Pensions Bill [Lords]

Stephen Lloyd Excerpts

Tuesday 18th October 2011 Commons Chamber

[Stephen Timms]

I could not have wished for a more effective endorsement of the case that I have put to the House. I am grateful to my hon. Friend.

The Government’s waiting period would incur significant costs through lost contributions for 500,000 employees at any one time and amounting to 7% of an average worker’s fund over a lifetime. Those losses undermine the principle of auto-enrolment and substantially outweigh the benefit from the small reduction in the annual costs to employers.

Amendments 19 and 20 would link the earnings trigger for auto-enrolment to the increase in either earnings or the lower earnings limit for national insurance. As the Minister set out earlier in his exchange with my hon. Friend the Member for Aberdeen South, the Bill will link the level of earnings at which people are auto-enrolled to the higher income tax threshold, with the level reviewed in future according to a number of factors. However, like the three-month waiting period, this measure will exclude a significant number of people from auto-enrolment. Those people will by definition be lower-paid workers, who we know already save proportionately less than others. We also know that they are disproportionately likely to be women.

Earlier the Minister touched on the aspiration that the income tax threshold will in due course rise to £10,000. As my hon. Friend said, there would be a worry if all those earning less than £10,000 were in due course excluded from auto-enrolment as a result. The National Association of Pension Funds has pointed out that that would exclude 17% of all employees and 27%—more than a quarter—of women employees. Adrian Beecroft might be pleased about that, but the Minister should not be. Pension contributions would remain payable on earnings above the national insurance threshold under the plans in the Bill. The TUC has pointed out that moving to that scenario would create a big cliff-edge, so that people would get to, say, £10,000 and suddenly find a large chunk of their earnings deducted, having previously not had anything deducted automatically. That would create a significant disincentive, which the Bill ought to avoid, to enrolment.

We have heard about the basis on which the Government intend to raise the earnings trigger. Their worry is that saving will not deliver sufficient benefits in retirement to be worth while for many people earning below the income tax threshold. However, the Government’s own report shows that most people earning around £8,000 to £9,000 a year will not be earning consistently or permanently in that range, as the Minister underlined, but will move up the income scale.

[Stephen Lloyd (Eastbourne) (LD)]

Does the right hon. Gentleman not agree that the danger of starting when incomes are too low is that the amount in the pot might be so risibly low that it would undermine the obvious advantages that auto-enrolment will deliver over the next 20 years or so?

[Stephen Timms]

The hon. Gentleman has a point—the Minister also made that point—which is that if the threshold was down at the national insurance threshold, the amounts involved could be tiny. What I am suggesting in our amendments is that the way in which the higher threshold that has now been agreed is subsequently uprated should be constrained. If it is not, a large number of people could be undesirably excluded from auto-enrolment at a time when it might be very much to their advantage to be included, particularly if the threshold goes up to £10,000.

The Minister will tell us—indeed, he already has —that people whose earnings are between the contribution threshold and the earnings trigger can opt into the scheme if they feel they are missing out. However, people have always been able to opt in; the problem is that they have chosen not to. That is why we have auto-enrolment. The point is that opt-ins have not worked. We need a step change. It is unfair to exclude people on lower wages, because they need to be part of the scheme too.

Our two new clauses would place a duty on the Secretary of State to review allowing transfers into NEST and the contribution limits on the scheme. The limits on transfers in and annual contributions were a factor in creating consensus on auto-enrolment—the Minister was right about that. They were correct at the time, and helped us to focus the scheme on where it was needed.

The Johnson review that the Government commissioned was clear about what ought to happen next. It made the point that the Government needed to review those two areas before the planned 2017 review. Paul Johnson said:

“Government and regulators should review as a matter of some urgency how to ensure that it is more straightforward for people to move their pension pot with them as they move employer, so that by the time of the 2017 review the more general issue of pension transfers has been addressed and NEST is able to receive transfers in and pay transfers out.”

The Minister suggested that to do two reviews would muddle things, but that is precisely what the Johnson review calls for, and I think that it does so with good reason. The report argues that that will be

“critical to the success of the reform”.

If this review does not occur before 2017, savers will spend years with fragmented savings in numerous pots that they are unable to combine. They will lose out on the benefits of being able to purchase an annuity on better terms as a result of having one, larger pot of money rather than several small ones. In some circumstances, they might also lose out due to higher management charges or as a result of deferred member penalties.

The Minister has offered some encouragement on this. I notice that he told a pensions conference last month of his vision that people will end up with what he described as “one big fat pot” instead of lots of little ones. However, no provision to review transfers in before 2017 appears on the face of the Bill, which means that people will continue to have lots of little pots, and his vision will remain unfulfilled.

It is right that contribution limits are in place while NEST is being established, but we should look again at whether those limits are necessary sooner rather than later. The Johnson review recommended that the Government legislate to remove the cap in 2017, which would be difficult if the review were commencing only in that year. The amendment therefore provides for a review in 2014. We remain wholeheartedly on the side of the consensus over auto-enrolment, but we believe that some changes are needed.

I shall also be listening with great interest to the speech of the hon. Member for West Worcestershire (Harriett Baldwin) in favour of her new clause 1. I was pleased that the Minister sounded well disposed towards it, although we shall need to know precisely what is going to happen to make its aims a reality. I hope that we can make progress in that area, as well as in the others that I have mentioned in my speech.