Guaranteed Minimum Pensions Increase Order 2019

Lord McKenzie of Luton Excerpts

Thursday 14th February 2019 Lords Chamber

WASPI was mentioned, a campaign that raises the whole issue of how people are informed and encouraged. The self-assessment income tax information campaign and process seems exemplary when we are being asked to pay money; however, when it is our entitlement that we want to establish, we ought to have a campaign that is just as effective and encourages just as much participation. I hope the Minister is able to explain a bit about and satisfy us on those points.

[Lord McKenzie of Luton (Lab)]

My Lords, I thank the Minister for explaining the purpose of the orders. On the face of it, the GMP issue is straightforward. As we heard, GMPs are designed to provide a minimum weekly pension broadly equivalent to the amount of additional state provision accrued if not contracted out. Has any assessment been undertaken of the value for money of the GMP system? My noble friend Lady Drake raised an important issue around the Lloyds judgment and the decision to equalise pension benefits. I believe she wanted to know what would happen to the guidance and how soon it could be forthcoming. Is it a question not of the GMPs themselves generally having to be made more equal but, rather, of other components of the package?

On auto-enrolment, there was a brief but good debate in the Chamber—the contributors being women—the main thrust of which, not unreasonably, was the role of women. We praise auto-enrolment but all too often overlook the fact that it still has a job to do. I could recite the roll of honour of those who made auto-enrolment happen, but you know who you are.

Specifically, the legislation requires that the Government do two things: renew and, if necessary, amend the upper and lower thresholds of the qualifying earnings bands; and review the level of the earnings trigger, adjusting for roundings where appropriate. As the Minister explained, the order proposes to freeze the latter at £10,000 but align the former with the lower and upper earnings limits for national insurance purposes. This widens the earnings band by some £3,500.

The supporting analysis for this included a DWP review document of December 2018, which sets out the three principles adopted for the review. Subject to challenge from my noble friend Lady Drake, those principles are: will the right people be brought into pension saving; what is the appropriate minimum level of saving for people who are automatically enrolled; and are costs and benefits to individuals and employers appropriately balanced?

As for raising the qualifying earnings band to the UEL, this increases total pension savings by £179 million, employer contributions by £68 million and employee contributions by £85 million. Retaining £10,000 as the earnings trigger represents a real-terms decrease, which brings an additional 40,000 individuals within the target population. According to the DWP analysis, of that 40,000 some 75% of the additional savers are estimated to be women.

How have the Government made the judgment that costs and benefits to individuals and employers are appropriately balanced? What are the tests? The above apart, what specific additional factors have influenced the proposal before us today? Subject as always to the Minister’s reply, we have no difficulty in supporting the proposals in the order.

I was pleased to hear what the Minister said on tax relief and trying to address the thorny issues of relief at source and net pay arrangements. These issues have been long outstanding, certainly over more than one Government.

I am conscious that we are addressing these issues in the wake of the 2017 review, which involves a wider focus on auto-enrolment. It is also at a point where most of the transitional introductory phases have been accomplished. March 2018 saw staging completed for small and micro employers, while minimum contribution levels rose to 5% in April last year and are heading for 8% this April. Can the Minister say something about re-enrolment and opt-out levels?

As that review identified, despite its success, individuals are still not saving enough. An estimated 12 million are undersaving for their retirement and some 5.7 million are mild undersavers. The broader review, Maintaining the Momentum, charts a path for the future that will help to address some of the shortfall. Its recommendations include: reducing the lower age limit from 22 to 18; calculating pension contributions from the first pound earned; removing the lower earnings limit; and working to increase saving among the self-employed. These may be matters for another day but, like my noble friend, I do not see why they have to wait until the mid-2020s. Is the Minister satisfied with this framework?

Nevertheless, we continue to be enthusiasts for auto-enrolment in one of the most important public policy initiatives of recent times, bred of a consensus.

[Baroness Buscombe]

My Lords, this has been an important and helpful debate and I will do my best to respond to as many questions as possible. I thank all noble Lords who have spoken in support of automatic enrolment. It was a cross-party initiative. It seems only five minutes ago—but it was a year—that the noble Lord and I were debating this subject in very similar terms. There is support for auto-enrolment, which is a success story, but we are never complacent. There is always more to do to improve the system.

I shall start with questions on the guaranteed minimum pension. I thank the noble Baroness, Lady Drake, for giving me early notice of her question about the recent Lloyds Bank case. That case endorsed the Department for Work and Pensions’ long-held position that schemes must equalise for the effect of inequalities caused by guaranteed minimum pensions. The principle of equal pensions was established by the European Court of Justice in 1990. The requirement on schemes to equalise is not a new cost; they have been aware of it and should have been planning for it for many years. My department has put forward a method that schemes can use to equalise pensions which, because of its “once and done” nature, should limit costs resulting from additional administration requirements. The department will provide guidance in the near future for schemes wishing to use the method upon which the department consulted in November 2016. The Department for Work and Pensions intends to make further changes to the guaranteed minimum pension conversion legislation to facilitate the methodology on which we consulted. We are looking to make those changes as soon as a suitable opportunity presents itself. The representative beneficiaries in the Lloyds case sought leave to appeal on two points of the judge’s decision concerning the methodology favoured by them and the requirement to provide back-payments. Leave to appeal was refused, as I am sure the noble Baroness knows.

The noble Lord, Lord McKenzie of Luton, asked about the assessment of the guaranteed minimum pension system. I am unable to answer a couple of those questions and will write to him. Guaranteed minimum pensions were abolished in 1997, but those which accrued before that time must be honoured by schemes which had contracted out while GMPs were accruing.

On auto-enrolment uprating, the noble Lord, Lord McKenzie of Luton, asked why the Government do not tackle the inequality in the tax system which means that individuals automatically enrolled into a pension scheme use net payment arrangements or are losing out on tax relief. My noble friend Lady Altmann is not in her place but I know she is particularly concerned about this. The Government recognise the different impacts of the two systems of paying pension tax relief on pension contributions for workers earning below the personal allowance. The Government will look at the current differences and explore how to make the most of any new opportunities to balance simplicity, fairness and practicality. The Department for Work and Pensions has worked and is working with the Pensions Regulator to issue guidance to highlight to employers the differences between the NPA and RAS schemes and the potential disadvantage for low earners who are not eligible for tax relief if their employers opt out of NPA schemes.

The noble Lord also asked how many individuals have opted out. A total of 9% did so during the implementation of auto-enrolment. The 2018 evaluation report showed initial evidence of opt-out rates having fallen since the programme was fully implemented. Of course, the department will continue to monitor re-enrolment.

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[Lord McKenzie of Luton]

I am sorry to interrupt the Minister. My specific question on that point was about the obligation to re-enrol people after a period.