Good morning everyone and welcome to this oral evidence session on the Pensions Bill. This morning we will begin by hearing evidence from representatives of the Pensions Policy Institute. Welcome to our meeting. Would you like to introduce yourselves to the Committee?
Chris Curry: I am Chris Curry, research director of the Pensions Policy Institute. The Minister for Pensions Reform (Mr. Mike O'Brien): Thank you for the research that you have done, which I have read. Unfortunately we do not seem to have a copy of it, but I have read it and am very grateful for it. One of the key issues you have been looking at in relation to personal accounts has been the issue of whether it pays to save, but I want to ask you about the extent of the problem of as to whether it pays to save under the current provision. What are your views on that? Are any obvious ways to resolve it?
Niki Cleal: I think that the reasoning behind your question is that issues around the interaction between private savings and means-tested benefits apply today. To a certain extent I think that that is true, but there are some quite significant differences between the target market for personal accounts and some of the people who actually save today. One of the key features of the target market is that they are likely to be on low earnings and therefore are disproportionately likely to be eligible for means-tested benefits. While you are right that the effects do come into play today, there are reasons to think that some of the issues may be more acute in relation to personal accounts, given the nature of the target market.
I am not sure that that answers my question at all. What I was asking you is whether that issue exists today and to what extent.
Niki Cleal: It does exist today. The existing system involves pension credit, housing benefit and council tax benefit, which affects the choices made by people today. However, there is something unique about the type of market we are concerned with, which means that it is an issue to look at in the context of personal pensions.
Do you accept that some people who are auto-enrolled today are on relatively low incomes, may have broken work records or be on means-tested benefits? Tesco does auto-enrols its staff it and large, reputable organisations ought to do so. I assume you agree that there are mechanisms today that could enable someone to get up to £16,000 back from a smaller pension pot, and there is also the opportunity to take 25 per cent. of the pension—if the figure is greater than that—in a lump-sum payment. There are also measures such as savings credit that attempt to address some of these issues.
Niki Cleal: I really believe that the proposals may help in some of these cases. In fact we have done some work, commissioned by the former Equal Opportunities Commission, that looked at some changes to the contribution limit. We found that increasing the contribution limit could improve—[Interruption.]
My apologies for interrupting the Committee, but apparently we have a problem with the sound recording and we do not know why. I suggest that we suspend for five minutes and we will see if we can put that right. My apologies to everyone.
I shall try again; now I know what it is like to be in the movies.
In the summary of your research you have identified at-risk groups; for example, people who are likely to be renting in retirement. Tantalisingly, that only takes us so far. If you were trying to identify the numbers of people in those groups, going forward, what kind of further research would you need to do? What kind of access to modelling would you need?
Niki Cleal: I will say something about the at-risk groups and then pass on to Chris Curry to take the modelling part of the question.
You are absolutely right that we conducted some analysis, looking at which groups of people are at risk of seeing lower returns in personal accounts. A particular group that we identified was people who may rent in retirement, because of the interaction with housing benefit. They were in our high-risk group. In terms of the numbers of people that that might affect, about 20 per cent. of current pensioners are eligible for housing benefit. We project that that may decline to around 15 per cent. of pensioners by 2050. That is one group.
A second group which might be affected is older people on low earnings who have not yet made any saving. There is an interaction here with pension credit. We feel these groups are at risk of lower returns. Chris will say more about what further modelling work could be done to get a handle on how many people fall into those groups.
Chris Curry: Thank you, Niki. Mr. Waterson spoke about trying to have a reliable estimate of what might happen in the future. The first thing to say is that this is not an exact science and I do not think you will ever get what you would see as a reliable estimate. You would have a guide, perhaps, to the order of magnitude of the groups involved. The difficulty is that you would need a lot of detailed information on an individual basis about how people progress through life. Clearly, we do not know exactly what people will do, so that has to be based on assumptions and, to a certain extent, on equations. What you need is a model that takes individuals now and looks at them as they progress through life—and models their interactions with the workplace and breaks for having children—as well as existing and future pension provision. In the UK, there is only one model that works in that particular way: the PenSim 2 model run by the Department for Work and Pensions.
Theoretically, if you could calculate on an economy-wide basis in the same way as we and the Government have done for certain individuals, it would be possible to run that model and see how many people might fall into particular groups under one or two different scenarios. Then you might be able to get some idea of the relative proportions of people in respective groups. We would have to be led by the Department’s analysts as to whether that is technically feasible. In theory, it is feasible, but it is worth continuing discussion with the Department to see whether it is something that would be possible in the future.
I have a couple of follow-up points. You recently updated your projections on likely means-testing levels after the reforms and narrowed the gap between the Department’s estimates and your own, but there is still a gap. Can you explain, partly for members of the Committee who have not seen the research, why there is a gap?
Chris Curry: Certainly. There are two main reasons for the difference. There are slightly different assumptions underlying the models used by the Department and those we use. Those relate to things like developments in the labour market and how quickly certain components of income will grow over time. That is driven by the second point, which is that the models work in very different ways. The DWP has a very sophisticated individual model, which builds up a complete life history for a series of individuals based on a very detailed set of equations, but it is ultimately based on assumptions about what will happen in future. In effect, it builds one particular picture of what the world will look like between now and 2050 for the individuals involved. It then calculates, on an individual basis, what will happen to those people and their incomes, and aggregates that to get the numbers eligible for means-tested benefits.
With our smaller budget and fewer resources, the models we use work in a slightly different way. They look at what happens at an aggregate level across the economy on a year-by-year basis, but do not break it down to the individual level. We end up with a projected income distribution for pensioners in the future, based on and consistent with what we think will happen at an aggregate level. Our model does not break this down into each individual’s work history, but bases it on the current distribution of pensioner incomes. These are two different modelling techniques with slightly different assumptions, but the underlying message—both in the Government’s projections and in ours—is that it looks as though future pension credit entitlement is likely to be reduced compared with today. Compared with what was in place before the last Pensions Act, there is certainly a substantial reduction. What we find in our modelling is that there is potentially more uncertainty about what will happen to pension credit in future than the Department might find in its own. That could be because we tend to change more of our assumptions when we look at different scenarios. The Departmental model is based purely on a single set of assumptions and a single projected scenario.
In one of your research papers, you estimate that the cost of a pension income disregard of £12 a week would be around £600 million. The Government take the view that it would be substantially higher. Do you agree?
Chris Curry: I have not seen any Government estimates, so it is difficult for me to comment on how those estimates would have been made or what they show. The £600 million figure that we used was the estimate of the first-year costs of introducing it in 2012 and applying the £12 disregard to all private pension income at that point for the existing stock of pensioners. Our initial work suggests that the costs should not increase substantially over time, but that is something we are looking at further.
Do you think that the proposed legislation assists in the “it pays to save” debate that is being generated in the UK? Do you think generally that the Bill in its present form will actually build confidence in the aspect of pensions and empower pensions even further?
Niki Cleal: I think that is an important question. It is important in this debate not to lose sight of the bigger picture. We have talked a lot about the “at-risk” groups, but we must remember that many people will benefit from the reforms. Our analysis shows that there are particular benefits for young people, those in their 20s in 2012. Many of them may be working today for employers who do not offer any contribution at all. They will now be eligible for a 3 per cent. contribution for the first time if they do not opt out. Clearly that will be a positive thing if the reforms are successful and if people do not opt out and if employers do not change their behaviour.
So, yes, there is potential for this Bill to have a positive impact. That said, there are these important issues for certain groups. We must look carefully at the incentives and the likely returns for some of those “at-risk” people that we have been talking about. So that is the answer to the first part of your question. Sorry, I have forgotten the second part.
Niki Cleal: Yes, trust and confidence. I think for many people, this may be the first time they have engaged with saving in a pension product. The impact this will have on trust and confidence is largely going to depend on how successfully it is implemented in 2012 and whether or not some of these issues we have been talking about, such as “it pays to save” are addressed in advance.
The risk is, if there are stories in the media saying that Mr Jones, who has done the right thing and saved all of his life, is no better off from having saved in a personal account, whereas Mrs. Smith down the road, who did not save, is equally well off—that will not be a positive thing for trust and confidence. So if some of the issues we have been talking about are addressed, then yes, the Bill could potentially have a positive impact on trust and confidence.
Many people choose to save for their retirement in various different ways, through investments or pensions. Starting with the new generation that will be caught at this early age and will have this opportunity through auto-enrolment, will the Bill be a fundamental step as to how people prepare for their retirement? We might see people getting used to saving through a pensions programme and as they move to better paid jobs, they may have already bought into the concept of saving through pensions and be less tempted to go and try to save through other mechanisms such as property investment.
Niki Cleal: I think that potentially there an important cultural shift here. Auto-enrolment may fundamentally change the culture around pension saving in this country. It is a very different proposition to have been auto-enrolled into something, with the right to opt out, from having to make an active choice.
There is a real opportunity here for a cultural shift, particularly among young people who we know are some of the groups that are currently undersaving. But, at the end of the day, whether or not that is a positive cultural shift will depend on what happens at implementation: how the scheme is perceived and how the media report on it at the time. All those issues are very important. I think that there is an opportunity there, but there are some challenges that need to be overcome to get to that point.
Could you say a little more? Mr. Banks touched on what I wanted to ask. In your paper, you talked about the importance of generic advice. We are all working slightly in the dark in that we do not yet know what Otto Thoresen is going to come up with, but if what you just said is to have real impact in a positive way, then the generic information, which the Bill already accepts will have to be provided to individuals, is going to be complex. You seem to be suggesting that in some way people will have a different view as to whether they should remain in or out, depending on their own personal circumstances. I wondered if we could tempt you to make some suggestion as to how you think the generic advice, the generic information, could be presented in a way that enables people to make the right judgment—without them having individual advice, because that would clearly not be available to the vast majority.
Niki Cleal: That is a very important issue. When we conducted all this analysis, we had to ask ourselves what we concluded from this. Are we suggesting that people should not be auto-enrolled? I must say that we did not conclude that. We concluded that this meant it was very important that people are given generic advice and information that helps them to make the right decision for their circumstances. For some people, the right thing for them to do will be to opt out of the system.
What the analysis does show is that it is quite complex for people to work out what they should do, but there are some indicators—flags, if you like—which, if built into the generic advice system could help people to make the right decision. For example, if someone is in their mid-50s or early 60s, they are not a home homeowner, they have no intention of purchasing a house and they do not have a lot of additional savings and wealth already, if they start saving in a personal account at that point in time, then they are probably only going to lose eligibility for pension credit and housing benefit. It depends on their income, obviously, and on their level of other additional savings, but if the generic advice system has some kind of flag in it, suggesting that someone in that set of circumstances should be told that this is a decision they need to think about very carefully, then perhaps there is not a problem.
Our analysis shows that there are lots of different things that you have to consider. What has someone been earning? Currently? How old are they? What level of assets do they own at that point? What other savings do they have? There are a number of factors that come into play here. I hope that Otto Thoresen and his team can find a way of enabling a generic advice system to cope with those different characteristics, but it does seem to me that it will be challenging. We will wait and see what comes out of that review.
They will produce a structure—potentially not dissimilar to what you suggested. But there are two very subjective points in your answer. You said, “They do not have a lot of income.” Well, how much? “They do not have a lot of savings”. Well, how much? I think that the question Mr. Banks asked is absolutely right on the button, because I suspect that financial media are going to do these sums. They will put in the press what they think “not a lot of income” or “not a lot of capital savings” actually means for people in certain circumstances, so I suspect there will be a culture that tells people in certain categories just to opt out. This brings us to the key issue of how we can make it more worthwhile for these people to save. In your paper, you suggest increases in trivial commutation limits, capital disregards and so on. Have you done, or would you be prepared to do, some modelling of what those proposals would mean in public spending terms for people of certain ages, over certain periods of time? Over the next four or five weeks, members of the Committee can propose an amendment that says “This is the plan”, but the Minister will say “Hang on, what is the cost of this?” Members on both sides of the Committee want to resolve this, but not in a way that has uncosted implications for public expenditure.
Chris Curry: I am very glad you raised that point. We have been looking at the public expenditure implications of some of the things you have mentioned. It is still early days in the process, but we have looked, for example, at the costs of changing trivial commutation limits and increasing the capital disregards within income-related benefits to enable people who have only relatively small sums in a personal account, or other forms of saving, to take a lump sum. The work we did for the then Equal Opportunities Commission suggested that that would have a cost of about £500 million in 2012, increasing to about £1.4 billion by 2050—not an insignificant sum. There are public expenditure costs within that.
We have also done work for B&CE looking at the costs of introducing an income disregard for private pensions within means-tested benefits. There, we looked only at the cost in 2012, which was around £600 million for disregarding the first £12 of all private pension income. But public expenditure is only one side of that. There are also benefits. We can model some of these, such as people being better off and having a clearer incentive to save, although we cannot say how many people actually act on that clearer incentive. Our initial work in both areas has identified that there is certainly potential for these measures to help in the “pays to save” situation, by making it clearer that people would benefit from being auto-enrolled in a personal account and remaining auto-enrolled.
There are also drawbacks. The trivial commutation option might mean people having more lump sums, but a lower income during their retirement, which might not be a desirable outcome. A pension income disregard would introduce further complexity into an already complex means-tested benefits system. We feel this is probably the start of the process, rather than the end. We would be very happy and keen to engage with all stakeholders in taking a step back and looking at what we would ideally like the system to achieve and the parameters involved in that—such as what a realistic public expenditure total would be, and what the trade-offs would be between complexity and making it clear that it will pay to save and that there will be value from staying opted-in. That is something we would like to progress. Realistically, it would be well beyond the Bill timetable, but I think it is worth starting the process in the relatively near future to allow the debate that goes on throughout the Bill to take place in the knowledge that these issues can be addressed.
Just to put your comments, analysis and research in some kind of context, will you say a few words about what the Policy Institute is? What are its aims and objectives?
Niki Cleal: We are constituted as an educational charity. Our charitable objective is to inform the public policy debate on pensions and retirement provision. It is very much a policy-focused objective. We are not in the business of giving individuals advice about their own personal circumstances. We have been established since 2001. A core part of our capability is a suite of models that we have developed with support from the Nuffield Foundation, which enables us to model the pension system in the UK, both for different types of individuals and also in aggregate terms by considering the expenditure implications of different policy changes. That analytical capability underpins a lot of the research that we do.
We are independent and apolitical. Many research institutes or think-tanks have political affiliations; we do not. We have a mixed funding base and we try to ensure that we are not over-reliant on any single source of funding. As director, I report to a board of people in eminent places in pensions and related fields. We have a couple academics, some industry people, a lawyer, an accountant; we try to ensure that we have a range of expertise. I am very fortunate to be supported by an excellent team, which includes economists and actuaries. That, in a nutshell, is the institute.
Can I move on to the other big issue that you have dealt with a good deal? That issue is levelling down and the likely effect of personal accounts on existing pension provision. I have two related questions. You describe one of your scenarios as a “pessimistic scenario”, but as potentially disastrous in public policy terms. How likely do you think that that scenario is? Do you accept that, if personal accounts are to be dubbed a success, they have to produce not only more savers but also an overall increase in savings?
Niki Cleal: Yes. I will say a little bit about the work that we did, and that you did too. We did some scenario analysis that looked at what we would see in terms of outcomes and the total flow of money going into the system under different scenarios of how employers might respond. The most optimistic scenario that we looked at was that employers would auto-enrol all their people into existing schemes, where they exist, on existing terms. Unsurprisingly, what we found was that by 2050 there would be an additional £10 billion going into the system. That would be a very positive outcome.
At the other extreme, which Nigel alluded to, we looked at a more pessimistic scenario, which was what would happen if all employers levelled down their contributions to 3 per cent. In other words, where they are offering an existing scheme of more than 3 per cent. they ratchet that down, over time, for new employees. Unsurprisingly, you see a £10 billion decrease in pensions contributions in the UK—a very negative outcome.
In terms of which outcome is likely, it is very difficult to put a probability on that. All that we can say is that auto-enrolment will increase costs for some employers. Where employers are offering existing schemes with contributions significantly more than 3 per cent., which is many of them, the introduction of auto-enrolment will increase their costs substantially. At this stage, it is very difficult to say how employers will respond. They may simply wear the additional costs and auto-enrol all their people on existing terms. Equally, they may decide that they cannot wear that additional cost and that they may need to make some changes to their scheme—for new members in particular. They may close their exiting scheme to new members or they may make some changes or introduce a different type of scheme. So, it is very hard to say where we will end up.
One of our scenarios was based on evidence from a survey conducted by Deloitte at the end of 2006. We called that scenario “the modelled employer response”. Deloitte had asked employers how they thought they might respond. The outcome of that scenario was a small, overall positive effect—an additional £2.5 billion going into the system above what would have happened in the absence of reform. Within that scenario many employers said that they would make changes to their existing schemes. It is hard to predict the future on this; there is real uncertainty. I know you are taking evidence from some employer groups this afternoon, and I am sure you will ask them how they think their members will respond to these reforms.
The second part of your question was whether the reforms would not only increase the number of savers, but increase the level of saving. My very strong view is that the reforms should aim to do both, and that if we simply increase the number of savers by transferring money from one set of people to another, I question whether that is a positive outcome. In a sense, that is a matter for the Government. It is their reforms and the important thing is that the Government are very clear about their policy objective. Is it both increasing the number of people saving and increasing the total amount of saving?
I would like to go back to this issue of uncertainty and your modelling of groups that were at risk of being better off opting out than opting in. I understand that point in relation to groups in their 50s or 60s, because the date of retirement is touchable. But the other part of uncertainty is the value of the state pension. It is interesting that many people in their 20s and 30s assume that the value of the state pension will deteriorate. Therefore, whatever your modelling may be for someone in their 20s or 30s, looking at pension provision in 40 years’ time, it is a risk to assume that the existing basic state pension and pension credits regime will be in place. However much we may wish that to be the case, there is a great deal of risk that it may not. It may be better in 40 years or it may be worse. Therefore, it strikes me that, at that age group, having a big pension pot that is theirs is a positive thing because of the uncertainty around state provision in 40 years when they may be looking at retirement.
Chris Curry: I think many people would agree with you on that. The savings decision and savings behaviour are very complex. It is a very well established research finding that many people do not expect the state pension to be worth very much at all in future. However, it is also equally well established that many of them do not do anything about it. So, what people expect and how they react are not necessarily closely linked together. As for the research we have done on the value of saving, I do not think it would be realistic to expect people to look at it and work out for themselves which situation they are in, what their internal rate of return is going to be or whether they should then invest £5, £10 or nothing at all .
What I think is important is how people perceive the system to be, and how they have seen the system work for other people. One of the things that often affects people’s behaviour is the behaviour of their parents, their peers or other people they see in similar situations. While for many people, especially the younger groups, it would almost certainly be in their interests to remain enrolled into personal accounts, there is a danger that if they see people who have been enrolled in the past and are coming up to retirement and do not seem to have benefited from it, they will automatically assume that this will happen to them. They have to have a concept of what might happen in future. They might not believe that everything will be there, but it is easy for them to base their decision on what they can see in front of them.
It is also true that it is quite easy to use perceptions as a barrier to saving. So if they think they might not do very well out of it—even if it can be demonstrated that they would do—just the thought that they might not benefit is sometimes used as an easy excuse and an easy way of not saving the money, especially if it means a difficult decision between how much income they have today in their pay packet and how much they will have in future.
Niki Cleal: May I just add to that? The point behind the question is a very important one. There is an implicit assumption within our modelling that today’s benefit structure will still exist in 30 or 40 years’ time. That is a strong assumption. It is easier to point out some of the implications for people when they are that bit closer to retirement, when they can make an informed judgment about how likely it is that the Government are going to change the benefit structure—within the next five years is a much shorter time horizon than a 40-year prospect.
That said, our analysis has shown that the issue is much less acute for younger people in general. In a sense the analysis suggests that, for younger people in general, this is less of an issue anyway. It is more of an issue for older people in particular circumstances.
Natalie Evans: I am Natalie Evans, head of policy at the British Chambers of Commerce. We represent 100,000 businesses across the UK, through an accredited network of 56 chambers of commerce. We represent businesses of all sizes and across all sectors, but at the heart of our membership are small and medium-sized businesses.
Bob Compton: I am Bob Compton. I am a director of a company called ARC Benefits, which is a small, independent pensions consultancy. We employ five people. I have been involved as a pensions consultant in the industry for over 30 years and have acted as a pensions policy adviser to the British Chambers of Commerce for the past two and a half to three years.
A fundamental question—is your organisation broadly supportive of the terms of the Bill, of the concept of automatic enrolment and of more people saving? If so, why?
Natalie Evans: Yes, we are supportive. We all agree on the need to encourage people to save. We have been broadly supportive of the Bill. Obviously, from an employer’s point of view, this is going to be a huge change. Many employers, particularly small and medium-sized employers, do not offer pensions. Instituting the new scheme is going to mean huge costs and changes for them. What we are really concerned about is making sure that this works, because both employers and employees want to encourage saving. We want to make sure that, from the start, this works so that it can do what it is intended to do.
Mike Cherry: We are certainly in favour of the intention behind the Bill. We would certainly hope that it enables the smaller businesses and their employees to save for their future. What concerns us considerably is the cost, as well as the administrative impact, that it is likely to have on the smallest employers. We have also made it very plain that we believe there needs to be very effective communication from the Government informing people as to the reasons why they need to be saving for their future and to restore confidence in the very word “pensions”.
I have two issues to raise. First, what evidence do you have from within your own organisations about the attitude of your members to the issue of levelling down? Once personal accounts come in, there will be a tendency for them to get out of existing pension schemes and point their employees in the direction of personal accounts.
Bob Compton: About two years ago, the British Chambers of Commerce asked the various chambers it represents to put a questionnaire to their members. A year prior to that there was a similar survey. There was concern that some companies would level down. The results of those surveys are now two or three years old, and potentially out of date, and life has gone on. The main concern at that stage was the thought of employers being forced to make compulsory contributions to pension schemes. There has been a sea change since last year. It has been accepted that compulsory contributions will apply and I think there is general acceptance that one has to get on with making sure that once the personal accounts system is up and running it works efficiently and with the minimum of disruption to employers’ businesses.
As to whether or not companies would level down their benefits, the chambers’ typical member companies are small to medium-sized businesses. Very few of those companies have what I would regard as being final salary type pension schemes, but they would have a lot of personal pension schemes or money-purchase type arrangements. We have not really got any more recent feedback from companies as to their intentions. The DWP has surveyed companies, and has published the results.
On a separate issue, are you concerned that the Bill as it stands does not contain any specific proposals for assisting smaller businesses in the introduction of personal accounts? What kind of assistance would your organisations like to see for helping smaller businesses through this period?
Natalie Evans: Yes, we are concerned, and we have raised that issue on a number of occasions. Obviously, we are concerned about the cost of implementing the scheme and have called for some assistance with the costs of the administration of set-up—perhaps a one-off payment—particularly for small and medium-sized businesses that have no pension provision. We also think that communication is going to be absolutely vital in helping businesses understand what their responsibilities are, and in helping employees understand what this personal account is. Important funding needs to be put into a wide communication scheme. Help for small businesses on set-up costs is crucial. We understand the Government saying they will not make decisions and give numbers now, but we think some kind of commitment will help to alleviate some of the concerns of small businesses as they begin to understand the implications of this scheme
Mike Cherry: I think we have a slightly different take on levelling down. Our membership is over 210,000. The vast majority of that is made up of small businesses with an average number of employees of around four or five. Levelling down is not really an issue for our members. Affordability is the key issue, not only for our members in their own right as owners or directors of their businesses but, crucially, for the employees of those businesses. Levelling down is not really a question, because many of them do not have pension schemes available at the moment. We do very much seek, and have been seeking, both financial assistance and to get the DWP to understand the impact any administrative burden would have on these businesses. Both of those are key issues as far as our members are concerned.
Mike Cherry: We do not. We have stakeholder pensions available should they wish to take them up, but the business cannot afford it on an ongoing basis, nor do our employees see any reason to put money into a pension scheme at the moment. Quite honestly, they believe that the national insurance they pay today will pay for their pensions in the future, whereas of course it will not because that national insurance contribution is paying for today’s pensioners.
Mr. Compton, you were indicating a different view from Mr. Cherry of the surveys that we have done. On levelling down, do employers fear that if they are offering their own occupational scheme and not all their staff are in it, the risk for them is that they will be faced with the additional costs of the new scheme together with the costs of an existing scheme? There is then a possibility that levelling down would come in. Is that a fair assumption?
Mr. Compton: That is a fair assumption. The National Association of Pension Funds, which represents larger pension schemes that provide valuable benefits, has made it clear that in terms of the work that it has done it would be a travesty if personal accounts came in and created a scenario in which everyone dropped down to the level of what the personal accounts de minimis is. The British Chambers’s membership is made up of a whole range of companies from the very large to very small, but the majority by number tend to be in the five to 50 employee group. Typically, those companies will have some form of personal arrangements, stakeholder arrangements, or group money purchase type contracts, rather than big final salary schemes. The results of the surveys that we had two to three years ago clearly show that there were concerns, but when you ask those questions, you are not necessarily hitting the right person who understands the issues. Personal pensions will not come into effect until 2012 so although people such as myself are aware of the issues, a large number of medium to smaller-size companies are oblivious to what is going on currently. The issue needs to be communicated out and managed effectively.
The reason behind my question is that I had made the assumption, particularly in relation to larger companies, that virtually all their staff would be in the company occupational scheme. Therefore, there would be no additional costs for that particular company if all its staff were in the company scheme and it would be only those companies with a mix of people—some who are in and some who are not in—that would face the additional administrative and financial burden.
Bob Compton: I think you will find that every company in the UK, whether or not it runs a pension scheme, will have a problem with picking up employees who are currently not in its scheme unless it is in the public sector. Prior to, I think, 1998 companies were able to operate automatic entry to their pension schemes. That was stopped by the Government of the day to allow personal pensions and people to opt out to personal pensions. For many years the pensions industry and pensions’ managers of larger schemes generally have looked forward to the opportunity of getting automatic enrolment into their schemes. There is a large number of people who have opted out of good company schemes because they chose to do other things, such as invest in houses. Those people will need to be picked up by those companies offering good schemes. That issue is a genuine problem.
I would like to ask you a bit more about the compliance regime, penalty notices, records and information, inspections and so on. I do not expect any business to welcome naturally what that entails, but at the same time, I imagine that in terms of issues of competitive advantage your members would be quite keen for that to be an area that is properly enforced so the good employers who are making their contributions are not undercut by people who are managing not to do so. I would be interested to hear your general comments on what is in the Bill at the moment and perhaps what we as a Committee need to do to have an effective compliance regime that it works well with the least amount of interference.
Bob Compton: From the BCC’s perspective, in the discussions that we had with the Department for Work and Pensions in the autumn of 2006 we made it clear that we felt that in the past, occupational pension schemes had been voluntarily provided by a large number of employers. We are trying to encourage that and to ensure that any form of compliance regime insists that rogue employers who are not complying with the new processes do so. Processes need to be in place to ensure that there is compliance, but they need to be light touch to ensure that the vast majority of well-meaning employers who are delivering and will be complying with the regulations are not overburdened by red tape.
At the time we recommended that the pensions regulator should be the body that oversees that process. The regulator so far has done a very good job in terms of what it set out to do with regard to improving trust in occupational schemes. But the regulations as set out in the current Act are very heavy-handed in approach. The regulator having the power to send an inspector on to employers’ premises, wherever those premises may be and at a time they deem as being reasonable, seems totally over the top to determine whether an employer is running access to a voluntary pension arrangement or a personal pension arrangement system.
It would seem much fairer if those employees working for employers who were bending the law could blow the whistle to the regulator and the regulator then had powers to direct the company to act correctly and, if the company fails to act correctly, to impose a direction to make it happen. The regulations appear to be belt and braces and over heavy. The current regulations in the Pensions Act 2004 should be sufficient to provide some form of checking up on the poorer employers.
Mike Cherry: The idea of a light touch is something that we have encouraged all the way through. My feeling on reading the Bill was that there is far too much emphasis on so-called rogue employers not wanting their employees to deal with it so they do not have to have a pension scheme for them. That is way over the top, as Bob has said. Where an employer is failing to deal with pensions, there should be clear information, advice and assistance to help them to comply in the first instance. It is only those employers who really will not, rather than cannot for any reason, who need to be taken to task. This goes way over the top. There is far too little emphasis on assistance for the smaller employers and far too much emphasis on compliance at the moment.
Mike Cherry: It will be absolutely critical because 40 per cent. of our members do not have a pension scheme at the moment. Communication on whatever comes in—our concerns are very much around whatever does come in on the administrative side—will be crucial for the employer and the employees to understand what they need to do. That must be kept to a minimum. We are already faced with far too much regulation, which is taking time resource out of our ability to run our businesses effectively. I am very concerned about the administrative effect of any new regulation that is coming in.
Natalie Evans: I think, as Mike said, our concern is that it seems to come from the standpoint that employers will not want to comply and will be bad and whatever. From our perspective that is not what employers will want to do. I imagine that there will be teething problems when this comes in because, as we have all said, it will be a huge change for a significant number of employers. A light touch is needed in the first instance to help employers who are not perhaps doing it entirely correctly, but more due to them not quite understanding what they are doing than out of ill will to their employees. We feel that there needs to be a light-touch regime. Of course employers who are not complying and who are blatantly flouting the rule need to be dealt with. We just feel that there is a perception that employers will go in with that attitude. We do not think that they will.
I think that I need to declare an interest. I am a member of the Federation of Small Businesses. I approach this next batch of questions from my business background. Most of the issues have been touched on but the burden to small business concerns me. If I was not sitting here now in 2008 having been in this House for three years I probably would not know about these pension provisions and the potential onus on my business. I am concerned about the overall burden and about the exposure that small businesses may face when they fail, as opposed to when they deliberately try to prevent the process from going forward.
The point about information is perfectly correct: we must have quantity, not quality. I know the amount of stuff that comes into a small business, and we have to have quality, not quantity. The business I am involved in offers pension provision, and people opt out when it is offered at an earlier age. As they become more mature, however, they opt in and they invariably turn around say, “I wish I’d done that 10 years ago. That is what I should have done.”
I can therefore see an awful lot of benefits to auto-enrolment, but I am concerned about the burden that small businesses will face and about the possibility of them inadvertently being drawn into a position where they are vulnerable to challenges over their competence and so on. That is more of a statement on which I would like some comments than a range of questions.
Mike Cherry: I would obviously wholeheartedly agree with Mr. Banks’s comments. Effective communication must not just be a matter of saying that the business can point its employees to a website or that it can go there itself; we must have effective communication with all businesses in plain and simple English so that they clearly understand what they need to be doing to comply. Most businesses, as you have already heard, will want to comply, and they often want to comply with all regulations; what causes most problems is the vast quantity that land on our desks when we are trying to run our business as well. Of course, there is the cumulative effect of all regulation, not just this one piece, which is coming in in 2012.
My other concern—this is on the cost basis—is that the figures that the Department for Work and Pensions has come up with in the impact assessment seem to be bear no relation to what I fear may come in, although there is not yet any detail behind that. We would ask the Committee to look closely at that part of the impact assessment.
There would be no point in my asking you my next question unless I had clarified that. Have you already had concerns, or do you anticipate concerns, about the definition of a worker and the potential inclusion of agency workers within it? An additional complication is that if an agency supplies a worker to a firm, and the firm has control over the day-to-day delivery of his work, there may be some confusion about who is responsible for auto-enrolment. I wondered whether the issue has crossed your radar and, if so, what your feelings were.
Bob Compton: Perhaps I can answer on behalf of BCC. About a year or so ago, when we were doing one of the surveys, we were looking at the issue of agency workers. There was not much coming through, although I know from the discussions that we want to be having with the Personal Accounts Delivery Authority about the development of the mechanics of the personal accounts system, that clear instructions need to be given to small employers as to where the responsibilities lie.
If there are agency workers, either the company or the agency will be paying those employees’ wages. So, it requires that the systems and processes developed take into account that group of workers, and that the communication material supplied to those employers and agency providers makes their responsibilities very clear. I agree that it could be a major cause for concern and for people complaining, and for the pensions regulatory inspector coming along to knock on the door at 7 o’clock in the morning to say, “Can we come in and search your books?”
I want to ask you something else. Therefore, I will not labour the point, other than to say that, if, over the course of the next few weeks or even months—the Bill will go to another place after we have dealt with it—you think that some clarification by amendment would be helpful, I am sure that we would be very happy to have that debate in Committee.
The other question that I wanted to ask you was about the concerns you may have as to the responsibility that may rest with employers from relatively small firms—I have had a lot of sympathy for what Mr. Cherry has said about the difficulties that small employers have—for the provision of information. That leads to the concern that, in the long run, it may be seen as the employers’ fault if people have been auto-enrolled, and that turns out to have been the wrong course of action. My own view is that we still have to get this area of the Bill right.
Mike Cherry: Our concerns very much mirror your question. We have stated clearly all along that any contract should be between the employee and the central body, and that the employers should not be involved in any way in trying to give or offer advice because of those concerns further down the line. If they do try to give advice, clearly it would need to be recorded in some minute detail, which would be another administrative burden on the owner-manager. They do not have the time to be doing that, and they certainly do not have the expertise to be offering advice. Therefore, any advice should be given to the employees outside of anything that the employer should be required to do. If the employee wants to take further advice, there are plenty of financial advisers outside with whom they can find it. It should not be incumbent, we feel, on the employer at all.
Bob Compton: From the BCC’s perspective, I agree with everything that Mike Cherry has said. That has been our line from day one.
Under auto-enrolment, if someone has opted out the company may, after three years—subject to the time period laid down by the Secretary of State—go for an automatic re-enrolment. That means that you may not only have to keep records of the contributions of those who are making payments, you have to keep a record of when an employee opted out, potentially.
Our view is that the processes for record information should be kept by the agency that is running the personal account system, and not by the employer. In my own business there are five people, and we run a reasonably generous pension scheme for them, but we have problems with the insurance company in terms of the collection mechanism and them keeping track of the records. Where you have a third party in a national scheme, with hundreds of thousands of employers all going to the same organisation, anything which puts a burden on the employer—the employer being the person who is responsible for that—will be detrimental from the employees’ perspective, because the employees’ first port of call must be to the agency running the administration of the pension scheme for any queries, questions or advice, and not the employer.
I want to touch again on the question of communications. One of the things that has always struck me about Government-business relationships is that Government are very good at communicating with large companies, and large companies have the resources to communicate with Government. Therefore, models and systems are set up which are suitable for large companies.
Organisations such as your own, which represent small businesses, have the job of putting forward their problems, but in my experience of meeting your organisations and your members, those proprietors of small businesses who actually participate in consultation communications are unusual, and very untypical of small businesses.
I am trying to get to the extent to which your organisations have the capacity to communicate to the DWP in terms of how that communication of the new system should be, how the regulation should be laid and what sort of form-filling is suitable. That communication is difficult, because the person I meet when I go to one of your events, the business person who comes to a business breakfast that I hold in my constituency, is not from the typical company with four, five or 20 employees because, by their very nature, they are too busy running their businesses to come to speak to politicians and Government and everybody else. One of the problems that Government have is consulting with those people who will have the most difficulty in implementing whatever comes out of here. I would like some comments around that.
Mike Cherry: The Federation operates in a slightly different way from the other business organisations in as much as we are led by members, not by employees. We obviously have some very good staff behind us, but the organisation is member-led. It is very difficult to say that the organisations should in any way be made to try to communicate out to our membership. We have the ability to communicate to our membership, but that should not be something that Government feels they can use to reach all small businesses. You have heard Natalie say that the membership of BCC is about 100,000. The Federation has around 200,000 members, yet between us that is a very small percentage of all the small businesses—according to the Government’s own figures there are around 4.5 million I believe. I feel that there should be a duty on all the regulators to communicate effectively, directly to those businesses. In their databases they have a record of all those businesses, including those below the VAT threshold. The duty should be on the regulators to clearly communicate what is required, in plain and simple English. It cannot be up to the organisations to try to do the Government’s job for them.
Natalie Evans: I agree with Mike in that we will do all we can to give out information and help our members to understand their obligations and what is happening, but we are a very small representation in terms of the world of business. That is why simplicity in the system, getting the system right and understanding the difficulties for employers over implementing this is going to be so crucial. The simpler the scheme, the easier it will be for everyone to understand how it works and to be able to comply. The more complicated the scheme is, the more difficult that becomes.
Communication is essential, as is starting very early. Telling people now about personal accounts, getting messages out to employers even if there is not a lot of detail behind them—not waiting until everything is in place and then suddenly going out with lots of information—is crucial. It has to be a cumulative campaign. The simplicity of that which you are asking employers to do is crucial to helping them to understand how to do it. Making the scheme simple and simple to run, and giving simple and clear guidance to employers about what they have to do, will be far more effective than any of us going around knocking on the doors of all the small businesses.
What I am trying to probe is whether or not your organisations have the capacity to help the Government tailor the communications message in the most effective manner. That is the key thing.
Mike Cherry: On anything that the Government want to bring in, if they first communicate with us, and with the Chambers and any other business organisation, we will be only too pleased to offer a constructive input at the outset—rather than later down the line when we have to be critical, perhaps—so that we can make sure that what comes through to our members is the best possible advice that we, jointly, can provide to them.
Bob Compton: The BCC, an enterprise operation that is based in the Midlands, has worked with the DWP on communication exercises with employers. One of the comments, when I first got involved with the BCC on pensions issues, was that if the BCC has looked at material that is educational from the employer perspective, about what employers are supposed to be doing—as opposed to the material that you get from the Inland Revenue or VAT people on what new employers do in terms of tax demands and processes—that is more likely to be well received by employers, because that material would have been vetted by people who understand businesses and are involved in running businesses. Certainly the BCC would be willing to work with whatever organisation—the personal accounts delivery authority, the pension regulator, the Department for Work and Pensions or the Treasury—in developing methodologies that get communication across effectively. That is back to the point that you cannot do it all alone. It is impossible. It is a big task. If you have the weight of the industry representative organisations backing some of the material that goes out, it has got to be more helpful for those organisations that are not party to those industry organisations.
Your views on the way in which the information should be provided to employers, and the role of the Government on that front, are very clear. I wanted to ask you a bit more about the provision of information to employees, because in an answer to an earlier question Mr. Cherry made it clear that he certainly did not see a role for employers in providing advice to their employees about the decisions that they should be making about whether to opt out. Do you think that there should be a duty on employers to provide information to employees about personal accounts?
Secondly, Mr. Cherry again made the point that there are lots of financial advisers out there who can offer people advice; but obviously, for people on low incomes, accessing advice from a financial adviser could be expensive and it is therefore unlikely to happen. Therefore, what is the role of the Government in ensuring that there is, at the very least, generic financial advice available to employees, so that they can make a rational decision about whether to opt out?
Bob Compton: From the word go we have been very clear that employers should not be seen as the first port of call for advice for employees on the personal accounts system, but naturally employers will be seen as where you have got to go for advice. The view has been that it must be made clear in any literature that the Government, the regulatory authority or PADA produce, that they are the source for advice and information such as through websites or other material. The employer can be the conduit for passing initial information out to employees, but is not to be responsible for giving the advice out. The employees should be given notices and information about where they can go to seek advice if they are not getting it direct from their employer for whatever reason.
Bob Compton: Employers should not be seen to give any form of advice. If you talk to independent financial advisers—and I am not one—they are very concerned that employers are not deemed to be giving advice. It is so important that there is generic advice out there. Obviously, for personal accounts to work, they must work well for the majority of people, but there are certain categories of employee for whom it would not be advantageous to join. There are issues affecting people relatively close to retirement, where there is a time scale to build up; those issues can be dealt with. There is also a means-testing issue about whether someone is better off not saving at all, in comparison with someone who has saved, on a low income, with benefit being topped up to the same level as the other person’s. Those issues need to be dealt with but it should not be for the employer to advise people on them.
Mike Cherry: My concern is that you have mentioned the word “duty” and I always get worried when I hear about a duty on employers. It always seems to be one-sided. We have always maintained on the pensions front that the responsibility should lie with the individuals to provide for their future pensions. Clear advice should be given to them on what their current national insurance contributions are not actually providing for, and why, and what they have to do for themselves. It should not be a duty incumbent on the employers, but we will act as a conduit, certainly. But I do get worried when I hear that word “duty”.
Could I ask about the regulatory impact assessment? Mr. Cherry said earlier that you thought that it was perhaps a little optimistic. If you were able to quantify that, it would be helpful.
Mike Cherry: I am looking specifically at the Pensions Bill impact assessment dated 5 December, where the costs in year 1 and the ongoing costs for the microfirms and the single-person director firms do not seem to bear much relation to what I think I am going to have to do as an employer to understand the regulations or the pensions issues, what my employers are probably going to ask me about and the ongoing costs of how it is going to be managed.
We have, from the outset, tried to suggest that PAYE was the collection vehicle, but for practical reasons it seems that that is not able to be used. So there is going to be an on-cost there for a different system that will, in some way, mirror what happens with PAYE. That is a doubling of what the employers already have to do and I do not see how it bears any true relationship to the costs that are shown in the impact assessment.
Natalie Evans: We have had Manchester Business School do some research into costs. It came up with a figure, if an entirely new system was implemented, of well over £1 billion. It has done some new work based on the KPMG administration burdens data on the position if some personal accounts payments were bolted on to payroll software. The administration of the national insurance element of payroll is £283 million, so we in Manchester Business School think that that is a more realistic base cost, in terms of compliance costs for that regime being the same for personal accounts. Again, we agree that the impact assessment costs underestimate the costs for small and medium-sized businesses.
I am surprised to hear you say that, because Manchester Business School has been assisting DWP and the other groups that have been looking at these figures. We took significant care to consider the detailed analysis done by Manchester Business School, with your assistance, and the figures in the table, which you have referred to, which include about £70 of ongoing cost for a microbusiness, about £80 for a larger small business and about £10 for a single-person director firm, include things like opportunity cost lost, so they are quite robust in terms of the costings that are included.
When I first looked at the figures, I questioned their size as an ongoing cost annual figure. We went back and did further research and double-checked our figures and not only are these fairly robust, but to some extent, when you look at what is in there, they might well be padded. It is curious, when we are talking about these sorts of figures—about £70 a year for small business—that there should be substantial concern about that, because we are talking about less than £2 a week.
Natalie Evans: From our perspective, we are working in the dark somewhat, because we do not actually know what the mechanism is going to be for payment collection. So in some senses we are talking on the basis of very little knowledge: obviously the costs will vary greatly depending on what payment mechanism is decided—
Well, in a sense you are not, are you? Bob is running an insurance company that is today dealing with him in terms of the collection of his insurance. I do not know what it is or what the circumstances are, but we do know that many people in small businesses will do exactly what Bob has done. They will decide not to go to personal accounts. They will decide to go to insurance companies with whom they have a current relationship or with trust-based pension schemes with which they have a relationship—whether a personal pension or whatever—and they will then be able to continue with that relationship and continue dealing with them.