6.55 pm

Pensions Bill [HL] – in the House of Lords at 6:44 pm on 30th March 2011.

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Schedule 1 : Equalisation of and increase in pensionable age for men and women: consequential amendments

Amendments 12 to 14 not moved.

Clause 5 : Earnings trigger for automatic enrolment and re-enrolment

Amendment 15

Moved by Baroness Drake

15: Clause 5, page 4, line 30, leave out "£7,475" and insert "£5,715"

Photo of Baroness Drake Baroness Drake Labour

My Lords, I rise to move Amendment 15 and speak to Amendments 16 and 19. The definition of the workforce who will be automatically enrolled into a workplace pension and benefit from the employer compulsory contribution and the tax relief or credit is a very important matter. The reforms captured in the Pensions Act 2008 were intended to achieve very wide coverage of the working population to facilitate them saving from a relatively early age, and for the private pension system to work for women.

Our concern with this Bill is twofold. First, Clause 5 excludes 600,000 people from auto-enrolment into a workplace pension by raising the earnings threshold a worker would need to reach, referred to as the earnings trigger, from £5,715 to £7,475. Secondly, Clause 8 gives too great a power to the Secretary of State to raise that earnings threshold and so reduce even further, by potentially some 1.4 million, the size of the working population who will, or could, benefit from automatic enrolment into a workplace pension. Amendments 15 and 16 seek to retain the earnings trigger at £5,715. The purpose of Amendment 19 is to limit the Secretary of State's power on the extent to which he can raise the level of earnings threshold, once set, to no more than the higher of the increase in prices or earnings.

I turn to the reasoning behind our amendment. The Johnson review, commissioned by the Government on the automatic enrolment policy, concluded that the earnings trigger for a worker to be automatically enrolled into a pension should be aligned with the tax threshold, which will be £7,475 from April, and will rise to £8,105 from April next year. As we know, the aspiration of the Government is to raise it to £10,190. The Government accepted the Johnson recommendation and had committed to a figure of £7,475. The presumption of the Johnson review was that the earnings trigger would remain allied and track the tax threshold.

Although the Minister has stated that the Government will not necessarily automatically chase the tax threshold when setting the earnings trigger for automatic enrolment, Clause 8 of this Bill amends Section 14 of the 2008 Act and gives the Secretary of State unfettered discretion to do just that, and increase this earnings trigger in line with the increase in the income tax threshold. Given the Government's aspiration, if the earnings trigger chased a future income tax threshold of £10,190-in 2011-12 earnings terms-a further 800,000 workers would be excluded in any one year from automatic enrolment. Seventy-six per cent of these people would be women. Consequently, of the group targeted to benefit from workplace pension reform, 66 per cent would be men, but only 34 per cent women.

So many workers should not be excluded. Excluding a further 1 million people and losing £40 million per annum of employer pension contributions does not support the overarching objective of enabling low to moderate earners to save. It would have a disproportionate impact on those working part-time, of whom 5.87 million are women and 1.94 million are men. Recent labour market figures revealed that some 27 per cent of the workforce is now part-time. These figures also show two peaks in part-time working by women, one which straddles the 30s and 40s age group and one which is post-50. Under the provisions of Clause 8, they could be excluded from the benefit of automatic enrolment for significant parts of their working lives.

The Government's impact assessment and the findings of the Johnson review confirm that such people should not be excluded from being enrolled into a workplace pension, notwithstanding that Clause 8 would allow that to happen. I shall repeat a quote that I used in Committee from the Johnson review. It states:

"Many or most very low earners are women, who live in households with others with higher earnings and/or receive working tax credits. These may well be exactly the people who should be automatically enrolled".

If the threshold for enrolling people into a pension is raised to £10,190, it is not sufficient to say that the impact could be mitigated by those earning below this being allowed voluntarily to opt in. It is not credible to expect the lower paid to have to overcome the barriers of inertia but those earning higher incomes can benefit from automatic enrolment. It defies logic.

The European part-time workers directive gave many women who work part-time access to their employer's workplace pension scheme for the first time. It would be a truly retrograde step if Clause 8 allowed the earnings threshold to rise to a level at which it introduced a barrier to so many women participating in workplace pensions. Increasingly, women approaching retirement will not be part of an ongoing relationship. They need to save in their own right. The key principle of pension reform is that it should work for women. The higher the threshold of earnings for auto-enrolment into a workplace pension, the less the reforms will work for women.

Raising the earnings threshold too high, and certainly to £10,190, affects the persistency of savings for men, too. Earnings are not static and for many workers, including men, can change significantly over their lifetime. Most low earners go on to earn more, so saving would still be very beneficial because of the enhanced persistency of saving and continuing to contribute to their pension pot over their working life. Relatively few people have persistently low earnings over their lifetime, so it is quite arbitrary to exclude them by reasons of setting a tax threshold at a high level.

In Committee, the Minister argued that the Government wish to retain the ability to raise the earnings trigger as high as their aspiration for the tax threshold, of £10,190, on the basis that £7,475 may not be right in the future and the shape of the state pension may change. If the Government proceed to accelerate the flat rating of the state second pension and integrate it with the basic state pension to bring forward a single-tier flat-rate state pension of, say, £140 in today's terms, subject to the accrual rates and the indexing of that single-tier pension, the number of people who should definitely not be saving will become even fewer. Thus, the argument for significantly increasing the earnings trigger becomes weaker.

The Minister has argued that automatic enrolment has to be sustainable and he fears scooping up people who cannot afford to take a hit on their pay packet. But in dealing with that fear the Minister is in danger of excluding millions over time who would benefit from saving; that is, some 1 million people if the trigger is raised from £5,715 to £10,190. The Department for Work and Pensions has produced evidence to show that, for the vast majority, it will pay to save.

I do not wish to argue against changes to the income tax system that would benefit those on low and modest incomes, but it is not necessary for what may be considered meritorious reforms to the tax system to result in an unfairness or inefficiencies in the design of the private pension system. Raising the earnings trigger in line with a significantly increased income tax threshold puts barriers in the way of access to incentives to save for men and women.

In Committee, the Minister made a commitment to provide an impact assessment for the next five years up to the 2017 review and shortly afterwards. I welcome that commitment. It is very important for the Government to show that they are not amending the proposed workplace pension system so that it ceases to work effectively for women part-time workers and arbitrarily excludes workers from the benefits of auto-enrolment at particular phases of their working lives when it would still pay to save.

I have no doubt that the Minister will argue that the earnings trigger for automatic enrolment into a pension should not be set in isolation from the tax threshold. But I argue that it should because they are intended to achieve different things. What might be meritorious in a tax system does not necessarily drive what is sound in the design of a private pension system. It cannot be right that changes to the tax system intended to improve the net income position of low and moderate earners must lead to a reduction in workplace saving by 1 million or 2 million or more people because the earnings threshold for automatic enrolment to a workplace pension has been raised to a much higher level.

In Committee, through the Minister, the Government argued that, in uprating the earnings trigger for automatic enrolment, they want flexibility to consider a wider range of economic measures, that pensions law has to last for the long term and that it is prudent to build in flexibility. I absolutely agree that the issue of pensions is a long-term project, which is why stability is so important. Unfortunately, all post-war Governments in the UK have a history of making what they feel, or felt, to be good incremental adjustments to the design of the pensions system for short-term considerations. Inevitably, 10, 20 or 30 years downstream there were sub-optimal outcomes in the strategic sense and a rush around to find measures to deal with that. I worry that the ease with which the earnings threshold for automatically enrolling workers into a pension scheme could be raised so high under the terms of Clause 7 that we would thereby have another example of such an error being made in the current period, which would have a major negative effect in terms of outcomes in the future.

Amendments 15 and 16 seek to retain £5,715 as the earnings trigger for auto-enrolment. Amendment 19 seeks to keep broadly constant the proportion of the population covered by automatic enrolment by giving the Secretary of State the power to uprate the value of the earnings trigger by no more than the higher of the general level of prices or earnings and to remove his discretion to increase it in line with increases in the income tax threshold.

If there is to be a major change in the earnings trigger, which will exclude perhaps 1 million or even 2 million people from the advantages of auto-enrolment into a workplace pension, I do not believe that that should be done by an order, even an affirmative order. It is of such significance to the outcome of the pension reform programme over time that there should be a high level of awareness of the consequences. People should understand the impact and all interest groups should be involved in that decision. I beg to move.

Photo of Baroness Hollis of Heigham Baroness Hollis of Heigham Labour 7:00 pm, 30th March 2011

My Lords, I strongly support my noble friend's amendment. The Government are essentially following the proposals of the Johnson report. I see red copies of it all around the House-I am sure that noble Lords have not consulted it for the first time as we now come to debate it. Having read that report, on which, as my noble friend said, the Government are basing their proposals to lift the trigger, I was completely unpersuaded. I thought that it was thin on everything except, possibly, employer preferences, which, left to them, would have no doubt pushed the earnings threshold to £10,000 or more. I am surprised, of course, by such a conclusion.

The Johnson report offers two reasons for raising the earnings trigger. The first is that such low earners are involved that even without NEST they would have a very high replacement income based on their state pensions in retirement, so they do not need an additional pension such as NEST. The second argument run by Johnson, and therefore presumably supported by the Government since it was relayed by the Minister in Committee, is that such people are so low paid that the sums they would achieve are not worth while. For example, if someone is earning £7,500 and the trigger is set at £5,700, they would bring in only about £130 a year for their pension pot.

Let us look at those two arguments. My response to the first argument, about high replacement, is, frankly, "So what?". There is nothing to say that just because you are poor in your working life, you would break some golden Treasury rule by being at least as well off if not better off in retirement. It is simply an irrelevant argument. I shall make two points in response to the second argument about the small size of the pot. First, as the Johnson report acknowledges and as the Minister has rightly told us, many women will go on to higher-paid jobs, and even small sums started early enough will be valuable and increase persistency of saving and the savings habit. If someone has not enrolled, it will be that much harder for them to do so later on when a pay rise seems to be eaten up by auto-enrolment, and it will not happen.

From my quick calculations over the weekend, even if there was only the very modest figure of £130 a year in real terms going into a pension pot, I estimate that over 30 years that would none the less allow a woman to build up a pot of £8,000 to £10,000. Given a decent state pension, it obviously would not be sensible to annuitise that pot, since it would be below the trivial commutation limit, but it would mean that she would go into retirement with a modest but useful capital sum, perhaps for the first time ever. After all-and this is the question that I would like the Minister to address-that was exactly the previous Government's argument, which I think the current Government have also run. We encouraged people to defer taking their state pension by one or possibly two years and, with the money saved from that deferment, provided a capital sum of £10,000 to £15,000 as a pension pot, which we further privileged by ring-fencing it and protecting it from pension credit. I stand to be corrected, but I take it that this is continuing and that the Government have not scrapped it.

In other words, a few years back the consensus around the House was that we thought it important to encourage people, mostly men, to build a modest capital sum for retirement by not drawing down their state pension at the age of 65 but deferring it for one or two years. Indeed, we so much wanted this to happen that we ring-fenced those savings by not allowing them to count against pension credit taper. When it comes to NEST and women, however, we do not seem to think that the same argument runs. I disagree with that. The one argument that was not run by Johnson, but might have been valid, was the means-tested trap. But even that depended on a woman's household income and on whether she was partnered. Given the single state pension in prospect-alleluia-that problem evaporates. We are allowing women to do this voluntarily, but as my noble friend Lady Drake said so rightly, these are precisely the women for whom voluntary enrolment is least likely to happen, is the least suitable, and for whom auto-enrolment is appropriate.

I would ask the Minister to remind us why it is acceptable to encourage men to build a small capital sum by delaying taking their state pension for a year or so, even protecting it against pension credit, but when it comes to NEST and where a woman might have a similar small capital sum, apparently it is not so desirable, even though her finances may be infinitely more strained. I hope that the Government will reconsider this. The Johnson arguments are simply invalid. They may give the Government a hook to hang on, but they do not run. The Government seem to be signing up to the notion that if you are poor in your working life, it is morally acceptable to be poor in retirement. I do not accept that and neither should the Government. If they are saying that the capital sum is not worth having, since we do not allow that argument to run on the state pension, we should not allow it on NEST. On both of those grounds, I hope that the Minister will offer his favourable support to my noble friend's amendment.

Photo of Lord Stoneham of Droxford Lord Stoneham of Droxford Liberal Democrat 7:15 pm, 30th March 2011

I support the proposal in the Bill that the threshold should be reviewed in line with the Johnson report. I do so particularly in the light of the reassurance given by the Minister in Committee that there is no proposal from the Government to link the increase in the thresholds to the increase in tax thresholds.

Photo of Baroness Hollis of Heigham Baroness Hollis of Heigham Labour

The noble Lord's honourable friend in the other place, Mr Steve Webb, has made the contrary assertion.

Photo of Lord Stoneham of Droxford Lord Stoneham of Droxford Liberal Democrat

Perhaps the Minister can clarify that, and I am sure he will. I do not know what the noble Baroness is quoting from since we remain committed to raising the tax threshold to £10,000, but we do not want this particular proposal undermined.

I shall come back to a further point that I think is important. The other interesting development is the new basic state pension. I am sure that my honourable friend the Minister in the other place will have had in mind his proposals on the threshold to align with what we are now proposing for the new basic pension. That makes sense. Too low a threshold, as we discussed in Committee, gives rise to considerable administrative problems and the issue of very small pension pots. I am sorry, but they are very small. They will be insignificant in the context of the improvement we will be making in the new basic state pension.

It is all very well for the noble Baroness to shake her head, but it is extremely dishonest to encourage people on low earnings to make contributions to their pensions which actually result in a low rate of return when they come to receive the benefit. Not only will they get that low return not only until we introduce the new state pension, but if they were in receipt of housing benefit they would actually lose income that they would have achieved through any increased pension.

Photo of Lord Stoneham of Droxford Lord Stoneham of Droxford Liberal Democrat

I have already allowed one intervention and I should like to move on, since this is a short debate.

Finally, it is important to understand that too low a threshold may well encourage more lower income people to opt out than would a more realistic one. For those reasons, I support the proposal set out in the Bill.

Photo of Lord Freud Lord Freud The Parliamentary Under-Secretary of State for Work and Pensions

My Lords, there is clearly a lot of consensus in the House around auto-enrolment, but I am afraid that one of the areas where there is genuine disagreement-there are not many of them-concerns the right earnings triggers for it. The amendments in the name of the noble Baroness, Lady Drake, seek to introduce a lower entry point for automatic enrolment, and we need to look at them with the amendment which seeks to cap annual rises in the automatic enrolment trigger to the higher general level of earnings and prices. Let me take a few moments to explain why it is our view that the threshold we are proposing is right and why reverting to a lower trigger would not be right. As the noble Baroness, Lady Hollis, pointed out, we reached a recommendation on the level by leaning on the Johnson review, which considered a number of factors: earnings dynamics, family characteristics, and the replacement rate which the noble Baroness finds distasteful.

Let me explain why the replacement rate is an important factor. If you are earning a certain level of income through your working life, it does not necessarily make sense to take money out of that to have a better income later. That should be a choice for the individual-that is the theory of replacement rates. When you are looking at asymmetric paternalism and encouraging people to do things that they might not if they thought about it harder or were equipped to make those assessments, it does not necessarily make sense to create a situation where people find themselves scrimping and saving during their working life to have a slightly better lifestyle when they are older. That might be the right choice, but it should not necessarily be something that we encourage.

If we only consider replacement rates, then the analysis done by the review shows that individuals with earnings in the £10,000 to £15,000-a-year range throughout their working life would, through the combination of the state pension and income-related benefits, receive replacement rates that are often in excess of 100 per cent. If it had been replacement rates alone that guided the setting of the threshold, it would have been set somewhere between £10,000 and £15,000. However, that clearly is not the whole story and the review recognised that. It recognised the importance of dynamic earnings, which mean that some of those who have low earnings today will still benefit from saving as they are likely to go on and earn more in the future, a point made by the noble Baroness, Lady Hollis. However, even that is not straightforward either-when a person's earnings are low there is a genuine question about whether it is right to encourage them to save at particular times when they may very well have a pressing need to use all their income to meet present living costs.

That led the review team to consider individuals' family circumstances. These may well mean that a low-earning individual with a higher-earning partner might benefit from saving even when their earnings are low, as it would help provide a decent replacement rate for the family as a whole. In the vast majority of families with both partners working, their total earnings are significantly higher than the earnings of just one individual. Bearing all these complicated and interrelated factors in mind, the aim of the independent review was to set a threshold which maximises pension saving for those for whom saving is valuable, while minimising the number of those brought in for whom it is not. In doing this and making their recommendations, the review team struck a very careful balance.

It is simply not correct to assert that all low earners will benefit from pension saving throughout their working life due to dynamic earnings, receipt of working tax credits or the fact that they live with partners who earn more; nor is it correct to say that all low earners will not benefit from saving. That is why we have the opt-in to allow those who will benefit from saving to choose to do so. Individuals who opt in and have qualifying earnings will of course still benefit from an employer contribution.

No earnings threshold will ensure that automatic enrolment is perfectly targeted, encouraging saving among all those who need to save while excluding all those who should not-unfortunately, the world is not that simple. That is why the review team sought to identify the correct balance between all these factors. The Government accepted its findings, including the adoption of a higher earnings threshold; this was widely welcomed by stakeholders. We believe that the starting point that we have proposed in the Bill on the basis of the review recommendation strikes the right balance between ensuring that we do not encourage persistently low earners or those experiencing a period of low earnings to save, while ensuring that those who clearly will benefit are able to be automatically enrolled.

We all agree that setting an appropriate earnings threshold for auto-enrolment is absolutely central to the success of the reforms. The arguments that I have heard today and during Committee have not persuaded me that there is sufficiently compelling evidence in favour of setting a lower threshold in the Bill when this is compared with what the review team has already considered in detail in reaching its recommendation.

Let me turn to the second element of the issue: the mechanism for revaluing the automatic enrolment thresholds year on year. The aim of the independent review was to set a threshold for automatic enrolment which maximises pension saving for those for whom saving is valuable, while minimising the number of those brought in for whom it is not. In doing this, the review team recommended that the automatic enrolment earnings trigger should be aligned with the tax threshold, currently £7,475. The presumption of the Johnson review was that the trigger would remain aligned with the tax threshold, unless future action by Government resulted in a fundamental change in its purpose or the relationship between them. The Johnson review is clear about its view on the right direction of travel.

The Chancellor has now announced the personal tax threshold for 2012-13 as £8,105. It is logical that this announcement has prompted the question, which my noble friend Lord Stoneham raised, as to whether it is our intention to uprate the automatic enrolment trigger to this figure for live running in 2012. We will want to undertake detailed work over the coming weeks and months to assess the impact of aligning the earnings trigger with that threshold of £8,105. We will look in particular at whether the right balance continues to be struck in terms of who is brought into auto-enrolment using this trigger, especially with regard to low earners and women.

It is appropriate to share with the House the figures that demonstrate the impact of moving up to £8,105. It would remove around 100,000 individuals from automatic enrolment. It is also appropriate to share with the House the fact that the bulk of those are likely to be women-our figure is 79 per cent, a proportion consistent with the impact of the rise to £7,475.

It is too early to say definitively that because £8,105 is the personal tax threshold for next year this will also be the auto-enrolment trigger. However, I can say that our expectation is that we would align with this figure, unless the evidence suggested that this was the wrong thing to do. It is therefore worth my repeating here the commitment I made at Committee that as well as the uprating order being subject to an affirmative debate, we will prepare an impact assessment to accompany the uprating order for each of the first five years up to and until shortly after the 2017 review. This will give us the opportunity to explain in detail to the House how and why we are proposing to uprate the auto-enrolment trigger and inform the affirmative debates that we will have annually.

Times are changing-as we debate these issues, the Chancellor has announced not only a new personal tax threshold but a major review of the operation of tax and national insurance contributions. It is vital therefore that we retain for the long term the flexibility in the uprating power to allow us to consider a number of factors.

First, we need to consider the possibility in the future that the earnings trigger could end up being within a few pounds of the tax threshold. What if, in such a situation, having anchored in all relevant criteria under the flexible provisions and taken into account all the evidence, the impact assessment suggests that the auto-enrolment earnings trigger should be £30 or less below the PAYE threshold? In that circumstance, it would be ridiculous to have different thresholds, separated by only 58 pence a week, given the burden on employers. Our priority must be to ensure that the reforms are credible and auto-enrolment works in practice. If it does not then we risk losing employer support and the reforms will not work.

We also need a level of flexibility as we consider the overall emerging financial landscape. At this point we do not know with any certainty what level state pensions will be or where earnings and prices are moving to. This is a policy for the long term, and we live in an increasingly uncertain world. We need to retain flexibility so that we can respond to changing circumstances.

Our primary aim in setting the earnings threshold that will trigger auto-enrolment must to be to ensure that we target the right group. The work that we will be undertaking over the next weeks and months will ensure that the threshold strikes the right balance between maximising pension savings for those for whom saving is valuable, while minimising the number captured for whom it is not worth while.

The flexibility that this uprating power provides, and the ultimate decision to increase thresholds for automatic enrolment, will not sit in my hands. It ultimately sits in this House and in another place through the affirmative uprating debates and the accompanying impact assessments that I have committed to, which provide significant protection against unwanted changes. I beg the noble Baroness to withdraw her amendment.

Photo of Baroness Drake Baroness Drake Labour 7:30 pm, 30th March 2011

I thank the Minister for that detailed response. I will reflect on some of the points that he has made.

I have sympathy with the point my noble friend Lady Hollis made that, if one spends time on the evidence compiled in the Johnson review, one can see that it can be deployed for not raising the threshold as persuasively as it can for raising it. That is one of the problems. Certainly, there is some persuasive evidence in that review that the earnings trigger should not rise above the order of £7,475 in today's terms. Even looking at that evidence and listening to the Minister's arguments, I can understand-I may not accept-the argument that runs that if one is moving to a single-tier flat-rate pension of £140, then an auto-enrolment figure of £7,465 may be appropriate, but that does not go to chasing an income tax threshold to £10,190, which is designed to achieve something quite different.

When it comes to the issue of replacement rates or who should be smoothing their income over their lifetime, and who needs to firmly hold on to their income over their lifetime because they are not well off enough to let it go and smooth it, we have to be very careful what is said. Again, I go back to the Johnson review; most people are not persistent low earners. Their aspirations on their replacement rates will not be determined by the low earnings they may have at a particular point in time; and those low earnings should not interrupt their persistency of savings. Equally with women, one has to look at household income, because one of the principal points of the pension reforms was that they work for women. As the Johnson review itself said, they may be in a household with someone who is working full-time or earning much more; they may be precisely the people who should be saving and their period of lower earnings as a part-timer may not be at that level over all their working life. Equally, to get the desired replacement rate, one has to have persistency of saving; one will not get there on five or six or seven years of saving. If one sets a trigger for auto-enrolment which interrupts that persistency of saving when someone moves to a lower level of earnings, that is not very efficient. Also, for those on lower and more modest incomes, no reference was made to how the tax credit system can make it pay to save, providing tax relief as high as 50 per cent or 60 per cent for some individuals, which when taken with the employer contribution should not necessarily be income forgone.

We will look with interest at the impact assessment that will be brought forward in each of the next five years, because I have expressed our concerns on this issue. Flexibility for changing circumstances is often driven by short or medium-term considerations: having a successful pension system is a long-term project and it needs people to be engaged in saving over a very long period. Having expressed those reservations, and recognising that there will be an impact assessment, I am sure that others will return to this issue. I beg leave to withdraw the amendment.

Amendment 15 withdrawn.

Amendment 16 not moved.

Clause 6 : Postponement or disapplication of automatic enrolment

Amendments 17 to 18A not moved.

Clause 8 : Review of earnings trigger and qualifying earnings band

Amendment 19 not moved.

Consideration on Report adjourned until not before 8.37 pm.