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My Lords, I start by declaring an interest. I am a trustee of NOW: Pensions, a master trust with 20,000 clients and 1 million members, which have built up in the last four years. Like many noble Lords who have taken part in this debate, I, too, welcome in general the thrust of the Bill and its aim to provide essential protections for people in master trusts. We have advocated for a long while that a more robust regulatory regime for these trusts is necessary to ensure that all savers in them enjoy protection. It is certainly now time, as other noble Lords have said, to tighten the rules for master trusts, including on charges and commissions.
Many questions will be debated in Committee, I am sure, and this Bill is a modest measure compared with the many pensions challenges already mentioned that affect this country—whether in relation to the state pension, the declining scope of defined benefit schemes and the apparently increasing risk of the more unscrupulous or perhaps most desperate employers joining BHS and others in dumping their liabilities as best they can into the Pension Protection Fund. More specifically, there is the big question, the stark fact, that despite the initial success of auto-enrolment, it comes nowhere near providing contribution levels of around 15% of earnings, which most people regard as the basic level of a decent pension in retirement.
There are many people still outside the scope of pensions, not least because of the qualifying earnings limit, which cuts out a lot of low-paid workers at present. A good start has been made but we still have some big challenges to face. Women have been the losers in the main, not just in relation to the state pension age, but given their preponderance in low-paid occupations and part-time work in particular.
How rapidly the pensions outlook has changed in the last few decades. I remember that as late as the 1990s, many employers with healthy defined benefit schemes were taking contribution holidays. Many of us were very worried, but they promised solemnly that they would honour their pension promises and some have done so. I notice that Rolls-Royce, which is not in the papers for reasons it would like at present, a week or two ago put new resources into its pension scheme to keep it healthy. Far too many companies have broken those promises but I note somewhat sardonically that, where senior executives remain in the general pension scheme, there is a greater tendency to keep it going than where directors are in their own separate, hived-off, top-hat scheme.
Maybe the decline of DB schemes was unavoidable because of demographic factors such as the welcome increase in life expectancy but, as the noble Baroness, Lady Hollis, said, that relates only to certain parts of the country—to certain wards in many cities where there is a big difference between the rich and the poor, the comfortable and those in need. That is a major factor. Other factors, such as the accounting and taxation changes and rather sudden actuarial reviews, had a big effect on DB schemes. The coverage of DB schemes was partial; they favoured full-time, mainly male workers in large companies. However, they were a British success story, and I am sorry to see our current position.
This increases the pressure on us to make a success of auto-enrolment. That was a rare thing in British politics: the product of a genuine consensus based on the report of the chair, Adair Turner, my noble friend Lady Drake, who will speak shortly, and Professor Hills. The major political parties did not turn it into a political football match and worked, for the most part—certainly until recently; some of the recent changes are exceptions to this—in a non-partisan way to build up the auto-enrolment system. I hope we can do that with both the Bill and next year’s review of auto-enrolment. Indeed, this kind of approach could usefully be expanded into other labour market issues, but that is a speech for another day.
There will be a major review of auto-enrolment in 2017, and I hope we will manage to make some progress together on that. I hope too that we will address the tough issues. For example, should we start to plan for a higher contribution rate, above the 8% of earnings currently envisaged? This question will of course entail some fine judgments of how both employers and workers would react to the higher contribution rate. Would employers under current pressures, which have been enhanced by the uncertainty caused by the EU referendum result, be in a position to up their contributions? Would such a move perhaps encourage them to go further towards self-employment, and not just those in the gig economy? Self-employment has accounted for half the jobs created since the crash of 2008, and we on this side are certainly aware that that could increase still further if we get some of these things wrong.
Would workers be prepared to pay substantially more into their pension, especially against the background of the very low real pay increases which have characterised recent years? Would the opt-out rate go through the roof in such circumstances? Should we even continue with the right to opt out, or should membership of a scheme be compulsory? That would certainly simplify administration. Could it perhaps be made widely acceptable as the right thing to do, given the many pressures associated with facing old age without adequate resources? One thing is clear: any changes certainly need to build up fairly slowly, giving people time to adjust to major changes and to maintain the spirit that the Turner commission developed. But the objective must be clear: we need to move towards prompting and helping people to save more for their old age.
The Bill rightly aims to correct some weaknesses in the current system. There has been no licence to operate and virtually no barriers to entry in the master trust world. This has spawned the big increase in master trusts that has been mentioned, and there is a danger that many will fail to achieve the scale necessary to survive. The result could be disorderly exits from the market, with all the uncertainties and possible losses that the noble Baroness, Lady Altmann, referred to. To an extent this is being addressed—certainly in the Bill, through the enhanced role of the regulator, which will become an authorising body, a new market entry test and a fit and proper person test for the trustee. Schemes will have to have these continuation strategies with adequate resources to wind up in an orderly fashion.
We will need to look at the details in Committee but, for the moment, I am unclear as to why master trust assurance would not be made compulsory. It is an existing framework that could be used as part of the licensing regime. It is also desirable that the requirement to hold capital against running costs should be set at a solid rate—one that can cover the emergencies which can arise. In the case of NOW: Pensions, we think around six months would suit us. At the moment, that would mean around £8 million for the organisation.
Although it is perhaps a bit premature to move into the review of auto-enrolment, could we place on the agenda a wish to remove qualifying earnings, particularly the lower limit and, instead, base contributions on every pound of earnings? At the moment, the lower-paid are losing out big time because of the way the system works. Such a change would improve the outcomes for all, but especially for low-paid and part-time workers, many of whom are women. Other outstanding issues include the net pay anomaly—settling once and for all the point at which tax has to be paid, on the money paid in or on the money drawn out.
Finally, will the position of NEST be reconsidered in the 2017 review? Here, I recognise I may differ a little from some colleagues on this side of the House. NEST was set up as a default option, to take care of low-paid workers no other providers would accept. In fact, there has been no market failure and NEST is now looking to expand its range of activities to provide new retirement products, as well providing pensions for the higher paid. Is this a device that could lead to market dominance funded by the taxpayer? After all, NEST is a publicly funded body. I quite accept that we want our money back from NEST in due course, but I would certainly be interested to hear the Minister’s views on this.
All in all there is much to support in this modest Bill, but it is only scratching the surface of the much bigger issues in the world of pensions that I think will occupy this House a lot in the next few years.