Pensions Bill

Part of the debate – in the House of Lords at 9:30 pm on 2 July 2008.

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Photo of Lord McKenzie of Luton Lord McKenzie of Luton Parliamentary Under-Secretary, Department for Work and Pensions, Parliamentary Under-Secretary (Department for Work and Pensions) (also in the Department for Communities and Local Government) 9:30, 2 July 2008

I thank the noble Baroness for these amendments, which give me the opportunity to explain our intentions on how costs in relation to the scheme will be charged. I hope that it is clear from our earlier debate that our intention is for the personal accounts scheme to be self-financing in the long term, such that its costs will be met from membership charges. Paragraph 19 of Schedule 1 simply enables the trustee corporation to fulfil this policy aim by allowing it to charge to the scheme any costs that it incurs in relation to the exercise of its functions. Amendment No. 112W would require, rather than allow, the corporation to charge the scheme for the costs that I have just outlined. However, given the clarity of our intention that the scheme should be self-financing, I do not see the need to go beyond the clause's current wording.

Although the scheme will be self-financing in the long run, there will inevitably be a period during its early years when its income from membership charges will be insufficient to recover its costs, as the noble Baroness acknowledged. This stems from the fact that it will have to bear set-up costs before it can open its doors to members and that it will need some time after that before its revenues grow to a sufficient scale.

It is not clear whether the purpose of Amendment No. 112WA is to ensure that the scheme would not have an operating deficit for more than two years running. If so, this could lead to unreasonably high charges for members in the early years of the scheme. It could adversely affect members' income at retirement and potentially lead to high levels of opt-out at the very time when we will most need to establish the confidence of a group of people, many of whom will be saving in a pension for the first time.

It is vital that we give the delivery authority the time and flexibility that it needs to develop a funding strategy that achieves the best balance between the scheme's initial level of charges and the time that it takes for the scheme to become wholly self-financing. I hope that it is also clear that one of our guiding principles in developing the scheme's funding strategy will be to ensure that the scheme is not unfairly advantaged. This means requiring the delivery authority to identify the costs that it incurs in relation to implementing the scheme and charging them to the trustee corporation so that they are recouped through members' charges.

I therefore find myself agreeing with the principle that appears to lie behind Amendments Nos. 112X and 113Q, which is that any costs incurred by PADA in relation to the establishment of the scheme should be recouped from the scheme through member charges. However, just as it seems fair that members should meet the costs of establishing the scheme, it would be unfair to ask them to meet those costs that do not directly relate to it, particularly those costs arising from the delivery authority's continuing role in providing advice on the commercial and operational implications of the Government's reform programme.

I do not think that it is the amendment's intention to pass such non-scheme costs on to members, but it is important to be clear about such matters. However, my response to the amendment is to make it clear that primary legislation is not required to achieve the noble Baroness's aims. Instead, we will place a requirement on the delivery authority to separately identify costs relating to the set-up of the scheme through the framework document that exists between my department and the authority. That document describes the respective duties, roles and relationships between the delivery authority and my department, and will be updated to reflect PADA's expanded role. The framework document will be in the public domain, with copies placed in the Libraries of both Houses and on the authority's website.

A lot has been said about whether the Government intend to put the scheme at a commercial advantage through a subsidy. However, less has been said about the commercial disadvantages that it will face due to the policy goals that we are asking it to meet. As well as being restricted to a particular segment of the market, it will have a public service obligation to accept into the scheme workers whom the current market finds commercially unviable. This means that the scheme will have to provide accounts to individuals where it will not recover the costs of doing so. In the long term, the scheme's scale will enable it to do this as part of its normal business while delivering low charges to members and being self-financing, but in the short term, prior to achieving this scale, the obligation could make it more challenging to bridge the mismatch between early years costs and revenues.

These obligations may ultimately mean a short-term level of charges that undermines both the scheme's policy goals and its ability to build the scale that it needs to be viable in the long term. If this is the case, it would be reasonable for the Government to consider whether it was in the public interest to compensate the scheme in some way for the burdens placed on it. This concept is recognised in European state aid rules, whose purpose is to prevent anti-competitive behaviour, while recognising that there may be cases when it is right to compensate a body for performing a public service obligation. These rules are very explicit: it is possible for the state to recognise only the cost of imposing a public service obligation; it is not possible to go any further. In other words, it is possible to ensure only that the personal accounts scheme is not disadvantaged by its public service obligation; it is not possible to tilt the playing field in its favour, nor would we want to do so. We do not yet know whether any such support will be necessary. The authority needs to complete its work on scheme design and scheme cost and engage in dialogue with potential suppliers before the parameters of scheme financing are known in detail.

I am conscious that this has been a rather lengthy explanation, but this is an important subject, around which I am sure that we will continue to have discussions. I hope that I have at least put enough on the record at this stage to help the noble Baroness.