With this it will be convenient to discuss the following: Government amendments Nos. 52 to 55.
Amendment No. 6, in schedule 4, page 43, line 11, leave out paragraph 8.
Government amendment No. 59.
Amendment No. 7, in schedule 7, page 66, line 27, at end insert—
It is a pleasure to welcome you to our morning sitting, Mr. Taylor.
The amendments will, I hope, help to allay the concerns about the treatment of contracted-out rights that have already been built up when contracting out is abolished for defined contribution schemes. Government amendments Nos. 51 to 55 insert a power to abolish or vary the rules on protected rights. This is the only area in which the Government are introducing a substantive amendment after Second Reading. Government amendment No. 59 is a separate, minor technical amendment, to correct a reference in schedule 4 to a section title in the Pension Schemes Act 1993.
Before I discuss the detail of the amendments, it may be helpful to explain a little about contracting out and protected rights. The amendments and clause 15 only relate to defined-contribution schemes, which are also known as money purchase schemes. We have already examined defined-benefit schemes.
As we have already seen, contracting out allows people to opt out of the state second pension by saving in a private pension scheme instead. People who choose to do so on a defined-contribution basis receive a rebate of their national insurance contributions. That rebate, together with any associated tax relief, is invested in the person’s pension scheme. That amount and any investment return are known as protected rights.
By contracting out, the person has forgone some or all of their rights in the state second pension scheme, so certain rules have traditionally applied to protected rights. Those rules are, first, that protected rights are invested only in certain specified products; secondly, that they are only transferred to schemes that are contracted out; thirdly, that annuities purchased with the protected rights must be calculated on a unisex basis, and fourthly, that the protected rights have to provide for a survivor benefit if a scheme member is married or a civil partner at the time that an annuity is purchased.
We recognise that those rules can complicate scheme administration and that they do not provide the flexibility for scheme members when they are choosing their annuity. By dictating that there must be a unisex annuity, we are restricting people’s ability to choose and they may have to make a choice that is not appropriate for them; that situation can apply for women as well as for men. The complexity in scheme administration is caused by the fact that the rules on protected rights do not apply to any other pension rights that are held in that person’s pension pot, so that protected rights must be tracked separately in order for providers to comply with the legislation. We recognise, therefore, that the removal of those rules would simplify the schemes for members.
We consulted on this issue in significant detail, and we had a unanimous response from the industry, which strongly supported the removal of those rules. However, we did not receive any responses from people who represented women’s interests in particular, and we therefore wanted to obtain further information from them before tabling the amendment.
Following that further round of discussions, we thought that the appropriate way of introducing this measure was in the context of the joint Department for Work and Pensions/Treasury review of the open market option for annuities. That joint review was announced in the pre-Budget report last November and one of its central aims is to ensure that people make informed choices about their annuity type and fully understand the consequences of their choice. The review will include specific consideration of the impact of removing the requirement to take out a dual-life annuity with protected rights, as well as more general consideration of the question of joint life annuities, including how partners can make appropriate choices for themselves both as individuals and as a couple; a number of suggestions have already been made as to how that can be achieved.
That review of the open market option for annuities is expected to report towards the end of the year. Therefore, amendments Nos. 51 to 55 would provide a power to abolish or vary, by regulations, the rules on protected rights following the outcome of the review. We intend to introduce regulations, once we have fully explored the potential impact of removing the rule about survivor benefits in the light of the conclusions reached by the review. Of course, we will come back to Parliament with those regulations, as any regulations made under this power will be subject to affirmative resolution and therefore they must be debated by Members of both Houses.
I hope that the Committee agrees with our considered approach. Our amendments will allow action on the rules applying to protected rights to be taken at the right time and are based on the evidence. The amendments agree in principle with amendments Nos. 6 and 7, tabled by the hon. Member for South-West Bedfordshire. So his party agrees with us about the need to make the change; we are just proposing that it should be done in the context of the wider changes on annuities, which might come forward as part of that. I look forward to the debate and I shall be interested to see whether he wants to press his amendments.
I think that I am reasonably reassured by what the Minister had to say. We were lobbied by the Association of British Insurers over contracted-out rights—also known as protected rights. The ABI feels strongly that those should be simplified further because, as it put it,
“the current rules add unnecessary complexity and cost for consumers”.
At the moment, the part of a person’s pension fund relating to protected rights has to be used in a particular way—often differently from the rest of the fund. For example, protected rights money must be used to buy an annuity based on unisex rates. When the policyholder is married or in a civil partnership, a joint life annuity must be bought.
The ABI says that
“individuals should be able to use the whole of their pension pot—non protected rights and protected rights alike—in the same way”.
It says that that will supply simplicity as well as reduce costs for consumers and providers. It would no longer be necessary to track protected and non-protected rights benefits separately. Crucially, it would also allow consumers to decide what sort of annuity is most appropriate for their own personal circumstances. The Minister said that he has been consulting on that matter, which is why he has introduced the amendments before us, rather than incorporating the provisions in the Bill as presented on Second Reading
“to take powers to enable us to remove the complex rules governing rights accrued in contracted-out defined contribution schemes, following the outcome of the review of the open market option for annuities that we expect to be completed by the end of the year.”—[Official Report, 16 January 2007; Vol. 455, c. 668.]
I am grateful to the Minister for providing the Committee with further information on that review.
As far as I can determine, the Government amendments would give them powers by regulation to simplify the current position in the way that the ABI is urging. Prior to seeing the Government’s amendments, of course, we tabled amendments Nos. 6 and 7 to schedules 4 and 7 respectively. They would remove the proposed amended requirements relating to protected rights and add to the list of repeals section 28 of the Pension Schemes Act 1993, which provides for the way in which protected rights must be used.
In a sense, our amendments merely force the pace of the Government’s apparent intentions. The Minister has confirmed those intentions, so I shall not press amendments Nos. 6 and 7.
I am grateful for the opportunity to ask some questions because this clause is extremely technical. I suspect that it will fly below many people’s radar but have a massive impact on widows, in particular, but also on civil partners, who are dependent on the main breadwinner for their pension rights. That is partly why I have raised survivors’ rights previously.
I think back to the problems of widow’s SERPS when women found out much later on that what they had assumed to be a secure income for their retirement was not, because the provisions that protected its value had been changed. There were issues about the information and the amount of time that they had. I am mindful that the Government were taken to the ombudsman by a number of MPs, including me, because our constituents had not received the information. I am pleased that the new regulations will be by affirmative resolution, as that will make us focus our attention on them. I hope that there will be very good consultation with the women’s groups as well as with the pensions industry, because although the pensions industry might understand the figures, the women’s organisations understand the human consequences of the calculations.
I hope that careful provision will be made, or that requirements will be placed on providers, to ensure that the right information is given to people when they make their pension arrangements. The information should focus on what will happen to their survivors—spouses or civil partners—so that they can make informed choices and do not find, part-way down the line when they are still working or are into their retirement, that they will not receive what they thought they would or, when the main breadwinner dies, that the survivor’s income is catastrophically changed.
I had some questions about clause 14, but I will take them up separately with the Minister. When we were dealing only with widow’s SERPS it was a very different society; now we have to ensure that the provisions are consistent for widows, widowers and civil partners. I trust that those matters will have been properly attended to so that the regulations are fit for purpose when they are introduced.
I am happy to respond to what my hon. Friend rightly said is a debate on important decisions. I reassure her that the aim of the open market review and the changes proposed is to help women and men to make better choices for themselves as individuals and as a couple, not to remove from consideration the importance of thinking about financial support for their partner. There is a bigger prize than protected rights to be achieved through the open market review, which is why the Equal Opportunities Commission is content with that approach.
Some women will not want to purchase a unisex annuity because the provision that they and their partner have means that the best financial arrangement will be for them to purchase an annuity for themselves, as individuals. The right approach is to consider what can be done to ensure that couples make effective choices. A number of suggestions have already been made; the EOC is interested in whether there can be a signed waiver, so that someone who is purchasing a single-life annuity has to show that they have consulted their partner. It would be possible to do that when the relationship is registered, although it may not be so easy if people are cohabiting, but the law may be able to cope with that situation. Other suggestions have been made, for example, people being automatically assumed to be purchasing a joint annuity unless they make an active choice not to do so.
The Government and the women’s groups mentioned by my hon. Friend, which have provided us with an excellent briefing on the subject, understand the human implications and the figures. The women’s groups are happy that the big prize should be informed choice for people to make decisions for themselves as individuals and as a couple. The provisions that the amendment would remove are very inflexible as they would require people to do something that may not be appropriate in their financial circumstances.
In conclusion, it is worth saying that the ABI will also be involved in the open market review. We have also written to the Joint Committee on Human Rights, which is content with our approach on taking this power and having the affirmative resolution later. This is the right way to take the decision—in a staged way. The bigger issue is the overall one of when people choose their annuities, and I hope that that reassures both my hon. Friend the Member for Northampton North—and the Opposition Front Benchers, whom I therefore urge to withdraw their amendments.
Amendments made: No. 52, in clause 15, page 18, line 43, at end insert—
‘“protected rights provisions” means provisions contained in, or in subordinate legislation made under—
(a) any of sections 26 to 33A of that Act, or
(b) any other provision of that Act if and so far as the provisions relate to, or otherwise have effect in relation to, protected rights within the meaning of that Act (see section 10 of the Act).’.
No. 53, in clause 15, page 18, line 44, leave out subsections (3) and (4) and insert—
‘(3) In Schedule 4—
(a) Parts 1 and 2 contain amendments which are consequential on, or related to, the provision made by subsection (1), and
(b) Part 3 contains savings relating to amendments made by Part 1.’.
No. 54, in clause 15, page 19, line 8, leave out ‘this section and that Schedule’ and insert
‘subsection (1) and Schedule 4 or any amendment, repeal or revocation of any protected rights provisions by virtue of subsection (1A).’.
No. 55, in clause 15, page 19, line 9, leave out subsections (7) to (9) and insert—
‘(7) Regulations under subsection (6) may in particular amend, repeal or revoke any provision of any Act or subordinate legislation (whenever passed or made).
(8) No regulations which amend or repeal any provision of an Act may be made under this section unless a draft of the regulations has been laid before and approved by a resolution of each House of Parliament.
(9) A statutory instrument containing regulations under this section that do not fall within subsection (8) is subject to annulment in pursuance of a resolution of either House of Parliament.’.—[James Purnell.]
‘(10) The Secretary of State must lay before Parliament no later than 31st December 2007 a report setting out how additional revenues from increasing National Insurance Contributions collected from abolishing contracting-out will be used to improve pension provision.’.
With this it will be convenient to discuss the following: Clause stand part.
That schedule 4 be the Fourth schedule to the Bill.
New clause 3—Review of the abolition of contracting-out for defined contribution pensions schemes—
‘(1) The Secretary of State shall make a statement to Parliament in each financial year after 6th April 2010 on the use of the revenue that would previously have been assigned to contracted-out rebates for defined contribution schemes.
(2) For the purposes of subsection (1) above, the statement shall cover the extent to which the revenue is assigned to promoting saving.’.
I welcome you to the Chair again this morning, Mr. Taylor. Clause 15, as most members of the Committee might acknowledge, is important not only in its own right but for the potential development of future pension policy, as it involves a significant change: the abolition of contracting-out for defined-contribution pension schemes. Amendment no. 37 asks the Secretary of State to lay a report before Parliament by the end of this year, setting out how the additional revenues from increasing national insurance contributions—collected through the abolition of contracting-out and other DC schemes—will be used to improve pension provision.
As I understand it, new clause 3, in the name of the hon. Members for Eastbourne and for South-West Bedfordshire, seeks to raise similar issues and is designed to provoke a debate about how the Government intend both to use the savings that have been made through this change and to underpin private saving in the future. There has been quite extensive debate about this among private providers in the pension arena, and significant debates both in the context of the Pensions Commission’s own report and in the Select Committee on Work and Pensions. The hon. Member for Weston-super-Mare was an active participant there and might want to make some comments on this issue.
Before touching on the substantive debate, it will be useful to get clarification on a couple of issues of detail. We have already touched on one in Committee—the costs involved in this particular change. When the Work and Pensions Committee was debating that issue a few months back, it did so on the basis of rather higher figures than the Government now seem to have for the value and yield from getting rid of the DC rebates. The figures that the Department for Work and Pensions was using for the cost of these rebates in 2003-04 seemed significantly higher than the figures being used now. The figures that were being used for 2003-04 had it that the rebate was costing £0.5 billion a year for the occupational DC schemes and £3.1 billion for personal pensions, giving a total of £3.6 billion. Some members of the Work and Pensions Committee were using figures of £4 or £5 billion in the context of the hearing, which I assume is from a previous year.
Now, the figures that the Government have supplied as part of the Bill’s regulatory impact assessment use far lower numbers. The cost of the DC rebate is given as £1.9 billion for the years 2008 through to 2011 in cash terms, while declining gently in real terms from a similar starting point. It appears, then, that the amount of money that we are talking about has roughly halved over the last few years. It would be useful to clarify whether there is a high degree of confidence in the figures that have been used and to ask Ministers to state the reasons for the big decline in the past few years. Does that simply come from the growing lack of attractiveness of the DC rebate—the point that the hon. Member for Weston-super-Mare is about to make?
Indeed, I hope that the Minister will clarify that for us. Given the eroding attractiveness of the rebates for both defined-contribution and defined-benefit schemes, one reason why it is costing the Government significantly less could simply be that more and more people are contracting back into the Government scheme. That may mean that the Government are saving money by reducing the amount of money that they are paying out for the rebates, but at the same time they are having to pay out a good deal more on the other side of the equation in the contracted-in element of the scheme. If those numbers do not balance, it will leave a big hole. I am sure that the Minister will want to reassure us on that.
The hon. Gentleman makes an excellent point, which relates to another issue that I want to come to in just a moment.
Another issue that the Minister could clarify and which is slightly more complicated is what the financial consequences of abolishing the defined-contribution rebates will be. We have some DWP estimates of that, which date back to 2006. At that stage the Government were using a much higher estimate for the potential savings from the rebate. They were using a figure of much more like £4 billion and then they had some projections for what the additional state second pension cost would be of ending the rebates,but therefore opting more people into the state second pension. They had a line which showed the savings from getting rid of the opted-out rebates and a separate line escalating rapidly over time that reflected the costs of providing the state second pension. That cost rose by 2050 so that the cost of the state second pension provision was greater than the saving from the rebate. It would be useful to have some new figures on that. I assume that these are now out of date and inaccurate in respect of the rebate savings. It would be useful to know the latest estimates for the rebate savings, which presumably are reflected in the regulatory impact assessment, and also what the state second pension projections are and how they have changed.
It would also be useful if the Minister would tell us at some stage what the net present value to the taxpayer and the Exchequer of the changes will be. He may not have those figures with him now, but they would be useful for a later debate. There is a significant dispute about what these moneys should be used for. Part of the argument is that although the Government are getting some of the benefit now of not having the rebate, they are taking on a big future commitment by increasing the state second pension expenditure.
There are other complications because there is the money on the existing Exchequer tax relief which will not have to be paid out. Therefore if we are to have a sensible discussion about this and how any money should be used, we should try to get an assessment of the net present value of this change. Will it end up as a greater burden because we are opting people back into a more expensive state second pension, or will we save money because we are getting the value of these rebates, which look as though they will save more money in cash terms for the Exchequer until about 2050? That calculation, which may be complex, is necessary to inform any sensible debate about what we should be doing as a consequences of these changes.
The hon. Members for Weston-super-Mare and for South-West Bedfordshire mentioned the fact that we are going to stick with the existing DC rebates until the year when the earnings link is restored. Sadly, we do not yet know when that will be. It could be 2012, but it could be 2013, 2014 or 2015. I assume that the Minister will confirm that the scrapping of the DC rebates could be as late as 2015. If I have got that wrong, I hope that he will take the opportunity to put it on the record. It is an undesirable aspect of the uncertainty that the Government have created on the earnings link that there will also be uncertainty about the change to the rebates.
On that point, we will keep the timing of the next quinquennial review under consideration. As the name suggests, they happen every five years, so it will be due by 2012, but an earlier review is an option. I hope that that helps the hon. Gentleman.
I am grateful to the Minister for that intervention. I am not sure whether he was saying that he will review existing rebate levels or that he is willing to review the possibility of the DC rebates continuing and the timing of their phase-out. I thought that the Government’s position was that the rebates are to be scrapped in the year when the basic state pension is linked to earnings again and that that will be sometime between 2012 and 2015. I therefore assume—I am sorry if I have got this wrong—that there is a lack of clarity on the timing of the scrapping of the rebates.
I do not accept the hon. Gentleman’s premise on our policy. Our objective is to restore the link in 2012 and our policy is that the rebate will also be abolished then. We have had a long debate on that, which I do not propose to reopen. The quinquennial review is a separate thing and sets the level of the rebate. The next one is due by 2012 but, as I said, there is always the option of doing it earlier.
Mr. Taylor, I am sure that I will get into trouble with you if I revisit our debate on the timing of the earnings link to too great an extent. However, the Minister has confirmed what I was concerned about: that if the earnings link is delayed, the provisions of the clause will be delayed with it. That is not particularly desirable. The reason why I wanted to establish that is the one given by the hon. Member for Weston-super-Mare. We know—it is set out clearly in the final report of the Pensions Commission—that the Government have not accepted the Government Actuary’s Department’s recommendations of the level at which the rebate for DC schemes should be set.
There is a useful table, figure 11, on page 25 of the commission’s final report. It compares the Government Actuary Department’s recommendations for the rebate levels for DC schemes in 2007-08 with the rebate that the Government are going to apply. Particularly for older groups, there is a big mismatch between the rebate and the level that the GAD was recommending as the break-even level for people either in their own personal schemes on a DC basis or taking state second pensions benefits. For somebody aged 60, the GAD recommendation for the rebate was 13.4 per cent., and the rebate that will be applied is only 7.4 per cent. For somebody aged 50 the GAD recommendation was 9.4 per cent. and the actual rebate 7.4 per cent. Helpfully, next to that table the commission spelt out that the implication was that
“unless individuals aged over 44 in APPs and 48 in money purchase schemes receive higher investment returns than assumed by GAD, the contracting-out rebate will not replace foregone S2P benefits.”
That is a bit of a concern and raises the question whether, at worst, there is an element of misrepresentation or mis-selling going on and whether people might in the future challenge the Government’s setting of the rebates at such a low level. The issue is particularly relevant because the Government seem to be saying, “This whole DC rebate thing isn’t really working. People have much more of an interest in just opting in to the state second pension.” Yet people will still be able to make that mistake for five, or maybe six, seven or eight years. Why have the Government decided to set the rebates at those levels? What information will be given to people, particularly those in the vulnerable groups, about the risks of not opting in to the state second pension? Why have the Government decided to maintain this slightly dangerous situation for a number of years?
Those are our preliminary statistical concerns. The bigger debate is on what the defined-contribution rebate saving should be used for. During the Work and Pensions Committee hearing, three or four different claims were made on the rebates. Although the level of rebate that people fought over to use for their own purposes has now shrunk by perhaps 50 per cent., it is quite a lot of money. A couple of billion pounds, even by my standards, is a lot of money, so it is worth asking ourselves what should happen to it.
Paragraph 4.14 of the regulatory impact assessment says:
“Against this background, contracting out for DC schemes will no longer offer the stimulus to private pension saving that the Government seeks.”
There seems to be some thinking that the DC rebates were designed to offer a stimulus to private saving, and perhaps that is an indication that that should happen in future. That was contested by Alison O’Connell of the Pensions Policy Institute, as the hon. Member for Weston-super-Mare will know, because he was involved in a lot of the questioning when she gave evidence to the Select Committee. She said:
“Contracting out was not ever intended to be as an encouragement for funded provision; it was intended to protect the existing Defined Benefit schemes when SERPS was set up”,
and as the Minister will know, the PPI was suggesting that there was therefore no rational need to put aside the DC rebate to encourage future saving. For some time the PPI has been suggesting reinvesting it in the first tier, on the basis that that might be a better foundation for encouraging saving.
The Minister will know that our view is that in future, while respecting accrued rights, we should not have a state second pension. We want a good foundation basic state pension set at a higher level than the present one. Then we want to provide a basis for people to save on top of that. It stands to reason that if we do not have a state second pension, we will not have an opt-out system, because there will be nothing to opt out of. However, in the context of the Government’s policy there are three or four views as to how the money from the DC rebates should be used. The Pensions Policy Institute was taking one of them—that the money should be invested in first-tier provision. I know that that is not the Government’s view, and I shall comment on that in a second.
If that was the first view, the second was put by a number of economists who gave evidence to the Work and Pensions Committee. They argued that it would be foolish to use any of the money to incentivise saving or improve the first tier, on the basis that all that was happening was that the Government were acquiring an obligation to spend on the state second pension, and swapping that for rebates that were designed to be an alternative to the state second pension. If that view is right—this is why I asked my slightly geekish question about the net present value of what the Government are doing—the net present value of what the Government are doing will be close to zero, because the state second pension obligations that they are acquiring will be offset by savings from the rebate. It will be interesting to know whether that is the case.
The third set of arguments seems to date back to the Government’s view, set out in the regulatory impact assessment, that the rebates are there to encourage private saving. One could argue that the more one encourages private saving in the context of first-tier provision—first-tier saving or saving through having a decent first tier—the less potential there is to end up with a large number of people on means-tested benefits, so that there is some moderation of the demands on the taxpayer of the future.
“Additional government cash flow generated from these changes should be used to increase government’s contribution to national saving: this requires either the pay down of debt, the diversion of the money into a national ‘buffer fund’, or its use to promote individual funded savings”—
“by measures to ensure the success of the”
national pensions savings scheme.
That seems to be the view that the Secretary of State has bought on behalf of the Government—perhaps not the entire Government, but certainly the Department for Work and Pensions. The Secretary of State was questioned on the issue before the Select Committee on 7 June. He said of the money that would be realised as a consequence of getting rid of the DC rebates:
“It creates extra revenue essentially for the National Insurance fund. Essentially that is how it works. What Turner said was that it would be rational and sensible to use some of that to embed and support a new pensions saving culture”.
He went on to say that a new mechanism of tax relief for the personal accounts was
“one potential way in which that investment, that saving...from scrapping the DC rebate, can be reinvested in promoting and encouraging and embedding the savings culture, and I think that would be an entirely sensible thing to do”,
“the savings that are generated from the DC rebate”
could be used
“to support the introduction of the personal cap system.”
The Secretary of State made his position extremely clear in answer to question 304, which was whether he saw himself as making a bid for the £5 billion being realised by the abolition of the DC rebate to be used in the pension system. The Secretary of State very clearly said yes. He does not want the Chancellor of the Exchequer to nab all the money from the DC rebate, although it may be too late. He was hoping to capture some of that to incentivise personal accounts.
Just to correct any misunderstanding that the hon. Gentleman may be causing by his remarks, that is exactly what we have done through the personal accounts policy, which will attract tax relief in the way that he, I am sure, understands. As he said in his previous supposition, the measure is broadly neutral. There is not a pot of money to be spent, but it needs to be taken into account when looking at tax reliefs overall. It is not part of direct pension expenditure.
I am grateful to the Minister for clarifying that, but I think that he is having that both ways. He is saying, first, that there is no money from the change, because one set of liabilities is being taken on to offset the money coming in, but he also appears to be saying that he has spent some of that money on the 1 per cent. tax relief, which will be there in the personal accounts. I am not clear whether the cost of all the changes, including the 1 per cent. that the Government are putting into the personal accounts, is zero, or whether the Government accept that there is some saving that they have already used on the personal accounts. I thought that the implication of what the Secretary of State was saying and of what the Pensions Commission was recommending was that, even on top of the things that were being done through the personal account tax incentives, there was the possibility of some additional incentives to encourage personal accounts. For example, such incentives might relate to the tax relief or to help on additional costs for smaller firms staying in the personal accounts, or might be designed to incentivise personal accounts versus other savings products. That was certainly the impression. The industry and a lot of people who are interested in the issue have been under the impression that the Department had not closed the door on using the money saved on the DC rebates for some new initiative.
That is the third option, the others being that the money is to be found in the pensions or that there is not really any money here at all. The third is that there is some money, but it should be used to incentivise saving in the personal accounts. The other, sub-view of the private savings incentives, was expressed very well by Mr. Waddingham of the Association of Consulting Actuaries, who gave some very good evidence to the Work and Pensions Committee on 17 May. In the context of levelling down, he set out his views and concerns about personal accounts and what was then called the national pension savings scheme. He said:
“NPSS is a good idea for broadening the scope of pension provision because there were always many employees who were never pensioned. What I am saying is that NPSS can in no way be an adequate replacement for those many millions of people in current occupational pension schemes, who are doing rather better at the moment, but the next generation will do very much worse in retirement terms.”
Later, he discussed his anxiety that although some bigger employers with a significant commitment to pensions may stick with their pension schemes, their DB schemes or their DC schemes, which are more generous, there is a risk, which it seems intuitively sensible to consider, that as the personal accounts are set up, many employers who are under greater financial pressure and have lower contributions to their pension schemes than the very high rates at the top of the market, or people who have DB schemes and discover that they are hugely under water, may decide to trade down to the personal account level, which would imply much lower contributions and carry an enormously higher risk.
We have not discussed the issue of the huge transfer of risk from the state, as the second pension provider, and employers, as major providers of second pensions, to individuals, many of whom will be very poorly qualified to manage that risk.
In the context of the DC rebate, Mr. Waddingham told the Select Committee:
“It would be much more beneficial, I think, to use some of that rebate to offer the good employers, say, a 1 per cent. reduction in their National Insurance if they were willing to introduce risk-sharing schemes to which they were contributing, say, 10 per cent.”
In other words, Mr. Waddingham was suggesting that some of the money should be used to give employers who are providing good second pensions an incentive to keep going rather than letting them fall to the minimum set by the Government for personal accounts. That is at least worth considering, because many employers who have acquired huge pension obligations over the past few years have not kept up with the implications of increasing life expectancy, and there is a great risk of them trading down to the personal account levels. We understand that the Government are introducing personal account pensions at a low level to avoid placing too big a burden on employers and employees, but the total amount going into the personal accounts will be very low in relation to the types of scheme to which we aspire.
Let us consider the issue in the context of the MPs’ pension scheme, which has a 27.8 per cent. employer contribution, against 3 per cent. for the personal account, which has a 10 per cent. employee contribution as against 4 per cent., which is about 4 per cent. going in from the taxpayer directly through our own pay, versus 1 per cent. in the personal accounts. We have a pension scheme that pumps about 40 per cent. of our average salary each year into a very good, defined-benefit pension. The personal account pensions, which will have much more money going into them anyway because the target audience is lower-paid people, will have much smaller elements of people’s overall income.
I am not sure that I would want savings from the DC rebates to go into advantaging personal accounts versus other forms of employer provision. If we gave incentives only to personal accounts rather than to other employer schemes, we would risk encouraging that levelling-down process. However, the Government might have good reason to be seriously concerned that many of the excellent employer schemes that we have had in this country over the past few decades will continue to be lost. They might want to think of imaginative ways in which to help good-quality employers keep good-quality schemes.
Does the hon. Gentleman have any comments on the importance of auto-enrolment? A couple of my local employers, who opened up the books on their pension schemes, said that the big problem with their company schemes was that younger people would not enrol and that, therefore, their liabilities became top-heavy. Auto-enrolment is critical in providing incentives and making the schemes work.
I agree with the hon. Lady that auto-enrolment is very important in bringing in people who have not been involved in pension schemes in the past, provided that we are not mis-selling to them because of the means-testing implications. However, that would take us into an even more extensive debate that probably would test your patience, Mr. Taylor.
Is the hon. Gentleman saying that automatic enrolment is not possible in a world in which there is any means-testing at all?
No, I am certainly not saying that. Even the PPI’s policy proposals on pensions could leave a small number of people—probably less than 10 per cent.—on means-testing during retirement. I am saying that a personal account system would be extremely dangerous if as many as half the population were to end up on means-tested benefits, especially if we do not have a proper system of advice, which becomes more difficult as the number of people in the category increases. But no doubt we will come on to that later.
We have aired some of the concerns about that issue.
The hon. Gentleman seems to be suggesting that the Government should support company schemes, which are good, but which are currently unviable and likely to close. Why should the Government do that when auto-enrolment is the critical issue in making such schemes work?
I am grateful to the hon. Lady for that point. I want to make it clear that I am certainly not inviting employers to keep open unsustainable schemes. The private sector has moved far more rapidly than the public sector in demonstrating how such schemes can be made affordable. Some good defined-benefit schemes in my constituency have made all sorts of imaginative changes. For example, some have shared the risk of longer life expectancy in order to keep the schemes going in the existing form, which employers value for providing the certainty of a final salary scheme and better levels of contribution.
We all know that when defined-benefit schemes close down and defined-contribution schemes open up there is usually an enormous disparity in the employer contribution. Even some of the best employers in my area, who had contribution rates of about 16 per cent. under their DB schemes, are cutting them to more like 7 per cent. under their DC schemes. That is the context in which we are having this debate. We will want to ensure that, as a consequence of the changes being made, we do not end up losing or undermining the very good employer schemes of recent years. That is why I think that some of the proposals put to the Work and Pensions Committee are at least worth considering. I hope that my comments will prompt some clarification on the details from the Minister and some discussion of the different savings options.
We went over quite a lot of the background of contracted-out rebates earlier this morning. Like the hon. Gentleman, I shall focus on the fact that in the regulatory impact assessment that was published in May last year, the Government confidently asserted that the abolition of contracting out for defined-contribution schemes would
“lead to an immediate cash-flow benefit from the rebate of around £4 billion in 2012/13, rising to £5.1 billion by 2050”.
That raises a major accounting issue. Figure 8.6 on page 100 of the latest regulatory impact assessment shows that the Government have slashed that amount. For both 2008 and 2009, the figure is £1.8 billion; for 2010, £1.7 billion, and for 2011, £1.6 billion. Slightly bizarrely, there is a figure of zero for the years between 2012 and 2050. Perhaps the Minister will comment on that.
The important point made by the ABI and other industry bodies is that contracted-out rebates are a major incentive for private pension saving. Not only does that system encourage people to save for their retirement but it reduces through pre-funding the state’s future pension liabilities. As well as being fair and equitable, it makes enormous sense for any saving to be ploughed back into the pension system. In theory, the money that is saved by scrapping contracting out could be used to increase the state pension or to hold down the future cost of pension provision. The Pensions Commission favoured the latter option, saying that there was a
“good argument that the extra tax revenue...should not be used to fund current pensions”.
The commission felt that the revenue should instead be used to reduce long-term pension costs.
The hon. Member for Yeovil has quoted extensively from the evidence of the Work and Pensions Committee and he is absolutely right to have done so. In its recent report, the Committee said that it
“believes that the Government should be explicit about how it intends to use the increased revenue arising from the abolition of contracting out for Defined Contribution schemes.”
The Secretary of State has undertaken that any savings should be used in one of the ways that I have described. In his evidence to the Work and Pensions Committee on 7 June 2006, he said that
“it would be entirely legitimate and sensible to use the savings that are generated from the DC rebate to support the introduction of the personal cap system.”
I shall be grateful if the Minister will confirm whether that is still the Government’s stated position. Assuming that the Government have not retreated, will he also explain in detail how he intends to utilise that significant saving for the benefit of the whole pension system?
As the hon. Member for Yeovil has helpfully set out, there is a wide range of options for the use of that money. It could, for example, provide additional support for employers, especially smaller employers. It could incentivise them to offer contributions above the default level. When we debate the relevant provisions, we will have a great deal to say about the dangers of levelling down existing pension provision as a side effect of the introduction of personal accounts.
Some of the money could be used to improve public awareness and understanding of the need to save and the incentives that are available. That point was also made by the Pensions Commission. In any event, proposed new clause 3 would require the Secretary of State to report to Parliament every financial year on how the Government have used the revenue saved by the abolition of contracting out.