions landscape. NEST is being set up to offer low-cost pension provision to individuals on low to moderate earnings. We expect this, as does the noble Baroness, to act as a benchmark across the pensions industry, as well as to help millions of low to moderate earners to save. We are also looking seriously at how transfers can be facilitated across the industry so that savers can shop around for better charge rates more easily. As I described in my response to a previous amendment, HMT recently held a call for evidence on early access, including a specific question on ways to improve the transfer process. The DWP, as I have already described, has recently published a call for evidence on the regulatory differences between occupational and workplace personal pension schemes. In this, we are seeking solutions to address existing rules that could impact on the success of the reforms. Those include rules on early scheme-leavers and disclosure.

We are actively seeking to identify ways to facilitate the best possible deal for savers across the areas of charging and transfers. Therefore, I do not believe that regulations to make guidance are necessary at this time. I urge the noble Lord to withdraw the amendment.

[Lord German]

I am grateful for the statement that the Minister has just made. Apart from the actions that he has described, I should be interested to know how in future you can actively promote to the companies and individuals concerned the sort of changes that the Government wish to see. I do not suggest that the DWP should set up its own confused.com-type of operation, but it may well be that we need some form of open process by which both employers and employees can see the benefits of different levels of charging by the different companies and whether there is transparency in the operation. I welcome the Minister’s statement on that and beg leave to withdraw the amendment.

Amendment 39 withdrawn.