With this it will be convenient to discuss new clause 9—Contribution limits—
‘(1) The Pensions Act 2008 is amended as follows.
(2) omit section 70 (Contribution Limits).’.
New clause 7 relates to transfers in and out of schemes, which has been discussed before and is a concern to everyone. New clause 9 is probing, because I wanted to amend provisions relating to contribution limits somewhere in the Bill, but could not find anywhere suitable, so I proposed the new clause in this part. I am aware, however, that if it were accepted, and it amended the Pensions Act 2008, that would result in far more consequences than we intend here.
The auto-enrolment review last October recommended that the Government remove the annual contribution limit for NEST from 2017. The recommendation said that it should be clear in the legislation that that will happen, but it is not in the Bill, which is why I am trying to include new clause 9, so that we can discuss the Government’s thinking on the matter.
I would like to see the cap on contributions removed for a number of reasons. It would mean that more people will save more money for their pension, which is exactly what we are trying to achieve. That has to be good. Especially in light of our earlier discussions about the increase in the women’s state pension age and the burden on future generations, which I heard described yesterday as “intergenerational fairness”, if we are trying to encourage people to save more for their pensions, a relatively low cap would work against that. We should encourage people to save as much as possible.
The other problem with the cap for NEST is that anyone who wants to make contributions slightly above that limit would have to find another vehicle in which to put money. That would be the time when they come across the man in the shiny suit. Which? has told us that research found that 52% of people would be more put off saving by that barrier and the hassle of opening a secondary pension plan.
The cap would also make it more complex for consumers, employers and the NEST scheme. If people had a one-off bonus or another source of income that they want to put into NEST, they might breach the limit. That would make the situation more complicated for the rest of the year, and there would be extra admin hassle for employers.
I understand that there was quite a bit of pressure on the Department regarding that issue, particularly from the Association of British Insurers. I believe that a number of us have seen an e-mail from the ABI that says that the Department feels under pressure to look at the NEST contribution limit. The annual limit is designed to focus NEST on its target market of individuals who the existing industry currently finds difficult to serve. It also says that the Department is concerned that the limit will not be as effective as it could be in achieving the policy intention. The ABI says that it would like feedback. I am interested in what the Minister has to say about that, because many people are concerned. There could be thinking that a solution to that will be found in time, if not now. That is why I have tabled new clause 9.
New clause 7 is about transfers in and out. Regarding whether there should a waiting period of three months, two months, one month or no month and whether the earnings limit should be lower, many of the Minister’s reasons for not reducing the waiting period or the earnings limit were because we would end up with tiny amounts of money and it would be unworkable. However, if people have an ability to transfer in and out of NEST, all those arguments would dissipate.
My parliamentary researcher, who is from Adelaide, is always going on about her “super”. She told me earlier this week that when she was a student, she had many jobs in bars and restaurants. She has tiny pots of money from that, which have been put into her “super”. She can roll them all up and they are worth something now, whereas they would have been worth virtually nothing.
We heard earlier in the week that people move between employers about 11 times on average, and I think that will increase—there is no longer a job for life, or any guarantee that when someone goes into a career they will stay in that. People have portfolio careers, where they move from one career to another. Anything that makes it clear to people that a pension is worth having and allows them to see the pot growing must be a move towards what we are trying to achieve with the Bill.
Last year’s review recommended:
“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 transers in and pay transfers out.”
The Bill is trying to get NEST up and running. Once that is achieved, and people can see that it runs well and the industry adjusts to NEST being a player in the industry, it may be easier to make those changes.
There is resistance to NEST in the industry. It is seen as a Government-sponsored player, which will create an unfair playing field. As I said earlier, industry as a whole has been uninterested in the people and small employers we are discussing, but that does not mean that the Government should also be uninterested—in fact, those are the very people and businesses in which they should be interested. Not being able to transfer small amounts of money—NEST’s target audience are people who will have small amounts of money, given the nature of their earnings—will make that target audience think that saving in NEST is not worth while.
The fact that people will talk to each other will make it more difficult to encourage them to participate in the scheme. People will be in a pub, and someone may say that they are about to be auto-enrolled into a pension scheme, and someone else may say, “It’s not worth it. I worked somewhere for a little while and I have just seen that it is only worth this much. I wish I hadn’t done it; I could have done more with that money.” That sort of negative story will sweep through communities and work forces, and will mean that more people than we would hope opt out.
We want everyone to automatically enter the scheme. If people can be auto-enrolled and then opt out at a later date, they may later have a chat with someone who says, “It’s not worth it; I’ve got this pot from my previous employer but it is worth nothing. I would rather have had that money for Christmas.” People might start opting out, and that will put a burden on employers. I would be interested to hear what the Minister has to say on the matter. I know from what he has said previously that he is sympathetic to my point, but it is about whether there will be an announcement after the Committee has finished its deliberations, or whether we might hear an announcement now.
Both issues about NEST—which are linked—are important and I appreciate what my hon. Friend said about wanting to get answers rather than a definitive decision at this stage. The importance of NEST is, was and hopefully will be to enable people who have not had the opportunity to contribute to a good pension scheme over many years to be covered. For obvious reasons, a lot of pension providers have not been particularly interested in the customer group that we are discussing, and to a large extent one can understand that. It is not a particularly profitable activity; it is more complex administratively and the return is not particularly great. Had the industry been able to deal with that client group, no doubt it would have done so because it is always looking for new business.
I have probably said this before, but I will say it again: my experience of paying into some of the products offered by insurance companies—such as when I became at least technically self-employed within a law firm—was that the product was not very good. We need NEST, and we want to make it possible for people to get the best out of it.
I was struck by the fact that the Johnson review, which we have talked about in relation to other issues and which has been relied on by the Government, made a specific recommendation about the contribution cap. It recommended not only that we consider lifting or removing the contribution cap, but that the Government should legislate to remove it now. That is rather more specific than we might have expected, and I presume there was a good reason for thinking that it would be wise to legislate now, rather than wait to see how things work out towards 2017 and do something about it then. The review does not require the cap to be removed at this stage, but that would allow us to be clear about what will happen in the future.
As Which? and the report have said, there are administrative difficulties for employers with the cap. It might create a situation where somebody found that they were in danger of exceeding the limit in a given year and so might have to suspend contributions so that they did not exceed the limit. That is an unnecessary administrative complication, which could be avoided if there was not a cap. If someone had a higher level of earnings for a particular reason in a particular year, removing the cap would make it possible for those additional contributions to be made, because contributions are limited under the cap to £4,271, which is not a large amount.
Of course, many people who are in a position to make larger contributions, and whose employers are in a position to assist them with that, will already be in adequate pension schemes. Indeed, they will be the ones that will not even be considering using NEST. There may well be employers in the middle who do not want to set up a scheme, perhaps because they only have a few employees, but who might in any given year be paying someone slightly more than the cap.
We have spoken a lot during this Committee about the signals that are being sent to people about the nudge into a pension scheme or the nudge not to enrol. Does my hon. Friend think that a signal is being sent with the contribution limit that that is all that they need to save to get a decent pension in retirement? In reality, if someone is earning £35,000 or £40,000, to have anything like their standard of living they would need to be saving much more than the contribution limit would allow them to.
I thank my hon. Friend for her intervention. The Johnson report was concerned that the cap sends an unhelpful message to employees that that level of saving will be adequate for their future. Clearly, the report took that into account in its recommendations. It clearly has not been the Government’s intention—otherwise it would have been in the Bill—to take up that recommendation. It would be interesting to know why and what the future intentions are. Does the Minister, in principle, agree that we should remove the contribution cap when we come back to this issue in the future? How will that be addressed once the roll-out is complete and we are ready to move on to the next phase?
On transfers, there is a long history in pensions of the vexed question of small amounts of pension that are accrued in various places. I take on board the points that the Minister made in response to the previous set of amendments on looking again at whether it is desirable for people to be able to take out money on a short-service basis. In the past, it was much easier than it is now for someone to take their superannuation if they had one. It was extremely commonplace for women to do that, not so much if they were getting married, but if they were leaving employment when they had their first child. It is attractive to get a lump sum at that stage.
I thank my colleague from the Work and Pensions Committee, the hon. Member for Erith and Thamesmead, for tabling these new clauses, which will lead to an interesting discussion. Does the hon. Member for Edinburgh East agree that the fundamental issue of NEST is that it is a state-subsidised competitor in a well-established industry in the United Kingdom? We support it, because it deals with a market failure. However, some of her arguments would encroach on what is already a well-established market.
As the hon. Lady said, there is indeed market failure. The contribution cap is slightly more relevant than transfers into competition with other parts of the industry. Widespread concerns have been expressed about the market and whether it really does offer a product and a facility for the lower-paid. We would not support NEST if we did not agree that the market has failed in that respect. If people were covered by NEST but wanted to make other savings and find another product, the complications that would accrue would be unduly complex and could lead to their not sourcing such facilities. They might not have the confidence to take such action or they might decide that the effort was not worth while. Moreover, fees and charges could be affected if a person had some provision through NEST and then took up an additional provision elsewhere. Such a system is not particularly efficient for a relatively low earner and, as a result, a relatively low saver.
As for transfers, in the past people used to take the money. It was an attractive option, especially for many women at that time in the lives. However, later they had a big hole in their pension provision. People were then prevented from taking such action so easily. Having bits and pieces all over the place is not necessarily the best means of being aware of what the pension cover will be in later life or being able to access it at the time.
One problem is that people do not know what their pensions will be when they retire. The complexity of both the state pension system and occupational pensions means that money comes from different sources and has been accrued in different ways. One of the results of people changing their jobs is the different pots of money and the fact that there is no one statement to say how much they have saved. Does my hon. Friend agree that if money could be transferred in and out of NEST, people could accumulate one pot of money? There would be better clarity about what is put aside for retirement and people would know what more needs to be done if they want to realise the standard of living they are looking forward to in retirement.
I thank my hon. Friend for her intervention. I agree that it would be more straightforward for people if they could organise matters in that way. However, NEST might become an unreasonable competitor in the sector. As people’s working lives become more stable and they have an opportunity to enter a better or more consistent pension scheme not through an organisation such as NEST, they might want to take out their NEST contributions and put them into the new scheme.
As other members of the Committee get their family involved in the debate, I must say how interesting it is when something esoteric is related to ordinary people, although whether my family is ordinary is another matter. It has been seven years since one of my sons graduated, and he has not had a permanent job. I am pleased that he has not lain in bed watching daytime television because that would be extremely disappointing. He has had several different jobs, such as agency work, sometimes over lengthy periods—nearly a year in some cases. He worked for an MP for six months. He has worked in a school for the past two years, and he is about to go back into training, hopefully to become a qualified teacher. In that seven years, therefore, he has done various different jobs and through the work in the school he has had a bit of pension contribution, but only in that two-year period. If he had been accruing bits and pieces in NEST through his previous agency work, he would have had that as well, and it would have been helpful to consolidate it.
If my son achieves his ambition and not only completes his teacher training but gets a job—which is not always guaranteed, in my recent experience of people qualifying—then had he had those bits of pensions, it would make sense to bring them together. That need not be in NEST, but they ought to be brought together—he could take what he might have accrued in NEST into a teachers’ pension scheme, and bring them together in that way. So it can work in both directions.
A lot of young people are in a similar position to my son, which is quite concerning, because I worked out that at that age his father had already been contributing to a pension scheme for six years, and he has been in that scheme throughout his working life. To be in a stable job for all that time is either very boring or very fortunate, but it is a considerable difference from approaching your late 20s and being unprovided for—that is a matter of concern, which is why all the provisions are so important.
We have talked a lot in this Committee about women, and a work pattern that was perhaps more traditional for women in the past. Many of us chose to have a more varied career path, for different reasons, which were often to do with child care but not exclusively so. Such a pattern might increasingly affect not only the unqualified or less qualified but those who have attempted to get themselves on the qualified career path.
I very much support the idea of removing the contribution cap and I am interested in the Minister’s proposals, as well as in the Government proposals for transfers and in how soon it will be possible to enable people to transfer in and out of NEST, making it a much more effective vehicle for people’s future pension provision.
It is a pleasure, Mr Brady, to serve under your chairmanship this evening. The day has gone quickly! I meant this morning, but that is not a reflection on the speech of my hon. Friend the Member for Edinburgh East, but on me entirely.
A clue about the timing of the day is that we have not even had our elevenses.
And I know that all members of the Committee are looking forward to their Fry’s Five Boys at 10.30 or 11 o’clock this morning.
I thank all my hon. Friends for their contributions this morning but, in particular, my hon. Friend the Member for Erith and Thamesmead for tabling the new clauses, which are to do with the operation of NEST. With the roll-out due to start next year, it is important to let NEST get under way as currently designed, but it is also important to debate the two issues currently earmarked for the 2017 review. I support the hon. Lady in principle on both new clauses: the first would allow transfers into and out of NEST, and the second would remove the existing cap on contributions into NEST.
NEST is not currently set up to facilitate transfers into and out of the scheme. As my hon. Friends the Members for Erith and Thamesmead and for Edinburgh East said, people can end up with a number of small pension pots which, individually, are too small to buy a meaningful annuity. The Johnson review stated:
“Facilitating transfers is, in our opinion, critical to the success of the reforms. In a world where automatic enrolment makes pension saving a norm, including for low earners and people who move jobs frequently, there is a much higher risk that an individual’s pension savings becomes fragmented in a number of small pots. The inability to easily see a complete picture of the extent of pension saving could act as a disincentive to save more, and having pension saving spread into…small pots may make it more difficult for an individual to access their savings on retirement.”
Those are important points made by Johnson and his colleagues who worked on the review on making auto-enrolment work.
During the debates on other aspects of auto-enrolment, we talked at length about the average number of jobs that people hold during their working life. We heard again this morning some stories about the propensity of people to move jobs. We know that the median number of jobs is 11 and that around 25% of people will change jobs between 11 and 15 times in their working life. My hon. Friend the Member for Nottingham South has emphasised that the number of jobs is likely to increase rather than fall in the future. Of course, some people will change jobs more than 15 times. Depending on the rules of individual schemes and how long people are required to work before they can join a scheme, it is likely that low-paid and part-time employees and people who move a lot in the first five, 10 or 15 years of earning will build up pension entitlement in different ways.
Let us look at the example of a woman on £11,000 a year, which is half of women’s average earnings. With a typical defined-contribution scheme, that woman may have between £1,000 and £1,200 a year in a pot for each year in a job. If she has five or six different jobs, she could have between £1,000 and £3,000 built up in each pot, depending on the rules of her scheme.
The question is what happens to those different pots of money. Without being able to transfer them, if the woman cannot trivially commute and she is handling pots of £3,000 each, she will get something between £1 and £4 a week from each of those small pots in retirement. They are what the pensions advisory service refers to as orphan assets, because it is often difficult to turn them into pensions later. Hypothetically, a woman may end up with £20,000 or £25,000 in her NEST pot, and then have three, four or five other pots of £3,000, £2,000 or £1,000, and either lose all those small pots, or at least not be able to turn them into a pension because she cannot bundle them together and get a meaningful annuity.
I accept that NEST was designed in that way—I hear the points made by the hon. Member for West Worcestershire—to ensure that it does not unduly impact private pension schemes. Indeed, some argue that there might be an exodus of funds out of insurance company-run pension schemes, which could have a detrimental impact on employees remaining within non-NEST schemes. No one would want to see that happen, but there are real reasons, as we have discussed previously, why NEST is to be created. There is some sort of market failure, which means that the people who most need pensions are often not provided for under the functioning of the current market. Savings, even those that are too small to interest pension companies, are swept up in all that. It is in no one’s interest, whether insurance companies, employers or employees, for individuals to have many small pots of money. Data from Her Majesty’s Revenue and Customs indicate that 10 million individuals own personal pensions and annuities. Around 40% of people have £10,000 or less saved in personal pension plans, which is often insufficient to buy a meaningful annuity.
The Johnson review noted that respondents have commented that the cost of administering a pension pot of ex-employees did not vary much with the size of the pot—one respondee said that administration costs were around £15 a year, regardless of the size of the pot—and that over time, the cumulative cost would eat into the value of a small pot in a way that it does not for a larger one. Money in small pots is likely to be eroded at a greater pace than money in a larger pot. The key priority must now be to allow NEST to get under way in 2012, but I support the Johnson review’s recommendation that
“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.”
That is important, and builds on the intervention by the hon. Member for West Worcestershire that the issue is not just about money going into NEST. Transfers will be able to come out of NEST, and the money can move with employees as they move between jobs. Some of those jobs may have automatic enrolment of employees into NEST, but others may have occupational or insurance-based schemes. It would not necessarily mean money flowing just into NEST; it would mean money moving the other way as well, especially if the industry rises to the challenge of designing pensions for people with a variety of backgrounds and career paths.
I turn to new clause 9 and the cap on contributions. As my hon. Friends the Members for Erith and Thamesmead and for Edinburgh East said, the Johnson review recommended that the Government should legislate now to remove the limits for NEST from 2017, but that recommendation is not in the Bill. Will the Minister explain the decision not to take forward that specific recommendation?
As we know, contributions into NEST are currently limited to around £4,721 a year at today’s prices. That was to ensure that NEST is focused on employees with low and medium incomes. However, I accept Consumer Focus’s argument that the practical implications of the limit, coupled with the minimum contributions of 8%, could deny people on modest incomes access to NEST on the full range of their salary. Consumer Focus argues that the existence of a hard limit on contributions means that employees whose qualifying earnings fluctuate —my hon. Friend the Member for Edinburgh East made this point eloquently—and might exceed that limit may be automatically enrolled into an alternative scheme to avoid risk of non-compliance, even if the employee and employer would prefer to use NEST. The alternative is to automatically enrol them into NEST, not on their full earnings, but just on the band of earnings. Consumer Focus says that
“the only option open would be to enrol the higher-earning employee into NEST and into a second top-up scheme for earnings above the NEST cap”.
Beyond that, the cap has the potential to deter people from saving more money.
Which? research has shown that 52% of people would be put off saving more by the hassle of finding and opening a secondary pension plan if they reached their contribution limit. Overall, 70% of the people surveyed agreed that there should be flexibility about how much can be paid into NEST. Which? is making compelling arguments for removal of the cap, and indeed the intention has always been that it will be removed in 2017.
The Johnson review concluded that
“the cap is probably appropriate whilst NEST is being established and employers are making their initial choices about pension provision. However, once the reforms are bedded in, we feel very strongly that the cap should be removed to facilitate greater flexibility for savers”.
It went on to recommend that the Government legislate for removal of the cap on contributions in 2017. Had they done that in the Bill, I would have supported them, and I am sorry that they have not done so. How does the Minister expect to move forward?
I congratulate my hon. Friend the Member for Erith and Thamesmead on instigating the debate on these two new clauses.
Again, as with the last group of new clauses, I congratulate the hon. Member for Erith and Thamesmead on giving us the opportunity to discuss some important issues concerning auto-enrolment and NEST. We have had a worthwhile debate to fill the time before elevenses.
The new clauses raise two issues. The first is the rules on transfers in and out of NEST. For the record, it is not strictly true that no transfers are permitted in or out. Transfers into NEST are permitted for pension credit members, which is not-for-benefit pension credit when there is pension-sharing on divorce. Split pensions on divorce can be transferred into NEST. Transfers in are also permitted for what are delightfully called pre-vested rights when someone has not worked for an employer for long and wants to consolidate pension saving. Such transfers are allowed in limited circumstances, just as there are circumstances in which transfers out are permitted in certain situations. It is fair to say, however, that in general such transfers are not permitted under the rules.
Does my hon. Friend agree that these matters will be kept under review over the next few years? The Department may look at making transfers easier, perhaps not now, but it will retain an open mind.
Indeed. As I said a moment ago, in the autumn we plan to produce a broader document on transfers. Broadly speaking, the goal has to be to have “one big pot”, to use the phrase of the hon. Member for Leeds West. There is much rich jargon—orphan assets, stranded pots and so on—but the idea is to enable people to consolidate their pension assets, be aware of them and get best value for money. Doing that in as painless a way as possible has to be the goal.
As always with pensions, the more this issue is considered, the less straightforward it becomes. I will give one example. Suppose there was a presumption that a person’s money always followed them, and that they would gradually built up a bigger and bigger pot. What would happen if they moved from a firm with a relatively low-cost pension scheme to one with a high-cost scheme? It might be in their financial interest not to consolidate their previous pension into the new scheme, because even with active member discounts and so on the previous pension may still do better than the new one. Should there be a default system for moving, or a system of advice? We will have to wrestle with such matters, but I agree with my hon. Friend and with the hon. Member for Leeds West that ideally, the goal must be not to have lots of stranded pots, but to have one big pot, good value for money and an awareness of pension savings.
I understand that point, and in some instances, if a person has been in a good pension scheme it might make sense to leave the money in that. Does the Minister agree, however, that it would be better for people to at least have the option to either leave their money in the original pension scheme or take it with them?
Well, in general, people have that option except with regard to NEST—we will come on to that because NEST is a special case. Although people do, in general, have that option, they often choose not to use it or the amounts involved are below the limits required. Although there is no legal barrier, a scheme might refuse to accept a transfer in of a very small pot.
I am delighted that the hon. Lady now endorses the findings in the Johnson review, but we must bear in mind that its remit was quite narrow. It was about making auto-enrolment work, not about the whole pensions landscape or transfers as a whole. One of my worries about picking out a little bit from that, such as short-service refund or transfers into NEST, is that we may suffer from what I call the curse of incrementalism. We do everything with the best of intentions and fiddle with a bit of the system in a way that we think will make it better, but we do not think through the knock-on effects on the rest of the system. In our autumn paper—which I am bigging up; I know that my officials are looking forward to delivering on the promises I am making—we will try to look at the system as a whole, including NEST and its place in the wider pensions universe. We need something that works across the system as a whole and that is what I am trying to achieve.
As my hon. Friend the Member for West Worcestershire rightly pointed out, NEST is a very special creature. It would not exist if the market worked, and it has been created to ensure that when we place a duty on firms, they have somewhere to fulfil it. It is, however, a state-subsidised competitor to private enterprise, and under EU legislation we have to justify subsidising a competitor to the private sector. We justify the subsidy principally on the basis of the public service duty—NEST has to accept people for whom it will make a loss, and that is a justification for subsidy. One way we were able to give reassurance that state aid was justified was by NEST being constrained in terms of transfers and the contribution cap. One option would be to immediately lift both those things, but we would potentially face a legal challenge. I know it is not the proposition, but if we lifted those constraints straight away, at the very least we would be challenged in the EU on a state aid case, because we would essentially have subsidised a competitor with unlimited transfers in and unlimited contributions, and we would be vulnerable.
The second option suggested by Johnson is that we announce and legislate now that in five years’ time the caps will go. However, that brings me to my point about not wanting to pre-empt our wider decisions about the transfer infrastructure, not only for NEST, but for trust-based DC, occupational DC, group personal pensions, defined-benefits and so on, and about how all those interact. Rather than pick a bit out—legislate for a bit in the Bill—we want to take a broader look at the whole thing.
There is a famous internet acronym, IANAL, which stands for “I am not a lawyer”; I preface my remarks with that. However, my understanding is that the state subsidy to NEST is based on the loan being at the rate at which the Government borrow rather than at market loan rates. I understand that the loan will take the best part of two decades to pay off. Lawyers might argue that other forms of subsidy are implicit—that, for example, the regulator will mention NEST in the letter. Once we are out of the loan period, if we argue that NEST is simply another competitor, other competitors might say, “Well, you can’t mention NEST in your letters, because that’s not fair.”
In principle, my hon. Friend is broadly right. The key point is the public service duty, which, as it stands, will go on for ever. NEST will always be obliged to take anyone, including loss-making people, and it will be the only one obliged to do so. Future Governments may want to deliver the public service duty in another way. My hon. Friend is right, however, that the key point is that the loan is subsidised—that is the state aid. The quid pro quo for that is the public service duty.
NEST has a specific purpose, and benefits have arisen from the constrained environment in which it operates. The fact that it knows that it is aiming at its target market has caused it to innovate for that market in a way that the financial services industry has not. For example, because almost one in four people whom we auto-enrol will be twenty-somethings, NEST has had to think far harder than anyone else about what the right pension regime for such people looks like. We might imagine ex ante that young people would be comfortable with risk, saying, “Stick it all on Bolivian futures. I don’t care if it goes up or down because it will be 40 or 50 years before I retire and it’ll all be right by then.” But NEST has carried out a lot of market research and found the opposite; if we take money off a 22-year-old, and when they come back the actual cash amount has gone down, we have lost them. It is very damaging. Perhaps counter-intuitively, NEST’s judgment on the lifestyling and profiling of its investments is that in the early years its staff will be cautious with the investment, to get it going so that a return can be seen. Then they will go for higher-risk, higher-return before easing off again later on.
NEST has had to be constrained and focused on its target market, so it has innovated. The iPhone app and so on, focus on the new market. Because of the cap, it has had to work out how to deliver for the smallest firms, which will make up a large proportion of the number of employers, if not necessarily the total proportion of businesses. Although I have no doubt that if NEST’s chief executive, Tim Jones, gave evidence to the Select Committee, he would reflect on the constraints and frustrations that NEST faces, such constraints have had beneficial effects for society, consumers and the trust’s target market. Those have been very welcome.
Another point is that the scheme is not quite as binding and constrained as it appears. The constraint was £3,600 in the contribution limit; it is now £4,200. People might be earning £58,000 and contributing 8% above the floor, and only just be hitting the cap—obviously, if people are in schemes that put in 10% or 12%, the wage figure will come down.
Some of the Labour party’s comments have related to people on average wages, and on £30,000 or £40,000. However, when considering auto-enrolment, it is important to remember that such people are not the principal focus of the policy. When we were discussing waiting periods and thresholds, we were talking about people on £8,000, £9,000 and £10,000. For those people, the concept of putting £4,000 into a pension scheme is beyond the dreams of avarice. It is worth keeping the matter in perspective.
In thinking about the employer who is choosing which scheme to automatically enrol employees into, as most firms employ people on a variety of different wages, are we in danger of creating too much complexity for employers in saying that they should automatically enrol some of their staff into NEST but that that will not be suitable for the rest of the staff? Some employers will have to make two decisions—one for higher-paid and one for lower-paid members of staff.
I do not dispute that there is an element of truth in that, but there is a risk of overstating it because, on the whole, people on higher earnings in the firm will be more likely to have pension arrangements. From talking to the financial services industry, our sense is that many companies see themselves as partners with NEST. Although some see NEST as an upstart rival, there are quite a few others that I would describe— at the risk of being sued; no, I cannot be sued in Parliament—as the more mature players in the market, and they see NEST as a partner.
Company X might go to a firm and say, “You have existing pension arrangements for some of your workers with us. Do you want to complement that with NEST, perhaps for newer employees or lower-paid workers? Perhaps we could also progress employees from NEST into our scheme.” Having two sets of pension arrangements might therefore become more common, and that might be what firms go for to fulfil their auto-enrolment duties. It is worth bearing in mind that many people who will be auto-enrolled are those in one-employee firms or micro-firms, and those individuals are the target market.
I recognise what the Minister is saying about many pension providers seeing themselves as partners with NEST. Employers might say that for the first two years they would automatically enrol lower-paid members of staff into NEST, and the lower-paid members of staff would hope to become higher-paid members of staff and the people who have worked for the employer for a year or two would hope to continue to do so for a long period. However, because of transfers in and out, coupled with the contribution cap, there is an issue about people who are in NEST for a while and then move into an all-singing, all-dancing scheme, in that there will be different pots of money. That could be avoided if everyone went into either one or the other.
The hon. Lady risks being inconsistent. She has said that she understands the need to have caps on NEST, at least during the transitional period, but the problem that she has just described will happen, because of the policy that she supports. The idea of having a cap on NEST is not ours; it is a Labour policy, because the 2008 Act provided for a cap on NEST and a ban on transfers. I am confused about what she is now saying, because we are hearing the opposite of the arguments that we heard at the time of the 2008 Act, and it feels as if it were a Government policy.
The hon. Lady is fond of talking about consensus, and she regularly accuses me of breaking the consensus. Auto-enrolment was designed to keep employers, employees, the financial services industry and consumer groups on board, and it was a very delicately put together compromise, as she has said. Part of the deal was that the financial services industry should co-exist with a state-subsidised competitor, and the understanding was that, despite being subsidised, it would have its own market niche. Our position is that that arrangement should be kept in place during the roll-out.
I have no problem with our having a statutory duty to start a review by 2017, and I am very sympathetic to the Johnson review’s suggestion that, at that point, we should have a hard look at the issues of caps and transfers. Transfers should be seen in the round. It is not just a NEST issue; it is a much bigger issue. We shall consider transfers and publish our thoughts later in the year. A contribution cap would be very unsettling for the market. The hon. Lady regularly quotes Turner, but that report was seven years ago. If I stand up in Committee and say, on the brink of auto-enrolment coming in, that we will knock the caps off in a few years’ time, one can imagine the bedlam that would be created. We want to get auto-enrolment going now and to have a period of stability, and that is the challenge that we face.
Transfers and the cap are important issues. On transfers, I should flag that the Secretary of State already has the power, under section 71 of the 2008 Act, to amend the transfer restrictions for NEST. We are concerned that an additional power, as in new clause 7, which seems to do the same thing, could lead to confusion and ambiguity. Leaving aside the point about NEST’s core market, my principal point is that we want to look at transfers in the round and not just tweak NEST. In terms of the cap, in my judgment the focus on the target market has been right. The cap will be reviewed and we will certainly look at whether it should go. However, at this stage, we do not want to unsettle the whole process. We want NEST to focus on its target market. We want to get auto-enrolment going and we want to make it a success. Further changes to the rules around NEST probably would not help. I am grateful to the hon. Member for Erith and Thamesmead for raising both issues, but I urge her not to press the new clauses.
I thank all the Committee members who have contributed to this debate—it is important—and I thank the Minister for his reassurances. As I said at the beginning, I was quite aware that new clause 9 did far more than I ever would want it to do, but I needed to get it in somewhere so that we could talk about it. I am therefore happy not to press new clause 9.
On new clause 7, I was interested in what the Minister said about NEST being a Labour Government policy. Although the shadow Minister and I were not part of the previous Government, we are both proud that it was a Labour policy. We have said repeatedly throughout our debates that we think on the whole it is a good idea, but the point of this Committee is to try to make it the best idea it could possibly be. That is why the amendments have been tabled.
I was also interested in what the Minister said about NEST being quite innovative and about thinking things through in a different way. One of the things that came up when we visited was our assumption that a young person in NEST would automatically be in a more risky fund, and it would not matter if the fund dipped, because they would have longer for it to rise again. That is what anybody who is familiar with pensions would look at. However, the people at NEST were quite firm that it would do exactly the reverse. As the Minister has said, a young person in NEST can actually be put in a low-return, low-risk fund. The thinking is that if a 23-year-old in the fund looks at it a year later and sees that it is not doing very well because it is a high-risk fund, we will lose them for ever. The point about NEST is to get people in early to save for a long time and to encourage that attitude. When we went to NEST, it was very interesting to hear that. It shows that we must not have preconceived ideas about any of this, because it is all completely new.
I understand completely what the Minister says about state subsidy, but one of the most important things about NEST is to make sure that it does what we intend it to do not just for the sake of future pensioners, but because it is funded by Government loan. The issues that we have been talking about this morning are important, because the biggest threat to NEST is insufficient membership. If people cannot see that NEST is of benefit to them, it could have insufficient membership, which would put at risk not only the Government loan but people’s faith in the scheme in future. That is my concern, and for that reason it is important to be able to move pots of money in and out. I very much look forward to the autumn statement. The Work and Pensions Committee might report on some of these issues, so I will meet fellow members of that Committee again. I am happy not to press new clause 7 to a Division, and I look forward to the statement in the autumn, which I hope will give us some satisfaction.
I beg to ask leave to withdraw the motion.