My Lords, I shall also speak to the other government amendments in the group. Ministers and officials have held a series of meetings with stakeholders over the summer to discuss qualifying earnings and, in particular, the impact on employers using money purchase schemes.
In response to the concerns raised and debated in Committee we have tabled a group of government amendments that together make clear that employers may meet the test on the basis of an assessment of the value of contributions paid into a scheme over an annual period regardless of the method by which these contributions are calculated.
This enables employers to assess the flow of contributions over a whole year and avoid any difficulty created by irregular payments if the assessment were done on a monthly basis, for example in a month when bonuses are paid. In effect, employers and their schemes will be able to smooth the flow of contributions into workplace pension saving over the course of a year while ensuring that all members receive the minimum standard. These amendments achieve the use of an annual assessment by making three broad sets of changes.
Amendments Nos. 1, 17, 18, 19, 20, 24, 26, 29 and 30 relate to the pay reference period that may be prescribed in relation to the money purchase qualifying test. Pay reference periods are used to determine the value of qualifying earnings for different purposes in the Bill, including for the purposes of assessing contributions in money purchase schemes. Stakeholders initially raised concerns that the test would require minimum contributions to be made every week or month depending on when the jobholder was paid. They feared this would mean a scheme would fail to qualify in periods when irregular payments such as bonuses were paid, even where the worker received contributions higher than the minimum in all other periods.
Taken together the amendments make it clear that regulations can require different pay reference periods for the different purpose in the Bill. They also clarify that the values of qualifying earnings in Clause 13 are expressed annually. This means that we can set the pay reference period for assessing the contributions required into a money purchase scheme at one year.
Amendments Nos. 13, 22, 34 and 35 address the risk highlighted by stakeholders that the reference to scheme rules in the quality test might be narrowly interpreted. Contribution arrangements can be contained in a variety of forms of scheme documentation such as the member information pack. A specific reference to scheme rules, if interpreted too narrowly, could drive an employer to undertake costly amendments to the founding rules of a scheme.
Amendment No. 22 therefore removes any confusion that the contribution requirements have to sit in a single "scheme rules" document. This amendment makes clear that, provided the scheme requires the minimum contributions in respect of the member, it does not matter if this requirement arises by virtue of the scheme rules or from any other form of scheme documentation. Amendments Nos. 13, 34 and 35 are for consistency with Amendment No. 22.
Amendments Nos. 23, 25, 28 and 31 seek to address the concern of stakeholders that the wording of the quality requirement could be interpreted to force employers to replicate the minimum contributions formula of 8 per cent of qualifying earnings into their scheme documentation. The amendments therefore confirm that a scheme can use any formula for calculating pension contributions or any definition of pensionable pay provided the actual value of contributions required by the scheme is equal to or higher than the value of 8 per cent of qualifying earnings. This makes clear that employers with money purchase schemes will not be obliged to adopt the same method for calculating contributions as is used to express the minimum contribution requirement. Amendments Nos. 27, 51 and 67 are consequential to those dealing with pay reference periods. They ensure that the definition of "tax year" where it is used in Part 1 is clear.
When taken together, these amendments will enable the overwhelming majority of employers who already provide a headline contribution rate of 8 per cent to meet the test using their own definition of pensionable pay without the need for any changes. Departmental analysis shows that 98 per cent of the members who currently receive total contributions of 8 per cent and 3 per cent employer contributions under their DC scheme today will meet the test. We believe the annual equivalence assessment provided for by these amendments addresses the concerns raised by stakeholders at and around Committee stage.
Over the summer, stakeholders articulated further concerns and, as a consequence, I recognise that some do not feel that these amendments go far enough. However, we are still working with them and looking at further options. We need to be satisfied that any further options do not have an adverse effect on pension outcomes for individuals and do not introduce unnecessary additional administration. I believe that some of the remaining concerns of the stakeholders have been reflected in the amendments that have been tabled by the noble Baroness, so I will give way at this point to enable her to speak to her amendments. I will comment further when I make my winding-up speech. I beg to move.
My Lords, I have Amendments Nos. 21 and 32 in this group, as the Minister said. They also address qualifying earnings, but from a slightly different perspective from the government amendments. We are content with the government amendments, but we believe that they do not go far enough, as the Minister implied, to resolve the issues that remain about qualifying earnings.
Let me say at the outset that we recognise that during the summer the Government remained in dialogue with the organisations that have expressed concern about qualifying earnings and the way they are worked out in the Bill. Those organisations include the ABI, the CBI, the Institute of Chartered Accountants, the Society of Pension Consultants and the NAPF. We had also understood that dialogue was continuing, though I gather that last weekend's reshuffle—which fortunately did not involve the Minister—may have caused some delay. I hope that the Minister can confirm that discussions will now continue in the search for a satisfactory solution.
When we discussed these issues with the Minister last week—I thank the Minister for the time that he made available during the Recess for those discussions—we recognised that further discussions with the industry participants were both necessary and desirable. That meant that matters would not be resolved by Report stage and would have to remain open until Third Reading. I hope that the Minister will confirm that the Government accept that further amendments on this subject can come forward at Third Reading. Neither of us can predict what those amendments might contain or indeed which side of the House might move the amendments. On that basis—I hope that the Minister will confirm that it is agreed—I have grouped my amendments today with the government amendments. I regard my amendments as probing for today.
Before I explain the amendments, I should like briefly to outline the nature of the concerns with qualifying earnings. The Bill's approach to the calculation of pension contributions uses two concepts which most, if not all, existing schemes do not use. First, the Bill uses in-year banded earnings. Banded earnings are not unknown in existing pension provision, but I am advised that banded earnings for in-year calculations are never used because of the very complications that the Bill creates. Where banded earnings are used in existing pension arrangements, at present they operate off previous years' data and hence are not affected by income variation in the year.
Secondly, the Bill uses a definition of qualifying earnings that includes the volatile elements of earnings that most workplace pension schemes avoid; in particular, bonuses. Again, existing schemes tend to use salary bases, which are stable and predictable, which is why bonuses are rarely included in earnings, at least in modern schemes. If employees have income volatility in-year, there will be peaks and spikes in contributions as calculated under the Bill, which is where part of the problem arises.
Taking those two factors together—in-year banded earnings plus variability—the Government have created a system that is likely to produce a variance between the Bill's minimum calculations and the employer's scheme calculations. Of course, in many cases, the employer's scheme will be more generous than the Bill's minimum, because few private schemes stop at the earnings level that the Bill uses, but for some employers there will be a negative variance. That is not in dispute between the Government and the various bodies that have been making the case. I understand that the number of employees involved is relatively small; possibly 30,000 at most. Putting that in context, the Government's regulatory impact assessment puts the number of people enrolled in workplace pension schemes following implementation of this Bill at between 9 million and 11 million people. Some 0.3 per cent of employees might have lower contributions than the calculation in the Bill. The question that the Government need to answer is whether they believe that requiring calculations to work for every employee down to the last penny is the right approach.
It is easy to argue, as the TUC has done, that every employee must be entitled to the minimum set out in the Bill, but there is another side to the coin, which could be much more damaging to employees generally—namely, levelling down. We are told that, whatever the early research on employee attitudes shows, as the details of the implications of the Bill have become clearer, there has been a hardening of view about the administrative pain that employers would be prepared to shoulder in terms of continuing with their existing provision. The economic climate is playing a part in influencing employer attitudes to the sustainability of costs and other burdens.
At present, employers prepare their payroll data for their businesses, but have to meet two sets of rules—those operated by HMRC for income tax and national insurance. If the Bill were passed in its present form, it would require another set of data to meet the pension contribution rules for every employer whose calculation methods differed from those in the Bill, not just the employers of the 30,000 or so people who might be affected. One does not know that there is no difference until the last decimal point has been calculated for the last employee.
There has been a suggestion that modern software can provide the solutions at the touch of a button, plus software updates and implementation costs. But that misses the point. Businesses hate complexity. Complexity costs money and creates an environment in which it is difficult or costly to avoid errors. If the Bill becomes too complicated for employers to deal with, they will seek a solution that avoids the problems. The solution is simple and obvious: level down to the Bill's calculation methods or, probably more likely, close the existing scheme and hand it all over to the personal accounts system. That is a rational approach and one which the employer groups and their advisers are telling us is what may well happen. If it does, every employee could end up receiving the minimum specified in the Bill, but hundreds of thousands of employees, or even millions, would get only that as well—to their detriment. A levelling down is not a theoretical possibility, but a racing certainty. The only question is: how much will occur? It is also pretty clear that it will hurt more than 100 per cent coverage or benefit.
That is the background to these amendments. Clause 16 has a quality test for qualifying schemes calculated for every member. That is the effect of paragraph (c) of subsection (1). My Amendment No. 21 introduces a further way of qualifying by reference to equivalence established at the level of the scheme as a whole. That is already established in Clause 22 for that dying breed, the defined benefit scheme. The effect of my amendment is to extend that approach to defined contribution schemes.
Amendment No. 32 backs that up by inserting a new clause after Clause 27 to set out a regulation-making power, whereby the Secretary of State could set up a self-certification scheme on equivalence to be enforced by the regulator. The Minister will be aware that the Association of British Insurers, on behalf of itself and other organisations who have an interest, is discussing how such a scheme might work in practice and might be turned into a practical scheme for the regulator. I know that the ABI is keen to continue those discussions.
No one wants to create loopholes through which rogue employers can avoid their proper obligations. For that reason, we have not constrained the regulation-making power in my new clause. The approach is designed to enable employers comply with their obligations, the vast majority of whom will want to do that in a way which fits with their business. The more we try to make employers retrofit their businesses to the concept of pension contributions in the Bill, the more we put at risk existing, more generous provision.
The Minister will not be surprised that I am not wedded to the wording of the amendments, which I have already said are probing for today. However, we are wedded to trying to find a solution to this problem that goes with the grain of reasonable business practice because we do not want the Bill to create incentives for employers to level their existing provision down. We do not want the Bill to create a presumption that future provision should always be based on the minimum in the Bill, and we do not want the Bill, in its search for perfection, to end up being the enemy of good pension provision. I look forward to hearing whether the Government's approach is capable of shifting by the time we reach Third Reading in order to avoid these problems.
My Lords, I am glad that we have started in a reasonably consensual mode today and I hope that that is how it will be for most of the afternoon. This is a proper way to work together to improve the Bill and, like the noble Baroness, I thank the Minister for the full and frank discussion that we had last week on all aspects of the Bill. It was very helpful. Perhaps I may say how pleased we on these Benches are to see that he is still with us. He is a listening Minister and I hope that his new colleagues at the DWP will listen to him. I welcome Rosie Winterton to the position of Minister for Pension Reform. Obviously, it must be very difficult to have these changes so late on in a Bill but we look forward to continuing to improve it.
Like the noble Baroness, I also thank the organisations that have been lobbying us and discussing these issues with us over the summer. They include many of the same representative organisations, which I shall not list again, but I should also like to thank individual companies—Legal & General and Norwich Union, in particular—for the helpful discussions that we have had. Legal & General, in particular, used rather a good phrase when we were talking through the detail of some of the qualifying earnings matters. It is getting some feedback and said, "The trouble is that the DWP and pension scheme providers don't speak quite the same language". I am glad if communication is improving.
We are broadly happy that progress is being made but, like the noble Baroness, we feel that there is a little further to go. I am not over-impressed with the argument that it is all right for big companies, with the attitude that you have the software and just have to run it to the end of the year. It is all right for big companies to check that no single employee is worse off but in the Bill we are talking about millions of small companies with five or 10 employees. They will not all be computerised and matters will not be so easy for them. We need to get out of a big company or big organisation mindset, if I can put it that way, when we look at practical problems of this kind.
Having said that, I believe that the approach is right. I believe that we are moving forward and I hope that by the time we get to Third Reading there will be something on which we can all agree.
My Lords, I welcome the amendments that the Minister has put forward but perhaps I may add my voice to those urging him to go a bit further along the lines of the amendments tabled by my noble friend Lady Noakes. In this case, it is a matter of the prize of simplicity being more important than the prize of precision.
If my arithmetic is right, someone whose basic earnings were at least 75 per cent of their total earnings would be better off getting 8 per cent of basic earnings rather than 8 per cent of earnings above £5,000 until their total earnings were well in excess of £20,000. Obviously, the higher their ratio of basic earnings, the higher that number goes. Therefore, it would be possible to have a simple test of the sort that my noble friend may have been imagining. So long as an employer ensured that bonuses and other one-off payments did not account for more than 25 per cent of the total wage bill across all employees—that is, an aggregate measure—he would be allowed to use the very simple test of paying people a percentage of basic pay, as is the case now. I know that would mean that there may be some individuals for whom that might not apply, but this is a matter of the benefits of simplicity outweighing the risks of having one or two individuals caught out. Most employers would not choose to run a system which deliberately disadvantaged employees in that way.
For the sake of precision, the risk is that rather than allowing a simple rule, the Government lose the bigger prize of having a high take-up of the national pension scheme, while encouraging those employers who have generous schemes to maintain them. If we drive many employers to take the simplest route, the Government will lose much more than they will gain by trying to make these laws too precise. I suggest one example—I am sure there are many others: you could have a rule when certifying the schemes that the higher the aggregate percentage of commission and bonuses, the higher the ratio of basic pay that has to be paid to take account of that. I urge the Government to be flexible and to consider whether there is a simpler way of addressing this which would address the concerns raised.
My Lords, I thank the noble Baroness for the constructive way in which the amendment was moved, and I thank other noble Lords who have spoken. We share the desire to prevent levelling down and to do all that we can to ensure that existing good-quality schemes remain and flourish.
As for the reshuffle, stakeholder discussion will proceed. I understand that the ABI has already been in touch with the new Minister of State. I am not sure whether this is good news, but—apparently as part of my departmental responsibilities—I shall be more directly involved in some of that.
My Lords, I was not looking for a cheer—well, perhaps I was. If the Government do not come forward with further amendments at Third Reading, and I do not guarantee that we will, then we would certainly recognise the right of the Opposition to do so.
I do not want to address in detail the points about banded earnings and the basis on which pay has been calculated. I believe that we addressed those issues in Committee. That concerns replacement rates, ensuring that auto-enrolment is right and that it pays to save, which is the reason for some of those parameters. I again acknowledge the benefit of avoiding complexity where possible. Administrative costs are an important issue and we need to keep them as low as we can. There is also the importance to business of certainty in how they conduct their affairs.
I note the comment of the noble Lord, Lord Oakeshott, that Legal & General does not think that the DWP speaks the same language. I would not accept that, of course, but we shall do all that we can to encourage the department to do so.
The noble Lord, Lord Blackwell, again stressed the prize of simplicity. I acknowledge that point. There is nothing to stop employers paying into the scheme as they currently do. They do not need to change the basis on which they make their payments, as the amendments today have made clear. At the end of the day, the challenge, now on an annual basis, is to ensure that contributions are at least equivalent to the requirements under the Bill.
We recognise that the amendments reflect the further concerns of stakeholders, who want employers to have greater certainty in advance of their existing schemes' quality. We take these concerns very seriously and are considering how they might best be addressed.
The amendments tabled by the noble Baroness would enable the Secretary of State to create an alternative standard for qualifying money purchase schemes and enable an employer to assess its provision at scheme level rather than at individual saver level. A scheme would qualify providing that the employer followed a certification procedure set out in regulations and guidance from the regulator. A form of certification procedure is one of the options we are considering. However, I must be clear that anything that moves away from a standard which guarantees the minimum to all jobholders will need very careful consideration. Until we have better understood the feasibility and implications of this and other options, we are unable to go further. We will continue to talk to a wide range of stakeholders on this issue. If we are persuaded on an option that does not jeopardise the outcomes of the reform and we can find a suitable means of achieving it, we would be content to bring forward further amendments at Third Reading. I appreciate that this remains an open issue and am content to debate it further at Third Reading.
At the heart of the matter is the situation in which the move from the standard laid down in the Bill facilitates arrangements whereby the quality of standards may occasionally not be met because of unexpected arrangements in bonuses and pay. We need to compare that, perhaps, with something that builds in a structural arrangement whereby there is likely to be a cohort of people who occasionally or routinely do not receive the minimum contributions. Grappling with that dilemma is part of our challenge, but I recognise the concerns. We need to keep talking to see whether we can end up in the same place, because we have that shared objective.
My Lords, I declare my interest as a partner in the national commercial law firm, Beachcroft LLP, and also my longstanding connection with the insurance industry, culminating in my presidency this year of the Chartered Insurance Institute. I also welcome such a consensual approach to the issue we are debating: the House's spontaneous reaction to the news that the Minister will be more closely involved in the development of this policy should not go unremarked. The Minister, with his normal modesty, referred to it. It reflects a genuine belief that he has taken a tremendous amount of time and trouble with noble Lords, particularly those on the Front Benches, who have sought to preserve and strengthen the consensual approach to this scheme. I endorse the remarks of my noble friend Lady Noakes in that respect.
Although this is a highly technical Bill, I hope that I can explain this group of amendments in a simple and straightforward manner. The rationale behind personal accounts is very much to develop and provide a good quality of pension provision for those who do not currently have access to a workplace pension. I believe that that objective is shared by everyone. However, "good quality" had not been defined until the introduction of this Bill, and even now that definition remains somewhat illusive and mercurial. That point will take me to the heart of this group of amendments.
The decision by Ministers to allow some existing schemes to become qualifying ones is widely welcomed. However, I have tabled these amendments to draw attention to a serious concern that the proposed criteria for judging the quality—and therefore the qualification or non-qualification—of existing pensions would be unworkable for many schemes. During the recess, I spent some time sitting down with a number of people who will have to implement the procedures we are debating, and I have been made aware that some aspects of what is proposed would threaten to undermine much good quality existing provision, which would have serious negative consequences for those customers with valuable benefits such as guarantees.
It is sensible to set up a simple quality test regarding contribution levels to ensure that people are not disadvantaged by being auto-enrolled into a qualifying scheme if it pays a level of contributions that is lower than personal accounts. However, I ask the Minister to take account of the fact that that does not relate to the age and complexity of the whole range of UK pension provision.
Contribution rates are one useful measure of the quality of a pension scheme, but they are not necessarily the only measure, and quite often they are not the best measure. By focusing on contribution levels alone, this legislation may force people out of pension schemes with potentially valuable benefits by using an arbitrary and inflexible definition of what constitutes a good quality scheme. These additional benefits may take the form of guaranteed income levels in retirement, protected rights or additional insurance, which are hard to compare with a straightforward contribution level.
We know that British business is already overburdened with regulations and red tape, and the Government's proposals could make the situation worse unless a step or two is taken in line with these amendments. The dirigisme that I have described could poison the well of existing good quality provision and dramatically reduce diversity in the marketplace. Of course, that is not the intention of Ministers, but they will be as aware as I am of the law of unintended consequences. One provider has told me that it estimates that pension contracts covering many hundreds of thousands will be unable to change to the basis imposed by personal accounts and will be unable to accept fluctuating payments. Should the contribution requirements remain unaltered, employers will have no alternative but to shut such schemes down and move employees to a qualifying scheme or personal accounts. People with additional benefits would be particularly hard hit, as they would miss out on the guarantees and returns that they rightly anticipated and expected to be the bedrock of their plans for a secure retirement.
The Bill lacks an acknowledgement of the need to treat existing members of existing schemes differently from new members of new or existing schemes. This goes back to first principles because such people are by definition outside the target market of personal accounts, which is those without access to current pensions, and they should not need to be auto-enrolled as they are already members and, in many cases, actively applied to join a scheme on its existing basis. Of course, they are not pension experts as a result of that, but the Bill must find some way of recognising historic decisions made by many people to go into that type of pension scheme. There is nothing in the Bill's fundamental policy objectives to suggest that we should be seeking retrospectively to fit pension contracts going back decades into the new framework imposed by personal accounts.
The amendments tabled in my name allow existing members of existing schemes to be exempt from auto-enrolment into qualifying schemes. They empower employers and employees to make considered judgments about the value of their pension provisions, enabling them to decide which scheme best suits their needs without unnecessary coercion or complexity. That could be their current scheme, which may not accept fluctuating contributions or have a total contribution of 8 per cent, but which may offer guarantees and a higher employer contribution, or a simpler new scheme aligned with the structure of personal accounts. Existing members must be allowed to have a clear and honest choice before being auto-enrolled in a qualifying scheme. Otherwise they may be steamrollered into making a decision that they later regret because they lose benefits—they will be unable to access those benefits once they have left the scheme.
The detail of the amendments would effectively replicate a more streamlined sequence of events, which would occur should what is described as the exempt job holder opt out of personal accounts to stay in their current scheme. It avoids members opting out of both their existing scheme and a qualifying scheme. Of course, members must be given protection against unscrupulous employers—the Minister kindly gave me an opportunity to talk to him about existing provision—so, as he will see, I have included in the amendments additional safeguards which would kick in if the basis of their current provision stops or reduces.
In conclusion, I feel strongly that additional administration and the requirement to make unpredictable additional top-ups may encourage some employers just to stop their scheme and move to a qualifying or personal account scheme to avoid the burden of liability. The ideal solution is one which allows employers to say in advance that X per cent contribution of their chosen salary definition is going to comply.
Money purchase schemes work on the basis of delivering a target income on retirement. These may be particularly affected by the contribution requirement. They have an expectation that overall the scheme will deliver a percentage of final earnings or an end benefit in monetary terms. Generally, they work on a set level of contribution for the life of the member, not just month by month. Changes in the benefit basis would be made by means of the employer buying additional levels of benefit in a separate contract and/or paying large single premiums at intervals.
Such a scheme would clearly be non-qualifying under the current criteria, yet it may well provide a benefit in excess of that expected from a qualifying scheme. I have seen some schemes which are based on a guaranteed end result rate of annuity, for example, paying £1 income for every £9 saved. To put this in context, if that existing scheme were lost to the member, each £1 income would now cost nearly £15 on the open market, an increase of nearly two-thirds. For these schemes, the contribution may be level or fluctuating, but the overall return is likely to be considerably greater than the level of retirement income that could be achieved with the same level of contributions in a qualifying scheme without those guarantees.
Many of those contracts are historic schemes, no longer sold. I am definitely open to the argument that the changes I am suggesting might be transitional, with sunset clauses attached. I am very much in the hands of the House on that. Certain schemes may be exempted from auto-enrolment until, say, 2020. Natural staff turnover and retirement levels within that sort of a window would make it likely that many of the issues that I have outlined to the House would be marginal and can be addressed in coming years, once the new system of personal accounts and qualifying schemes has been able to bed down.
I hope that the Minister will think carefully now that people are beginning to focus on how the whole scheme will be implemented and recognise that there are some anomalies here that I do not think that the Government or the House had contemplated when we went through the Bill in detail in Committee. I just want to limit the upheaval for members, employers and providers for those schemes not considered part of the original target for personal accounts, but ensure in time that all employers will have access to schemes that the Pensions Bill will make the norm.
Any action by the Government now that causes further damage and instability within the pensions industry would be especially unhelpful. I therefore propose the amendments to give the necessary protection to the embedded value of a number of the UK's major financial institutions. Changes are needed to enable individual citizens and pension providers alike to plan ahead with confidence, rebalancing their portfolios over a longer transition without causing unnecessary damage to the legitimate interests of individual members of pension schemes. I look forward to the Minister's response. I beg to move.
My Lords, I listened carefully to that interesting speech. The noble Lord is always persuasive; indeed, at times he can sound quite seductive. None of us is in favour of dirigisme and poisoning the well, but I felt a little uncomfortable as I listened to some of the speech. I struggle in particular with the idea that a pension scheme with an employer contribution of less than 3 per cent can be a good-quality scheme. I simply do not feel in my heart that that is likely to be or can be right and I worry that the amendments water down the protections too far. "Good quality" would replace "qualifying", and I have difficulty knowing what that means.
I listened with interest to the noble Lord's reference to what I can only call the Equitable Life guarantee, because that is what it is—the one that brought that company on to the rocks. It would have a guaranteed annuity buyout but, if you think about it, the real ongoing cost of something like that is pretty high and will certainly in practice involve more than a 3 per cent employer contribution. So although the principles of simplicity and so on that he mentioned sounded quite attractive, I would require a lot of convincing that such schemes would also pass the test of having an employer contribution that was the equivalent of at least 3 per cent. The numbers simply do not add up.
My Lords, I thank the noble Lord, Lord Hunt, for his kind remarks at the start of his speech on the amendments and for the manner in which he introduced them. I am afraid that I cannot accept them, but I hope that on the way I can give him a degree of comfort on some of the points that he made.
We recognise that the amendments reflect pension providers' concerns about the impact that the quality standard will have on existing provision. Let me be perfectly clear: we want good-quality existing provision to continue unfettered. The noble Lord referred several times to fluctuating contributions. Again, let me be clear: the Bill does not require fluctuating contributions. As we said in our discussion on earlier amendments, it is the total quantum of the contributions measured over a 12-month period that is key.
We want all workers who are currently accruing pension benefits either at or above those that would be required by the Bill to continue to do so. As I have said, we are still working with stakeholders to look at ways to address their concerns, but we do not think that the amendments are the right way to balance wider stakeholder needs. I hope that we all agree that the core purpose of the reform is to tackle not only non-saving but undersaving for retirement. The Bill achieves this by establishing a duty on employers to enrol jobholders automatically into pension saving that meets the minimum criteria set out in Chapter 1.
The criteria for money purchase schemes include minimum standards of contributions. The noble Lord's amendments would result in the establishment of two standards: the one envisaged by the current version of the Bill and the other a new lower standard for some existing members of money purchase schemes who would be denied the benefit of automatic enrolment into a qualifying scheme with a certain level of contributions.
Under the amendments, an individual would have to decide actively to give up membership of their existing scheme in order to become eligible for automatic enrolment into a qualifying scheme. Given the challenge of undersaving, we believe that the converse should occur: an individual should have to decide actively to save in a non-qualifying scheme with lower contributions. It is therefore important that all jobholders are automatically enrolled. We have taken care to ensure that, should they wish, jobholders will be able to choose to save on terms that fall below the new minimum level of pension saving.
I stress that nothing in the Bill prevents an employer from coming to a separate agreement with a jobholder outside the duty, provided that any movement away from the minimum level of pension saving is voluntary on the part of the jobholder and not coerced. I understand that there is concern that, as it stands, Clause 49 would prevent an employer from offering an alternative to a qualifying scheme or from advising an employee that membership of a qualifying pension scheme might not be in their best interests. That is not the case. The clause prevents an employer from making any statement or asking any question during the recruitment process that indicates that an offer of employment would be determined by the applicant's decision on whether or not to opt out of membership of the qualifying scheme.
Employers are free to offer alternatives to a qualifying pension scheme and to explain the benefits of membership of such an alternative to job applicants. However, we believe that they should not be free to indicate to applicants that they can work for them only if they are prepared to opt out of the qualifying scheme. Neither should any alternative offer be made available in a manner that contravenes Clause 53 on inducements. Clause 53 prohibits employers from attempting to induce individuals to opt out of or cease membership of a qualifying pension scheme.
Amendment No. 44 would extend the protection offered by Clause 53 to exempt jobholders so that their employers would contravene the measure if they attempted to induce them to cease membership of the relevant existing scheme. This amendment flows from the "exempt jobholder" amendment. Because I cannot accept that, I cannot accept this for the same reasons.
However, it might be helpful if I try to clarify matters. I believe that the intention of this amendment is also to allow new members to join the existing non-qualifying scheme without their employer having contravened the general inducement prohibition. If the employer simply offers an alternative to the qualifying pension scheme, they should not be at risk of contravention of the prohibition on inducements. To be found to have contravened this measure, an employer must have taken action for the sole or main purpose of inducing someone to opt out of or to cease membership of a qualifying pension scheme. Offering an alternative non-qualifying scheme and providing employees with information about the benefits of membership of that scheme should not in itself constitute a contravention of this measure. Even if the "exempt jobholder" amendment were to be accepted, I do not believe that this amendment to Clause 53 would be needed.
Noble Lords mentioned guaranteed income schemes. Clearly, such schemes increase complexity and would not be appropriate to automatic enrolment products. However, there is nothing to stop those products being qualifying schemes, so long as they meet the quality test. An individual who has already taken an active decision to become a member of one of those types of arrangements, even one that fails to qualify, should be more than capable of understanding what is at stake. Following automatic enrolment, such individuals should be able to decide whether to remain in a qualifying scheme or in their current arrangement.
As the House knows, the Government have worked long and hard to secure a position where the EC agrees with their view that under the employer duty automatic enrolment into a WPP is outside the consumer directives. We have reached this position, but it does not extend to the cross-selling of other products, such as insurance benefits, which would still be viewed as financial products and their sale would be covered by the DMD and the UCPD.
The noble Lord proffered some heady numbers on likely returns, which were commented on by the noble Lord, Lord Oakeshott. I would be interested to discover where it would be possible to strike such advantageous deals in current times. But I want to stress that such jobholders, if they opt out of auto-enrolment and stay in or rejoin an alternative provision, would be entitled to opt back in at qualifying levels of pension saving at any time and would be caught periodically by the re-enrolment provisions. The individualised standard for money purchase schemes supports this approach because it means that a scheme can be used simultaneously as a qualifying and a non-qualifying scheme in respect of different members.
In summary, we think that the principle of automatic enrolment into pension saving that provides minimum contribution should hold for all jobholders, but where an individual wishes to save on alternate terms, this will be possible under the reform. As I said, we understand that these amendments, like those tabled by the noble Baroness, Lady Noakes, reflect residual concerns about the impact of the qualifying criteria on existing money purchase provision. This and previous discussions illustrate that the issue is difficult to resolve and reaches to the heart of the reform. I hope that the amendments that we have tabled demonstrate our commitment to address this difficult issue and maintain the balance between the needs of workers, employers and schemes. We do not think that it is possible to move beyond these within the scope of a minimum standard for all, but in the light of stakeholder concerns we are considering options to go further. However, in assessing those options, we need to be satisfied that any solution will not have an adverse effect on pension outcomes for individuals or introduce unnecessary additional administration. If we are able to find a solution that does not open up significant risks to the outcomes of the reform, as I have said, we will bring forward further amendments at Third Reading.
On that basis, I hope that the noble Lord will feel able not to press his amendment. Although I have explained that we cannot accept it because we think that the primacy of auto-enrolment is the proper way to proceed, that does not preclude the outcome that the noble Lord wants, which is that existing schemes can continue even though they are not qualifying, provided obviously that the hurdles of inducements are not breached. I hope that that is at least in part helpful to the noble Lord.
My Lords, I am grateful to the Minister. Being the eternal optimist, I see that he came half way towards me rather than half way in the wrong direction. I also thank the noble Lord, Lord Oakeshott of Seagrove Bay, who similarly moved half way towards me. All I would say about guarantees is that we are talking about schemes that were entered into 20 or 25 years ago when such guarantees were commonplace. Of course, the noble Lord, Lord Oakeshott, has reminded us of one example, but he with all his background experience will know that many other guaranteed schemes are being honoured by the companies with which they were taken out. That is why the returns are substantially better than they would be on the open market today.
I think that the Minister slightly misunderstood my point. These returns cannot be secured today because the market has moved on, away from the investor and away from the person contributing to their pension. Annuity rates have come down in value and guarantees have almost gone away. That is why I made the point that I am talking about historic schemes. I would welcome the opportunity to give specific examples—I sensed that this was very much in what the Minister was saying and I am grateful to him for agreeing—just so that we talk through some of them in order to ensure that people do not lose out in what is, after all, a consensual approach to the whole notion of the new personal accounts. These have received a welcome in varying degrees right across the House, so during the transition period we do not want to knock out good schemes and opportunities that are awaiting people in their retirement and which were secured many years ago.
In the light of the Minister's kind offer, which I proposed during my speech and to which I saw him nod in assent, as is his wont, I should like to continue these discussions. In the mean time, I beg leave to withdraw the amendment.
moved Amendment No. 4:
After Clause 3, insert the following new Clause—
"Tax effect of automatic enrolment
(1) The Secretary of State shall ensure that every jobholder who—
(a) becomes an active member of an automatic enrolment scheme under section 3, and(b) has not opted out under section 7, receives value equivalent to the contributions made by him multiplied by the basic rate of tax applicable at the time of the payment of the contributions.
(2) The value referred to in subsection (1) shall be delivered in accordance with regulations made by the Secretary of State and may include—
(a) tax relief to the jobholder if that jobholder would otherwise pay tax at the basic rate an amount of income equivalent to the amount of his contributions, and(b) direct payment by Her Majesty's Commissioners of Revenue and Customs to the relevant automatic enrolment scheme."
My Lords, this amendment concerns the delivery of tax relief in respect of pension contributions under auto-enrolment. Noble Lords will recall that the Government portrayed the personal accounts scheme as 4+3+1; that is, 4 per cent from the employee, 3 per cent from the employer and 1 per cent in tax relief from the Government. The Bill, however, refers to 3 per cent from the employer and 8 per cent in total, with no reference whatever to tax. I moved this amendment in Committee in order to ascertain from the Government how tax relief was to be delivered, especially when the individuals concerned were not paying income tax. The matter arises principally where personal tax allowances are in excess of the qualifying earnings threshold and will depend in part on whether the lower threshold is the same as the personal allowance when the scheme is implemented. But even if they are aligned, which they are not at present, other factors, such as additional allowances and employment for only part of the tax year, could create problems.
In Committee, the Minister described the current possibilities in relation to UK qualifying schemes. If I understood him correctly, where the employer chooses to operate relief at source, tax relief will be delivered regardless of the employee's tax status. If the employer chooses to use the net pay method, tax relief will be dependent on the employee's status. Employers can choose one or the other but cannot use both. But the Minister said in relation to personal accounts that a decision was not necessary until 2012, when it would be made on something called "the underlying tax landscape", which he did not explain. So we left the Committee stage with clarity as to company schemes but with no clarity in relation to the millions of people who are likely to be enrolled in personal accounts.
Accordingly, I have tabled my amendment again in order to give the Minister an opportunity to provide further and better particulars on how the 1 per cent will be delivered to all in the personal accounts scheme. The amendment is drafted in relation to auto-enrolment rather than solely for personal accounts. As I mentioned, in Committee the Minister explained how tax relief was delivered for existing pension schemes. In addition to explaining how tax relief will work for personal accounts, will the Minister say what proportion of pension schemes currently use either the net pay method or the tax relief at source method? Can he extrapolate from that the number of employees in company schemes who might be at risk of not getting the full amount of tax relief because of the choices that their employers have made? I beg to move.
My Lords, I again thank the noble Baroness for raising this issue and for originally prompting us on it in Committee. On her specific question about the proportion of schemes that are dealt with under relief at source rather than net pay arrangements, I do not have those data but I will see whether they can be dug out and provided to her. The extent to which we would have further authoritative detail on the number of people who would not necessarily benefit from tax relief at the moment is more difficult, but I will see what we can do.
My Lords, perhaps I may ask the Minister whether he might be able to dig it out from the underlying tax landscape.
My Lords, I shall live to regret having made that remark. I shall blame it on officials because I religiously read the notes that they put in front of me.
Tax relief on pension savings forms a valuable part of the incentive to save. Individuals who save at the new minimum level will see contributions worth 8 per cent of the banded earnings going into pension savings. Of these contributions, only 4 per cent will come from the jobholder's pay; 3 per cent will come from employers, with 1 per cent being provided by the state for basic rate taxpayers. All UK qualifying schemes will have to be tax registered to ensure that members receive tax relief. As registered pension schemes for tax purposes, employer-sponsored schemes may choose, as we have heard, whether to operate either the net pay or relief at source method for delivering tax relief.
The Government have decided that personal accounts will use the relief at source method for delivering tax relief to members, which is the crucial point on which the noble Baroness seeks our position. Under this method of paying tax relief, the individual saves up to £2,880 in any one tax year and the Government add another £720, giving a total pension savings with tax relief, irrespective of whether the individual is otherwise subject to tax, of £3,600. This method of delivery of tax relief for personal accounts will be set out in the detailed provisions of the scheme. We intend to consult on the draft scheme orders and rules next spring.
As I said, delivery of tax relief for other schemes is dependent on the mechanism chosen by the sponsoring employer. However, tax rules are clear that the same method must be used for all workers in that scheme. I accept that in certain limited circumstances those on low incomes who have a high personal allowance will not receive additional tax relief on their pension if their employer chooses to operate net pay arrangements. However, with the personal accounts scheme giving relief at source, the numbers of low earners with high personal allowances who would not receive tax relief are likely to be quite small. We believe that, if we were to change the basis for those operating the net pay arrangements, the administrative cost of delivering tax relief to such a small number of people would outweigh the benefits of creating a system to deliver that relief.
I am grateful for the opportunity to put that explanation on the record and hope that it will enable the noble Baroness to withdraw the amendment.
My Lords, I shall speak to Amendment No. 6 as well. Regulations under Clause 4 will enable an employer offering higher level pension provision to postpone the automatic enrolment of a jobholder for a short period. Employers who take advantage of the postponement facility must not disrupt active membership of the higher quality scheme for a minimum period. This is to ensure that jobholders have the opportunity to catch up on the employer contributions forgone during the postponement period. The length of the minimum period will also be set in regulations.
The amendments are minor and technical in nature and ensure that the clause operates as intended. They make it clear that the regulations under Clause 4 will define the features of the higher level scheme that must be provided during the minimum period. They also make it clear that the scheme must retain those features during the catch-up period. I beg to move.
My Lords, this is the second case today—and I hope that there will be many more—of, as they say on the west coast of Scotland, thinking better later. The amendments have clarified the situation dramatically and I am very pleased to accept them.
moved Amendment No. 6:
Clause 4, page 3, line 17, leave out subsection (4) and insert—
"( ) A scheme ceases to be a scheme of the relevant kind, in the case of any person, if it ceases to have a feature by reference to which regulations under this section operated so as to postpone the automatic enrolment date in that person's case."
On Question, amendment agreed to.
Clause 8 [Jobholder's right to opt out]:
My Lords, I shall speak also to the other amendments in the group. Automatic enrolment into workplace pension saving will be the new pension savings default; even so, workplace pension saving will not be compulsory. Clause 8 ensures that people who are automatically enrolled into workplace pension saving are free to opt out if they wish. A jobholder whose employer enrols them into a scheme may give notice to opt out of membership within a period to be prescribed in regulations. A valid opt-out undoes membership and gives entitlement to a refund.
It is possible that a jobholder may have been an active member of the same scheme during a past period and have accrued rights in the scheme. We do not want any confusion arising that opting out affects those previously accrued rights. Any refund due following a decision to opt out is only for the current spell of membership. Without this amendment, workers could become entitled to a refund of contributions from past periods of active membership, not just the current period, which conflicts with existing law on vested rights and is likely to cause confusion. Vesting means that a pension pot is locked into invested funds and moneys cannot be refunded or paid out until decumulation. The amendment, therefore, brings greater clarity to the Bill and removes the potential scope for confusion with the vested funds. I beg to move.
moved Amendments Nos. 8 and 9:
Clause 8, page 6, line 2, leave out from "become" to end of line 2 and insert "an active member of the scheme on that occasion;"
Clause 8, page 6, line 4, after "jobholder," insert "on the basis that the jobholder has become an active member of the scheme on that occasion"
On Question, amendments agreed to.
My Lords, as we have already seen, there is both an advantage and a disadvantage to the Government in having stages of the Bill separated by such an enormous length of time. The advantage is that it gives them much more time to consider, first, whether their responses at the previous stage hold water and, secondly, whether bits of the Bill should be changed because of comments made by the Opposition or their own Back-Bench Members. This has resulted in many more government amendments on today's Marshalled List, with, I am told in one of the Minister's numerous but welcome letters, more to come before we finish Report and yet more at Third Reading. I join those who expressed great satisfaction that the Minister's role in the pensions arena will become—how shall I put it?—rather less passive than it was during Committee. The Minister, even if no one else, knows exactly what I mean.
The disadvantage to the Government is that other non-government participants have had much more time to digest the Government's responses to questions posed, and to produce counterarguments and even completely new thoughts. I sympathise with the Minister in this because I have been in the same position. Nevertheless, the Recess has crystallised my thoughts on the mechanics of the proposals in the Bill for removing money from a worker's pay packet for up to three months, pending their decision to opt out. There is logic to this proposal as it will concentrate the minds of those who may not opt out to see their wages or salaries apparently reduced. I use the word "apparently", because pensions are deferred wages, although the average employee may not appreciate this. Nevertheless, their take-home pay will be reduced by 3 per cent, and with the cost of their household bills rising so rapidly, especially at the moment, they will most certainly feel the difference made by what may seem only a small amount of money to other members of society.
The Minister has told us several times that around 6.5 million people will benefit from the new personal accounts outlined in Chapter 5. What is not said—and I ask him now—is how many of those 6.5 million he expects to opt out from the very beginning. Last week, I had the opportunity to visit the National Debtline in Birmingham, which does sterling work in advising people how to clear their debts. Its staff very kindly furnished me with their statistics for July this year, in which they had 21,572 telephone calls—some 3,000 a week. This caused me to do a little arithmetic and produce a worst-case scenario. Almost 47 per cent of callers revealed that they had debts of between £1,000 and £15,000, and almost 40 per cent had debts ranging from £15,000 to £50,000. While I would have expected many of the holders of the lower amount of debt to be either not working at all or on some form of benefit, I was brutally disabused in finding that almost 55 per cent of callers were in either full- or part-time work. If being in debt is the most likely cause of opting out, as I believe that it is, as many as half of the 6.5 million people to whom the Minister referred could do just that. I described that earlier as a worst-case scenario—it will not be anything like that many people—but it will be considerably more than I for one thought when we were discussing the matter in Committee. These repayments will cause a major logistical headache when a large number of withdrawals have to be paid back. In total, that doubles the number that opt out—clearly, because money does more than that, as the money has to go to the employer for his bit and to the employee for his bit, as the noble Lord made clear in col. 978 in Committee.
Amendment No. 10 would go a very small way to reducing that. Under the Bill, even though an employee elects to opt out before he gets his first pay packet, money is still taken from those wages and then has to be paid back to him subsequently. This is a total nonsense; it should be quite possible for an employer to know that a member of his staff has opted out. The Bill should therefore reflect that eventuality and money should not be deducted from his pay cheque.
Amendment No. 11 is to probe the Government's intentions behind Amendment No. 24, made in Committee, now to be found in Clause 8, on page 8. In col. 976 of
"Our intention is that any contributions paid by jobholders who opt out under Clause 7 will be refunded to the jobholder. Similarly, any contributions paid by the employer will be refunded to the employer".—[Hansard, 17/06/08; col. 976.]
That means that if 3 million people opt out, refunds for 6 million will be made. Regulations are to be made as to when and how that is to be achieved. As our experience in Committee showed, the Minister had no idea. I raised the matter as early as Second Reading and he could say only that it was too early to say—a fact that he kept on repeating throughout our eight days in Committee. That is why I keep repeating that the parts of this Bill referring to auto-enrolment and personal tax are a year too early; we do not know nearly enough to have much confidence that it will work as intended, even if the intention is correct—which I think that it is, as far as the first five chapters of the Bill go. In broad terms, I remain content with the Bill; it is the detail that concerns me.
Amendment No. 11 is to probe how the Government's thinking on this has progressed over the summer. For the Minister to say, as he did in Committee, that:
"If the money has reached the scheme, there will need to be a process for the money to come back out of the scheme", is simply not an explanation. It is a sine qua non. He went on to talk about the situation in which an opt-out has occurred and the money has not yet reached the scheme. He then said that:
"Those processes need to be worked through".—[Hansard, 17/6/08; col. 980.]
Has any working through been done over the summer and, if so, with what result?
It is also a fact that the tax forgone has to be reclaimed by HMRC. I assume that that will be done through an adjustment to PAYE, but there is another way—that the gross sum will be reduced by the tax allowance when it is returned to the employee and the tax element sent to HMRC, presumably by the trustee corporation. But, again, we simply do not know. I wonder whether the Minister does.
What concerns us with these two amendments is the speed with which the employee and the employer get their money back. I apologise for the time that I have taken. I beg to move.
My Lords, we like Amendment No. 10 and encourage the noble Lord, Lord Skelmersdale, to press it to a Division, if he wishes. It is a modest amendment, but it makes an important point. I was struck by the horrific statistics he gave from National Debtline about the pressure of debt on people's currently very stretched budgets. Obviously, we get a similar story from Citizens Advice and the other leading bodies in this field.
As the noble Lord said, pensions are in principle deferred wages, in the long term. However, in the short term, for people under pressure, pensions contributions are a pay cut. It is all very well, if that contribution is to build up to a worthwhile extra pension in old age. However, if the cost is either letting your debts roll up faster than the pension is rolling up or losing benefit because you lose means-tested benefits in old age, clearly that is not good. We shall be dealing with this whole issue in more detail when we reach the amendments on generic financial advice, but the same arguments apply here in a more modest way. Practically, we do not think it is a good idea that people should have the money taken out and then have to wait for it to come back. Administratively that is also a bad thing. Therefore, the noble Lord has made a good point.
My Lords, I thank the noble Lord, Lord Skelmersdale, for this amendment and hope to satisfy him that it is not necessary. Specifically he asked about percentages on opt-outs. The research done to date—and this is an ongoing programme which we will also discuss later—including whether people would participate or opt out of personal accounts, found that seven in 10 would be inclined to participate, so there is a 70 per cent participation rate and a 30 per cent opt-out rate.
The noble Lord raised a point about debt and whether that is likely to be a key driver for people opting out. Clearly that will be a factor. Certainly it is quite possible that it would be in the interests of those with high interest charges. Automatic enrolment changes the default approach to workplace pension saving, but it does not make participation compulsory. Accordingly, Clause 8 ensures that people who become automatically enrolled are able to opt out, if they wish.
Amendment No. 10 seeks to ensure that contributions are not collected from jobholders if they opt out before the first contribution is deducted. However, a valid opt-out completely undoes membership. Therefore, once a jobholder gives notice that they wish to opt out, the employer no longer has any right to deduct contributions from pay. Furthermore, the jobholder also becomes entitled to a refund of any contributions that may have been deducted between the day they were automatically enrolled and the point at which they gave notice of their wish to opt out. This is government policy, and the Bill already gives effect to it.
Amendment No. 11 removes the powers in Clause 8(3). These are necessary to enable government to frame the process by which jobholders receive a refund of any contributions due. It may be of interest for noble Lords to know that we have started to develop more detailed plans for framing the automatic enrolment and opt-out processes. I can see that that is greeted with delight by the noble Lord.
Our target is to consult on draft regulations during the early part of 2009. The eventual regulations will be subject to the affirmative procedure, so there will be plenty of time and opportunity to debate the details of the various processes. However, it might be helpful if I expand a little on our current thinking. The Bill makes clear that jobholders need to be automatically enrolled from day one. At this stage, we anticipate that regulations will provide a working window of up to 14 days from the automatic enrolment date—for example, the day the jobholder starts work generally—during which employers will be required to take whatever steps may be necessary to make the jobholder an active member of their scheme.
We also expect to regulate for a concurrent 14-day window, during which the employer will be required to provide the jobholder with information about the effect of the employer duty—for example, that the jobholder has been automatically enrolled into pension saving, what the contributions will be, that they have a right to opt out, and so on. While these windows are likely to be 14 days, there will be nothing to prevent an employer from acting more quickly. In some cases it might be possible to carry out all the necessary steps within one day.
Should a jobholder have a pay day during the joining window, the employer will be required to make a deduction from pay to avoid any negative impact on participation of waiting to take a large bundle of contributions at a later date.
Our current thinking is that the schemes should be the source of the blank opt-out form. Once completed, the opt-out notice should be given in the first place to the employer, although it is likely there could be ways for a scheme and an employer to be notified simultaneously.
Jobholders need to be given time to consider their options. We expect to propose an opt-out period of 30 days. This period will start when the jobholder is both an active member of a scheme and in possession of the information that enables them to make an informed decision. Jobholders who opt out will be treated as never having become a member of the scheme and both jobholder and employer contributions will be refunded. Regulations will propose that jobholder contributions must be refunded within 21 days or two pay days, whichever is the earlier. We do not propose to regulate in any detail on refunds of employer contributions. The manner and timing of employer refunds will be a matter between the employer and their scheme.
Where the money will be during this process will depend in part on whether the employer, having deducted the amount, will have paid it over to the scheme. The requirements for payment over to the scheme are already defined in legislation. I believe that the 19-day rule operates for defined contribution schemes, so that would determine whether the money is still with the employer or whether he has paid it over to the scheme and needs to recover it or offset it against continuing payments.
I hope that I have helped the noble Lord by setting out our thinking on the timescale and processes of opting out, on which we shall consult in due course. I emphasise that we do not need a specific provision in the Bill to prevent employers taking contributions once opt-out has been initiated because the Bill and the law would prevent them doing that. The noble Lord raised a good point but I hope he will accept that it is already covered.
My Lords, I am grateful to the Minister for telling me that one of my fears is already covered by the Bill and, to an extent, by existing legislation. I am also grateful to hear that thinking on this matter has progressed during the summer. I hope that it will not come to a grinding halt between now and when the Bill is enacted, in whatever form that may be. We have lost the chairman of PADA and a Pensions Minister. The latter has been replaced, the former not yet. I hope that does not bring thinking to a grinding halt. However, for the moment, I am pleased that the Minister explained the thinking so fully. I beg leave to withdraw the amendment.
My Lords, Amendment No. 12 presupposes that an employee decides to opt out in the second half of the period allowed. For the sake of argument, let us say that the relevant period is three months and that two months into that period he decides to opt out. I calculate that an employee on the average wage of £22,000 would have £146 to be returned. Somebody—we still do not know who—outside the firm will have accumulated this money, which may have been paid in eight weekly instalments or, if he is salaried, two monthly ones. That somebody is hardly likely to sit on the money, but will put it on deposit somewhere at some rate. They will earn interest on money that is not theirs. Is it not both right and fair that interest should be returned to the employee, and the relevant interest to his employer, who I think will have £110 to be returned to him? Is this the Government's intention, or have they vetoed the idea of repayment of interest altogether? If they have vetoed it, the interest earned by whoever receives the money will go into the overheads of the scheme. In other words, non-members will be subsidising members. Is that really what the Government intend? I beg to move.
My Lords, a decision by a jobholder to opt out completely undoes membership of the pension scheme into which they were automatically enrolled. Our position is that jobholders should neither gain nor lose by opting out.
In addition, we do not want employers or their schemes to bear unnecessary burdens or risks; including any associated with interest payments on contributions that may be taken between the point of automatic enrolment and the completion of the processes for a jobholder who goes on to opt out.
Clause 8(3) sets out the key issues that are likely to be regulated for in connection with the refund of contributions to jobholders who opt out. The amendment would extend that list to include interest payments to jobholders to compensate the jobholder if, following automatic enrolment, they go on to opt out, but some contributions have already been taken and there is a short interval before they can be refunded. We maintain that refunds should be restricted to the value of the contributions originally taken, and we have no plans to introduce interest payments.
It would be premature to attempt a detailed debate about how refunds will work. However, we have started to develop our thinking about how to frame the processes and we have given an insight into the sort of timeframes involved. The key will be to strike an appropriate balance regarding the provision of sufficient time for jobholders to consider their options, ensuring that most if not all jobholders will have the chance of feeling the impact of workplace pension saving on their pay packet before the end of the opt-out period and minimising the need for refunds by enabling employers to be able to deal with the whole process relatively quickly.
On current thinking, we do not expect the interval between automatic enrolment and the completion of any refund processes to be long, and certainly not long enough to result in interest payments of any meaningful sums. To recap, current thinking is that the enrolment process would have to be taken within 14 days, and it is within those 14 days concurrently that the information flow should be undertaken. From the date of active membership and the information being provided, there would be a 30 day opt-out period. In some instances, the opt-out might have happened before any contributions had been taken.
I asked for someone to calculate the maximum amount of interest a weekly-paid jobholder could accrue between the point of automatic enrolment and the refund of all contributions taken following an opt-out at the last minute, including the time taken to make the refund. I am advised that for someone on a median salary of £24,550 a year, with a 5 per cent interest rate, it would amount to 60 pence. The equivalent for a monthly-paid jobholder would be about £1.50. I suggest that putting in place complicated arrangements and provisions to deal with that goes against the spirit of simplicity and trying to make the administration of this as effective as possible.
We are currently on target to publish and consult on draft regulations during the early part of 2009. The resultant regulations will be subject to the affirmative procedure, which means that there will be plenty of scope for further debate about the detail in due course. I urge the noble Lord not to press the amendment. I understand that he is seeking to achieve equity in all of this, but for the potential sums involved—the amounts calculated were maximum amounts—having a bureaucracy to deal specifically with them is inappropriate.
My Lords, I am glad that my amendment prompted the noble Lord to have some mathematics done behind the scenes, but the mathematics are accurate only if there is a comparatively short period before the repayment is made. The longer the repayment takes, the more interest will have accrued.
My Lords, if the noble Lord will permit me, I can go through the detail of the calculation. I have not done it myself, but I asked about the maximum amount of interest, assuming that opt-out is at the last minute and that the refund takes the maximum time to be completed—two paydays or 21 days, whichever is shorter. That is the current proposition. I had asked for the calculation on the basis of the maximum interest that would accrue in that scenario. It is relatively modest, as I have pointed out.
My Lords, it does not matter when the calculation is made; what matters is when the money gets back to the employer and the employee, which may take a considerably longer time. We simply do not know. The noble Lord talks about—
My Lords, I am sorry to keep jumping up, but it is important that we are clear on this. I have explained that we will consult around a proposition and what that proposition is. It is the 14-day period for becoming an active member of the scheme, a 30-day opt-out period that runs from that and, if opt-out has taken place, there will be a defined period within which contributions must be refunded to the individual. This is not open-ended. The period, once opt-out has taken place, would be the lesser of 21 days or two paydays. Obviously, for monthly paydays the period would be 21 days, and for weekly arrangements it would be two weeks—depending on whether the person had worked for a week in hand. I hope that that helps. We are not talking about open-ended issues, but about consulting on a proposition with real timescales that are around those that I have indicated. That is our current thinking.
My Lords, we are talking—or at least the Minister is—about a situation in which we have 100 per cent, perfect, super-duper administration. The Minister said—and I wrote this down—that the current thinking was that some 30 per cent of the 6.5 million people of whom he has been talking are believed to be likely to opt out. That is around 2 million people. If 2 million amounts of cash are floating around, that represents 4 million repayments, does it not? To achieve that within a short period is beyond possibility. However, I shall not press the amendment as I was asking whether the Government had any intention of paying back any interest earned on that money. The answer is no and I am content, for the moment, to live with that, but I cannot promise that I shall be content for very much longer. I beg leave to withdraw the amendment.
moved Amendment No. 15:
After Clause 10, insert the following new Clause—
"Protection for employers
(1) An employer shall not be required to give advice to jobholders or workers, either generally or on an individual basis, in respect of their rights under this Chapter.
(2) An employer who provides information in compliance with any regulations issued under section 10 shall not incur any liability to any jobholder or worker to whom the information is given."
My Lords, the amendment adds a new clause after Clause 10. Its main purpose is to make it clear that employers have no responsibility to provide advice to their employees. We are clear that some, if not all, employees will need to take advice as to whether they accept auto-enrolment into an employer's scheme or into personal accounts. We had some discussions in Committee about who should be responsible for the provision of that advice. The CBI, among others, has been clear that employers should not be responsible for advice. The Minister confirmed in Committee that employers would not be required to give advice. Subsection (1) merely places that confirmation in the Bill.
My amendment has another purpose. It relates to Clause 10, which gives the Secretary of State power to make regulations about giving information to jobholders. In Committee the Minister made it clear that the Government may well require employers to give information. Provided that the requirements are not onerous, I am sure that most employers would not object to providing information to their employees. However, employers will want to be clear that they could not incur any liability by complying with information regulations.
Subsection (2) of my amendment is designed to give employers who comply with Clause 10 regulations a safe harbour from any liability in respect of that information. When we debated this amendment in Committee, the Minister said that it was,
"difficult to envisage how an employer could be held liable", and that,
"holding an employer liable is particularly unlikely".—[Hansard, 17/6/08; col. 1007.]
That is, the Minister did not give an absolute assurance that compliance with the regulations would, in all cases, hold the employer harmless, and I believe that employers are entitled to that protection.
In Committee, the noble Baroness, Lady Hollis, supported this amendment but suggested that the concept of good faith might be usefully incorporated. I have thought carefully about that but I do not believe that it is the right addition to the amendment. An employer must comply with Clause 10 regulations and I cannot see that the state of mind of the employer in complying with the regulations would in any case be relevant. A "good faith" defence might need to be available if an employer decided not to comply with the regulations because he thought that it would be positively harmful to his employees but it is not a necessary addition to simply complying with the regulations. That is why I did not insert "good faith" into the amendment. It is about protecting employers from the possibly unintended consequences of compliance with legal obligations under Clause 10.
In Committee, I did not detect a massive difference of opinion between these Benches and those opposite except as to whether something needed to be put into the Bill. I invite the Government to reconsider their position on that and to give some welcome reassurance, preferably in the Bill, to the employer community, on whose shoulders the burden of implementation will fall. I beg to move.
My Lords, I still have some of the hesitations that I had last time, although I have a lot of sympathy for the amendment. It is entirely reasonable that an employer should not be expected, let alone required, to give advice. That is a very tendentious area, and I think we all agree that straightforward information would be acceptable, particularly if the employer was a vehicle for other people's information which might be provided by the Government, Citizens Advice or the Pensions Advisory Service, in which I declare an interest as a trustee. The good faith issue was not about testing the mind of the employer but about whether he—for these purposes I shall use the word "he"—had taken reasonable steps to ensure that the information that he was passing on to the employee was correct. Clearly, I would not expect the employer to take any responsibility for information that came from a third-party source—the DWP or Citizens Advice, for example—but if the employer decided to give information, I think that he would have a duty of care to act reasonably by ensuring that the information was correct and not misleading.
I was seeking to establish that an employer could not act recklessly. It could be the employer in a newsagent or a chip shop who has never been in this situation and decides casually to give information that is incorrect or misleading and, as a result, someone decides to opt out or possibly opt in when they should not do so. Therefore, I suppose that I was seeking to introduce a test relating to recklessness or reasonableness or whether someone has behaved appropriately. I do not have precise words for it. I suspect that the noble Baroness and I do not disagree on this but I wonder whether, when she comes to reply, she can help me further. I do not know what her intentions are but if she were to revisit this issue at Third Reading, I would hope very much that she could at least clear up that matter.
My Lords, this is quite a tricky matter. I completely agree with the noble Baroness, Lady Noakes, that most employees will require advice but that that is not what they get from their employers and no employer should be in the position of giving advice. There is a clear distinction between information and advice, and I suppose that the problem arises if employees are given incorrect information. The more I think about this matter and the more I listen to the noble Baroness, Lady Hollis, the more I question how you tell the chip shop owner that he has been reckless, not reckless or reasonable. Sadly, I do not think those are workable concepts.
I shall listen with great interest to the Minister. What will happen if people give incorrect information? I do not think that going down a reckless route helps us. It may well be that, on balance, one has to go with the raw version from the noble Baroness, Lady Noakes.
My Lords, I thank the noble Baroness for the amendment and for the opportunity to make our position absolutely clear on what is a very important issue. As I said in Committee, it has never been our policy contention that employers would be required to give advice to workers. The purpose of Clause 10 is to provide for regulations which will clearly set out the key pieces of factual information that must be provided to a worker as part of the wider automatic-enrolment joining process. Evidence suggests that the best means of getting some of that factual information to workers will be through the employer, as much of that information will be known only by the employer at the relevant time. By factual information, we mean, for example, the date of enrolment, details of the scheme and the amount of contributions being deducted from wages and paid over to the scheme. I believe that our aims in this regard are entirely consistent with the first part of the amendment tabled by the noble Baroness, Lady Noakes.
The Government's position on employers and advice is absolutely clear and, therefore, we do not consider it necessary to put that in the Bill. That has been explained and, in Committee, where we differed was on whether it is necessary to provide employers with protection from any liability as a result of giving information to a jobholder or worker. We considered the issue and decided that there is minimal risk to the employer who complies with what is prescribed in regulations. The regulations will clearly set out what information must be given by the employer. As the employer will be required to provide simple and straightforward information and will not be expected to play any part in the decision-making process, we do not believe that an employer will be held responsible for an individual's decision to save for retirement.
I appreciate that employers would welcome the reassurance that a safe-harbour provision would offer. However, I am mindful of the potential risks of such an approach in the wider employment-law context and wish to consider that further. I would not want to commit to bringing forward a safe-harbour amendment without full consideration of all the issues.
We need to consider carefully how offering employers a safe harbour will impact and interact with other provisions in the Bill. For example, we would not want to introduce accidentally an exemption to the Chapter 3 inducement provisions, nor would we want to provide protection to those employers who influence a jobholder's decision to participate in pension saving by, say, over-inflating the amount of contribution to be deducted from wages, as the noble Baroness, Lady Hollis, said. Advice needs to be given properly, in a considered and accurate way.
If the noble Baroness does not press her amendment, I promise to return to this matter at Third Reading. I am conscious that we are stacking up a few issues for Third Reading, but I would like to give further thought to whether we can have a safe-harbour provision. I do not commit to being able to do that, but perhaps that might give the reassurance that employers want without giving carte blanche to those who would deliberately not wish to comply with proper information requirements.
My Lords, I thank the noble Baroness, Lady Hollis, and the noble Lord, Lord Oakeshott, for their support in speaking to my amendment. I certainly thank the Minister for what he has said. The noble Baroness, Lady Hollis, raises some important issues about the responsibility of the employer. To some degree, it is difficult for us to debate this fully because we have not seen the draft regulations under Clause 10. We might well have a better fix on what we are talking about if we have an idea of what those regulations will contain. The Minister clearly has had some discussions with his officials on the content of those regulations. My concern is that the employer should not have to do too much; he should just hand over whatever is necessary because anything else would imply that he was acquiring a duty of care which the employer would not want to take. I can see, as we unpick the layers, that it becomes ever more complicated.
I am very grateful to the Minister for offering to take this away and I look forward to debating the issue again at Third Reading, I hope with an amendment, but if not I hope that the Minister can bring some clarity on the role of employers in relation to the information regulations. I beg leave to withdraw the amendment.
moved Amendment No. 16:
After Clause 10, insert the following new Clause—
"Duty in relation to provision of free independent generic advice
(1) The Secretary of State shall ensure that every jobholder aged 50 or over who becomes an active member of an automatic enrolment scheme under section 3 is also automatically enrolled to be offered free independent generic financial advice in accordance with subsections (2) and (3).
(2) The advice referred to in subsection (1) shall be given, unless the jobholder chooses otherwise, in a face-to-face interview, and shall include integrated advice on the possible effects of pension contributions on the management of personal debt and the loss of means-tested benefits in retirement.
(3) The advice referred to in subsection (1) shall be provided by a trained adviser, and shall be made available in the parliamentary constituency where the jobholder has their main place of residence or employment."
My Lords, we on these Benches make no apology for the amendment being bigger and bolder than our similar amendment tabled in Committee. In the intervening two months since we last discussed the importance of free generic financial advice to be offered before auto-enrolment to those over 50, the landscape has changed, as the noble Lord, Lord Skelmersdale, said. More people are getting into financial difficulties. Housing repossessions are rising daily and jobs are being lost. Not only are some high-profile businesses going under, but all around the country many smaller businesses are in quite a precarious position. Many employees—and of course employers—are worried about their jobs and their futures. It is almost certain that the situation will get worse before it gets better.
So there is no point in thinking that what is happening to our economy is just a temporary blip and that in a few months' time everything will be all right, with all the implications that that has for employees and for this Bill. This means that the offer of free financial advice to vulnerable groups before auto-enrolment in 2012 is even more important. After all, as has already been said today, employees who are auto-enrolled will see a dip in their wage packets just when they least want it.
There is general agreement that auto-enrolment is a good thing to overcome the inertia of jobholders about opting into an occupational pension scheme. But that surely means that there is a particular responsibility on the Government to take into account the inertia of those for whom it might not be the right course in their particular circumstances. One of the at-risk groups is quite possibly those in the second half of their working lives who have relatively low-paid jobs and mounting debts. Citizens Advice, which is conducting its own generic financial advice pilot, says that half of its inquirers are aged over 50 and that debt advice is at the top of what people need advice about.
Take Ron, aged 55, a carpenter who works for a building company and whose wife lost her job a few months ago. Let us say that it is a couple of months before the start of auto-enrolment in 2012. Rob remortgaged his house a few years ago to pay for an extension in order to accommodate his mother-in-law, who can no longer look after herself. He has cut down on all but the essentials. However, with no second wage coming in, he knows that he cannot afford to lose a single penny of his already precarious weekly wage. He has asked his boss about auto-enrolment, but he said that Ron will have to ask someone else as he does not want to get into trouble by saying the wrong thing.
Ron does not do websites and he is dyslexic, so he is not too good with leaflets either. The Minister will say that Ron has only to telephone the Pensions Advisory Service, or other bodies whose numbers will be on the leaflet, but Ron does not really want to discuss his financial affairs over the telephone. What he does want is to be able to talk face to face to someone who will explain his options and make sure that he has understood them. And he certainly cannot afford to pay for professional advice.
If Ron is lucky, he might find out that his local CAB can help him. Its Moneyplan service, which is being piloted now, aims to give free generic financial advice and will, I am sure, be able to add auto-enrolment to its competences. One of the advantages of that service is that clients can relatively easily be referred to benefits or debt experts within the bureau. However, if the CAB had to offer advice to every employee who wanted face-to-face discussions before auto-enrolment, it would be completely overwhelmed, unless it had a great many more trained advisers—something that we would very much like to see.
I know that the Government are carrying out studies exploring what information should be offered and how. In particular, I understand that the Resolution Foundation is working on protocols to find unanimity on how the information should be framed. That is welcome, as far as it goes, but information is not enough and the amendment states that advice must be offered to people in this age range under the auto-enrolment scheme.
When the Minister replies, he will no doubt caution against that prescription being put into the Bill, as he did in Committee. However, our worry is that if nothing is put into the Bill, we will be left with vague promises that some sort of guidance will be available sooner or later. We are looking for a commitment that before auto-enrolment comes in, those aged over 50 will be offered free, comprehensive and face-to-face advice from independent financial advisers who understand the way in which personal debt, savings including pension savings, benefits and tax interact.
I understand that the Government fear that the offer of such face-to-face advice may look as though auto-enrolment has risks, but many people will be reassured to know that they can talk through their concerns with an independent adviser and that the advice is being offered simply because auto-enrolment is new. After all, in Committee, the Minister said:
"Of course there will be people for whom it will not pay to save".—[Hansard, 17/6/08; col. 955.]
We expect that people who have no occupational pension plan will be happy with auto-enrolment in the vast majority of cases. However, if it is not the right course of action for even several thousand people, then the Government cannot be accused of pensions mis-selling if advice has been offered in the way that the amendment suggests. I beg to move.
My Lords, although I support the spirit of this amendment, the noble Baroness will understand if I have hesitations about some of the implications of its detail. She is absolutely right that, even before the implications for debt, the mortgage fears and the unemployment and benefits issues associated with the events of the past couple of months, most people have an amazingly low level of knowledge about pensions, before they get into the even more complex area of the interaction of pensions savings with all other forms of financial expenditure.
I again declare an interest as a trustee of TPAS, which has now published its report on the Women's Pensions Helpline. It found that of the first 10,000 or so women who phoned in on the basic state pension—which is universal and, one might have thought, well known—almost all of whom were over 50, only 14 per cent knew that the state pension age for women is going to increase. Almost 75 per cent did not know that they could make additional voluntary national insurance contributions if they qualified, and 94 per cent did not know that they were not entitled to a basic state pension although they had paid the reduced married woman's stamp. Those are three of the most elementary pieces of information about the basic state pension—that the age at which women can draw it is rising from 60 to 65 from 2010; that it is possible to make good your contributions—to a limited degree at the moment, but I hope to change that; and that the reduced married woman's stamp does not count. If that is the situation with the basic state pension, the situation will be even worse regarding private pensions—information about the interactions with benefits, whether one's priority should be debt reduction, and what one should do when faced with increased pressure on income. The noble Baroness is absolutely right on all that. The widespread need is recognised by all the players, so to speak, in the field, from the CABs, the Resolution Foundation, TPAS, the Government and so on.
However, I have three hesitations about the amendment. Perhaps the noble Baroness can help us in her wind-up. The first is that she is talking about advice rather than information. Information is much more neutral and less obviously tailored to the individual, so it can be generic and much more easily provided. The Government have accepted—TPAS may well be prominent in that—the need to provide generic information. Advice seems to me much more difficult to provide because of the numbers involved, especially given that the noble Baroness, perfectly rightly, is specifying that the person should be trained, that the advice should be given face to face, that it should be local and that it should cover the full range of financial issues that may affect that individual.
The need to offer that service to possibly 1 million or 2 million people brings me to my concerns about cost, training and the provision of those advisers. I do not think that that is possible. I wish it were, but I doubt that it is, although we have a reasonably long lead-in time to 2012 and I suppose that one could begin the training activity over a period. Does the noble Baroness have any estimates of what costs might be involved? The cost of the financial advice to be provided is about £100 to £200 an hour per person face-to-face. Multiply that by two visits of one hour each by 3 million people and you see the sort of costs that we are talking about—they are huge.
I do not know whether the noble Baroness can help me on this. As I said, my heart is with her on the amendment but I find it difficult to see in practical terms how such a wide-ranging amendment can be delivered as she suggests.
My Lords, I wonder whether I can make a brief intervention in this important debate to support the case powerfully made by my noble friend Lady Thomas. I understand perfectly the position that has just been explained in her usual lucid way by the noble Baroness, Lady Hollis, but we will have to face up to this. I have no final costed scheme for the various elements in this important amendment, but my firm belief is that if we do not move to meet the requirements enshrined in it, we may risk the whole success of self-enrolment.
As I understand it, between now and 2012, the Government's thrust is to try to get personal accounts established through auto-enrolment. Auto-enrolment is a big step. I absolutely agree with the noble Baroness, Lady Hollis, that we underestimate at our peril the amount of genuine ignorance—I do not use that word pejoratively, I mean genuine lack of knowledge and understanding of any of this stuff—across the landscape that the Bill is intended to cover. Small businesses will struggle with this throughout the length and breadth of the United Kingdom.
Big businesses are much better positioned because of the professional breadth and depth of advice that they have within their ranks. They are used to doing all this and it can be made easy for people in the employment of bigger businesses, but small, micro and family-sized businesses will struggle with this. If businesses struggle, so will the people faced with the important decision. Of course there are financial cycles and the scene that we are facing today may well have settled down by then, but the way that the amendment was presented was absolutely right: people, especially those on the lowest decile of household income, will run with fear from any prospect of their take-home pay being reduced unless someone is able to set the scene for them.
The noble Baroness is right; there is a world of difference between advice and information. For me, the amendment says that there needs to be something that interprets information. You cannot safely found on information; you cannot give a leaflet to someone who works in a joiners' business somewhere in south-east Scotland and be safe in the knowledge that they will go away, read it diligently with a wet towel around their head over the weekend, or over the 30-day period, and come back with a sensible decision. They will not get to the first base of understanding what is being asked of them unless someone interprets that information.
Whatever else the House decides about this amendment, information by itself is not enough. For my money, if the Government could even get as far as saying that or saying that they will think it, that would be enough for me, because we could then go on to the more important things such as the location, the format, and the qualifications of the people who are delivering this interpretation of the situation that is being faced by individual families and around which so much depends.
Even if personal accounts and auto-enrolment work perfectly and the turn-out is 80 or 90 per cent, which I hope it will be, we will still be left with a nation that is undersaving to a degree that has not yet dawned on the majority of people. It is therefore essential, not only for the Government but for ordinary hard-pressed working families, that auto-enrolment works as well as it can. It cannot work well, however, unless there is someone to interpret for the majority of ordinary folks who are going to be asked to take this decision just what they are facing, and to interpret it reasonably sensibly in terms of their situation and their age.
One of the important elements of this is that there is obviously a bigger risk to people over 50, who if they are not careful will fall foul of this by taking the wrong decision. It is not right for the House to pass this legislation without being really clear about what we expect from ordinary folk when coping with this big question. This cannot be done unless there is an element of interpretation in the information service that is currently being proposed. I understand that this is hard and may be expensive. I would prefer it to be face to face. It will not be needed by everyone, but the people who need it really will need it. If they do not get it they will suffer, and that is in no one's interests. Whether we get anything like what my noble friend has proposed—a gold-plated service that I am absolutely in favour of, although it may be too expensive—we need something. If it is not this, it must be something else, because information by itself is not enough.
My Lords, I very much support what my noble friend Lady Hollis has said about the amendment. The amendment is well-intended—I really do support its intention—but I wonder about the practicalities. Mention was made of the Pensions Advisory Service. I was associated with that service for many years, and my noble friend is presently associated with it. TPAS offers a countrywide service on an individualised basis, which would be very appropriate in the provision of information as some guidance is involved. It would be available to everyone and not simply to people aged 50 or over, because people much younger than that will also require information and some assistance. I am therefore not particularly happy about the wording. The amendment as it stands is not a very practical solution to something which I agree is a real need.
My Lords, not for the first time, the noble Baroness, Lady Turner of Camden, has taken the words right out of my mouth in criticising the drafting of this amendment. Not many years ago, one of my colleagues on the Front Bench had a researcher who was just out of university and had debts of £30,000, which I gather was extreme then. The noble Baroness, Lady Howe of Idlicote, is nodding. As a university person—if I may put it that way—she will know that these days it is not unusual for young people to come out of university with debts of £20,000.
There is no question but that those people will need individualised advice. To that extent, I have sympathy with the amendment proposed by the noble Lord, Lord Oakeshott. Because the Minister has told us—at col. 956 on
I gather that the noble Lord, Lord Oakeshott, wrote the amendment the first time around and, for all I know, wrote this one, although the noble Baroness, Lady Thomas of Winchester, spoke to it on both occasions. I do not think that we have got to the point where we can put our hand on our heart and say that this is the appropriate way to do things. I am sorry for that, but I cannot support the amendment as it is.
My Lords, we have heard a great deal today about just how little knowledge people have on pensions, their entitlements and so on. It is quite clear that in the current frightening circumstances the situation will get very much worse and people will be very concerned about what to do with their money and how much should be put under their pillows. We certainly heard about that on the wireless today regarding those who can lay their hands on any money.
This is an important amendment, which I hope will make the Government think. I am not totally convinced that advice is the right approach, but there must be some form of advice because the detailed information necessary will have to be relevant to an individual's circumstances. How else can that be done? There is concern about any money being spent by the Government or anyone else now and everyone has particular projects on which they would prefer money to be spent. However, I am inclined to support this amendment. I will of course wait to hear what the Minister has to say and hope that he will give serious consideration to just how people will be better informed in the future.
I like the idea of provision for the 50-pluses. Obviously the amendment cannot be perfectly comprehensive, but could it not take into account those with learning difficulties, about whom mention has been made? However, it will be the older generation that is more likely to be disadvantaged, so the amendment prioritises that group, given the limited amount of money involved.
I hope that we will hear something convincing from the Minister. I support in particular the need to ensure that, given the added demands that will be placed on voluntary organisations such as Citizens Advice, they will be properly funded.
My Lords, I should say first to the noble Lord, Lord Skelmersdale, that the drafting of the amendment was very much a joint effort between me, my noble friend Lady Thomas and the officials of the House, who have been very helpful. The amendment has been carefully constructed. I thank the noble Baronesses, Lady Hollis and Lady Turner, for their support in principle, but the answer to their points are the striking figures quoted by the noble Baroness, Lady Hollis. They show how amazingly low the current level of knowledge is with the existing set-up. I must say to the noble Baroness, Lady Turner, that it is all very well saying that TPAS is available, but the problem is that this is the present situation and the information is clearly not getting through.
These responses and those of the Government suggest that the Government do not begin to appreciate the scale of the problem. It is not a question of slightly stepping up a gear; we are dealing with 10 million people, many of whom are, as we know, very unsophisticated. That is why we believe that something much more substantial and radical—a one-stop gateway, if I can put it like that—is required. Of course there are many good individuals doing different kinds of work, but they are not getting through to people now and they certainly will not get through when 10 million are involved. I do not think that experts such as the noble Baronesses or the Government have any concept of how big the problem is going to be.
We say clearly from these Benches that it is wrong to auto-enrol vulnerable groups into what for some of them will be a pay cut—let us be quite straightforward about that—without auto-enrolment to face-to-face advice. Of course, auto-enrolment means that there will be an option not to enrol; it does not mean that you have to have it and many people will not want it. However, the network must be in place. By making sure that at least the most vulnerable groups—research by the PPF and others shows that the over-50s are most at risk—have in place a serious framework of advice, we know that things will happen.
The noble Baroness, Lady Hollis, asked how long we had to do this and how much it would cost. We have four years if the Government start facing up to it now. On my rough figures, I think that the people who are auto-enrolled will be paying around £5 billion a year of their pay into this scheme. In particular, the over-50s will be paying in something approaching £1,500 million a year. Those are enormous sums. Are we seriously saying that the money cannot be found to fund a provision that we suggest is likely to cost around £100 million a year? Just think about those numbers.
I am disappointed that although the Conservatives feel that means-testing is a problem and they do not quite like this approach because of their concerns about public expenditure commitments—I wish that we could engage and talk about how it could be done—the fact is that the amendment has been deliberately drafted so that it does not specify the method of paying for it. If the amendment is passed, it would be open to us to ask industry for a contribution.
We are saying that the Government, in bringing in this legislation, must make a commitment to auto-enrolled advice, particularly for vulnerable groups. It was bad enough even before the desperate credit crunch, which is clearly not going to go away any time soon, but when two-fifths of all households have negative monthly cash flows and with pension saving virtually down to nil—the squeeze has basically destroyed pension saving at the moment—it is essential that we do not start off personal accounts on the wrong note. If people, particularly the over-50s, were to find that they were being ripped off after a year or two—as quite a few of them will—that would be the worst possible start for personal accounts.
I ask the House and the Government to face up to the fact that a much more substantial commitment to providing advice through a single gateway—a one-stop shop—is essential. The exact way to do that is not sacrosanct for us. We feel that Citizens Advice is the right base because it has a trusted name that people know. I say with great respect to the Pensions Advisory Service that if it carried out an opinion poll I would be interested to know how many people had ever heard of it. It is important to use a name that people know, to build on that and to work around it.
I am afraid to say that last week's Pensions Minister, Mike O'Brien, displayed a very cavalier attitude. What a way to run a Government and a long-term policy. However, we are delighted that our own Minister is now more closely involved. The Government will run the serious risk of derailing the pensions consensus if they persist in their attitude that there is not a serious problem and in their piecemeal approach to giving people proper advice on the toxic interrelationship between debt, means-tested benefits and what is now looming as a pay cut for many people. I warn the Government that we shall not stand by if they do not move on this issue.
My Lords, given the noble Lord's interesting speech, perhaps he can help us a little further. I was interested in his approximate, broad-brush estimate of £100 million. Perhaps he will say a word or two about how he got to that figure. I would be very interested in his assumptions.
My Lords, this does not relate only to pensions; this builds on work that I have done with Vince Cable in the other place on the need for a rollout of a national debt advice service. That is the key point. The incremental cost may be even less. This is clearly a pensions debate, but we have been saying in all the warnings that Vince Cable has been giving about debt generally that we need to move to a much higher gear. That is the kind of figure that we are thinking about. We can talk further about it but that is roughly the figure, on our analysis, as part of an overall national debt advice service.
My Lords, I thank all noble Lords who have participated in the debate and particularly the noble Baroness, Lady Thomas, for moving the amendment on a subject of shared concern—it is certainly a concern for the Government. She referred to the economic backdrop, as did other noble Lords, and clearly these are challenging times for our economy. Our priority as a Government is to guide the country through them on a basis that is focused on being fair. Of course, the thrust of our pensions legislation is to look at the long term.
Let me start by giving one or two statistics because issues around practicalities and capacity were very much on the minds of some noble Lords. We have referred to 9 million to 11 million people being auto-enrolled; around 2 million of those will be over 50 years old, with 3 million under 50 and in debt. Much of the discussion was around personal debt and the impact of that on people's decisions. Clearly people with high levels of high cost debt may well be better advised to opt out, but to focus on the over-50s is, in a sense, the wrong way round from a debt point of view because the data that we have from the British Household Panel Survey 2005 show, basically, that the over-50s are less in debt than other people. In a sense, that is not surprising. Fifty per cent of all auto-enrolled individuals are expected to have some personal debt but that figure drops to only 35 per cent for the over-50s. So, for that reason if no other, focusing on the over-50s does not seem the best possible targeting.
Although I share the concerns of the noble Lord and noble Baroness, the amendment implies that the Government need to be forced to provide information to those being auto-enrolled. That is simply not the case. We are actively considering how to ensure that everyone who is auto-enrolled can find the information they need quickly and easily. It is, after all, in our interests to do so. Those who have questions and cannot get an answer that reassures them may well decide that the safest option is to opt out. That puts our reforms at risk, so we have common cause on this issue.
I assure the noble Baroness that we share the same vision: a clear, simple route for every individual to the information they need in a format they find convenient. To do that, we expect to make available a simple set of contact points in different formats—web, phone and so on—and to link the services together so that people can find their way through them easily.
We want to build on existing services, including those that offer face-to-face help, using their expertise and experience. I know that the noble Baroness shares my high regard for those who are already involved in this field. CAB and TPAS, which have already been mentioned, have strong records in this regard. But those services will need to be added to, adapted and linked to create the unified offering we all want. The development of the money guidance service proposed by Otto Thoresen will make the task considerably simpler.
If there is a distance between us, it is in the assumption which underlies the amendment that face-to-face provision is the best approach. In effect, the amendment would mean that individuals were enrolled into face-to-face advice unless they actively opted out. It is not self-evident that most people will find face-to-face sessions the most convenient and helpful. For many people who are used to using the internet or phone services, being able to get the information they need in their own living room or even at their desk will be far preferable to finding the time to visit an adviser.
Otto Thoresen, in his review of money guidance, concluded that face-to-face provision should represent no more than a minor part of the package. Indeed, the New Zealand pension reforms have succeeded without any offer of free face-to-face advice.
My Lords, if we had a basic state pension anything like New Zealand's, we would be delighted not to have any face-to-face advice.
That is an interesting, but superfluous, point.
The amendment is also based on the presumption that being over 50 is, in itself, a good indicator of poor returns on private pension savings. This is simply not the case. Noble Lords will be aware of the analytical work programme we are doing with stakeholders on incentives to save. Our analysis shows that age is not, in itself, a good indicator of poor returns. So rather than second-guess now what people will want, we are undertaking research to find out. Not to do so could damage these reforms, and that is what concerns me about the amendment.
In the first place, it could seriously distort the allocation of resources, diverting them towards the wrong provision. If the Government were under a legal obligation to enrol everyone for face-to-face advice unless they opted out, we would need to ensure that we could meet the potential demand. The fact that face-to-face services would be the default option would increase demand over and above that which we could expect if there were a level playing field for all channels. People may conclude that if the Government considered it necessary to offer face-to-face advice in this way, they had better use it. Demand would be unpredictable, varying in different locations at different times, yet people would need to be able to get to a face-to-face adviser at a place and time convenient to them before they made the decision on opt out. If the opt-out period is 30 days, that is a very substantial logistical issue.
Providing for this service would be extremely expensive. It is estimated that just an hour's advice for all people aged over 50 could cost up to £150 million, an ongoing cost as people move in and out of work. We would risk wasting money on advisers who were underemployed. At best, we would spend money on providing face-to-face advice to people who may have been better served by other means. That is not the best way to direct resources.
I am also concerned that if an individual cannot make the time to take up this face-to-face advice before making their opt-out decision, they may conclude that they should err on the side of caution and opt out. No doubt some will promise themselves to look at it again when they have time, but we all know how that situation ends.
There is a serious risk that the amendment undermines the simplicity we have been striving to achieve in the auto-enrolment process and threatens the success of the reforms. Of course we recognise that face-to-face support ought to be a component of what people can access. My noble friend Lady Hollis emphasised the limited knowledge that there is of financial matters but referred also to practicality and capacity.
The noble Lord, Lord Kirkwood, said that information is not enough—it also needs to be interpreted. That is right, but in a sense that is the situation for people who have the opportunity to enter into a pension scheme. The fact that there will be personal accounts and auto-enrolment does not change that fundamental issue. Effectively, he argued that although the amendment is targeted on the over-50s, if the logic runs true, it should be made available to all, particularly those younger cohorts who have the greatest levels of debt. The costs and practicalities associated with that would be even greater.
We have a shared concern to make sure that these reforms work and that they enable people to access pension savings when they have not been able to previously. We need to ensure that they are helped to make the proper decisions by providing information. We need to recognise that some people will need additional face-to-face support, but the proposition before us is not the way forward. Indeed, it could be a diversion of resources which could and should be used more generally to support these pension reforms.
My Lords, I thank all noble Lords who have spoken in this important debate. I am not surprised by the level of ignorance about pensions found by the noble Baroness, Lady Hollis. Employees will be told that their contribution will be 4 per cent—3 per cent from the employer and 1 per cent tax relief. We must not forget that some years ago the Treasury found that only 50 per cent of people in the whole country knew what 50 per cent meant.
There are people under 50 who have large debts, but they have much longer to pay their contributions across their working lives. In addition, they will undoubtedly be able to use the internet to get the information they need; the under-50s will not. I think that it was the Pensions Policy Institute which in previous research highlighted that the people whom it then considered to be in most need of help were the over-50s who would rent in retirement. The situation since that research has changed completely: we are now told that the real problem is people remortgaging their houses and finding life very difficult as a result. The good should not be the enemy of the best. This amendment will be even more important in years to come than it is now. My noble friend Lord Oakeshott answered the question about payment for the important advice that would be provided. I commend the amendment to the House.
moved Amendments Nos. 17 and 18:
Clause 13, page 8, line 10, leave out "at any time"
Clause 13, page 8, line 10, after "period" insert "of 12 months"
On Question, amendments agreed to.
Clause 15 [Pay reference period]:
moved Amendments Nos. 19 and 20:
Clause 15, page 9, line 1, leave out paragraph (b)
Clause 15, page 9, line 6, at end insert—
"( ) A reference in any provision to the relevant pay reference period is a reference to the period determined in accordance with regulations under this section, as they apply for the purposes of that provision in the case concerned."
On Question, amendments agreed to.
Clause 16 [Qualifying schemes]:
[Amendment No. 21 not moved.]
Clause 20 [Quality requirement: UK money purchase schemes]:
moved Amendments Nos. 22 to 26:
Clause 20, page 10, line 19, leave out "rules"
Clause 20, page 10, line 22, leave out "must be at least" and insert ", however calculated, must be equal to or more than"
Clause 20, page 10, line 23, after "the" insert "relevant"
Clause 20, page 10, line 25, leave out "must be at least" and insert ", however calculated, must be equal to or more than"
Clause 20, page 10, line 26, after "the" insert "relevant"
On Question, amendments agreed to.
Clause 23 [Test scheme]:
moved Amendment No. 27:
Clause 23, page 12, line 5, at end insert—
"( ) Section 13(1) (qualifying earnings) applies for the purposes of this section as if the reference to a pay reference period were a reference to a tax year."
On Question, amendment agreed to.
Clause 26 [Quality requirement: UK personal pension schemes]:
moved Amendments Nos. 28 to 31:
Clause 26, page 12, line 39, leave out "must be at least" and insert ", however calculated, must be equal to or more than"
Clause 26, page 12, line 40, after "the" insert "relevant"
Clause 26, page 13, line 3, after second "the" insert "relevant"
Clause 26, page 13, line 7, leave out "at least equal" and insert ", however calculated, are equal to or more than"
On Question, amendments agreed to.
[Amendment No. 32 not moved.]
Clause 28 [Transitional periods for money purchase and personal pension schemes]:
In Committee, I raised the issues that have been raised with us by several sources, namely the cost and administrative burdens for SMEs of moving to compliance with this Bill and with the auto-enrolment requirements in particular. I remind the House that on the Government's own estimates this Bill will cost employers £2.5 billion a year, on top of year-one costs, but this will bear disproportionately on small and medium-sized employers. On the Government's figures, £1.2 billion will be borne by SMEs, adding around 1 per cent to payroll costs compared with 0.5 per cent for larger employers. Organisations which represent SMEs believe that the Government's figures massively understate the administrative cost burden that will fall on SMEs and, in particular, on microemployers.
In Committee, the Minister accepted that there were concerns about the impact of auto-enrolment on employers, but conspicuously failed to give the kind of assurances on which the SME sector could place any value. He did not accept that a support package for SMEs, such as that proposed by the Engineering Employers' Federation, was necessary. He did not even commit to constructing the staging of the introduction, as envisaged by Clause 12, so that small employers were last in the queue.
I return to these themes with Amendment No. 33, which would allow the transitional arrangements of phasing, as set out in Clause 28, to be specified differently for different types of employer. At present, the staging provisions in Clause 12 are envisaged to be used for different groups of employer—and it specifically so provides—but there is no such facility for the phasing provisions in Clause 28. What my amendment would allow, but would not require, is for the transitional periods in which the employer's and employee's contributions are reduced below the maximum to be extended for some groups of employer, so that if the transitional periods were set at the minimum of one year for all employers, with their contributions rising from 1 per cent to 2 per cent to 3 per cent over three years, they could be set at, say, two-year intervals for one or more of those stages for SMEs, perhaps giving SMEs a longer period in which to absorb the costs into their system.
I am not wedded to giving support to the SME sector through either or both staging or phasing. There are other options, such as the EEF's proposals for a special support package, which I have already mentioned. What I am keen to see is that special provisions are made in this Bill or outside it to enable support to be delivered in some form to SMEs.
I remind the Minister that the economic environment in which auto-enrolment is now being developed is considerably less benign than when the Pensions Commission first came up with its proposals. We do not know what the economic circumstances will be in 2011 or 2012 in the run-up to the commencement of auto-enrolment but, even if the economy improves, as we all earnestly desire, many employers still in business may be nursing the wounds of the current trading environment. These will be additional strains to those of absorbing the one-off and ongoing costs imposed by this Bill. My amendment would give the Government some additional flexibility to respond to circumstances and deliver aid where necessary to assist in a successful launch of auto-enrolment. I hope that, if the Government cannot accept this amendment, they will have some positive proposals of their own. I beg to move.
While Clause 28 sets out specific arrangements for phasing, moving from 1 per cent to 3 per cent employer contributions over two transitional periods of at least a year, we have retained the flexibility to set the length of the periods in regulations. We believe that our proposed arrangements for phasing will help all employers adjust to the reforms. However, phasing will be of most benefit to the smallest employers who do not currently make workplace pension contributions for their workers. Only 23 per cent of firms with fewer than five employees offer pension provision with an employer contribution, compared to over 60 per cent of firms that have more than 50 employees.
We will consult employers and employer groups to develop the detailed regulations that will establish exactly how long phasing will last. As part of this consultation, we will, of course, consider any views about whether our proposed arrangement is right for all types of employer. We also intend to carry out research into the ability of small employers to absorb and adjust to increases in costs. These findings will inform our draft regulations on the phasing periods. If it became clear that a longer phasing period was required by small employers, we could legislate for different phasing periods for larger and small employers under Clause 28, by exercising it in conjunction with Clause 138. In that sense, the amendment moved today would not be necessary. Looking beyond the phasing policy, we expect that many small employers, who will be engaging with pensions for the first time, will elect to offer the personal accounts scheme to discharge their duty. With that in mind, Clause 78(2)(b) requires the Personal Accounts Delivery Authority in carrying out its functions to have regard to minimising burdens on employers when designing the personal accounts scheme. An employer panel has been established to advise on the design of the scheme.
We believe that these measures will help to minimise the impact of the reforms on employers of all types. We will continue to work closely with employers to develop the secondary legislation for phasing and for all the employer duty and compliance measures. I hope that this provides some reassurance, in particular that what the noble Baroness seeks to achieve in her amendment is already made possible by two separate clauses in the Bill.
My Lords, I am grateful for the clarification on how Clause 28 can be extended by Clause 138. Having looked at it briefly, I might be forgiven for not realising that it had that effect. The purpose of my amendment was to raise the issue of support for the SME sector. I still did not hear from the Government whether they plan to do anything for SMEs, either by staging or phasing, or in any other way. The Minister did not respond to that. Will he do that, before I decide what to do with my amendment?
My Lords, we are pretty much where we were when we discussed the matter in Committee. We are consulting and, when we look at the total costs of the scheme, there will be issues to discuss around procurement before funding arrangements become clear. Knowing more fully what is involved, we will be able to take more informed judgments. We have taken no final decisions on these matters. As I explained, we will consult when regulations are put forward, but we have the scope in the regulations to phase differently for smaller or larger employers.
We recognise that the reforms should impose the fewest possible burdens on employers of all sizes, and small employers in particular. In developing the policy and operational framework for the reforms, we have engaged with employers and their representatives to ensure that we balance our objectives of increasing access to pension savings while minimising employer burdens.
Until operational systems are more fully developed, we cannot predict reliably the final costs of potential administrative burdens. There is no evidence at this stage that financial support would be necessary for small employers. Obviously it would be unwise currently to commit future Governments to spending taxpayers' money in this way. I would like to re-emphasise our belief that we have taken and will continue to take the necessary steps to get the design of the reforms and the scheme right. Any decision around financial support for employers should rightly be left for future Governments to make, based on the evidence available at the time.
As we have said before, we expect staging to occur by business size. However, the decision on how we divide employers into groups is operational. We will not be in a position to consult until we have had detailed input from the Pensions Regulator and PADA on system readiness, but we will consult on regulations that we expect in late 2009. I return to the point that the specific flexibility that the noble Baroness seeks with the amendment is already in the Bill.
My Lords, I thank the Minister for confirming that the flexibility is in the Bill and for what he has said on the burdens on businesses of different sizes being taken into account. He should perhaps recognise that there are still concerns among groups that represent smaller employers. The Government have been keen to say what they could do, but have not said what they will do. That leaves smaller employers feeling that they will bear something which may feel unsustainable when the time comes and not knowing whether their concerns are recognised, especially as—the Minister will know—there is considerable dispute about whether the Government's figures for smaller businesses fairly reflect the cost burdens that will be reflected on them.
I shall not divide the House on the amendment, but will urge the Government to stay in touch with organisations that are in touch with the concerns of all employers, particularly small employers, because these are very real issues that could affect the success or otherwise of any launch of personal accounts. If we put that in the context of a conjuncture where economic circumstances are not good, the Government could be laying straws that break camels' backs without intending to if they are not very careful when they implement these proposals. I beg leave to withdraw the amendment.
My Lords, in Committee I tabled amendments to compare the penalty regime in the Bill with the much lighter regime that the Government have seen fit to impose for national minimum wage avoidance, about which we heard a little in the second Starred Question today. The Minister's objections to those amendments have led to some changes in my approach, and I hope that my attempts today will garner rather more sympathy from him than previously. For example, I appreciate his argument that the regulator already has the power to impose a penalty of £50,000 so it would be inconsistent to reduce arbitrarily that cap for these penalties. We have therefore withdrawn our objection in this area; indeed, we have been so receptive to this that I have not even imposed a cap on the escalating penalty, although I still have severe reservations about giving such an unlimited power to the regulator.
Instead I have addressed our concerns about the possible size of penalties in another way, again by using a technique found in existing legislation. The Competition Act 1998 sets out the penalties that could be imposed on businesses as a function of their turnover. That has many advantages. First, larger businesses, which could pay a penalty without much difficulty and could avoid obligations so as to save a great deal of money, can be hit with an appropriately high penalty. Secondly, at the other end of the scale, small businesses are protected from a disproportionate penalty that in many cases could shut them down altogether—I think everyone would agree that that would not be in the best interests of their employees or indeed the economy as a whole.
Despite my attempts to address the Minister's concerns regarding our amendments, I am sure that he will have found new reasons to oppose these—although I can indulge in optimism at least until I sit down. It is possible that he will object to the limitations these amendments will impose on the freedom of the regulator to impose the enormous penalty of £50,000. However, given that apparently neither the regulator nor his predecessor, Opra, has ever in 13 years' existence imposed a penalty higher than £10,000, I cannot feel that this limitation will hamper the regulator in his duties.
I do not feel that the limitation this amendment imposes on the escalating penalties will be difficult to live with either. The Minister pointed out in Committee that limiting Clause 40 would in effect cap the period within which employers are deterred from continuing to breach their duties. He spoke as though these penalties were the last resort. Of course they are not. A very comprehensive deterrence is still available in the form of prosecution through the courts. If an employer is not deterred by the time he has seen 10 per cent of his annual turnover become liable for confiscation, I feel that the best way to encourage his future compliance would be to expose him to the potential penalty of two years' imprisonment.
The precedents that the Minister highlighted in aid of this uncapped escalating penalty do not in any way justify what Clause 40 does. The Companies House regime, from what I can see, imposes a maximum penalty of £15,000 for a public company filing more than six months late for two years running. Somehow I doubt that any penalty regime under Clause 40 would find itself demanding only £15,000 after two years of non-compliance.
Similarly, the claimed precedent of PAYE requirements does not stand up to scrutiny. The Finance Act 1994 limits the escalating penalty to the terrifying sum of £60 a day. It also caps this escalating penalty at the total tax liability. The noble Lord, being an accountant, would know that only too well. I would be perfectly happy with an uncapped escalating penalty if it were limited to £60 a day rather than the £10,000 we are looking at instead.
I hope that these amendments meet with better success than their predecessors did in Committee. I beg to move.
My Lords, I am grateful to the noble Lord for raising this matter and for giving us the chance to discuss the important issue of the penalty regime. As is common with other penalty regimes, we have set the maximum penalty ceilings in the Bill, with details of the regime to be set in regulations. We will make regulations following further analysis of levels in existing regimes and consultation with stakeholders.
We are considering a range of options which include scaling the level of penalties to employer size, as well as other approaches. This work includes, importantly, establishing that the processes for setting penalty levels are workable in practice.
The amendments to Clauses 39 and 40 propose to limit the total amount of a fixed or escalating penalty dependent on the size of the employer by turnover. The notion of scaling maximum penalties by employer turnover, as suggested in the amendments, presents a number of challenges. It could lead to significant operational difficulties because the Pensions Regulator would require additional financial information about an employer before a penalty notice could be issued. For some employers the regulator may obtain this information from Companies House. However, smaller, micro-employers may not be registered with Companies House—they may not be corporates—therefore the regulator would have to contact them directly. This would create a burden on such businesses, as they would be required to provide the financial information. It could also impede the imposition of a penalty, therefore slowing the processes of ensuring employers meet their obligations. As the noble Lord acknowledged, we have already set the ceiling for fixed penalties at £50,000, in line with the regulator's current limit. An additional cap at 10 per cent would be inconsistent with the regulator's existing regime.
We see any ceiling on an escalating penalty as potentially problematic. The essence of an escalating penalty is that its value directly reflects how long an employer continues not to comply. Capping the level to which it may rise could significantly limit its impact and incentives for employers to comply.
It might be helpful if I gave two hypothetical examples of how much money non-compliant employers could withhold to illustrate that having a large maximum penalty is necessary for the success of the reforms. A medium-sized employer with 100 employees each earning an average of £20,000 per annum would save approximately £45,000 annually by avoiding paying the 3 per cent employer contribution. A large employer with 6,000 employees earning an average of £24,000 per annum would save approximately £9,400 per day by avoiding paying the 3 per cent employer contribution. These examples show that for the maximum penalties to be perceived as meaningful it is necessary for them to be as drafted.
As I say, the essence of an escalating penalty is that its value directly reflects how long an employer continues not to comply. Capping the level to which an escalating penalty may rise could have a significant impact on the escalating penalties and incentives for employers to comply. I reiterate that we are exploring options to ensure that penalty levels are proportionate. This detail will be set out in regulations and we will consult fully employer groups and other interested parties. The draft regulations will be published for consultation in due course and we will welcome further input at that point.
Reference was made to how escalating penalties differ from those provided for by HMRC. HMRC can impose a daily penalty of up to £60 for the late return of income tax self-assessment papers. The Bill sets a daily limit of £10,000 per day. However, as we explained, the actual daily penalties will be set out in regulations. While the principle of the deterrent is the same, the level of penalty needed is completely different.
I hope that that explanation has persuaded the noble Lord to withdraw his amendment. There is still work in progress and we need to have meaningful consultation to ensure that, within the maximums that are set down here, we come up with a regime which does the job and is proportionate.
My Lords, the Minister reminds me of an incident many years ago when a noble Lord who had a stutter addressed the House. That stuttering space, while he managed to get the next word of his sentence out, meant "actually". The Minister reiterates a whole phrase again and again. However, he can set his mind at rest because I have no intention of dividing the House on these amendments. I appreciate that Clause 40 sets out the maximum and that it is very unlikely—I hope impossible—that they will ever be reached. Indeed, I pointed out that the £50,000 has not been reached in the past 13 years. However, I make no apologies whatever for tabling these amendments as, if I had not done so, I would not have discovered that the Government were considering setting penalties depending on the size of the employing firm. That is the underlying idea behind these two amendments. I am very pleased to hear that, as I am sure employers will be. I beg leave to withdraw the amendment.
moved Amendment No. 38:
After Clause 41, insert the following new Clause—
"Guidance on the appropriate level of a penalty
(1) The Regulator must prepare and publish guidance as to the appropriate amount of any penalty under sections 39 and 40.
(2) The Regulator may at any time alter the guidance.
(3) If the guidance is altered, the Regulator must publish it as altered.
(4) No guidance is to be published under this section without the approval of the Secretary of State.
(5) The Regulator may, after consulting the Secretary of State, choose how he publishes his guidance.
(6) If the Regulator is preparing or altering guidance under this section, he must consult such persons as he considers appropriate.
(7) When setting the amount of a penalty under sections 39 and 40, the Regulator must have regard to the guidance for the time being in force under this section."
My Lords, I hope that when considering making penalties appropriate for the size of the relevant firm, as the Minister just mentioned, he will also consider issuing guidance on the appropriate level of a penalty. It is only right that firms should know what they may be in for should they disobey pensions law.
This amendment is a last-ditch attempt to put one of the safeguards in the Bill that the Minister promised would apply. The proposed new clause is based on the Competition Act 1998, which explains its rather lengthy drafting. In Committee, the noble Lord prayed in aid the Macrory review to justify the penalty regime the Bill sets up. One of the recommendations of that review, which the Government claim to have implemented in full, was transparent enforcement. The advantage of such transparency is clear: better information about penalties will lead to better compliance. Therefore, I cannot see any objection that the noble Lord might have to the principle behind my amendment or, indeed, the amendment itself. What possible situation could justify withholding guidelines on the penalty regime from employers, or what could excuse arbitrary deviation from such guidelines?
Since my previous group of amendments failed to win the Government's total approval, I hope that they will accept this one as a palliative measure. With such flexibility and the potential for such enormous penalties built into the Bill, clear and binding guidance is critical. I look forward to hearing the Minister's response. I beg to move.
My Lords, the amendment gives us the opportunity to touch upon transparency, which is at its heart. We agree that it is crucial for employers to be aware of penalty levels and how the regime operates. That is why we are setting out the actual penalty levels and structure of the regime in secondary legislation. This will provide the official framework, and the regulator will not have discretion on deciding penalty levels once the regulations are set. Detailed penalty guidance is more appropriate in regimes where penalties are decided at the regulator's discretion. In such regimes the regulated community will need to be aware of the mitigating and aggravating factors which will influence the level of the penalty.
The regulator will, of course, communicate to employers how the sanctions regime could affect them. We appreciate that, as statutory instruments are necessarily rather technical documents, employers may not want to engage directly with the legislation to learn about the penalty regime. However, requiring the regulator to communicate with employers in a particular way and requiring that they have guidance on penalty rates signed off by the Secretary of State is both unnecessary and cumbersome. While the regulator already uses guidance to help the pensions community understand a variety of topics, they are not required to follow a specific process under their present responsibilities. The regulator is developing a strategy for communicating with employers so that all are fully aware of their duties and what may happen if they do not comply. The regulator can use a number of communication channels to achieve this, including internet publication, direct mail exercises and intermediaries.
Regulations under this clause will be subject to consultation in the normal way. The content of these regulations will be developed following further analysis and full consultation with stakeholders. These regulations will, of course, be subject to scrutiny via the parliamentary process. I hope that has assured the noble Lord that we will communicate with employers to ensure that they are aware of the regime and how it affects them.
Perhaps I can say something about the statutory code of practice for regulators, since the noble Lord referred to Macrory. The code supports the Government's better regulation agenda and is based on the recommendations in the Hampton report. It promotes efficient and effective approaches to regulatory inspection and enforcement, which includes recommendations that regulators enforce in a transparent manner and publish an enforcement policy as appropriate. Regulators are not bound to follow the code if they properly conclude that the provision is either not relevant or outweighed by another consideration.
The Pensions Regulator is transparent in its approach to enforcing existing duties and, as previously mentioned, it is developing a strategy for communicating the new requirements and enforcement actions to employers. One of the communication options that it might consider is an enforcement policy, but there are other ways in which it could meet the transparency objective. I absolutely agree with the noble Lord about the need for transparency. That will clearly be the case. We consulted on the regulations before we reached the final position. I hope that that will reassure the noble Lord.
My Lords, I was amazed—absolutely struck dumb—by the noble Lord's opening paragraph. He gave the impression that the average employer would have on his desk a statutory instrument describing the penalties. The noble Lord in the past must have visited many employers up and down the country, and I wonder—
My Lords, I am sorry to interrupt the noble Lord, but I did not say that. I said that we appreciate that, as statutory instruments are necessarily rather technical documents, employers may not want to engage directly with the legislation to learn about the penalty regime. That is precisely the reverse of what the noble Lord has just said.
My Lords, I think that I am right that earlier he said something rather different. Whether he did so or not, there is no doubt that the employer will not get any information directly from a statutory instrument. He might well get it from a trade organisation or by various other means. That is all very well, but when a matter of non-compliance arises, it is up to the regulator, in telling the employer that that non-compliance is being investigated, to warn him what he is in for. I do not see anything whatever wrong with that. I shall not pursue this today, but I will look with great care at both paragraphs that the noble Lord read out. I may well come back to this at Third Reading. I beg leave to withdraw the amendment.
My Lords, I will also speak to Amendment No. 40. Noble Lords may be aware that the House of Lords Select Committee on the Constitution wrote to us in June and expressed concern over the discretion afforded to the regulator by the Bill to choose whether to suspend the effect of a notice while an employer is seeking a review. The noble Lord, Lord Skelmersdale, tabled an amendment on this issue in Committee. The committee also asked about the lack of provision for a stay of proceedings where cases were being referred to the Pensions Regulator Tribunal. In light of those concerns, we committed to re-examine the review and appeals processes.
On reflection, we agree that making the stay of proceedings mandatory would strengthen the safeguards offered by both the review and appeal processes. It would also provide further transparency and assurance for the regulated community. The amendments ensure that the effect of a notice will be suspended until any review or appeal of that notice is completed. I thank the noble Lord, Lord Skelmersdale, and the Constitution Committee for drawing our attention to this issue. I beg to move.
My Lords, I am extremely grateful to Ministers in the department for thinking through the proposal that the relevant notice should be suspended while the regulator makes his review. I am very pleased by that. I do not know whether the noble Lord, Lord Tunnicliffe, or the noble Lord, Lord McKenzie, will move Amendment No. 40. It strikes me that since the amendments are so similar it would have been appropriate to group them, but grouping of government amendments is in the hands of the Government. I am in the hands of the House; I am happy to speak to the next amendment now while I am on my feet if that is for the convenience of the House.
The noble Lord, Lord Tunnicliffe, has moved Amendment No. 39 to the effect that when a notice, which may be any of the types mentioned in Clause 42(2), is under review, the effect of the notice is suspended for the duration of that review. That is common sense and I have just commended him for it. I am glad, too, that the change is to extend to the appeals to the Pensions Regulator Tribunal. However, I see a slight problem, especially when an escalating fine is at issue. Under the 2004 Act, the appellant has 28 days to appeal the regulator's judgment to the Pensions Regulator Tribunal. Therefore, there is at least one block of time when the notice is suspended.
However, under Section 10 of the 2004 Act, the appellant has 28 days to appeal to the PRT, so there appears to be a lacuna between the two appeals, during which the fine is presumably reinstated. Is that the Government's intention? If so, is it the case that if the appeal to the PRT is successful, the fine, which may amount to £28,000 if it is an escalating fine, is repaid to the appellant? What is the intention? Most important, does the Bill accommodate that intention?
My Lords, this is a satisfactory outcome. I am glad that the Government have taken notice of what the Constitution Committee said. It is excellent to see it doing its job.
My Lords, I thank noble Lords for their comments. The point is technical and it would not be helpful to respond now. We will write to the noble Lord. It is certainly not the intention of the amendment to have a situation where a fine is paid and then refunded. I do not believe that that is the intention of our drafting, but we will confirm that in writing, because I do not have the appropriate brief to be able to say now.
moved Amendment No. 40:
Clause 43, page 22, line 19, at end insert—
"(2A) On a reference to the Pensions Regulator Tribunal in respect of a notice, the effect of the notice is suspended for the period beginning when the Tribunal receives notice of the reference and ending—
(a) when the reference is withdrawn or completed, or(b) if the reference is made out of time, on the Tribunal determining not to allow the reference to proceed.
(2B) For the purposes of subsection (2A), a reference is completed when—
(a) the reference has been determined,(b) the Tribunal has remitted the matter to the Regulator, and(c) any directions of the Tribunal for giving effect to its determination have been complied with."
On Question, amendment agreed to.
My Lords, in moving Amendment No. 41, I shall speak also to Amendment No. 42. We have tabled these two minor and technical amendments to ensure that Clause 43 operates as intended. Amendment No. 41 corrects drafting to ensure that it is clear which aspects of the Pensions Act 2004 are being amended. Without the amendment, the Bill would incorrectly amend a further provision of the Pensions Act, causing confusion. Amendment No. 42 ensures that the changes to the Act that are made by Clause 43 apply also to any corresponding provisions in Northern Ireland. In other words, it ensures that the changes relating to the Pensions Regulator Tribunal apply also to references made under corresponding legislation in Northern Ireland. I beg to move.
moved Amendment No. 42:
On Question, amendment agreed to.
Clause 49 [Prohibited recruitment conduct]:
[Amendment No. 43 not moved.]
Clause 53 [Inducements]:
[Amendment No. 44 not moved.]
Clause 59 [Requirement to keep records]:
My Lords, this amends the record-keeping provisions of Clause 59, which has a regulation-making power to allow the Government to specify record-keeping requirements for up to six years. I tabled a similar amendment in Committee to ask the Government to explain the relationship between this power and the 1994 insolvency regulations, which in general have much shorter periods for record retention following the winding-up of a company. The Minister said that the Government needed to think about this further and I have had a helpful discussion with him. I have tabled my amendment again in order that he may enlighten the House as to the record-keeping requirements for companies that are wound up. I beg to move.
My Lords, I am grateful to the noble Baroness for giving me the opportunity to bring enlightenment to your Lordships' House on this matter. Clause 59 enables the Secretary of State to make regulations that would require any person to keep prescribed records for up to six years and to provide those records to the regulator on request. Where a company has been wound up, its records pass to the control of the liquidator, to be retained for as long as insolvency legislation requires. The provisions regarding record keeping by insolvency practitioners are found in the 1994 insolvency regulations. Under these regulations, following a voluntary winding-up, the records may be destroyed by the last liquidator of the company one year after the dissolution of the company. Under Regulation 16(1), in a court winding-up, the records may be destroyed at any time with the authorisation of the official receiver.
I reassure noble Lords that there is no intention to make any regulations that would be inconsistent with these regulations. We are working with the Insolvency Service to make certain that the regulations are fully consistent with existing insolvency provisions. Where a corporate entity has been wound up and ceases to exist, any prior obligation that it would have had to keep records would cease to have effect and the insolvency regulations would become relevant. I hope that that response was what the noble Baroness was seeking and is clear enough for her. There is no intention of imposing a second obligation on anyone else in those circumstances.
moved Amendment No. 47:
After Clause 66, insert the following new Clause—
"Policy on ethical investment
(1) In carrying out its functions under section 66, the trustee corporation must secure that—
(a) a written policy on responsible investment is prepared and maintained;(b) the policy on responsible investment is reviewed at such intervals, and on such occasions, as may be prescribed and, if necessary, revised; and(c) the implementation of the responsible investment policy is incorporated into the trustee corporation's annual report and in the statement of investment principles.
(2) In this section "responsible investment" means determinations about the environmental, social, human rights and good governance ("ESHG") practices of the institutions in which investments are made by or on behalf of the trustee corporation, and their relationship to the long term profitability and sustainability of those institutions.
(3) A policy on responsible investment may include powers for the trustee corporation, and anyone appointed by the trustee corporation to manage the investment of pension money, to—
(a) engage with persons, from whom the trustee corporation purchases securities, to ensure that such persons act, or take steps to act, in accordance with the trustee corporation's policy on ESHG practices;(b) disinvest or sell, or not purchase or invest in, securities issued by persons whom the trustee corporation determines on reasonable grounds conducts, or has investment in, business operations that are associated with the commission of crimes against humanity, war crimes or genocide, the content of which is defined in the Rome Statue of the International Criminal Court and adopted into English law by the International Criminal Court Act 2001 (c. 17).
(4) A policy on ethical investment shall be in writing.
(5) The annual report referred to in subsection (1)(c) on implementation of policy against the statement of investment principles shall be made publicly available and cover—
(a) key aspects of the trustee corporation's investment policy and practices against the investment principles;(b) any significant changes in the policy and practices in investment policy against the investment principles over the previous year."
My Lords, I am moving the amendment in the absence of my noble friend Lord Judd, who has asked me to apologise for his unavoidable absence. I pay tribute to the Aegis Trust for its support for the amendment.
The purpose of the amendment is to require the trustee corporation to prepare, publish and implement a responsible investment policy as part of its investment principles. A responsible investment policy means that, in addition to the normal principles that are applied in making investment decisions, the trustee corporation would take into account such environmental, social, human rights and governance practices of the institutions in which the investments are to be, or are already, made as are provided for in the policy that the trust corporation will have prepared and published.
It is important to emphasise that there is no intention to impose a specific and responsible investment policy on the trustee corporation. It is for the corporation to prepare its policy and to make it as demanding as it sees fit. The amendment should be considered in the context of the statement by the Minister for Pensions, which, in his customary and fair way, my noble friend the Minister drew to the attention of the House in Committee. It states:
"If we are to build a more successful, vibrant, modern economy we can no longer afford to view economic success as being in conflict with social and environmental goals. On the contrary these goals must be seen as integral to economic success and the very essence of sustainable development".
That is the precise reasoning underpinning the amendment. We want the pension corporation to take into account these social and environmental goals of which the Pensions Minister spoke. We believe that the amendment would not only give effect to government support for responsible investment but be of positive benefit to the corporation's trustees, who would know that it was perfectly legal for them to take social, economic, environmental and human rights practices into account in making their investment decisions.
Some trustees believe that the law does not permit them to take ethical practices into account in making their investment decisions. Rather more trustees question whether it is lawful for them to actively engage with corporations in relation to what they see as unethical practices. Even more trustees do not believe that they are permitted by law to disinvest from corporations whose practices they see as anti-social, anti-environment or anti-human rights.
The amendment would make it clear to trustees that it is perfectly lawful for them to act in this way. My noble friend the Minister made it clear in Committee that the Government are sympathetic to ethical investments but that they would not agree to include them in the Bill for at least two reasons. The first was the primacy of the trustee of any pension scheme when making investment decisions. However, it is difficult to understand why this principle is so sacred. Trustees have no primacy, for example, to make investment decisions that benefit them personally. They are subject to fiduciary duties and to the requirements of their regulators. It is hardly an infringement of trustees' primacy to require only that they take into account unethical practices that could harm people or the environment. It is arguable that the trustees' failure to take account of such practices could be a breach of their duty to act responsibly.
The Minister drew attention to the costs and said that the costs of the corporation trustees should be kept to a minimum. It is important to be realistic about costs. The cost of a few extra members of staff to look into environmental and associated matters would be minuscule in relation to the scale of the costs of running the investments that are likely to emerge.
The Minister was good enough to invite my noble friend Lord Judd and me to see him. We greatly appreciated that gesture and the fact that he listened carefully to what we said. We still could not convince him but, in view of the points that I have made, perhaps he will feel that the amendment fits in completely with government policy. I beg to move.
My Lords, I rise briefly to support the amendment and apologise for not being here at the beginning of the remarks of the noble Lord, Lord Joffe. The Committee is moving at a very fast pace all of a sudden and I am afraid that I was at a meeting.
The amendment concerns a very important principle. It is an issue that we fought over long and hard during the passage of the then Companies Bill and the Climate Change Bill, and we made some very good progress. I welcome the fact that the Government have been engaging with us on this issue. The noble Lord, Lord Judd, was surely right when he said in Committee that pensions should be about equality, dignity and fairness, and that should also apply to the question of where pension money is invested. It can of course be a power for good but equally, as we very well know, that may not be the case. Surely it is self-evident that pension money should not be invested in companies associated with, as stated in the amendment, crimes against humanity, war crimes or genocide.
The amendment is in line with what we agreed in the Companies Act and more recently in the Climate Change Bill, although we have to ensure that the amendments that were agreed in this House are adhered to and not watered down in the other place. As we know, companies are moving in this direction in terms of corporate responsibility, and that is an extremely welcome development.
These are not mandatory requirements, welcome though that might have been, but they open up what policies are in place by having the written policy on ethical factors there to try to motivate investment decisions. For pension funds to assess this issue properly, they need to take corporate responsibility into account as a factor. That does not necessarily go against corporate interest in that pressure on companies in such a situation will have an effect on their share price. Pension funds are of course mindful of that and their members are now much more likely to hear about and react to such stories than used to be the case prior to the internet and the spread of global information.
As I and the noble Lord, Lord Joffe, said, the Government seem to have been listening. That is very welcome, and I look forward to hearing what the Minister has to say in reply.
My Lords, I, too, welcome and support the amendment. I do so partly from the experience of the Church of England Pensions Board, which for many years has worked to the ethical policies established for it by the church successfully and effectively. It seems to me that our experience of ethical policy within the church has enabled us to maintain particular ethical standards, which have been extremely important for the life and witness of the church and, I hope, for the encouragement of others in areas of ethical investment.
It is becoming increasingly important that sustainable development should be at the heart of much of our legislation. This seems to me to be an ideal opportunity to go with that principle in total accord with the Government's aims, and I very much hope that the Government will see fit to accept the amendment.
My Lords, I start by paying tribute to the Aegis Trust for its valuable work on the amendment. From the Liberal Democrat Front Bench I thank my noble friend Lady Northover and my noble friend Lord Joffe—if I am allowed to call him that—with whom I have long and happy experience of working on charitable matters.
This is an important principle and we on the Front Bench are sympathetic to it. I think it is fair to say that the debate has probably moved on a little since Committee. We particularly welcome the detailed and very inclusive discussions that we know the Minister has been having with both the movers of the amendment and PADA in particular.
We are concerned to ensure that such changes do not add significantly to costs or make the operation of PADA more complicated, because obviously it must be a simple, low-cost scheme. However, we believe that these are sensible points for PADA to consider. To be honest, I would define a little more widely why I think the cost argument might favour something such as this amendment. Even over the past few months, we have seen how the operation of pension funds can facilitate the wrong sort of activity—and very damaging activity—in markets. I would define social responsibility also to include things such as not facilitating the activities of short-sellers and hedge funds, and being very careful about stock-lending, for example. In the past few weeks, we have seen what I can only call the short-selling wolves in bank shares feeding on fears and causing great distress and problems for the country. That sort of thing needs to be included within good governance in relation to ethical investment.
The other point on costs—I find this most distasteful—is that a series of companies have announced that they are to move their headquarters to Dublin from this country for tax purposes. Often it is just two men and a dog and is not really moving but it is clearly tax-dodging. To me, that is also bad governance and should be considered in relation to ethical investment. I am particularly concerned about Henderson, which is an old established, pukka British fund manager. It is the same family that founded Cazenove. It runs many billions of pounds in ethical funds for British local authorities, charities and public bodies, yet it has just announced that it is to move its headquarters to Ireland for tax purposes. How socially responsible is that? Therefore, if as part of our consideration of the Bill we can try to stop people doing that sort of thing, we will save costs. We will recover some costs for the benefit of British taxpayers and pensioners in general.
We are very concerned to keep things simple. We know that the Minister has been engaging in this and we look forward to hearing what he has to say but we think that the mover of the amendment made some good points.
We had a long and comprehensive debate in Committee on a similar amendment in the name of the noble Lord, Lord Judd, and I can do no better than reiterate the comments of my colleagues in another place: we believe in the need for a proper appreciation of the importance and benefits of ethical investments. I agree with the Minister, who said that pension schemes are a,
"significant area for ethical investment".—[Hansard, 10/7/08; col. 915.]
However, yet again the argument, and indeed the amendment, have been limited by the intention that trustees should take account of ethical investment principles in terms of personal accounts rather than more generally. If ethical investment is such a good thing—and indeed it is—surely it should be considered by the trustees of all pension schemes. As I understand the position—the Minister will be able to correct me if I am wrong—to an extent it already is because, under existing trust law, trustees must prepare a statement of their investment principles which is sent not only to fund managers but also to members and prospective members, and most importantly must include the extent to which social, environmental and ethical considerations are taken into account in the selection, retention and realisation of investments. In other words, that is something like 75 per cent of what is sought in the amendment.
The ex-chairman of PADA has not yet been introduced to your Lordships' House as Lord Myners, so he cannot say whether, before he left, PADA had yet started on a round of consultation on socially responsible investment, which by definition includes ethical investment. Given his ministerial responsibility, perhaps he never will be able to tell us in person, but I am sure that the information will filter through somehow.
I say to the noble Lord, Lord Joffe, that work is apparently progressing, but that the amendment does not really cover what it needs to cover.
My Lords, I am very grateful to my noble friend Lord Joffe for moving this amendment and to all noble Lords who have participated in this short but important debate. At the outset I say—I hope this will not come as a disappointment—that we do not feel able to accept the amendment. The purpose in seeking it to be laid was to provide an opportunity to state again the Government's position and to outline what PADA has underway in terms of investment consultation—an upcoming event. We discussed that when we met. When I met with my noble friends Lord Joffe and Lord Judd, I fully understood the concerns driving the amendment and I was sympathetic to their intentions.
In setting up a new workplace pension scheme on the scale of personal accounts, it is hugely important that responsible investment is properly considered. But, as in any other trust-based scheme, the trustees must be allowed to make investment choices that are right for their members. It would not be appropriate for the Government, or Parliament, to impose any guidelines which might restrict a trustee's ability to act independently in carrying out the overriding duty to the members.
Furthermore, as the noble Lord, Lord Skelmersdale, and others have identified in recognition of the importance of responsible investment, current law already requires the trustees of pension schemes to prepare a statement of investment principles which must be made available to members and prospective members. It sets out the guidelines which fund managers must follow in investing members' funds. In the statement of investment principles, trustees of pension schemes must already state to what extent social, environmental or ethical considerations are taken into account. That is an obligation on trustees—not simply a right or an option.
The delivery authority has already confirmed that it will consult on investment and will be holding a responsible-investment event later this year. My upcoming noble friend—Lord Myners—may not be able to say that in person, but he was at the meeting with my noble friends Lord Joffe and Lord Judd and I know that if he were able to deliver that message directly he would do so enthusiastically, as he is a great supporter of socially responsible investment.
Originally, the amendment was laid to enable me to speak again on disinvestment. The proposed new clause seeks to provide the trustee corporation with the right to disinvest from investments associated with crimes against humanity, war crimes or genocide. In responding to this issue, I would like to take the opportunity to provide some clarification on the current operation of the law in this area.
There is no reason in law why trustees cannot consider social and moral criteria in addition to their usual criteria of financial returns, security and diversification. This applies to the trustees of all pension schemes. Of course, disinvesting may not be the most appropriate approach for pension scheme trustees looking at the long-term sustainability of their investments. Engagement may be the right approach in any particular case.
I hope that I have been able to put clearly on record the Government's position on responsible investment by pension schemes. We take this matter seriously and it is one on which, as I have already mentioned, the delivery authority will be consulting. A component of the authority's approach, as I have said, is to hold a specific stakeholder event on responsible investment shortly and I urge all noble Lords who have participated with passion in this debate to take the opportunity of engaging in that event. That would be an important part of the process which is undertaken in respect of recommendations to the trustees about investment policy.
I am grateful to noble Lords for their insightful and thoughtful contributions to this debate. I hope that noble Lords will not press the amendment, but see that there is a very clear way forward to engage in investment policy.
My Lords, I am grateful for that thoughtful response. Does the Minister agree that aggressive tax avoidance, such as moving company headquarters offshore, or the aggressive use of tax havens to avoid business taxes or taxes like stamp duty, is an important part of assessing whether companies are acting in a socially responsible way?
My Lords, the noble Lord challenges me on a very interesting and important issue. I suppose there is an issue of where an investment is located and whether one makes a judgment narrowly, say, in relation to the UK's domestic interest, or more broadly and whether companies are engaged in simply taking advantage of the laws that exist or are doing something beyond that. I rest my defence by saying that, ultimately, that is a matter for the trustees or for my Treasury colleagues, and not for a lowly DWP Minister.
My Lords, I am grateful to the Minister for clarifying the law and the consultation process, for his courtesy throughout the debate here and in Committee and for being prepared to engage on the issues. I shall need to discuss with my noble friend Lord Judd whether to bring this back at the next stage. In the mean time, I shall withdraw the amendment.
moved Amendment No. 48:
After Clause 67, insert the following new Clause—
"Scheme orders: transfers
(1) An order establishing a scheme must provide that the scheme may not—
(a) accept transfers into the scheme from other approved schemes, or (b) make transfers out of the scheme into other approved schemes, except in circumstances which are prescribed in the order.
(2) This section ceases to have effect on 1st January 2017."
My Lords, I shall speak also to Amendments Nos. 49 and 50. These amendments are similar to some which I moved in Committee and focus on concerns which have been expressed about the way in which personal accounts will operate in practice. We had good debates in Committee but concerns remain, so I have tabled these amendments to seek further clarification from the Government. I have been briefed by the Association of British Insurers, which represents the insurance industry and has a considerable involvement in the provision of defined benefit contribution arrangements for employers and individuals. To put it in a nutshell, the industry wants to continue to be involved in defined contribution business but it has real concerns about the way in which personal accounts might operate.
Amendment No. 48 amends Clause 67. When a personal account pension scheme is set up, it must, at least until 2017, prohibit transfers in or out except in specified circumstances. Banning transfers has the advantage of minimising complexity in the early days of personal accounts, which PADA has said is an extremely important issue. However, there are also substantive reasons, and the whole area of advice on which we have touched today is one that applies also to transfers. It is important that personal account holders make rational decisions on whether to transfer in or out, and it can never be assumed ex ante that transferring in or out is the correct decision.
The Minister explained in Committee that the Government did not intend to ban transfers in or out, at least until the review of personal accounts which will start in 2017. He said that there will be two exceptions to that for pre-vested pension rights and for pension credits on divorce. He then suggested that stranded pots might also be addressed, so it was clear that that was still something of a moving feast. Accordingly, while we were substantially happy with what the Minister said in Committee, I have tabled this transfer amendment in order to hear from the Minister the Government's latest thinking.
I approach Amendment No. 49 in a similar vein. The amendment is to Clause 69 and states that the annual contribution until 2017 should be no more than £3,600—indexed, of course. No annual limit appears in the Bill, and this has been a matter of concern as different figures have been mentioned by the Government. There are still those lobbying for higher figures. The insurance industry is concerned that if a figure higher than £3,600 is used, the personal accounts scheme will stray out of its core mission to provide pensions for those within the target groups.
To be fair to the Minister, which I am sometimes, in Committee he said:
"We are committed to an annual limit of £3,600".—[Hansard, 2/7/08; col. 292.]
I ask him once again to say why, if the Government are genuinely committed to that figure, they will not place it in the Bill—even if it should last only until 2017.
Amendment No. 50 also amends Clause 69, by deleting subsection (3). The subsection would, if the Government used the power, allow for an amount of contributions over and above annual contributions. We do not support this added complication, especially as it is far from clear that people would be well advised to lock up their money in a personal account. That is another of the advice-free zones which could cause trouble, and other investment vehicles are available which could offer a better solution. But this amendment, unlike my two previous amendments, takes us into territory for which we do not have a previous government policy statement.
The Minister said in Committee that the Government were considering PADA's advice on a lifetime allowance for extra contributions. Many people have been waiting for the Government to say what they intend to do in this area. If the Minister cannot accept my amendments, I hope that he can instead make a definitive statement of government policy. I beg to move.
My Lords, I am grateful to the noble Baroness, Lady Noakes, first, for tabling the amendment because it allows associated issues to resurface and, secondly, for being so fastidious in her fairness to the Minister.
I want to make three points, though I am more confident of the first two. On the third one, although I am batting technically out of my range, I suspect that the noble Lord, Lord Oakeshott, will be able to confirm my apprehensions in this area. My first point is about stranded pots, raised by the noble Baroness. Perhaps I may remind your Lordships of the example which I gave in Committee of a hairdresser who might pile up £18,000, say, in a personal account and have £2,000 and £3,000 in two other small pots as a result of previous employment. Currently, the £18,000 in the big pot means that she cannot commute the little pots, but the little pots are too little to annuitise. Without the right to transfer the two little pots into the bigger pot, she loses them altogether. Effectively, it is theft—bureaucratic theft, if you like. Presumably, the money will go to the members of the original scheme and their defunct assets.
My noble friend the Minister and other Members of your Lordships' House were sympathetic to this issue. We need some way of ensuring that a man or woman with modest savings does not lose a modest but sizeable chunk of them simply because they are too large to commute but too small to annuitise. There must be some way of corralling them. I take the point that we do not want to destabilise existing schemes and I understand the five-year rule, but I hope that my noble friend will reassure us that at the point of retirement—whether it is before or after 2017, and given the roll-up time for personal accounts it will probably be after then—when there is no risk of destabilising any existing arrangements, smaller pots where the provider is not willing to annuitise may be imported into the bigger pot which is above the trivial commutation limit. That seems the only way not to lose those funds.
My second point relates to Amendment No. 49. I do not think that it will happen often, but there could be circumstances in which someone would wish to bring into play a personal account contribution for a missing year. They may have taken a year out to have a child, for example, and in the following year be able to make that up from savings. I am not suggesting that the employer will, but the employee may. I hope that my noble friend can assure us that that can be the case.
With my third point I am very much out of my range, so I would welcome any comments from noble Lords on whether my apprehensions are valid. This is a growing issue which has been raised with perhaps two or three professionals in the field. It is that when prospective companies buy out defined benefit schemes from employers, they engage, or increasingly are likely to engage, in a form of cherry picking by encouraging enhanced transfer value—to encourage people not to stay in the DB scheme but to leave it. They do that and make it attractive by adding a cash bait to take up the transfer and not to stay in the scheme. The evidence is that in these hard-pressed times the cash bait—putatively, £5,000 on a transfer of £50,000, for example—is proving considerably attractive and will destroy people's pension entitlement.
I was told by a pensions professional that this scandal is beginning to emerge and could turn out to be as serious as that of policy protection insurance. I do not know whether that is an overstated claim—it is not my field—but I know that at least one exceedingly major company is engaged in this practice. It is alleged that some other companies are considering whether they should follow suit or whether they regard it as unethical. I do not expect my noble friend to have an answer on the spot now, but I would welcome comments from Members who know much more about this field than I do whether that is a valid fear.
I am grateful to the noble Baroness, Lady Noakes, and I ask my noble friend the Minister to confirm that we will be able to make decent and fair arrangements for standard pots along the lines I have suggested. Will he also confirm that someone could make good missing years on their contributions into personal accounts before 2017 and continue to do so thereafter? Thirdly, does he share my worries about bribing people out of DB schemes with a cash bait associated with transfer values? If so, what will the implications be for long-term savings and pension provision?
My Lords, that was an interesting and wide-ranging speech. I am flattered that the noble Baroness, Lady Hollis, thinks that I may be able to answer the riddle of the little and big pots. I am not an expert on that, but I agree that it is a problem. I would go further and say that I do not agree with these amendments. I say to the noble Baroness, Lady Noakes, that they are nanny-state amendments and are unnecessarily restrictive. We should be encouraging people to save for a pension in whatever way they wish. We believe that the Government have been weak in caving in to industry lobbying—it is interference in free consumer choice. We do not support restrictions such as these—indeed, we are doubtful whether restrictions are necessary.
At the end of her speech, the noble Baroness, Lady Hollis, raised an interesting point about enhanced transfer values and DB scheme buyouts. Although I have no personal experience of that, I am, like her, hearing some worrying reports. It is important that there should be a rigorous requirement for proper independent advice to be given before anyone undertakes such a transaction. It is too easy to hand out a cash carrot to hard-pressed people, and they may be making a very bad decision. Like the noble Baroness, I raise the issue with the Minister and hope that the DWP is on the case. It needs urgent action because the reports are worrying.
My Lords, I very much follow the line of what has just been said. The argument which the noble Baroness, Lady Noakes, seemed to put forth in her analogy is that, as a figure is mentioned in Clause 13 and it is reviewable in Clause 14, the logical corollary would be to provide a figure in Clause 69. But I do not think that that is a logical corollary at all. Is that the nature of the argument? Amendment No. 49 refers to reviewing the value in the same way as Clause 14 does, but Clause 14 is reviewing the value of the figure in Clause 13. Will my noble friend comment on the apparent belief that this is simply a logical corollary of having the figure in the Bill in the first place?
My Lords, I can confirm the point made by the noble Baroness, Lady Hollis. I am a member of two defined benefit pension schemes. When I wrote to the administrators of both schemes about six months ago to find out what pension I might expect to be paid when I reach the retirement age in both cases, one of them interpreted my letter as a suggestion that I might like to transfer out of the scheme into another scheme and offered me a cash benefit to transfer out. Indeed, the letter was framed as though that would be the natural thing to do and that unless I took advantage of that within a certain period of time, this attractive offer would be lost.
Exactly, my Lords. As I reckoned that I was much better off staying in the defined benefit scheme—of course, there is a risk that the body that will be paying it may not exist in its present form at that time—I did not respond to the letter. The noble Baroness is right that this is going on and is widespread.
My Lords, the noble Baroness has a point. One has to look very carefully at the way in which such letters are written. The letter I received clearly showed a misinterpretation of my request to the administrator.
My Lords, I thank the noble Baroness for these amendments and all noble Lords who have spoken in this wide-ranging debate on some fairly narrow amendments. We are committed to ensuring that the personal accounts scheme remains focused on the target market of low to moderate earners. We have been very clear both in this House and in the other place that we will introduce a number of measures to protect existing pension provision when the scheme is introduced, in particular provision for an annual contribution limit and a general ban on transfers to and from the scheme. Our aim has always been to ensure that the personal accounts scheme should complement rather than replace good pension provision.
Amendment No. 48 sets out that the scheme order must include a ban on transfers into and out of the personal accounts scheme except in prescribed circumstances, and that the ban will be removed in 2017. Similarly, Amendment No. 49 seeks to insert into the Bill an annual contribution limit until 2017, adjusted annually in line with the qualifying earnings band.
We have clearly committed to set out in the scheme order the detail of the ban on the transfer of pension funds into personal accounts. We have also committed to specifying through secondary legislation the ban on transfers out of the scheme. Existing legislation, the Pension Schemes Act 1993, gives individuals the right to transfer out of a pension scheme. Clause 130 therefore makes amendments to those provisions to give us the scope to introduce a general ban on transfers out of the scheme. This amendment is therefore not necessary to give effect to the ban on transfers in and out of the scheme. Furthermore, it would tie a future Government to the date by which a transfer ban must be removed.
On the contribution limit, we have always been clear that we intend to set the limit at £3,600 in 2005 terms. That has not changed. We fully expect to uprate the annual contribution limit in line with changes to average earnings on an ongoing basis. We must remember the uniqueness of this feature in an occupational pension scheme. We have agreed that it should be a feature of the personal accounts scheme to protect the existing market. However, as we also recognise the impact that it might have on an individual's capacity to save, we need to avoid tying the hands of future Governments when it comes to ensuring that the annual contribution limit maintains its value.
Amendment No. 49 would also have the effect of removing the annual contribution limit from 2017. Combined with the lifting of the ban on transfers, this would enable an individual to place an unlimited amount of contributions in the personal accounts scheme from that date and to transfer pension funds in or out of the scheme. The aim of the 2017 review is to establish whether the transfers ban and the contribution limit remain necessary. These amendments would pre-empt the outcome of the review.
Our current policy of setting out in the scheme order the detail of the ban on the transfer of pension funds into personal accounts and specifying in secondary legislation the prescribed circumstances in which members will be prevented from transferring out of the scheme does not pre-empt the review. Only the current drafting of Clause 69—which allows for a contribution limit but also allows the Secretary of State to repeal it if evidence in future suggests that that is appropriate—covers all outcomes of the 2017 review.
Amendment No. 50 seeks to remove the Secretary of State's ability to prescribe other contribution limits. We have always been aware that there will be individuals with irregular contributions or broken work patterns who may want the scope to make lump sum payments to their personal account to boost their pension savings. This is why, as discussed previously, we are taking a discretionary power to allow for an additional facility such as a lifetime lump sum contribution limit that could run alongside the annual contribution limit. We have also been very clear from the start that we would implement this facility only if it can be done while delivering on the principles of low cost and minimising the impact on the existing industry. That is why, as noble Lords are aware, we have asked the delivery authority to advise on this issue.
The delivery authority has provided its advice and recommended against having a higher limit of £10,000 in the first year of the scheme or introducing a lifetime lump sum limit when the scheme commences because that would introduce additional complexities and complicate communication with individuals as well as increase risk for the administration of the scheme. It has also recommended that we reconsider the lifetime lump sum facility in 2017 when the scheme is fully up and running and when we know more about the saving behaviour of the target market. We have considered its advice very carefully and accepted its recommendation. However, we understand the concerns of those stakeholders who have called for these two features. That is why it is important that subsection (3) remains in the Bill, so that the scheme can offer an additional contribution facility from 2017 if that is considered appropriate and necessary.
I shall pick up on one or two other points. My noble friend Lady Hollis asked about stranded pots in pension schemes, an issue we touched on in Committee. We agreed to examine the Government's approach to individuals with stranded pots. Although officials have discussed with stakeholders the extent and nature of the problem, there is no agreement on the scale of the problem or immediately obvious solution. Officials are currently working with the ABI and other stakeholders to understand the extent of the problem and the barriers that prevent individuals transferring their pensions into a single pension fund.
Abolishing contracting-out provisions in the Bill will help to alleviate stranded pots in defined contribution schemes. It was previously suggested that individuals should be allowed to transfer small amounts into the personal account scheme. However, we do not think that that is the solution for stranded pots in other pension schemes. Preventing transfers between personal accounts and the rest of the pensions market will keep the scheme focused on serving the needs of our target market, facilitate the smooth introduction of the new scheme, maintain simplicity in administration for individuals and employers, prevent replication of services for existing providers and, most importantly, help to keep costs down for members of the scheme.
My Lords, before my noble friend leaves that point, can he assure me that the Government do not intend to allow the situation to continue where the very people whom we are all seeking to help—the low paid, especially women who have very modest savings—find themselves losing £2,000, £4,000 or £6,000 because we cannot agree on what should be done? It seems to me that there are perfectly good ways straightforwardly to do so. Surely my noble friend cannot be saying that the Government will allow that money to be lost to them in perpetuity.
My Lords, indeed that is not what we are saying. We have recognised that as an issue; we have recognised that work needs to be done to understand the scale of the issue and provide an effective solution to it. One question that I posed to officials when we were discussing the matter was: do we need another Pensions Bill to provide a solution? The answer was: almost certainly not. Finance Bills would be the mechanism to do that, and, as my noble friend knows, they come along quite frequently.
My Lords, surely that cannot be right. When my noble friend Lord Fowler introduced portability of pensions, it was necessary to have primary legislation. I know that in recent years the Government have changed the length of time for which one has to hold a pension before it becomes portable and that, I think, was done by statutory instrument. None the less, if a change such as the noble Lord has just talked about should come about, I would be very surprised if it was not by primary legislation.
My Lords, I did not say that it would not be by primary legislation; I said that it could be dealt with via a Finance Bill. That is the advice that I have received, so there is a ready mechanism. In a sense, that is a subsidiary matter. I reaffirm to my noble friend that this is actively being worked on, but issues need to be resolved and a solution produced.
My Lords, this is a wide-ranging debate, but I found that an exceptionally disappointing answer. I could hear the long grass growing as the Minister spoke. I do not see why a lot more work is necessary to establish the scale of the problem. Surely it is a very simple principle: if people have a pot of two or three small amounts such as that, one could set a limit, whether it is £2,000, £100 or £5,000. If that is the limit, that seems a very simple and straightforward principle. The arguments that the noble Baroness has given are quite clear. The amount of money involved cannot be enormous. It is a straightforward, simple question of justice. Unless we have some evidence and response before Third Reading, we shall move an amendment on the matter then. His response was extremely disappointing and does not match up to the problem at all.
My Lords, I have not finished my response yet, but it is the noble Lord's right to move whatever amendments he wishes at Third Reading. I simply hang on to the point that it may be easy to describe the circumstances one is seeking to address, but that does not necessarily immediately extrapolate into an understanding of the scale of the problem and the best way to solve it.
I stress to my noble friend that this is work in progress; work is going on. I was especially going to say to her that, over the summer, there has been consideration of transfers out of personal accounts. It has been agreed that we will allow transfers out of personal accounts at the age of 55 for the purposes of decumulation. That is a contribution, although I accept that it does not deal with the totality of the issue.
My noble friend also asked about the missing year. Given that we are fixed on the annual contribution of £3,600 uprated by earnings until we get to the review in 2017, the scope for dealing with the missing years will be in the headroom that that already provides, but there is no proposal further to change arrangements before that review. As we discussed in Committee, that £3,600 level provides a reasonable amount of headroom, certainly to pick up one year.
My noble friend Lord Lea asked whether we have to specify in the Bill whether other provisions are in Clauses 13 or 14. I do not think that that follows. It is always an issue when the Government give assurances. Some want it firmly implanted in the Bill; some do not. It is a judgment in each case. Oppositions generally press us to put everything in the Bill; for some reason they do not trust the Government's word—is that not very strange? There is no logical reason why, just because it is in those earlier provisions, it should be in this one.
My noble friend talked about DB schemes, buyouts, enhanced transfer values and cash baits, as did the noble Lord, Lord Oakeshott, and the noble Viscount, Lord Trenchard. I would like to take that issue away and get some early focus on it. Perhaps we can invite those noble Lords who have contributed to the debate to come to a meeting so that we can scope out precisely what we are dealing with here. If the noble Lord has a letter that he is happy to share with us, that would also be helpful. Let us get the issue looked at again and understand the scale of the problem.
I hope that that has dealt with the issue. I suppose that in all of that, the noble Baroness may have gleaned that I would prefer that she withdraw her amendment, but I hope that I have given her clearly the assurances that she wanted. I have not addressed the issue of transfers-in, where we identified just two incidences where we would support those uninvested pots and pension credit on pension-sharing. Apart from that, we contemplate no other provisions.
My Lords, I thank all noble Lords who have spoken in this debate, including those who did not support my amendments. I thank the Minister in particular for his detailed reply. He gathered from the way in which I introduced my amendments that I was seeking clarification and restatement. Although it would have been preferable in the Bill, to be honest, I did not expect the Minister to accede to that request. I had not appreciated that in proposing those amendments I was denying the Government or a future Government the ability to set annual limits in future. That was clearly my error.
What the Minister had to say on the annual limit, the lifetime limit and transfers was broadly satisfactorily. I am grateful to him for restating that and basically saying that those things will be dealt with in 2017. There is an open issue on stranded pots. The noble Baroness, Lady Hollis, made a good case, if it is backed by facts, for there being hardship or inequity in the current position. I hope that the Government are prepared to look at that.
I also pay tribute to the noble Baroness for opportunistically raising the issue of inducements in the context of transferring out of defined benefit schemes. I do not believe that it is to do with buyouts. The issue of offering inducements to people to move out of defined benefit schemes has been seen by some companies as a solution to some of the problems in a non-buyout situation—as an alternative to buyout. Those have been around for some time. Normally, they are regarded by companies as rather expensive because the trustees make the companies pay rather a lot of money, in my understanding, but it may well be that the practice has moved on. As we all know, the pension scene is fast-moving and I do not pretend to be up to date on everything. If the Minister is prepared to take those issues up, he may want to see the letter that my noble friend Lord Trenchard received as an example of what may be not good emerging practice. I am grateful to him for taking that up. With that, I beg leave to withdraw the amendment.