Good afternoon. Welcome to this oral evidence session on the Pensions Bill. May I welcome Mr. Stephen Haddrill, director general of the Association of British Insurers, Joanne Segars, chief executive of the National Association of Pension Funds, and Mr. Dick Saunders, chief executive of the Investment Management Association? I warn you that the session will have to finish at 5.10 pm on the dot, but I will try not to cut any of you off in mid-flow. I shall call the Minister first.
I welcome you to the Chair, Mrs. Anderson. I will begin by asking Joanne Segars a question. How do we ensure that automatic enrolment best targets those who are currently without pension provision?
Joanne Segars: One of the ways in which we can make sure that personal accounts are adequately targeted is by ensuring that the Bill is crystal clear on this point. One of the things that we would like to see is an amendment to the Bill that, where we are talking about the Personal Accounts Delivery Authority’s principles, makes it absolutely clear that PADA is focusing personal accounts on those who currently have no pension provision.
In terms of pension provision more broadly, the aim, obviously, is that people should go to not just personal accounts, but other types of pension schemes. The aim of personal accounts is to complement, rather than to compete with, existing pension provision. Therefore, how do we ensure that other pension schemes, such as some of the ones that you represent, are able to access those who are currently without provision?
Joanne Segars: As you know, NAPF has been a strong supporter of auto-enrolment. Many of our member schemes already adopt auto-enrolment. Those that do not—75 per cent.—will need to make changes as a result of auto-enrolment in the personal account process. Schemes seem to be well geared up for that. We think that one of the things that could make sure that those schemes are still around in 2012 is pursuing the package of simplification and deregulation measures that you have started to bring forward.
May I just follow up that question by putting a similar question to Stephen Haddrill? More specifically, what kind of measures do you think should be in the Bill to minimise the erosion of existing provision, particularly to avoid the worst case scenario painted recently by the Pensions Policy Institute about the levelling down of existing provision?
Stephen Haddrill: First, on the point about levelling down, there is going to be a risk of levelling down the more an employer has to decide and the more complex that decision is. If employers face a situation where, for instance, they are potentially going to end up with an existing pension scheme and having to set up a personal account, they are going to think quite hard about whether they want to carry on with an existing pension scheme that has a higher level of pension contribution from the employer than the personal account will do. We think that that kind of simplicity will mean that employers will keep their existing provision. At the moment, we have about 100,000 group personal pensions provided by the insurance industry, and the average employer contribution into those schemes is 6 per cent. There is £900 million going into those schemes every year, so that is an awful lot to lose if it is levelled down to a 3 per cent. personal account. That is very important.
If you will forgive me for going on for a second, the other issue is whether the personal account system is going to remain targeted at the people it is really designed for—those who do not have any pension provision at the moment and are on low to middle incomes—or it is going to draw in, as I am afraid that stakeholder did, a much better-off and more affluent person? Money speaks, and we fear then that personal accounts will get delivered for the people with more money. That is why we do not like the idea of high levels of contribution being allowed during the year—the Minister has given assurances on that, but we do not see that £3,600 figure on the cap actually on the face of the Bill. We would much prefer that to be in the Bill.
We do not see anything about transfers in from other schemes on the face of the Bill in terms of them being stopped, which is what we would like to see. I think that we should also be very cautious indeed about random lump-sum contributions—in fact, not allow them—into these schemes, because they will not be matched by an employer contribution and they will not necessarily be the right thing to do. This is an advice-free zone—rightly, we think, because of the cost—so people will be making mistakes, and, in 20 years’ time, liabilities will be laid at the door of the Government as a result. Rather a long list, I am afraid, but the points are important.
Can I just follow up on one point? Going back to group personal pension schemes, what is your preferred solution to the problem? Joanne and Dick might also want to have a go at this. What do you think that we should do about what everyone acknowledges is a problem because of European legislation?
Stephen Haddrill: The problem arises from European legislation—you are quite right. We think that the best possible solution is to persuade the European Commission and our partners in Europe to change the legislation. We think that the Government should strenuously pursue that because the European legislation was designed to promote a single market—cross-border trade. This has nothing to do with cross-border trade, and while the Government have a difficulty in that probably no other member state has this problem, that should, I think, be taken as an advantage, since no other member state would necessarily oppose what we want to do here. I therefore think that vigorous pursuit of that is very important.
Beyond that, the insurance industry does pursue what we call streamlined joining—techniques to encourage people to join a group personal pension through an e-joining mechanism, through face-to-face joining being arranged by the provider, and so on—with simplified forms and simplified letters. We get a high level of take-up when that is done by the companies, so we feel that streamlined joining should be allowed. Where that is taking place, the employer should have an exemption from having to set up a personal account, which would bring in complexity and the likelihood of levelling down.
Joanne Segars: We do. We agree with the ABI and, I think, with the Investment Management Association,that the preferred solution would be to sort this problem out through a change in European legislation. In the absence of that, we take a different view from the ABI. Our preferred solution is that auto-enrolment should, as nearly as possible, apply to group personal pensions and workplace personal pensions. We do not believe there should be an exemption for workplace personal pensions—we believe that that would undermine the principle of auto-enrolment that is at the heart of these reforms, and on which the success of personal accounts really depends. It would create an uneven regulatory and cost playing field between occupational pensions—whether defined-benefit or defined-contribution pensions—and workplace personal pensions. The cost of auto-enrolment to occupational pension schemes is between £1 billion and £2 billion a year.
We are also slightly unclear as to how some of the solutions around streamlined joining—which, as I understand it, is by no means universally applied by the insurance companies—would work in practice combined with targets. We believe a better solution lies in requiring employers to auto-enrol in workplace personal pensions through a system of master trusts. We believe that that is feasible, affordable and workable.
Dick Saunders: I would support what Stephen has said on this. Clearly, the best solution would be to negotiate an acceptable outcome in Brussels. This is, quite clearly, an unintended consequence of the directive. Between the two alternatives, I think it is very easy to underestimate the cost to the financial services industry of imposing a so-called master trust system. I think that that would need to be thought through very carefully indeed. It is not just the life insurance industry that would face those costs, but the fund management industry as well. Bear in mind that what we have here is, in essence, a transitional problem. It will not be a problem for anybody joining a scheme after 2012 because it will be impossible to incorporate it into their contract of employment. Assuming we cannot negotiate a solution in Europe, I would suggest that some kind of short-term, flexible, transitional remedy, perhaps based around streamlined joining, would be the way forward.
Dick Saunders: The question was whether the industry would benefit from the provisions in the Bill.
Clearly the investment management industry, or a part of the investment management industry, would get the job of managing the money here, but in terms of its significance to the industry as a whole, it would be pretty small in relation to the fact that the UK asset management industry now looks after £3,000 billion. This would be nothing like that amount, and what is more—and rightly—the management fees on the mandates to look after the personal accounts money would be very modest indeed. Indeed, that is one of the purposes of personal accounts. So while business for the investment management industry would come out of this scheme, it would certainly not be something of huge significance to the industry.
May I bring up an issue that I raised in the previous evidence session and which relates to clause 10 and employers duties? With regard to the significant increase in the current regulatory impact assessment costs from last year’s, have you been involved in the development of cost projections in those latest impact assessment and are you confident that the Government’s latest cost projections are accurate?
Stephen Haddrill: We have not been involved in the latest cost projections, particularly in relation to the costs falling on the employer. We have had discussions with the Department about some of the costs that we have just talked about, such as the costs of converting a group personal pension into something else, which we regard as significant. Earlier, we were heavily involved in trying to assess what was an acceptable cost for a personal account to be charged out at, but that has been the limit of our involvement.
May I ask what your views are on the issue of possible future legal liability in relation to generic financial advice? We have obviously just been through the saga of the 125,000 to 140,000 people whose occupational schemes collapsed, and prior to that there were various legal challenges about how much they were able to rely on information put out at the time about those pension schemes. What is your view on the possibility of problems in that area, should people save and believe that the generic financial advice that they were given was wrong, perhaps because they do not benefit through the loss of other means-tested benefits?
Dick Saunders: I am not in a position to comment on the issue of legal liability. However, the issue of means testing is an important one, but one that needs to be kept in perspective. When you hear some commentators on the Bill, you would get the impression that anyone going into the scheme would be no better off, and indeed possibly would be worse off, as a result. All the analysis that has been done suggests that that is far from the case. I shall just give one example: on Second Reading, the question was asked, “Would you advise someone earning £16,000 a year to save in this scheme?” If you look at the numbers, someone earning £16,000 a year would have to pay £8.46 a week of their own money into the scheme. If they did that for 40 years at that level, they would end up with a pension pot of around £100,000, which would pay for an income for life of about £100 a week and which I would suggest is not a bad return for £8 a week.
Having said that, there are clearly some areas where the interaction between means-tested state benefits and personal accounts or any other form of savings is more complex. I believe that there are relatively limited areas, but think it is important that more analysis should be done by the Department about where those problems are going to arise. If problems do arise, the way to fix them is through the benefits system. To postpone or abandon personal accounts as a result of those kind of problems would be a mistake.
Joanne Segars: From NAPF’s perspective, we very much agree that the issue of generic financial advice and the ability of consumers to depend on that links closely to the issue of means-tested benefits. I agree with Dick that it is important to get some perspective. There are clearly many millions of people who will benefit from the introduction of personal accounts, and we really should not lose sight of that in our very important discussions on means-tested benefits. It is important that we use the time between now and 2012 to look for a solution to means-tested benefits and ensure that we minimise—we will never be able eradicate the problem—those who will potentially lose out, through means-tested benefits, by saving in a personal account. There are a lot of interesting options on the table, and we need to work to explore some of them and work with Government and across all parties to find solutions to the problems.
Stephen Haddrill: I think that the best protection against legal liability is to keep the scheme simple, so that people really know what they are getting into. That is why, as I was saying earlier, I feel that it is absolutely important that any contribution that is allowed in can be matched by an employer contribution. That should make it suitable for most people. If you allow in other, random, lump-sum contributions, they will not necessarily be suitable and people will possibly have cause for argument down the track. Whatever you manage to put in the Bill and in law, we know that if things go wrong, you get political pressure and liability on the Government for a non-legal reason at the end of the day.
Will the group expand a little on some of the submissions that you have made on the effects of personal accounts on existing pension schemes? I know that concerns have been raised about the proposed contribution limit and whether things can transfer, and whether that will lead to a levelling down of existing pension schemes. What evidence do you have that that is likely to occur?
Stephen Haddrill: We think that there is a risk of that, because if the employer is forced into a position of having to reassess its existing situation, a number of things will happen. First, employers will not want to overcomplicate their lives, so they will not want to run an extra, new personal account alongside an existing thing. The chances are that in those circumstances they will go for a personal account, and personal accounts have an employer contribution of half what is typical in insured systems. There is a big risk there.
We also dispute some of the Department for Work and Pensions evidence on levelling down. My understanding is that, when employers were polled on that subject, the polling was directed at human resources departments. Our anecdotal evidence is that if you ask the finance director, you get a rather different answer about how they might look to the future.
Joanne Segars: We undertook some analysis in 2006 that has since been corroborated by the Pensions Policy Institute. It showed that the effect of levelling down could be quite significant in the occupational pension scheme sector. Where that bites is on auto-enrolment. The costs to employers who sponsor occupational pension schemes of auto-enrolling employees into them at existing rates would be, as I said, between £1 billion and £2 billion a year.
It is important to recognise that auto-enrolment remains a minority sport in occupational pension provision, so the number of employers that will have to amend their schemes to accept auto-enrolment is quite significant. The costs associated with that, for having additional people coming in with additional contributions—the typical employer contribution to a defined benefit scheme is 16 per cent.—are quite significant. At that point, employers may say, “Well, this is all a bit too rich for our blood.” It is therefore important that, as well as designing personal accounts and the auto-enrolment process, you ensure that there are protections on transfers, although we take a slightly more flexible position than the ABI, and on low contribution ceilings. There must also be incentives for employers to keep their existing occupational pension schemes going with the package of deregulation measures that is also in the Bill.
Dick Saunders: It is very important to keep this one in perspective. Very interesting charts and numbers were produced by the Department for Work and Pensions in its 2006 White Paper, which examined the 18.6 million employees in the private sector. Of those 18.6 million, 12.4 million—about two thirds—are in no occupational pension scheme, and would therefore benefit from levelling up under personal accounts. Another 1.9 million are in schemes, but the employer contribution is less than 3 per cent., so those 1.9 million would also benefit from levelling up under personal accounts. It is only the balance—4.3 million, less than 25 per cent. of private sector employees—who are currently in a scheme in which the employer pays more than 3 per cent. contributions and are therefore at risk from the sort of levelling down that has been discussed. While I think that with such schemes one should avoid levelling down at all costs, if possible, let us not forget that the vast majority of people will benefit from this.
Stephen Haddrill: We do support the Bill, and we think that the basic proposal from the Pensions Commission and the way in which the Government have taken it forward deserves support. At heart, it produces a simple pension scheme that everyone should reasonably be able to understand. It brings money into pension saving, where there is an enormous great hole at the moment, as Dick’s numbers have shown. It is a way of energising pension saving in this country. Where we do not support the Bill is at the interface with the existing provision, which is very important—that has to be got right—and, related to that, if there is a temptation to overcomplicate it, because that is where things will start to fall apart.
Joanne Segars: Again, the NAPF has been a strong supporter of the pensions reform process. We think that the building blocks of auto enrolment with mandatory employer contributions are the right framework, coupled with low-cost personal accounts. We hope it will be the start of a continuing process of deregulation for existing workplace pension provision, and we think that the package is quite a powerful one, which should see a real step change in pensions saving and the number of people retiring with good workplace pensions in the UK.
Dick Saunders: We have supported the proposals from the beginning. The reason is that people have become increasingly cynical about whether they can look to the state to provide for their long-term retirement provision. We are seeing a trend of large companies and employers quite properly, under forces coming from the market, backing away from occupational pension provision. People will increasingly have to be helped to make their own provision for retirement and the Bill is an important first step in that process.
Mr. Haddrill, you said that you were less supportive of the Bill because you were frightened of it being overcomplicated. Will you give us an idea of what you have in mind?
Stephen Haddrill: It is things like being able to put in extra contributions above what is matched by your employer. If that does not earn a satisfactory return for you, as you see it, in the future, that sort of thing will lead to potential reputational damage. The other point is one that we have already talked about: it has to be as clear as possible where people stand on the interface with means testing. If that is not reasonably clear, and word on the street gets out—however fair or unfair—that it is not a good bet, people will not go near it. We need clarity, we need a simple offer and it needs to do what it says on the tin.
The interface with the benefits system is another point that I was going to pick up. While I completely agree with all three of you that that issue can be overestimated, many millions of people would benefit from this. However, as we all know in politics, it is the ones who do not benefit who complain. There clearly will be a group of people, Mr. Saunders, because 40 years is a long time. In the mean time, many people with a working life span of 10 or 15 years could find themselves paying in and not receiving what they consider to be a benefit because of the interaction with the benefit system. Ms Segars mentioned that there are schemes that could right that potential wrong. Can you give us a bit more of a flavour of what they might be and whether they should be in the Bill before it proceeds, or whether this issue could be dealt with afterwards by the Department for Work and Pensions fiddling with benefit requirement levels?
Joanne Segars: Some examples are the PPI’s suggestion of a disregard for the first £12,000, the suggestions about trivial commutation, the Swedish system, in which pension income is disregarded when setting eligibility for means-tested benefits, and the suggestion about the refund of contributions. They all need examining, and whatever the solution, they need to apply across the piece to pensions, not just to personal accounts, which clearly carries a cost. All the issues need to be looked at and thoroughly analysed. We have great respect for our colleagues in the DWP, and we work closely with them, but it would be a tall order to expect the work to be done before the Bill’s conclusion. I am not sure that if we rush into decisions, it will benefit any of us, least of all those under discussion. We must work through solutions very carefully.
Dick Saunders: I very much agree. The issues are of such complexity that they cannot be dealt with under the timetable for the Bill. What is more, there is time. Although the scheme does not start until 2012, it will probably be another five years before anyone has built up significant pots to trouble the triggers in the benefits system, so there is time to work the proposals through. That work must start now, but it cannot be concluded now.
On the point about 40 years, if somebody has 40 years ahead of them and you advise them that it might not be in their interest to save in a personal account because they might be worse off, you are asking them to make two assumptions. The first assumption is that their life chances do not work out, they do not pursue a full career, they are unemployed and end up on housing benefit—there might be reason to think that that will happen to them, I do not know. The second assumption, which I suggest is a real gamble, is that they need to take a bet that the benefits system in 40 years’ time will look like it does today. Set against those two huge uncertainties, I should think that for somebody with 40 years ahead of them, the prospect of saving with an employer’s contribution matching theirs pound for pound, when you include the tax relief, is far and away the better bet.
Stephen Haddrill: If Parliament passes those measures, it is, in a way, implicitly accepting that means-testing and benefits will have to be kept in a framework so that the money people put into the system, in good faith, comes out as they expect. If it does not, there will be a thumping great row, so the issue should be explicit. All parts of the House must recognise that that would happen, so we ought to sign up to that idea. If we do, people will be given confidence.
Joanne, you went through the options for dealing with the issue of pays to save. There are people today who have saved for a second pension, and the pot is not large enough and they are on pension credit. One option that has been floated is that such people who end up on pension credit should get back all their contribution. What would your industry’s reaction be if it had to repay anyone who went on to pension credit, and provide, in effect, a guaranteed investment?
Joanne Segars: That is one reason why all the issues must be considered, not just from the perspective of the potential recipient of means-tested benefits, but from the perspective of workability—whether it is possible to unwind the contributions of somebody who has saved for 40 years in a defined-benefit pension scheme and might still be on means-tested benefits. There are a number of people like that.
With respect, that is not the question I am asking. I understand that point. You have made it very well and I agree with the point you have made. I am asking what the likely reaction is of people in your industry to the suggestion that the contribution that people have made would have to be repaid from the pension fund. What effect would that have on the pension funds that you operate?
Dick Saunders: We would need to look at that rather more closely, but an immediate reaction is that it would introduce a liability to the fund that would need to be hedged in some way, and a cost would be attached to doing that hedging. If one is looking at a return of contributions over a long period, because the risk of having lost money over that period would be so small, the cost of the hedge would, I guess, be quite low. If you are looking at it over a shorter period, the cost of the hedge might be a bit higher, but we would need to see slightly more detailed proposals and be able to analyse them a little before I could give you a definitive answer.
You gave us sums relating to the number of people in the private sector who are in schemes—6.2 million. How many of those people—you might not have the figure, but it would be useful if you did—are in workplace group personal pension schemes? Do you have that figure?
I just wondered how big a problem that was, because the question that I really wanted to ask you was this. In terms of discouraging levelling down and encouraging employers to continue with arrangements that they have, resolving this issue is a major challenge. A number of the memorandums that we have received have talked about potentially resolving it through a master trust. It would be helpful to the Committee—it would certainly be helpful to me—if someone could explain how that would work and how we would need to amend the Bill to make that possible.
I think that we have to finish this Committee stage with some clear idea of how we resolve the issue. There is agreement across the Committee that it is a problem that needs to be solved. If we can solve it, we remove one of the temptations for employers suddenly to say, “Well, if I’ve got to change anyway, why don’t I give them all 3 per cent.?” Do you all perceive that to be the case?
Joanne Segars: That is right. I will happily send the Committee the memorandum that we have prepared, but from the employer’s perspective, they simply pay the money over to the insurer, so from their perspective and, indeed, from the member’s perspective, there is really no difference—[Interruption.] Or the fund manager’s perspective. There is really not a huge amount of difference. It is a legal entity that sits within the insurance company. Insurance companies have run master trusts in the past. Many of them still have master trusts. They might not be actively selling the products, but they still exist within insurance companies.
Stephen Haddrill: We do believe it is seen by the employer and, indeed, by the employee. Apart from anything else, a trust-based scheme is regulated by a different regulator from a contract-based scheme. That means that things like the letters that go out are written in a different way. That also applies to the information that is provided and so on. There are a number of visible differences. We also have different IT platforms for different sorts of provision, so there are costs involved in that. Given that we are talking about 100,000 schemes, you only need it to cost £1,000 per scheme to do the conversion and you are starting to rack up quite a lot of money across the industry as a whole.
You have all spoken about the potential for millions of people to gain from these personal schemes. What key factors do you each think have to be in place to ensure maximum consumer confidence in pension schemes that have a statutory foundation?
Joanne Segars: I very much agree with Dick on the point about independent governance and something that is, or is seen to be, at arm’s length from Government. Also, simplicity is absolutely key so that people know that they are paying in their money, get a very clear statement, and—we have talked about means-tested benefits—can get some clear messages that it is actually going to pay to save.
Coming back to the point that John Greenway made, I, and I am sure other members of the Committee, would welcome any thoughts that you have on how the unintended consequence of the schemes—the risk of the schemes—could be reduced. Mr. Haddrill referred to the risk of the levelling down of the schemes that currently cover 4.2 million people. You will never get rid of the risk, but you can certainly reduce it.
Can I ask you some questions about the self-employed? They will not be covered by the scheme, but they will be able to opt in. You are part of an industry that is famed for its marketing. If you have not been able to encourage somebody who is self-employed—not necessarily on a particularly high income—to take out a personal pension plan, how do you think that the opt-in will work? Do you know how many self-employed people do not have a personal pension plan?
Stephen Haddrill: I do not know that figure. I actually do not think that this is going to work for the self-employed. Without a clear employer contribution sitting alongside it, I think that it is going to be quite hard to convince people that it is what they should do. I also think that the self-employed tend to think of their business as their pension, so there is a big cultural thing to get over there, but perhaps I am being pessimistic.
Joanne Segars: I tend to agree with you. I think that pension provision for the self-employed has been a concern for many years. I am not sure that personal accounts will address that in quite the way they will for employees. I think that perhaps there are different routes into tackling pension provision among the self-employed than through personal accounts. Perhaps Her Majesty’s Revenue and Customs, the Small Business Service and other routes through which the Government reach the self-employed could be one of the solutions. It is a very difficult problem that has been wrestled with for many years.
Have you any idea of how many people we are talking about—those who are self-employed and have not got a pension plan? As you say, they might be dependent on selling their business on when they want to retire and on that providing them with a pot for their pension.
Two brief questions, if I may. First, I would be interested in your estimates of the additional amount of net pension saving that we will have overall as a result of personal accounts—if you are prepared to hazard a figure, even a ballpark one would be useful.
Secondly, can I take you back to the point about the European Union and workplace and personal pensions? You said that this was an issue that applied to only the UK. Are there examples in the recent past where the Government have gone into battle with the EU, perhaps on some issue of City regulation, and have come back with a result? You seem to be indicating that perhaps with a bit of oomph the Government might be able to achieve a result here? Would that be a fair summary of your views?
Stephen Haddrill: Yes. I think that, unfortunately, quite a lot of the examples where the Government have achieved things against the flow, so to speak, are where they have stopped something rather than initiating something. I agree that that is a bit more difficult. We have spoken to the European Commission, which feels that the Government’s interpretation of the existing directive is correct. From what I have heard, the Commission would not necessarily be in a great rush to take us to court if we took a more liberal definition.
The real risk is that an individual will take the Government or somebody to court, and whatever the Government want to do, they cannot protect against that, so we could end up in the European Court of Justice anyway, which we want to avoid. That is why we must try to get the Commission to do something, rather than just doing a sort of Italian job on this.
Dick Saunders: May I respond to Mr. Selous first? Our central estimate is that about £10 billion a year will go into this scheme, which sounds a lot of money but to put it into perspective it is about what will be invested in retail mutual funds this year. There may be some offset to that number from levelling down, but my guess is that it would be a lot less than £10 billion, so there will be a net gain. I do not know whether Joanne would agree with that.
One of the themes that comes through strongly in most of the submissions from the industry is the concern about a level playing field and the lack of public subsidy for the personal accounts system. Do any or all of you want to expand a bit on the sort of things you have in mind that you have spotted in the Bill so far on this issue?
Stephen Haddrill: The primary one that concerns me is that there is a power in the Bill for the Secretary of State to make loans to the personal accounts system and to do so without necessarily charging any interest and I cannot see why that should be the case.
It is very important that the system and the consumers of it—the people who go into it—absorb the costs of it just as people who are in other pension schemes have to absorb the costs of those pension schemes; they get charged out. Why should someone who is in a personal account get a taxpayer subsidy other than the basic pension subsidy when somebody in another scheme does not? We should look all the way through and ensure that there is no scope for that subsidy. I was alarmed when I saw that the clause had been written in that way and I could not understand why that was the case.
Dick Saunders: Having said that, there will be a need for finance in this scheme. We tend to talk about charges as a percentage of funds under management, but a lot of the administration costs are fixed; they are £10 per account or whatever. There is no question but that in the early years, if we have the sort of low charges that we all want to see, the scheme will be loss-making until those funds build up and the management fees are big enough to cover the cost and the borrowings.
There will be a need for the scheme to borrow in the early years to beat that J-curve, which any business plan has. Obviously, that borrowing should be on arm’s-length terms; I am sure the Treasury will not want to lend to it interest-free.
Both Stephen’s and Joanne’s organisations have schemes that sell to employers and through them to employees. We have discussed the issue of “it pays to save”. What sort of information or advice do you give to those who may buy the sort of pension scheme that is being sold by your organisations?
Stephen Haddrill: It depends exactly how it is arranged, and it will vary company by company. Certainly with a GPP, very often the provider goes into the workplace to explain what it will involve. There is an enormous volume of regulation, which requires a great deal of advice to be given every year to the person in the scheme about how it is performing and whether they are should go back into the state second pension and so on.
Joanne Segars: We have 800 member scheme sponsors sponsoring over 1,000 workplace pension arrangements. That varies from scheme to scheme. However, an increasing number of employers are actively engaged in what we might call generic financial advice. Clearly in regulatory terms that is much easier to do in the occupational pensions scheme setting at the moment than in the contract-based setting in which Stephen’s members operate. Our members are more engaged, particularly where there are final contribution schemes, in offering information to their members. They are very cautious in what they say about state pension provision. The contributions are often much, much higher than is available under personal accounts, which is a helpful factor.
Of the people with whom both your organisations will deal, most will benefit while some will end up having to claim pension credit. Therefore the advice they are given at the start of that process, if it comes from your organisations, is not independent. You are obviously regulated. Do you think that a requirement, which might attach to personal accounts and therefore would probably have to attach to any other pension scheme that is created, would need to be much more developed than it is now or do you think that the current level of regulation gives people sufficient understanding of what they are buying to enable them to make a judgment about whether they should invest?
Thank you, Chairman. This was really on the theme that Mr. O’Brien raised. Perhaps I could just address the issue the other way around. In fairness we all have high hopes of the Thoresen results. In another Committee Room this morning the Financial Services Agency told the all-party insurance group that its retail distribution review will be leisurely in order to take account of that. There will be an opportunity for us to look at this.
Should not the question that Mr. O’Brien put be the other way around? Is there a fear from the point of view of the existing industry that personal accounts, with their lower regulatory regime, much lower costs and quite a number of investment vehicle opportunities—we were told this morning by the Personal Accounts Delivery Authority that it would be perhaps as many as a dozen or 20—will make the existing contract-based pension products look increasingly uncompetitive? We may be looking five or 10 years down the track, but if that is an issue should not we address it now and is this one of the reasons why everyone seems to be so opposed from within the industry to additional contributions being permitted for personal account holders?
Stephen Haddrill: The real reason why we do not like additional contributions is because we think it complicates matters. We think it will be taking money out of financial pots where people have had advice and where they have got good investments and are putting them in something on which they will have no advice. Can we compete is the question. We think we have a good product. We think its features will appeal to many people. It often has higher levels of contribution, as I have already mentioned, and it may come with life insurance protection of one sort or another. It is potentially a more sophisticated product, a better product, and we are confident about it competing.
The other factor is that, yes, personal accounts will be low cost. Talking to PADA recently, I think that it is coming to the view that this 0.3 mantra is the one that is going to be delivered. We always felt that it would be closer to 0.5 or 0.6. The numbers will come out when the numbers come out, but from our experience of running these things that is where we think it will end up. That is where the larger GPPs come out already, so we do not think that the gap is as great as all that. But what we do feel is, if there is a level playing field with no taxpayer subsidy, that we will take on the competition. That is the sort of industry it is.
I am afraid that we now have to move on to the next evidence session. If the witnesses want to add anything we would welcome them writing to the Committee. Thank you very much to all three for your evidence.
We now come to the next oral evidence session. I welcome our five witnesses who together make up the people’s pension commission. They are Christina Barnes, director of pensions policy at the Commission for Equality and Human Rights; Sally West, policy manager of Age Concern; Nigel Stanley, head of campaigns and communications at the TUC; Mervyn Kohler, a special adviser at Help the Aged; and Doug Taylor, personal finance campaign leader for Which? I warn you that there may be another Division in the Chamber; if so, I shall suspend the sitting for 15 minutes.
Thank you all for coming here today. May I ask each of you briefly to say why you think it important, as you have indicated, that the legislation is passed?
Christina Barnes: The Equality and Human Rights Commission is very supportive of the personal accounts initiative and the measures contained in the Bill. We believe that personal accounts are vitally important, particularly for the lower and median earners and those with broken working lives who have not been served so far by the private and occupational pensions industry. We think that personal accounts offer an opportunity for the first time for those individuals to be able to save in a low-cost employer-supported environment in a simple scheme. That is why we support personal accounts.
Sally West: At Age Concern, we see many older people who do not have a decent income in retirement who are in poverty; and we think it really important to give younger people better opportunities to save for retirement. We think that the principle of auto-enrolment into personal accounts or another occupational pension scheme, and the new personal accounts, will provide real opportunities for many people to save for the future—and people who do not have those opportunities at the present time.
Nigel Stanley: There has been a big retreat by employers from providing good pension schemes. Big employers have become smaller and new employers have not set up pension schemes. There has been a market failure in terms of the industry being able to provide pensions products to employees and savers. There is a huge pensions gap and the Bill does a lot to close it.
Mervyn Kohler: A variation on a theme. People tend to postpone thinking about their older age until it is desperately too late to do anything helpful about it. The only good reason for doing anything about it is if you look at the wreckage of pension schemes in the recent past and say, “I don’t want to go there”. This is a one-off opportunity actually to bring some confidence back into the pension-building industry.
Doug Taylor: At Which? we have for some time recognised the need for individuals to make a higher level of saving for their future. The difficulty was, particularly for people on low to medium earnings, finding a vehicle that was able to deliver that. We have been keen to see a vehicle that puts the consumer at the heart of the decisions that it would take, that has a low charging structure and that will deliver the highest possible benefit to them for their contributions. We believe that the personal accounts system could deliver that.
In terms of your answers, some of you have indicated the importance of automatic enrolment. If there was an exemption for insurance-based schemes on automatic enrolment, what would be your view?
Nigel Stanley: We see that as a pretty fundamental breach of the auto-enrolment principle, which we see as very central to the post-Turner commission consensus. It breaks the need to keep it simple, which I think is a good mantra from the earlier evidence session, and makes things more complicated. Even if the vast majority of employers operated another system in good faith, it would provide opportunities for abuse. A threshold system would delay things as well because there would be a time period during which the tests were being applied regarding whether recruitment was sufficient to meet the threshold. We are also concerned that putting a percentage as some kind of test fails to reflect that work forces are different—80 per cent. might be an appropriate figure for one work force, but not for somewhere else. We see all kinds of objections to that and, like everyone else, we rather hope that Europe can ride to the rescue and make auto-enrolment much easier.
Doug Taylor: We would concur with the position of the TUC. On a level playing field, auto-enrolment is a key feature for ensuring that there is a high participation rate. Indeed, in earlier days we would have argued for compulsion rather than auto-enrolment, but we accept that auto-enrolment is the pragmatic way to move forward on this issue. Like the TUC, we would be concerned if there was a different set of arrangements for GPPs from the set of arrangements for personal accounts.
Sally West: This is also about the sort of the information we give out to people. It is going to be very important that people understand how pensions work and that there is a clear message that we can give to say that if you are employees in these circumstances, you will be automatically enrolled into a pension scheme, and it is then up to you decide whether you want to opt out.
May I ask how concerned your various organisations are about the at-risk groups identified in the work done by the Pensions Policy Institute? What do you think should be done to minimise the disadvantages caused to people who are auto-enrolled, but might have been better advised to have not been enrolled?
Mervyn Kohler: I strongly believe that we have got to rely on information and advice here. It seems to me that to make assumptions about the circumstances of different individuals is actually a cop out when we ought to be seeking to educate individuals about their options and making them understand a bit more about the pensions regime. I understand the thrust of the question because I can see that there are going to be quite a lot of people who are in perhaps the last 10 years of their working life and have not put aside any pension funds so far. For them, it is probably not going to be a brilliant idea actually to go for enrolment into the new personal account scheme, but I would rather explain that than have them exempted unilaterally.
Sally West: The pay-as-you-save issue has been coming up time and time again. It is a really important issue. We certainly do not want people on low incomes paying into pension schemes and then finding that they are little better off in retirement. Similarly, we do not want some of the many people who will benefit from paying into private pensions to be deterred because they hear some of the debates, or because their neighbour says that it is not worth saving. We are concerned about that because we do not want people not to benefit from the new scheme.
The issue is difficult. I have spent an awful lot of time looking at it, and you might have seen the paper that we produced with help from colleagues here. It is one of those issues that the more they are looked at and the more one understands how means-tested benefits work and people’s circumstances differ, the harder it sometimes is to think of the answer. There is not just a single answer.
I support some of the things that previous witnesses have said, and we need a detailed debate. We have had some discussions with DWP analysts and the Pensions Policy Institute. Both have done a lot of work, which is a good starting point, but we want to explore what more can be done and what modelling can be done so that we know exactly who these people are not only at retirement, but earlier. We would also like a detailed analysis of the different policy options and looking at changes to means-tested benefits, trivial commutation, and the range of things that could be done. We need those options to be worked out with the pros and cons because there will be trade-offs. For example, there could be a system whereby everyone benefited from saving involving means-tested benefits, but that might make more people reliant on means-tested benefits. Helping the system in one way might mean that we do not achieve another policy aim.
We have discussed the matter with the Minister and officials, and I am encouraged that there will be a way forward in setting up some sort of detailed programme of looking at all the issues. We would like to be involved in that debate, and hope that Opposition MPs want to be involved. It is good to have a shared agenda on this.
It has been suggested that we could amend the scheme to allow some variation in the level of contributions from both employers and employees in a risk-sharing system. I am interested in your views on those proposals and whether there is any merit in exploring them further.
Nigel Stanley: If you are referring to the proposals that emanate mainly from the Association of Consulting Actuaries on introducing an amendment to make it easier to introduce a particular form of risk-sharing pension, I can respond. We are not against risk-sharing pensions. It seems to me that there is room for creativity, although sometimes the more creative the scheme, the more complicated it is, so the principle of pension simplicity goes straight out of the window. However, we are not convinced that that is the one proposal that should have the privilege of an amendment. If there is to be a discussion about what legislative blocks there are to risk sharing—we are not convinced that there are many—we think it should be a longer-term process with a much wider debate.
The proposal is interesting, but there is no need to have an amendment favouring that scheme, which we think has some problems. It may be not so much risk-sharing as risk-avoidance by employers, sometime with employers making the judgment. We are not happy that the balance is quite right.
We do not think there is an argument for the amendment at this time, although I suspect that the issue will not go away. We are happy to contribute to a longer-term discussion about risk-sharing, hybrid schemes and other ways of giving employers who want to do more than DC the opportunity to be more responsible without providing an easy way for employers with good DB to level down to something so complicated that staff do not understand what is happening to them.
Mervyn Kohler: I agree with what Nigel has just said. The ACA’s proposal is about trying to reduce the costs of DB schemes by introducing the conditionally indexed pension in the same way as the Government’s proposal in their own Bill on looking at the indexation of deferred pensions is aimed at reducing the cost of DB schemes. Help the Aged is far from convinced that the jury is in or out about the future of DB schemes, based on their cost. One might even be able to say, if the good work that will be unrolled eventually from Otto Thoresen and others raises the awareness of pensions around the workplace, that employers will actually up their game and offer better pensions. To start legislating as this stage, either with the clause that is in the Bill or with this proposal for conditionally indexed pensions, to cut the benefits of DB schemes does not seem to me to be the right starting place for this particular debate.
Nigel Stanley: There are two technical points, also. If you have schemes like this, how will they fit into the PPF regime and how will you work out the transfer values? These are quite complicated issues and until we know the answers to them, I think it would be unwise to proceed in a way that encourages them.
Would it be correct to say that your view is that we should introduce these schemes and get things bedded down, and that if seven years down the track people want to discuss risk sharing and other areas, we could look at it again once we know how the proposed new system is actually working?
Mervyn Kohler: There will always been room for invention in this industry. The first thing that we are trying to do with these new personal accounts is to restore the sense that it does pay to save. To start offering people pensions where the benefits are potentially not going to show that it has paid them to save is counterintuitive, is it not?
May I ask those who have not spoken on the new risk-sharing proposal to indicate their views? Do you agree with the TUC line on that?
Doug Taylor: We have done no specific research on this issue, but it strikes me that the position that was outlined by Nigel on behalf of the TUC seems quite sensible. While I think that we should look at all the issues and the points that people are making, I am not convinced that this is an area for a specific amendment.
May I ask a brief question of everyone, although perhaps I will start by asking you, Mr. Taylor, a specific question? Do you think that the arrangements for consumer consultation proposed in the Bill are sufficient? That is the first question; the next one is for all of you. Concerning the methodology in respect of administration costs, have you been involved in preparing projections for the administration costs of this scheme?
Doug Taylor: Perhaps I can start by saying that, in terms of the general consultation that has taken place post-Turner with groups and consumer groups specifically, which I will refer to, I think that the Department for Work and Pensions has been open and able to encourage contributions to the debate so that our voice has been heard. We have been keen for consumer representation, and with PADA there is a consumer panel, which I think is an important feature. Moving forward, in terms of future consumer representation in the actual trustee co-operation, there are some issues where we would like to see debate around specifics. If you refer to the Financial Services and Market Act 2000 or the Legal Services Act 2007, there are some specific areas that are set up for consumer representation, including the right to research, the right to publish and the right to have payment of members who are on panels. It might be helpful to include some detail in the Bill.
Moving forward on being involved in any detailed administrative costings, we have not been involved in the details of costings, but perhaps I should refer to one specific issue: the charging regime that might exist for consumers. Debate is taking place about whether there should be an annual management charge or an upfront contribution charge. Our own view has historically been an annual management charge, although we would be open to consideration if it was demonstrated that other systems would be more cost-effective for the consumer. That has been the one area that we have expressed opinions on to date.
May I pin you down on a specific issue? You say that you are not involved in the cost projections of administrative costs, or have not been. Can I infer from that that you might have some doubt as to whether the Government’s projections are accurate, or would that not be the case?
Doug Taylor: No. We started off, in a sense, from a consumer aspiration that the costs should be kept as low as possible. Therefore, the administration needs to be as effective and as efficient as possible to deliver that. At the end of the day, any costs will effectively be borne by members of the scheme.
May I refer to the issue of compliance? It is anticipated that most employers will co-operate fully with the scheme and great difficulties are not envisaged. However, it is feared that a minority of employers will not be inclined to co-operate. Therefore, we have to address the issue of how to put that right. There are issues not only of publicity and how to raise awareness but one of enforcement as well. What views do you have of the pensions regulator and how we can ensure that that body is able to fulfil its new enhanced role successfully?
Nigel Stanley: Clearly, there was a debate in Government about which was the best agency to enforce the scheme. Some argued that it should be Her Majesty’s Revenue and Customs, and some that it should be the Pensions Regulator. The arguments were finely balanced, and reopening them does not seem to be terribly helpful. What is more important is whether TPR has the resources and powers to do it properly and whether individual employees have the rights that they need for their own protection. The resource level is not an issue for the Bill, but it is something that will arise. We are convinced that there is a pretty effective compliance regime in the Bill. Obviously, we would like it to go further in some regards, but we do not want people to think that we do not believe that it is going to be effective. Certainly, the proactive nature of the TPR and its ability to deal with errant employers is important, as is the fact that all employers will have to register their pension arrangements. The fact that people who opt out will do so directly to PADA and not via their employer is also very important, and the employment rights in the Bill are drawn from equivalent employment legislation and protection, and that generally works fairly well. Therefore, our tests will be in how it is applied. Will TPR have enough resources and will it be proactive enough? It is a big change in role. At the moment, it is dealing with what you might call the responsible good employers who already have pension schemes. Things may go badly wrong in one or two of them from time to time, and it will have to deal with that. Indeed, we think that it does a pretty good job at the moment. The Tennant case, which is live at the moment, is a good example of it acting well and efficiently. The TPR will now have to deal with many more employers, some that are at the opposite end of the responsibility scale and some that are just a bit disorganised. They are not evil, but just do not get round to doing things properly and do not understand their obligations. Therefore, it will be a test. However, that is a question of resources. I do not think that there is a problem with the powers in the act.
I would like to ask a couple of questions. The first is about people who are on low incomes, or means-tested benefits or perhaps have several jobs. Several of you have raised concerns about that. What changes would you like to see that would enable those people on the margins to benefit from personal pensions?
Christina Barnes: We have real concerns about people with multiple jobs, and not just those with multiple jobs that do not get over the £5,000 threshold but also those with perhaps one job that is slightly over the threshold and one under, or those people with two jobs that are both over the threshold. Because of the way that the lower earnings band works, people only pay their contributions in on their earnings that are over that £5,000 limit. We would really like to see that issue explored further. An individual could perhaps opt to pay in their contributions on their full earnings, and so go right down to zero pounds under that £5,000 threshold. If an individual opts to do that, their employer should have to match them, which would help not just the multiple jobs issue but also those people with a single job who are on very low earnings of up to about £7,000 and who will only be putting in very small levels of contributions.
Nigel Stanley: We agree with that. It seems to us wrong that someone who has multiple part-time jobs with a particular income should be treated differently for their pension arrangements from someone with a full-time job with the same income. That is discriminatory against part-time workers, who are mainly women. There is a problem there. We understand that it is technically very difficult. It is difficult to have auto-enrolment for such people, as one employer will not know about their situation. However, the basic problem that someone can be treated differently if their equivalent income comes from two or three part-time jobs is wrong, and we need to find a solution to it.
Mervyn Kohler: We would be looking for a tad more flexibility in the contribution regime. In the last evidence session, you heard a strong argument for not having flexibility, but for people who live untidy lives, in and out of a variety of different jobs and such things, the opportunity to put in different sums of money on a more irregular basis when the opportunity presents itself, is important. I know that there will be a review on that for 2017, but that seems a long time to wait for a review of something that could make a great deal of difference to people’s lives.
Doug Taylor: If I could just add, with regard to flexibility, that when we did research with the target group, we found that 70 per cent. of consumers felt that there should be flexibility about how much they paid into their personal account. For us, that raises the issue of lump-sum contributions, and the extent to which they would or would not be permissible. In previous evidence, we heard reasons for why they should not be permissible, but we find that people’s lives are not linear, there are changing circumstances and sometimes people will be in better paid jobs than at other times, they may receive inheritances, and certainly, in so far as it is practical, they want to amalgamate their pensions in one place. Levels of flexibility is an issue that should be considered.
I ask this question first to Nigel Stanley. In the previous evidence-taking session, Stephen Haddrill, the director general of the Association of British Insurers said that in his opinion, for the 4.3 million people currently in occupational pensions whose employers contribute more than 3 per cent., there was a real risk that some of those employers could start to level down their schemes. I would guess that a significant proportion of those 4.3 million people are represented by trade unions in the TUC. Your paper does not touch on that issue——the potential unintended consequence of the new schemes. Does that mean that you do not share Mr. Haddrill’s fears, or that you were not really aware of the matter?
Nigel Stanley: It was more that we did not feel able to submit every single bit of pensions policy that we had to the Committee, and we wanted to deal with the live issues that were causing controversy at the time. To address the remarks on levelling down, I think that we must accept that one cannot introduce a new pension system without employers noticing it. If employers are made to think about pensions, they might make decisions about the kind of pension that they offer. There is no technical way to stop employers levelling down if they decide to try to do that. Frankly, the best way of stopping that was referred to in your question, and it is to have good, strong trade union organisation in the work place concerned. Perhaps the Committee would like to consider that—I suspect that it may be outside the long title of the Bill, but it is a matter of work place power.
Mervyn earlier made the point that we also hope that making pensions more prominent and important will lead those good employers, who want to be employers of choice and differentiate themselves from other employers, to value the pension contribution. Staff will be more aware of the fact that they do this, and we hope that there is a market incentive that goes the other way as well. Will there be some levelling down? Of course there will be. Will there be huge benefits for everyone who does not have access to a pension scheme at the moment? Yes, there will. We think that the equation is positive overall. We are very wary of those arguments that say that you have to make personal accounts really awful to stop employers levelling down, as that seems to be punishing the vast bulk of people in the work force who have to rely on personal accounts. We are wary of those arguments, although we accept the compromises that are currently in the Bill around that point. Too many of the arguments about levelling down seek to make personal accounts really unattractive, so that not even miserable employers will level down to them. That is false logic.
I would not suggest that in a million years. Surely the experience of the last few years has been that employers that were recognised as good, including in the public sector, have changed their pension schemes and have, in many cases, ended final salary schemes because of the cost involved. Unfortunately, the evidence so far is that irrespective of whether employers are good or bad, given certain circumstances, they are likely to seek to reduce the costs of their contributions to a scheme. Do you have any ideas other than increasing the power of trade unions in the work place? Other than that, are there any technical things that you think could be introduced in the Bill to try to reduce the risk of this levelling down threat?
Nigel Stanley: We have gone through a deregulatory review and some of the proposals from that review are included in the Bill. There are other things that I believe that the Government will do that they do not need primary legislation for, so some technical fixes can do this. But if employers make a business decision meaning that they can reduce the cost of their pension scheme and not suffer any ill consequences from that, they are quite likely to do that. So it is much more a case of making employees value pensions more and making employers want to differentiate themselves from other employers by making good pension provision an important tool not just for recruiting staff, but perhaps more importantly for retaining staff. That is the way in which you are more likely to do it.
Looking for technical fixes here is a bit beside the point. There are some things that one can do to help and a deregulation review has looked at those, but there have been other measures before and employers have made that calculation. One reason why we are all sitting here today looking at a completely new system with auto-enrolment and contingent employer contributions is that an enormous number of employers have already levelled down or never levelled up in the first place by starting and never offering a good pension.
Mervyn Kohler: Can I follow Nigel’s point? Long before personal accounts were a dream in anybody’s eye, employers were trimming their pension obligations. It is not as if people necessarily will downsize their existing pension schemes because there is an offer of an apparently cheaper alternative; it is probably much more to do with a sort of yo-yo prediction of life expectancy: the way in which FRS 17 required companies to declare their pension obligations in a different form. If one is looking for technical fixes, this is the area in which to look for it. If we had had a little bit more consistency across the piece at that stage, it might not have provided the same sort of shocks that employers respond to then suddenly say, “I must actually downsize my pension scheme.”
Doug Taylor: I should like to echo some of the points that have been made. Clearly, there has been a levelling down from defined benefit to defined contribution and a reduction in employer contributions over recent years. I was struck by a survey recently on why firms provide employees with pensions, which ranked these things in order: first, we consider our responsibility as a good employer to make adequate arrangements; secondly, the scheme helps us to build our image as a caring employer; and thirdly, the scheme helps us to compete in the labour market. In a sense, from the supply side, there is an issue there. From the employee consumer side, there needs to be more awareness that those things are key features when choosing an employer and maybe that has not always been the case in the past. But I suspect that, as pensions become a more important, significant part of the planning process for consumers, the good employers that offer the best schemes will have a competitive advantage in the market as far as recruitment and retention is concerned.
I have two points to make. It would be possible at the moment for an employer to offer a financial inducement to their employees not to be auto-enrolled, because they might want to save their costs. The Bill is silent on this subject at the moment. Were that to be the case, there would not be a level playing field as far as employers were concerned, in that the cost-base of some employers could be significantly lower than others. Do any of you have views on that? Is that perhaps an area that the Committee needs to examine going forward?
Also, in point 7.4 of the TUC contribution, there is a suggestion that
“modest pension income and lump sums are disregarded” as far as means-tested benefit rules are concerned. I wonder whether Nigel Stanley or perhaps any of our five witnesses, or even all of them, might be prepared to put some possible figures to those two suggestions, even if they were tentative ones at this stage.
Nigel Stanley: To answer the first question, about compliance, as we understand it, the Bill will not stop an employer offering a financial inducement to a member of staff to opt out, but there would be nothing to stop the member of staff taking the inducement and then not opting out, because that deal would not be enforceable. So, “roll on the employers who want to try it on” would be my line, because we would certainly be there saying, “Take the money and don’t run.” I think we are fairly satisfied on that.
May I just come back to that subject? Perhaps you might get a savvy employee who might do that and more power to him or her were that to be the case, but there might be others who just take the money without really understanding the issue and think that they have got a good deal up front, and actually they would lose out in a significant way. Then that employer has a lower cost base and can go in and undercut other good employers in the area. So I take your point, but there is a serious point to my question.
Sally West: That was something that we have concerns about, because it does seem slightly odd that financial incentives are not prohibited but they cannot be enforced. It is okay if you have got a trade union and you have got Nigel there telling you that, but there will be an awful lot of employees who, if their employer says, “Oh, you know, if you opt out I will give you an extra £500”, they will not have read the detail of the legislation that says that that deal is not enforceable. It is really important that information goes to both employees and employers about rights and responsibilities in terms of the new pension provision, and I think that it is a big challenge as to how you ensure that employees realise their rights in that respect.
Nigel Stanley: To give a more serious answer, the point that I would make is that, if there was a way of introducing that into the Bill, I think that we would support it. Our legal people seemed to think that making such terms contractually null and void was the best way of doing it.
I think that I am more worried not by employers financially inducing people, or trying to bribe them out of it, but more by a general type of propaganda saying, “This isn’t a good idea. You don’t want to do that. It doesn’t make sense. Here’s a cutting from such and such newspaper that says they’re a bad deal.” Again, outlawing that type of propaganda is very hard, but I would hope that the regulator would have a view about that and some codes of practice for that kind of thing; that might be a way round that. I am more worried about the canteen culture encouraging that propaganda than I think that I am about obvious bribes, because clearly there is a kind of risk to the employer in doing that if the staff find out what they are doing, and then the employer would lose out. It is more that type of murmur and rumour stuff that I think is the problem. It is very hard to outlaw rumour-mongering.
Nigel Stanley: On the second question—no, we have not. We were trying to do some creative thinking about where a discussion might start about how you would do that and a number of suggestions have been made about trivial commutation limits, which would be particularly useful perhaps for older workers joining who did not have the chance to build up enough to buy a significant annuity, but who built up enough to take them perhaps just a little over the trivial commutation limit. Perhaps there are some ways of allowing income from pensions not to count against some of the means-tested benefits, particularly housing benefit, which is always the one that seems to cause the most difficulties. Indeed, people can be in perfectly good DB schemes and lose out because of the interaction with housing benefits at the moment, although no one uses the argument that they have been mis-sold. So these are issues that go much wider than personal accounts. We would welcome a longer term discussion of the attempt to reach consensus between the approaches, which has been the hallmark of the debate since Turner. We welcome that and would like to participate in it. This is not easy, it is technical, and there will be trade-offs and difficulties. To at least share a menu with prices would be a good step, rather than rushing into anything in the Bill.
Christina Barnes: That idea of trying to get a menu with prices is an important one. As the Equal Opportunities Commission, we did work on trivial commutation and suggested various raises to that limit. The work of the Pensions Policy Institute on income disregards has looked at about £12 per week. Those were the suggested figures and we need to play with those figures and look at the outcomes and impacts, which will give us that intensity of modelling that can help to bring this debate on the potential options alive.
Mervyn Kohler: As far as the Bill is concerned, while the debate is still slightly on about showing that it pays to save, it would be unfortunate if the Bill did anything to make it difficult to have another look at changing the trivial commutation arrangements, such as an income disregard within the means tested benefits system. We will have to come back to these issues at more leisure than you have had in taking the Bill through the immediate parliamentary stages.
Sally West: I wish that we could say that Age Concern thinks that there should be a disregard of something and put forward a specific proposal that you could try to rally support to. However, as colleagues say, it is a more complicated issue than that. On the timescales, I do not think that by the time the Bill has gone through, there will have been time to look at all of the options and consider them. I hope that we get a strong commitment from the Minister that we are going to have a really good look and that anybody who wishes to be involved can feed into it so that we come up with something that we all feel comfortable is the best way forward.
I would like to talk about the employers who before even offering an incentive will try to screen out individuals who they think might want to save for a pension. There is a consideration of putting in the legislation a pre-employment prohibition. What are the panel’s views on that?
Nigel Stanley: We are glad that the Bill will outlaw people asking such questions in interviews or in job references. We think that that is an important advance. We would like to have seen the Bill go further and introduce that pre-employment right, so that, effectively, employers could not discriminate against job applicants on the basis of their pre-existing pension history. We understand the argument that pre-employment rights are rather unusual in British employment law, but our argument is that they are not that unusual. In some ways, it is analogous to the trade union membership right: employers cannot discriminate against you on the basis of your pre-existing membership of a trade union. I am not sure that that many employers will do so or whether it will be a huge issue. The clear outlawing of asking such questions is very important, but we would have liked to have seen that pre-employment right in the Bill and were disappointed not to.
I would like to take you back to the conversation that you had with Mr. O’Brien about the review of defined benefits. We need to be absolutely clear what you are saying. In an answer a moment ago, Mr. Taylor said that there has been a levelling down from defined benefits. I thought that I detected in Mr. Stanley’s initial answer a sense that there is an issue here of the contraction of the number of defined benefit schemes or of the number who are in such schemes, but that you were not quite convinced with the ACA proposal. Perhaps it needs to be explored more, and so on. We need to provide some impetus for the kind of review that you talked about. If we tried to include in the Bill a clause that might not be as prescriptive and specific as the ACA proposal, but that provided impetus for a review, would you go so far as to support that?
Nigel Stanley: We would have to look at the clause, rather than give that kind of blanket approval or not. There are a number of issues. To what extent does the law currently stop risk-sharing schemes? The view of the deregulatory review was that the law allows quite a lot of risk sharing, so the first question is whether there is a need for legal changes in the first place. The second question is: if you are going to have changes in the law, what kinds of risk sharing should they encourage? There are other ways in which employers can reduce the cost of DB schemes. Moving to career averages over final salary, for example, is one that unions have negotiated and, indeed, can be an egalitarian measure in many workplaces.
Nigel Stanley: Exactly. We are not suggesting the ACA scheme is without merit; we are saying it is one possible way of looking at things. We have some problems with it. My impression is that the Government have already said they are open to a discussion on risk sharing in their response to the deregulatory review. Whether an amendment is needed to the Bill saying the Government shall conduct a review of this, I do not know. It is probably unnecessary to write that into legislation, but if the Government are saying there should be a discussion about risk sharing and other ways of—I would like to see it more as improving DC schemes than reducing the quality of DB schemes—
Nigel Stanley: There is certainly a range of options that we would like to explore, but we do not see any need in this Bill for what has been described. I do not think this will be the last Pensions Bill that Parliament has before it for five years or so. There will be other opportunities, one suspects.
They come at a pretty alarming rate. I want to move on to a couple of other points in the TUC memorandum, which I have to say was one of the better reads among the papers that we were sent. The first issue is payment of arrears. We are talking about employers simply not enrolling people when they should or not making the contributions when they should. Is it your view that the employer should be responsible for the loss of investment return that the individual member suffers by those contributions not being paid? It could be quite considerable.
Nigel Stanley: It could be, though it could of course be at a time when the funds went down as well. Our view is slightly more simple than that. We think that if it is the employer’s fault that contributions are delayed, there will come a point when, if the employee has to pay the back contributions, they become such a size they may even become an incentive to opt out so the employee does not have to find that amount of money, which would be unfortunate. If it is the fault of the employer that contributions are not made or someone is not auto-enrolled, obviously there needs to be some administrative measure. Three months is a figure that has been talked about as a recent compromise for this, but beyond that it seems to us to be the responsibility of the employer to put right what the employer should have done.
But that is why we need to explore it—that is the joy of this afternoon’s sitting. In paragraph 5.7 of your report, you make a point that I have not read anywhere else. It is an issue that I can tell you has cropped up before, not in pension discussions—
The point that I was just about to make to Mr. Stanley concerns paragraph 5.7 of the memorandum. It reflects on the fact that our general understanding is that personal accounts will not be suitable in the Government’s view for transfers in and out, even of fairly small amounts. As a result of the Bill, we are increasingly likely to see migrant workers, who might be in this country for two or three years—some for a longer time, some for a shorter time—who, because of the level of earnings and the fact that they now have such an opportunity, will build up personal accounts and have a fair amount of accrued benefit in them.
However, if the migrants leave the country and never come back, the question arises whether there should not be a mechanism to provide for that. What underpins the matter is a growing sense in European institutions that, if the individuals are making contributions in host countries, they should receive the benefits for which those contributions provide. Is that the scenario you envisaged when you made the suggestion in the memorandum? Do you think that there ought perhaps to be at the least clarification of what regulation-making powers will be in the Bill to cope with such matters, if they became a problem in the future?
Nigel Stanley: We think that that is a good point and agree with the premise behind your question. We understand that part of the consensus is a desire to stop there being big transfers in and out of personal accounts and between other personal accounts. That is understood, but we were concerned that we could end up with a lot of very small pension pots in personal accounts. That is not good for the person with the small pot or for those with personal accounts because they are expensive to run. It is more complicated than that, but essentially there is a fixed cost per account rather than a cost that goes with the size of the account. In particular, if we then talked to a worker who had gone home to Gdansk, but has a small pension pot stuck in personal accounts in Britain, it just seems that that person should not be a victim of the consensus that people have not thought about or the exceptions to it.
Our reading of the Bill suggests that regulation-making powers would allow that, but it might be useful for hon. Members in Committee to probe the Government about whether they think that such a provision would be a suitable exemption to the general consensus, which people generally understand and sign up to. After all, there will be an exemption in the general sense that there will not be transfers in that will cover people who have not yet been vested in employer schemes. For example, such people have been members of a scheme, but the employer only puts it into the DB scheme if they have been working for two years. If they leave just before the two years is up, they would normally get back their money and be allowed to put it into personal accounts in one lump. That is obviously a sensible thing to do. The migrant worker argument and other such arguments are similar exemptions to the transfer-out side.
I want to be serious for one second longer. I am also concerned about the same issue, but the other way round. Let us suppose that the migrant worker thinks, “Well, I might not be here for too long, so therefore I shall opt out. I would rather have the money and send it home”. The employer might then think that that is a good idea because he saves money. There might be a general environment, culture or climate in which migrant workers think that such matters are not for them, whereas in reality about 25, 30 or 40 years later some of them might still be here and, if they have not taken the opportunity to invest in personal accounts, we will end up with a whopping great pension deficiency in respect of those workers. If we could clarify matters in Committee, it might be particularly helpful in explaining to a growing number of people—the number of whom is likely to increase by 2012—why it is a good idea for them to take part.
Mervyn Kohler: I think that you are absolutely right to identify such matters as being a problem. A working party has been functioning in Brussels on the portability of pensions in Europe for the past 18 years without actually reaching a conclusion. An answer must be found in respect of that particular agenda. As for the labour market, you rightly say that we are all living in a global market.
We have not spent 18 years on this matter in the Council of Europe, but the council has made it absolutely clear that people have a human right to get the benefit for which they have paid. The mechanism for doing that is not with the Council of Europe, but with the European Union. We will pursue it.
That is a particularly vexing point of the proposed legislation because clearly we have many potentially migrant workers; albeit my hon. Friend the Member for Ryedale said that not all of them might back to their own countries. If, however, we did allow transfer out, would it have to be a transfer out to another pension scheme in their own country even though it is a very small amount?
Presumably, there is also a scenario whereby people who are born in Britain and who are not migrant workers here go and live abroad, and we cannot distinguish between British people going and living in Spain and Polish people coming and working here for a period of time and returning to wherever they want, which might or might not be Poland. Is that another issue on how we differentiate between migrant workers and someone who was born in Britain, and should we therefore insist that it has to go into a scheme in order to stop British people going abroad and just taking out the money that they put in? Should there be a limit on how much could be in the fund before that would be allowed, or do all of those issues simply not have answers?
Nigel Stanley: Clearly, it is not a simple question. With regard to the first point, I think that generally everyone accepts that transfers out of a pension scheme can only be into another pension scheme, as anything other than that would open another completely different set of issues. It would therefore have to be transferred into another pension scheme. I think that, as you suggest, the test will probably end up being about a reasonably small pension pot to which no one has contributed for a period of time, so that you are generally dealing with the problem of small orphan pension pots, rather than a migrant worker issue. That might be the way into that argument.
When we were writing the brief, it just seemed that the migrant worker can rather graphically illustrated what is possibly the most extreme case of that. It might be an issue for others as well, but transfers should certainly only be between pension funds. I think we are moving towards more EU understanding on that, and am sure that there is a suitable definition of a pension fund in most other EU countries, although I must admit that I am not an expert on the Polish pension system.
Nigel Stanley: This is thinking off the top of my head, but that could possibly be one way of doing it. I would like to get it flagged up at this stage as an issue and am sure that good minds can come up with a solution to the problem. The idea that there can never be a transfer out under any circumstances will give rise to problems, and one can understand why it has happened and support the compromises and trade-offs that were behind it. Will it, however, have unintended consequences? Yes it will. That is a point that we are trying to make at this stage.
I want to come back to the issue of flexibility. I think that most people would instinctively feel that we should have the maximum amount of flexibility, whether that is a matter of people with multiple jobs being able to put income from all of those jobs into one pot or people who have money left to them being able to put that into a personal account, or a whole range of other things that we have just talked about.
One of the things that I picked up on during this morning’s evidence session with PADA was that they were still working and acquiring information in this country and overseas on both the administrative and policy problems. Would you agree with me that one of the important things for the Committee as we deal with the detail of the Bill is to ensure that there is sufficient scope for regulations to be laid at some point in the future to allow the issues of flexibility to be addressed when administrative and cost problems are met?
I think that we would all recognise that greater flexibility brings administrative difficulties and has cost implications. What we do not know at the moment is how great those will be. The key thing is that the Bill has to have enough flexibility through future regulation to ensure that, if things work, we can bring in flexibility in due course. Is that the way you see that going ahead?
Nigel Stanley: We would agree with that. Clearly, no one has built personal accounts before and I think that it should not require PADA and its successor to discover a big problem that comes back and then requires primary legislation, when really a more flexible regulation-making power would deal with that.
Our general perception of the Bill is that it is fairly flexible. There are lots of regulation-making powers. Sometimes people object to that in primary legislation, but I do not think anyone should in this, because there will be a need for some flexibility and for learning from experience. No one should underestimate what a difficult administrative task it is setting up personal accounts. There will undoubtedly be some lessons from that, and I would think that the more flexibility that there is in the system the better. We have used, for example, unforeseen outcomes already quite a lot. There may even be others—actually, we have tried to foresee them, but I am sure that there will be others that we have not foreseen yet. Having regulation-making powers will be helpful in dealing with that.
Sally West: One of those issues, which has been raised at times, is the potential of the modest lifetime sum. The Bill gives the power for that to be introduced. All the organisations here think that is a good idea. Your previous witnesses were all rather against it, but that is something that needs further explanation.
Doug Taylor: It is a sensible approach, but one other thing that we would like to see in the Bill is that PADA has an overriding responsibility to exercise its duty in the best interests of future members. There are a series of principles there. They currently do not appear as a principle. If it were a principle in the design of the scheme, then in terms of future flexibility it would be informed by that drive to make future members the key issue for PADA in the way that it puts this together.
Mervyn Kohler: Everyone involved in this Public Bill Committee should remember as well that this legislation is designed to try and help people who by and large are living slightly untidy, disorganised and forgetful lives. I think that there has got to be the flexibility to understand that this is the kind of target group that one is predominantly aiming for and that one needs to make sure that the system that we set up at the end of all this is one that takes account of allowing people to have second thoughts and slightly change their order of priorities and things like that.
One of the things that Sally mentioned is that someone should be able to make a lifetime payment in—from a legacy or something like that, into personal accounts. What is your view of the other suggestion about payments in, which is that at the creation of a personal account someone should be able to pay in a lump sum, such as £10,000?
Sally West: It would help; otherwise there might be a danger of people thinking, “Well, I would like to start saving, but I will wait until 2012”, so that people could be encouraged to save maybe in an ISA and then transfer that to the personal accounts, if that seemed appropriate when the system was introduced. I think it would be a positive start to the system if we were able to have that additional contribution in the first year.
Nigel Stanley: We strongly agree with that. It seems to us that too much is made of the dangers of putting in lump sum investments. I have an AVC that goes alongside my—I am one of the lucky ones—DB scheme. No one said that I should take advice before I put extra money into my AVC, and I think that there should be the ability to put extra money, within reasonable limits, into lump sum payments—particularly the kind of lump sum payments from the target group, which would not be enough to interest a commercial pensions company. The odd £5,000 here does not make much sense to invest in a personal pension pot with an insurance company, but it might make quite a big difference to someone who suddenly comes into that amount and wants to do the responsible thing with it, which is to put it into their pension. Simply adding it to their personal account is a straightforward and simple thing to do. One suspects that if they cannot do that, they might not put it into their pension at all, and might spend it in some other way, which would not suit public policy quite so well.
Doug Taylor: I would concur with my colleagues. One issue that we considered was whether there could be any transfer from the savings gateway. I know that we are talking about more modest amounts of money, but we looked at transferring money through from the savings gateway into someone’s personal account.
I want to return, if I may, to the interesting discussion that was prompted by the questions asked by my hon. Friends the Member for Ryedale and for Bromsgrove on the issue of migrant workers. In some parts of the country and in some industries, there are firms staffed entirely by migrant workers. I am concerned that if none of those migrant workers auto-enrolled, because they were here for just six months, a year or a couple of years, that business would have a significant competitive advantage over other businesses in the area. That is an observation as much as a question, but I would be interested if you had any comments on it.
Is there a case for generic financial advice being directed specifically at migrant workers who are going to be in the country for short periods of time, advising them whether there are transfer possibilities to send money back to Poland or whether it will be tied up in the UK until they are 60 or 65? I can see the matter being a real problem by creating a competitive advantage in local economies up and down the country, and I would be interested in your comments on that.
Nigel Stanley: That is an interesting point. One is in danger of making a lot of assumptions without researching to what extent that is a problem. Competitor companies may tend to employ a lot of part-time workers on the minimum wage who would not be best advised to have a personal account anyway, so one does not know whether there would be much of a competitive advantage. It will certainly be a problem—whether a big problem, I do not know.
There is certainly a case for providing information and advice to migrant workers on a range of their rights in this country, including employment rights. Some employers of migrant workers exploit the fact that they do not know their employment rights, cannot speak English and do not know how to do it, just as there are also exemplary employers of migrant workers. There is a case for ensuring that migrant workers are helped to understand the work environment that they find themselves in and given generic or particular advice on whether they should opt in or out of personal accounts. That certainly does apply, and you have raised an interesting issue.
Christina Barnes: It also raises a wider issue about the targeting of generic financial advice to different groups. There are other groups to whom that will also apply. I am thinking about women who have had career breaks or are post-divorce, certain black and minority ethnic communities and communities that need different generic advice to suit their circumstances.
I must say that I have not read all the briefings that have come through, so this point may well be in them. While you were talking, the question crossed my mind whether there is any assurance provision attached. In most private pension schemes, if one snuffs it, the family gets something out of it. In some cases, you can pass on your pension contribution to someone else. It stays in the scheme, and they get many more years’ benefit as a result of your early demise. Do you have any views on whether something could be done on that, as an incentive for some people to take out pensions in the first place?
Christina Barnes: My understanding is that it is a standard defined contribution scheme, so it is an inheritable pot before retirement. That also leads on to an important debate on what happens once you have withdrawn the income from your pension scheme and chosen which annuity to buy. People’s information and advice needs when choosing an annuity are vital, particularly on choosing a single-life or joint-life annuity. It is vital to ensure that individuals and couples make the correct choice about what annuity is right for them in their circumstances, with regard to providing a survivor income or a guarantee on their annuity income should they die.
Mervyn Kohler: I would urge caution about allowing a system to develop with too many extra bells and whistles. It will be a hard enough task explaining to people the basic principles of pension saving and how to turn it into an annuity without their getting muddled up with life insurance and extra entitlements to Nectar points and things of that nature.
Thank you very much. If there are no further questions, I thank you all very much indeed for giving up the time to come before the Committee. It has been very useful.
Further consideration adjourned.—[Mr. David.]