This is another session in which we take evidence from distinguished witnesses. I welcome David Yeandle of the Engineering Employers Federation; Neil Carbery, head of pensions and employment at the Confederation of British Industry; John Cridland, the deputy director-general of the CBI; Ian Farr, chairman of the Association of Consulting Actuaries; and Keith Barton, honorary secretary of the Association of Consulting Actuaries.
I say again for the benefit of both members of the Committee and witnesses that questions and answers must relate directly to the legislation that we are considering. I do not want rambling questions or rambling responses relating to any matter other than the legislation that we are considering. We have Ministers here, so I call Mike O’Brien, to put the first question to our witnesses.
May I ask our witnesses whether their organisations broadly support the Bill as it stands? Some of you may wish for additions to it—I know the Association of Consulting Actuaries does. As the Bill stands at the moment, do you give broad support to its principles, and, if so, why?
John Cridland: The CBI does, indeed, broadly support the Bill. What is particularly significant about the Bill is the consensus that has been built up about the need to tackle the gap in pension provision that is going to increase in significance. Those on lower earnings do not currently have the benefit of employer-supported provision. Thanks to Lord Turner’s report and the resulting debate, it is now clear that something is needed to help those people.
There are aspects of the Bill where the CBI would not have started from the same place. Our small business membership is concerned about the practicality and cost impact of a form of soft compulsion. That is not something the CBI would have proposed, but we are quibbling about it. It is a necessary act, and we can acquiesce in it to achieve the purposes of the legislation.
David Yeandle: Thank you. My response is along the same lines as that of my colleague John Cridland. We have consistently supported the Government’s pensions reform agenda for the last two or three years, and we see the Bill as the final piece in the legislative jigsaw to implement these proposals. We are particularly pleased with the introduction of personal accounts, which we have always supported, in terms of both the auto-enrolment of employees and the modest compulsory employment contribution. We think that it will provide an important opportunity to save for retirement for many people who do not have that opportunity today.
We are also very pleased that, as part of the Bill, there will be we what we regard as an equally important part of the Government’s pensions reform programme: the start of what I hope is going to be a rolling programme of deregulation of personal and occupational pensions. We have some issues of detail as far as the Bill is concerned. I suspect we may cover some this afternoon. There are also some issues along the lines John mentioned—particularly relating to support for small businesses—which we think need to be addressed, but not necessarily during the course of the Bill itself.
Ian Farr: We broadly support the Bill, and the extension of pensions to people who do not currently have them. We also support the reduction in the 5 per cent. cap for the revaluation of deferred pensions in existing defined benefit occupational pension schemes, but we are concerned about the probability of levelling down. Like all the major pension organisations in this country, we are concerned that, as yet, there is not nearly enough in the Bill to protect the good occupational schemes that currently exist—or did exist a few years ago until the great switch happened. That is why we would wish to see a change.
John Cridland mentioned the importance of maintaining the consensus around the Turner commission proposals. Is that a view that everyone shares? Can you say why it is so important?
David Yeandle: Certainly, we very much support the concept of building the consensus. Frankly, we would applaud the Government and the Opposition parties, as well as all stakeholders, for the way they have worked at this over the last two to three years. This is such an important issue for the long-term future—not only for all of us in this room, but for our children and grandchildren—that it is really important we try to get a degree of certainty about the way things are going to go in the future. Although there will obviously be issues of detail between different groups and different parties, the broad consensus that we go forward with the Pensions Commission’s proposals is something that we very much support.
May I direct a question at the employers’ organisations, and come back later to the actuaries? I have two issues in one question. Do you support the approach that the 3 per cent. contribution level should be enshrined in legislation so that it can only be changed in the future by primary legislation? Could you expand a bit more on the sort of help your organisations would like to see proposed for the smaller employers, as clearly there is an issue about extra costs and administration?
John Cridland: We very much welcome the fact that 3 per cent. is enshrined in legislation. My earlier comments gave an impression of how far the small business community has already needed to move to acquiesce with this legislation. It is vital in giving confidence to the small business community that when we talk about 3 per cent. employer contribution, that is precisely what we mean. If you look at the Australian experience, to take an analogy, we have seen their figure start low and then move progressively over a period of years. Clearly, it will be for Parliament in future years to decide whether pension provision is adequate; these things are not set in stone for ever. But it would have been very uncomfortable for small businesses to believe they were being taken on a journey where they did not know the destination.
The particular proposals that we have brought forward on support for small businesses will, in a sense, loom as we move toward 2012, but I will ask my colleague, Neil Carbery, to outline the particular proposals we have.
Neil Carbery: Our initial thinking on support for small businesses was to put in place a time-limited package of support to help with the implementation phase, because our key issue here is that a lot of the businesses we are talking about are not complex in their HR practices. Many of them are running paper-and-ink payrolls and so forth. Our initial proposal was that there might be a 1 per cent. reduction in the level of contribution expected from businesses with fewer than 50 employees for a certain period of time. We are still in discussions with the Department for Work and Pensions about this and are happy to take those discussions forward. Our estimate was that the cost of that kind of employer support over the introductory period of personal pensions would be about £850 million.
David Yeandle: In exactly the same way as the CBI, certainly one of the major planks of our representation to the Government over the last two to three years has been to stress how important it is in terms of building confidence for employers, and particularly small employers, that the 3 per cent. minimum employer contribution is on the face of the Bill. I am extremely pleased that it is there, and that the Government have clearly indicated that it will be introduced on a phased basis over a shortish period.
We believe, like the CBI, that there is a real issue about smaller employers, because of course all employers—large and small—will benefit from the phased implementation and the fact that the 3 per cent. figure appears in the Bill. But there are an awful lot of small employers who, for the very first time, are now going to making pension contributions for their employees. So we do think there is a strong case for a relatively modest financial support package to be introduced and to last for a relatively short time when the scheme comes in in 2012.
We also think compensating some of these smaller employers for making contributions would send a very important message to the small business community. Clearly, that community and the employees in them are very much an integral part of the target market. It is really important that the small business community is seen to be as supportive of the Government’s proposals as possible. If the Government were able to make a gesture towards them in this way, that would be extremely helpful and would, I hope, avoid some of the problems that might otherwise occur in parts of the small business community.
In terms of the methodology, our members are very clear that, if there were to be any support, it needs to be done in such a way that it does not disadvantage the very people who work for the small employers who make up many of the people we try to support. We would not want, for example, an exclusion for small businesses or a longer phasing-in for small businesses. The idea that we have been exploring and trying to cost—although that is increasingly difficult—is to make provision so that a proportion of the employer contribution that is being paid into the employees’ scheme is refunded to the employers over a two to three-year period. They would get small compensation back for what they put in—not the full amount, but a phased reduction. I can give more details about that, if that would be of any assistance.
Let me raise it now, although it moves us on to a different subject, which is the issue of deregulation—or simplification, however you want to call it. I was in Holland last week, hearing about the benefits of the flexibilities in their system, especially conditional indexation. Would Ian and Keith like to elaborate on the kind of flexibilities we might be able to build into the system through the Bill? What could encourage employers to keep existing defined benefit schemes open and, perhaps, stem the tide of levelling down when the time comes?
Ian Farr: Conditional indexation—what we have proposed—is not a panacea. We and all the national pensions bodies that support this believe that it could stop the dramatic shift from defined benefit to defined contribution schemes that we have seen over the past 10 to 12 years. We reckon that there are now only about 900,000 active members in private sector open defined-benefit plans, compared with 5 million in 1995. That is a drop from 5 million to 900,000 over 12 years. In the public sector, of course, the total of active members has stayed at about 5 million throughout the whole period.
There is an urgency to this. Our proposals are aimed at medium to large employers that want to, and are prepared to, share some of the investment risks of longevity with their employees. At the moment, these employers do not really have that choice because legislation bans conditional indexation, which is why you have seen so many final salary schemes replaced by defined contribution money purchase plans. We think that there is scope for a middle way—conditional indexation, which has worked so successfully in Holland.
Why conditional indexation? Because conditional indexation—not being a panacea—is a natural step. It offers a genuine middle way between defined benefit and defined contribution; it has been well tried and tested in the Netherlands; it requires only small changes to the law; and it could be implemented quickly.
Keith Barton: For the avoidance of doubt, what we mean by conditional indexation is that members’ benefits would increase depending on financial health. We have thought through this very hard and there are important safeguards to avoid abuses. In the normal course of events, members would receive their benefits in full—they would be indexed each year in payment and in the period prior to payment. But if things went wrong and if there were investment problems, there would be the opportunity to hold off those increases for a period until the funding and investment conditions improved and the fund was again able to afford full indexation.
It is an important safety valve. One of the reasons why pension schemes are closing at the moment and have been closing in droves over the past 10 years or so is that there is no safety valve. An employer who commits to a current scheme of a DB nature has to guarantee every single benefit. There is very little opportunity to be flexible if things do not turn out quite as the employer planned. Our schemes would give that flexibility and, we believe, would encourage a reversal in the trend from final salary plans straight to defined contribution schemes where members are at great risk of making poor investment decisions and ending up with poor benefits.
On the risk of levelling down, in the paper that you submitted to the Committee, you indicated that you had undertaken a survey in February 2007, covering 336 schemes with 2.1 million members. In the survey, did you ask the employers whether the 3 per cent. level would encourage them, irrespective of where we go with conditional indexation, to change their existing occupational pensions? If only part of their work force was covered by their own scheme, were they concerned that the introduction of the new scheme would increase their administrative costs and so on? Therefore, was that another encouragement for them to switch from a more generous scheme—from their point of view, in terms of their contributions—to the 3 per cent. scheme? I hope that that was not a rambling question.
Ian Farr: I think that some levelling down is almost inevitable. If you have an employer with a pension scheme where the contribution is 10 per cent. and 30 per cent. of the staff are members and then, through auto-enrolment, the proportion of staff who are members rises to 60 per cent., to stop the outgoing pensions contributions doubling the employer could reduce the contribution by a half to 5 per cent. There will be a concern among finance directors about the membership doubling from 30 per cent. to 60 per cent. and the 10 per cent. contribution doubling. Therefore the danger is that the finance side of the house might say that they want to reduce the contribution down from 10 per cent.
I accept there is an argument that would say that perhaps it is better for society as a whole if there are 60 per cent. in the pension scheme, with a 5 or 6 per cent. contribution, than only 30 per cent. with a 10 per cent. contribution. We do not have strong views about that but we think that levelling down is almost inevitable with some employers, looked at from the financial point of view.
Keith Barton: Unsurprisingly, we did not ask precisely that question but we asked similar questions. One question was, “Will auto-enrolment into the new style of schemes lead you”—the employers surveyed—“to considering abandoning your present occupational schemes in favour of personal accounts for all members?”. The headline figure from the survey was that 15 per cent. of all employers said yes and 85 per cent. said no, but there was quite a bit of skewing. Among smaller employers, around a third said that they would consider abandoning their current schemes and two thirds said that they would not. The survey was undertaken early in 2007.
May I just clarify that point? The employers who responded to the survey were those who were already paying more than a 3 per cent. contribution?
I was going to ask about this later on, as I suspect Mr. Waterson was, but we will deal with it now. I wanted to ask a question of the CBI.
To what extent do you think that the fact that, to all intents and purposes, there will be no transfers in or out of the schemes would be a disincentive for the kind of levelling down you have described? Employers would then be left with frozen schemes to administer at a cost.
No, I am talking about the fact that, not surprisingly—and I share your sentiment on this—employers have only so much money to spend on pensions and they will be tempted to level down. If they levelled down, by saying “We’ll just auto-enrol everyone in the personal accounts scheme”—that was Mr. Ainger’s question—an occupational pension scheme would then become a paid-up frozen scheme. The Government’s clear intention is that the benefits that employees have should not be transferred into their personal accounts. Would that not be a disincentive to people doing that very thing? It has been suggested to us that it is, but you are the professionals so I would be grateful for your view.
Keith Barton: I think that it is only a small disincentive. Our survey suggested that only 15 per cent. would consider ending their current arrangements in favour of personal accounts. That is a relatively small number. If an employer wanted to abandon its current arrangement and there were no good alternatives, such as a risk-sharing scheme of the type we proposed, I do not think that the administrative difficulties of operating a paid-up plan would be seen as insurmountable.
That is very helpful. Coming back to the conditional indexation issue, you will be aware that on Second Reading I made known my support for what you have said. Two days ago, the TUC, with the support of the charities for the elderly, expressed some reservations about conditional indexation, and I think we reached a point where they would support further review on trying to find a middle way, rather than have all the risk resting with employers or employees. Have you done any work or given any thought to features other than conditional indexation, which might lead to a sharing of risk? If we were to have a further review of this, it would have to be on the basis that we might find some other golden solution. I suspect you have looked at all the possible solutions and concluded that there is no golden solution other than the one you propose.
Ian Farr: As I said, our solution is not a panacea, but those of us who have been thinking about this for a long time—not just the Association of Consulting Actuaries but all the other national pension bodies, including the National Association of Pension Funds—believe there is an urgency to this. This is why I asked to make an opening statement.
When I read the account of Tuesday’s proceedings, I was concerned that the people made comments to the effect of “Let’s get the personal accounts bedded in, see how they bed in, and then, after 2012, have a look at risk-sharing”. That is far too late. By then the 20 per cent. of defined benefit schemes that remain open will be down to zilch, particularly as employers, on the lead-up to the introduction of personal accounts, will be reviewing their existing provision. Whatever is going to be done has to be done now and, as far as I am concerned, there is complete unanimity among all the national pension bodies as regards the urgency of the situation and the need to get something into this Bill.
That leads to the practicalities, and it is pie in the sky to try to get an amendment in to cover all sorts of different risk-sharing, so what is the most practical one that is workable, taking account of the current regime? That is what we have come up with. It is the natural step. We have already seen some final salary schemes—such as those at Tesco and the Royal Mail—move towards average earnings schemes instead. That is going with the drift of the wind. However, rather than having mandatory indexation in career average schemes, this would give conditional indexation in average salary schemes, because not every employer can afford to take on all the risk. Our view, our research and our professional judgment is that this is the practical way forward and, indeed, virtually all the major consulting actuarial firms who advise medium to large employers believe that if this went through, many of their employer clients would go for the middle way, rather than switching from final salary to money purchase.
That is very clear, and your answer is so full that I do not need to ask you another question on it.
May I turn to the general issue of employer duties? I want to raise the issue of advice and information. What is your feeling—particularly those of you from the CBI—about who should be responsible, not just for the provision of information but for the accuracy and good sense of that information? Do you and your members have concerns that, in the fullness of time, there might be some attempt to suggest that the information provided by employers was quasi-advice that and the employer would be responsible for that? Should PADA and the Government be responsible for the accuracy of information, given that this is going to be an execution-only, non-advised product?
John Cridland: We are absolutely clear that it is not a reasonable responsibility to place on a small employer, particularly as the constituency of employers we are trying to reach are those who—even in the days when pension schemes were very much in vogue and very generous as we look at them now with the benefit of hindsight—even in those days, this target group did not feel they could voluntarily contribute to pensions. They thought it was beyond them. These are small businesses that are starting up, focused on survival and very much unable to take on broader employment responsibilities that medium to large companies are able to take. Even if we persuade those companies to honour the spirit of this legislation—we will make a major effort so to do—it is simply a bridge too far to think they can part of the advice network. They neither have the competence nor the intention to play that role.
In conclusion, I wish to return to my point about consensus around the Turner proposals. I think Lord Turner well understood this point. He understood that we were segmenting the market and going for a part of the market that previous pension initiatives, including stakeholder pensions in recent years, had not met satisfactorily. He understood that that would only work if the measures, both in terms of administration for auto-enrolment and the fiscal measures, were kept very, very simple. We would have all made a huge mistake if we allowed mission creep to occur; if we go back to saying that advice is essential at the point at which people make decisions. It is not the employer’s responsibility to provide the advice, and if that is the case, we have a reasonable expectation both in letter and in spirit that small employers will operate auto-enrolment fairly and properly, so that the part of the community that currently gets no support gets its 3 per cent.
David Yeandle: I would very much like to support what my colleagues have said. There is no doubt, talking to our members—large, medium-sized and small— that they are extremely nervous and apprehensive about getting involved in the provision of information, and certainly not advice. It is not just the potential legal implications—we may be able to build something around that—but there are broader employee relations implications that may worry companies.
We very much support the whole concept of risk-sharing. It is something we think should be encouraged more widely than it currently is. It certainly is a differential between the DB and DC schemes. Indeed, some of our larger member companies have already gone down that route. But I think it is a real problem for medium-sized companies, and one way in which the Government could seek to do something to move the debate forward in this area—this does not involve legislation—would be to provide some very good guidance in terms of examples of the sorts of risk-sharing schemes that have already been introduced by companies, including how they have gone about them and how they communicated them to their employees. This guidance should be readily accessible to smaller businesses, so they could look at what is available, since there are lots of different types of risk-sharing to choose from. I am always in favour of things that do not involve legislation: it is usually cheaper and quicker. We certainly put this in our response to the Lewin-Sweeney Report, and I would very much urge the Government to look very seriously at this, rather than necessarily introducing further legislation which I am frankly not convinced—certainly from talking to our members—they are crying out for, in terms of conditional indexation. I think they believe there is something out there already they can use.
Ian Farr: I support Mr. Yeandle’s proposal—he made it to the deregulatory review, which I think has taken it up—to make public the ways that risk-sharing can be carried out. The trouble is that there are not that number of ways. Also, to do meaningful risk-sharing and to go for a true middle way, it has really to be an employer that can accept some risks; you are into the medium to large employers. The medium to large employers already have advisers—typically consulting actuaries, I am afraid—and they have been advised for years on all the ways of doing it. The publication of such ways for the small employers is useful, but many of those small employers will not be able to afford to share risks. Therefore, I am sceptical whether it would lead to much progress.
I would like to go back to some of the issues that we have touched on briefly and explore them a little bit more.
I come to this discussion from a business background, having run my own business since 1986. My first comment—probably for the CBI and the Engineering Employers Federation—is that I have concerns about how Government and Government bodies disseminate information to businesses, especially small businesses. Small businesses are often too busy being small businesses—certainly too busy to go and look for the relevant information—to make sure that they are compliant. They are often far too busy to be members of organisations, such as those you are representing here today.
That leads me to what concerns you might have over inadvertent non-compliance, from the employers’ point of view, while bearing in mind that there is a responsibility to seek the right balance between the employer’s rights and obligations and the employee’s rights. I am thinking of things like the re-enrolment periods, which we discussed this morning with other witnesses and which mean that records are going to have to be retained for significant periods of time. I have another point to make on information, but perhaps you would like to comment.
Neil Carbery: You are absolutely right. This is a key constituency that we have never previously reached, as a nation, in terms of pensions saving. It is the corner shop, the hairdresser—businesses with limited capacity for regulatory time. That is why we were very keen when talking to DWP—there are some very stringent penalties in the Bill. The most important thing that we have learned through the process of the last few years, looking at areas like the national minimum wage, is that the pensions regulator, as the designated authority, will have to take an approach that is based first on support. The first step here has to be support and help to comply. The pensions regulator must have the budget to be able to do that. A sliding scale of penalties after that is perfectly acceptable to businesses—no one wants to defend rogues. But, from our point of view, we are looking at making sure that the first time the regulator steps into your business to say, “Why is something wrong here?”, it is not bashing your door down; rather it is saying, “You are not doing this”, “How can we help?” and “What information do you need?”
Mr. Yeandle was going to make a contribution and I wanted to come back on another question about generic advice.
David Yeandle: Yes. The problems of inadvertent non-compliance are inevitably going to be there. The pensions regulator is going to have a hugely important role in this, in terms of the way it addresses it. That is going to be a real challenge for the Pensions Regulator, because it is going to be dealing with a very different group of employers from what it has historically. Historically, it has tended to deal with the larger companies. It is now going to be dealing with the little chip shop, the little corner shop and the hairdresser, most of whom, frankly, have never heard of the pensions regulator. When they get the first piece of paper from it, they are going to wonder what it is all about. There is a huge educational exercise.
Picking up your point about repeat auto-enrolment, you are right that there is a problem. That is why we, certainly, are very much in favour of repeat auto-enrolment on a fixed date, such as the start of the tax year. We think that that would avoid a lot of unnecessary paperwork being kept. It would certainly make it a lot easier for small employers if they knew that it had to be done on a fixed date, rather than their having to worry about when Joe or Mary might have joined. That might mean that some people would be re-enrolled on different time scales—it would not always be three years for everybody—but doing it on a fixed date would, we feel, be an awful lot easier, especially for smaller employers, and would particularly avoid inadvertent non-compliance, which I think is exactly your point.
On the issue of the generic advice and your concerns, obviously we do not know what the content of the generic advice will be. It is very difficult, as we all know, to get a one-size-fits-all scheme that does the job 100 per cent. Do you have comments relating to the difficulties that that might produce?
David Yeandle: Yes. It has to be written in a format that those involved will understand. I think that it is going to be quite a long process. The process of education needs to start well before 2012 because we need to get the message out to the community. The first occasion will not be enough; a drip, drip, drip will be needed over two or three years. We all have a role in that in our different ways.
I want to return to the question of information and advice that was touched on. There appears to be a consensus among you that it is not the role of employers to provide advice. I want to ask two things. First, what is the role of employers in providing information? Should they be expected to provide information to their employees themselves, or should they simply be expected to be a conduit for information that is prepared and provided by the Government or the personal accounts delivery authority?
Secondly, in relation to the point on advice that Gordon Banks raised, there clearly will be some people for whom automatic enrolment in a personal account could be the wrong decision. That advice has to be more than generic; it has to have some personalised quality. In that case, is it the role of Government rather than the role of PADA to provide that advice?
John Cridland: I think that generic advice can be very powerful in this area, notwithstanding the difficulties that we have already touched on.
I am involved as an employer member of the steering group for the Government’s financial capability initiative, which is looking at generic pensions advice alongside other forms of generic financial advice to students, families having children and a whole range of groups that often get themselves into deep difficulty. We have found in the financial capability exercise that it is possible to cast quite generic, quite short and pithy advice that is nonetheless quite meaningful to the constituency, and to use a series of intermediaries to reach groups in a way that we had previously not managed to do. I do not understate the difficulties but I am quite optimistic that that will be possible.
In relation to your direct question on the role of the employer, I think that when employers make such a strong stance that it is not their job they are largely saying “We are not competent to do it”. Without repeating the points made, we are not talking about sophisticated companies with their own HR resource. Therefore, in direct answer to your question, I think that they are willing to be a conduit for advice prepared by others but not to provide even outline information that they have generated themselves. I think that they are simply not competent to do so.
David Yeandle: I hold very much the same position. There is no doubt that the whole question of advice and information is a serious issue. I think that employers would be comfortable, in most cases, to be active as a conduit, but that they would be extremely nervous if they had to generate any information. Indeed, I think that that would be quite dangerous. There is a real danger that if you had 500 employers producing information it would all be slightly different; much better to have one piece of information produced by an authoritative organisation that is then disseminated to employees by the employer. The whole message of Adair Turner and the Pensions Commission was: we have to keep this simple. The more we keep it simple, the better chance it has of working. Simple for employees, simple for employers. That has to be the message. I have been reading some of the reports of the evidence sessions from earlier this week, and it is encouraging how much that message keeps coming across. We must focus on that and not get carried away trying to do lots of other things which, in an ideal world, might be ideal. Frankly, we will fail if we do that. We must keep it simple.
Should we consider having a prohibition on employers giving advice? Looking the other way through the telescope, that would prohibit employers from giving advice to employees to opt out, thereby avoiding the payroll cost to the employer of automatic enrolment. If you have studied our evidence, you will have heard that some of our witnesses have that concern.
The EEF and the CBI have employers who currently have pension schemes. Presumably, in most of those cases, information will be given but not advice. I have a great deal of sympathy for the points you have been making in terms of the role of the employer, but that is the case now. You give information to an employee who is either automatically enrolled or is able to join the scheme, but you will not give advice because that would put you at some liability. It may be that some of the larger employers have advice schemes: I do not know.
John Cridland: Advice is not for employers. Information is not for the target group of employers you are seeking to reach with this legislation. However, the Minister is absolutely right: there are many employers on a bigger scale, with more resources, and they would feel comfortable giving information. Indeed, some of the best practice that has led you to consider auto-enrolment as a sensible route has come from the good practice of companies that have driven up enrolment rates by working very closely with their employees on the provision of information, but not on the provision of advice. Advice? No. Information? That depends on the size and sophistication of the business, but cannot be a requirement.
David Yeandle: I agree entirely that we need to clearly distinguish between information and advice, and I recognise that sometimes there is a slightly hazy barrier between the two. We must be absolutely clear: employers should not be involved in any way, shape or form in giving advice. Some of them may wish to provide information through a conduit.
I am delighted at the constructive attitude of the employers’ organisations. However, I got more pessimistic as I listened, though not because you do not want to give information or advice. We are concerned—though perhaps not all of us—about employees within small businesses. There is a reluctance by the employers’ organisations even to give information, to get involved with small businesses. Would you agree that the Government are going to have to put some sort of mechanism in place to be proactive with small businesses? I think Mr. Yeandle was optimistic when he said that people look at information and say, “Who is this from?” I think the first reaction would be to throw it in the bin and not even wonder who it is from. If we are not proactive, we will not get small employers involved. I have had experience in large companies and in running my own business, and it was a dreadful shock moving from a large company to my own small business. Have you put some thought into how the Government could be proactive in this field?
John Cridland: I agree with the point that David Yeandle made earlier: this requires a major marketing campaign as we move to 2012. It requires a lateral approach to reaching the marketplace, which Government Departments do not always find easy. It is not just about publishing notices or sending out brochures. We do however have some experience of getting this right with projects on a similar scale. I was previously a low pay commissioner as a representative of employers. We asked all the same questions in the late 1990s about whether we could make a national minimum wage work, because it was aimed at very low-paid employees, who often did not have very much access to information and worked for very small employers, few of whom would wilfully have avoided the minimum wage, but many of whom would have been confused by it. By keeping the minimum wage simple, by a bold approach from public advertising and promotion, we have actually shown through third-party surveys that there is a very high level of awareness by both individual employees and small employers of their legal responsibilities.
But it is because we kept it simple. In principle—and I would not claim there was 100 per cent. compliance—it ended up being fairly close to self-policing. I think that is an analogous model to what we want to achieve here. We need to keep personal accounts so simple and straightforward, keep that 3 per cent. figure in people’s minds—that this is a right unless they choose to opt out—keep the procedures of automatic enrolment crystal clear so that the vast majority of employers and employees find the system user-friendly. There will always be the one bad apple in the barrel, but we cannot produce a system for trying to tackle the one bad apple, or we will mess the barrel up for everybody else.
Do you agree that no small business would want to pay the 3 per cent., but much more difficult for them than paying the 3 per cent.—finding the money—is actually the administration of the scheme and the willingness to get to grips with it. Have you put any thought, as employers’ organisations, into being able to help, or helping the Government set up a proactive organisation that can give not just advice, but practical help and go knock on the doors?
Neil Carbery: We have. We have had a number of meetings with some people who have been involved with PADA. We are looking at payroll providers and so forth to see what might be deliverable to small businesses in an online portal. One of the things we are looking at, for instance, is delivering an opportunity to develop computerised payroll free of charge as part of the delivery of personal accounts. So the small business would benefit because they would pick up a computerised payroll program, for instance, from the delivery authority that is helping them comply but is also offering them some business benefits as well. That is the kind of discussion we have been involved in—certainly something that we would be keen to take forward as we move toward 2012.
Do you get the feeling that the people who are responsible—both PADA and the Government—understand that that is the major problem and that they are listening to you?
I was pleased with the experience of the PADA chair and chief executive, but obviously we are talking about a body of companies that are way below the level at which those people have worked. That is what concerns me; we have got to get it right before we get too close to it.
David Yeandle: Much like the CBI, we have also had some valuable and constructive discussions with PADA senior officials, and very much stressed the point, that I think they fully endorse, that the whole process has got to be kept simple for employers to understand and be able to administer. Frankly, we are all going to have to think about innovative approaches to this. We are going to have to think broader even than pensions in terms of how we do this: we need to think outside the box a little bit about how we get the message across. We should not assume that it is only people within the pensions community who have the best way of doing this: we have to think more broadly.
We do need to get the small business community at large on board, and if the Government were prepared to give some indication that they recognise this is a big challenge for them, and to do something—even if it is relatively modest—at the start of 2012, that would be an important message. It is about getting everybody on board and singing off the same hymn sheet as much as we possibly can.
David Yeandle: You are going to have to find all sorts of ways of getting the message across. Certainly it is not necessarily always going to work if it comes directly from Westminster. We must try innovative approaches to get the message across. How do we get the message across to the small business community about other things, other than pensions? We need to think about that. What works? What does not work? We need to learn from that. We need to talk to all the different engaged organisations and find out what works or does not work for them and learn from that.
All of you talked about simplicity, more than once. What about the issue of agency workers, as far as the employer organisations are concerned? We have briefings from the House of Commons Library that says that they can be defined as employees of the organisation that they are working for, and that the definition of “jobholder” in clause 1 of the Bill includes “employee”. I wonder if that is an issue that has come across either the CBI’s or the EEF’s radar screen.
Neil Carbery: The issue of agency workers is a difficult one with regard to this Bill. We have to acknowledge that people pass in and out of agency work during their careers. They often choose to do it because it suits their lifestyle at that time. We might expect agency workers to have one of the highest opt-out rates from personal accounts, because of the stage of career that they are at. It is clear to us that the responsibility for administering personal accounts should sit with the body administering payroll for the individuals—that would usually be the agency.
David Yeandle: The question of agency workers is very problematic. We are pleased that agency workers are going to be covered, because clearly they comprise an awful lot of the people who are not saving for their retirement. We have to recognise that agency workers are a very varied group of employees. They are not all low paid and vulnerable. Many of them are quite well paid. We have to recognise that there are lots of different types of agency workers. I entirely share Neil’s point that—in exactly the same way as the responsibility for ensuring that workers get paid the national minimum wage and for adherence to the working time regulations—the responsibility here should be the agency’s, not that of the organisation that happens to be making use of the agency on that particular occasion.
The other phrase that we have heard an awful lot throughout today is light-touch enforcement, specifically in relation to inadvertent non-compliance. We know that there are some pretty big sticks within the Bill. We all accept that they are there for good reason, to deal with the rogue employer element. How would you all like to see the enforcement regime operated, from a light-touch point of view? That is going to be critical going forward.
John Cridland: There is an analogy here with the deliberations that you needed to have on the issue of employers and illegal working. For illegal working there are some stiff penalties, but the approach to regulation has to be light—if people inadvertently, as an employer, find themselves employing someone who does not have the appropriate employment status, and it happened because of the complexity of the questions about their employment status, then someone gets a slapped wrist and they are encouraged to do better. One of the ways of encouraging them to do better is better provision of advice and guidance, along the lines that we discussed earlier, rather than the notion that someone has messed up and they are immediately facing the sorts of penalties in the Bill.
As a responsible employer body, we support the compliance provisions in the Bill. We think that there have to be provisions of this kind, but “light touch” for us is a culture in the regulatory body where, as we heard earlier, you only use these powers in extremis. The big stick is there to be kept in the cupboard and brought out when needed, not used on a regular basis.
David Yeandle: I entirely agree with that point. It is very important to all employers, in exactly the same way as with the national minimum wage, that we want a level playing field. The good employers—the vast majority of employers and of our members and of the CBI’s members—will do their very level best to adhere to this legislation. We want to ensure that there is a level playing field out there. I think that the legislation is drafted in such a way that it achieves that. But we also want to make sure that it does not impose additional regulatory burdens on those employers who do the right thing. The sort of step-by-step approach that John talks about, where the big stick is there and is available but is only used in extremis and on a very occasional basis, is the right approach. Most of the problems hopefully will be able to be resolved by a common sense phone call, a bit of advice, a bit of education. Most of the problems will then hopefully disappear.
You are a very fair umpire, Sir Nicholas.
I want to return to the issue that Mr. Farr raised of conditionally indexed schemes. I notice that in his written submission, and also orally today, the emphasis was placed on how lifting the ban on the implementation of those schemes has worked effectively in the Netherlands, for example. But, of course, the Netherlands is not the United Kingdom.
My question is not so much to you, Mr. Farr, but to Mr. Yeandle and Mr. Cridland. I get the impression that both the EEF and the CBI are lukewarm towards the suggestion and I wonder what would happen in practical terms. Do you think that there would be a reasonably large take-up by your members?
David Yeandle: As I have indicated already, it is not something that lots of people are knocking on my door about. I do not get the impression that there is an enormous demand, from our members at least, for this type of scheme. I think that there is a limited interest in risk-sharing, but not an enormous demand out there for conditional indexation. We would not oppose it as a matter of principle, particularly if it could be introduced in a relatively simplistic way, by relatively modest changes to the legislation. However, in terms of taking forward, the agenda we think that there may be other issues of deregulation that it might be more advantageous for the Government to address.
I come to the point that I wanted to make. We are very supportive of the proposal in the Bill to reduce the 5 per cent. cap from 5 per cent. to 2.5 per cent. but we think that the Government need to go a little further. There is real problem for many employers to be able to implement that part of the legislation. Indeed, they have had trouble implementing the provision in the 2004 Act to reduce the cap from 5 to 2.5 per cent. for pensions. It would be really helpful, in terms of implementing the legislation and really getting it to work, if the Government were to go that little further and provide the opportunity for overriding legislation so that employers could genuinely implement it. There is a problem in doing so.
John Cridland: There is a lot of common ground between the pensions industry and the broader business community concerning the desirability of innovation in pensions provision, and in considering that the halfway house, the risk-sharing approach, has considerable merits. But the debate has still some way to go. It surprises me that pensions industry bodies believe that this would make a major difference. I have to say that CBI member companies have taken a very similar approach to David Yeandle’s answer, which is, “Yes, we can see the merits of this but actually we don’t think it would make any major difference”. Therefore, there is still some way to go to flush out why different constituents are taking slightly different approaches.
I do not want to suggest that we were not supportive of Ian’s aspirations, because we most certainly are. But when my members say what they would like to see Ministers or the House do in relation to the Bill, they give much higher priority to other issues. It has not come up yet in discussion, but the definition of pay, for the purposes of the Bill, is a huge issue for my members, who believe that the Bill in that one single area is overcomplicated by a very wide definition of pay. Most employers with pension schemes use basic pay as the definition. Here is a rare example of perhaps over-gilding the lily and bringing in administrative complexity that would defeat some of the objectives of the Bill.
There is widespread concern among pensions industry members, as well as business members, about the fact that European law may interrupt our ability to use automatic enrolment, certainly in relation to group personal pension schemes. We are working with the DWP to find a solution to that. The real solution we desperately need is to go to Brussels and get them to understand that things like the directives, which were there to provide consumer protection, were never intended to interrupt auto-enrolment, but could do so.
I mention those two issues as ones on which I have a mandate to say that employers are very concerned to see them resolved. They share the conditional indexation aspiration, but that is not something they have asked me to say is their current No. 1 priority.
Ian Farr: I gave you the figure of £900,000 compared with £5 million 12 years ago. You still read every week of the closure of final salary plans. You also see their replacement with money purchase plans—there is very little risk-sharing going on—and that will continue to go on. Some of the difference in emphasis comes from the fact that we are talking not about small employers, but about medium to large employers who employ several million people.
We know from advising medium to large employers that many of them have a heavy heart about changing from taking all the risks of a final salary scheme to passing all the risks to individuals under money-purchase. Such medium to large employers want to, and can, afford to share the risks, particularly when their employees are modestly paid—£20,000 to £40,000 a year—and have difficulty in withstanding the volatility of a pension from a money-purchase arrangement.
Of course, if you are self-employed or a smaller employer, all you can have is a personal account type arrangement in which you have to accept that volatility. The pension depends on the level of the stock market when you retire and the cost of annuities. If you are lucky enough to work for a medium to large employer that can share some of the risks and can offer you a pension related to salary rather than directly to investment returns or the cost of annuities, why ban that for those employers that wish to offer that but are currently not able to?
This is a very interesting discussion, but we are not taking part in an esoteric philosophical discussion here. We are considering a Bill, and we will get into the nitty-gritty very shortly. It is not my intention to try to put words into the mouths of Mr. Cridland and Mr. Yeandle, but can I infer from what you said earlier that you would not be in favour of an amendment to the Bill as suggested by Mr. Farr?
May I ask a question to which I hope you will have an answer? Mr. Cridland, you mentioned at the beginning of this evidence session the question of the costs to employers of implementing this scheme. We have estimates of the costs in the regulatory impact assessment provided by the Government. Do you think that those costs are accurate, or—as we heard from other organisations this morning—that they might be underestimates?
John Cridland made a point about group personal pensions. Everybody knows there is a problem. There are three possible solutions being mooted: getting Brussels to change the law; streamlined enrolment or master trusts. Can I have a yes or no answer from each organisation as to which of those you favour as a solution?
John Cridland: We favour getting this issue sorted in Brussels, but if the fallback has to be a streamlined approach, there are examples from employers such as Asda that it can be done.
In relation to the cost, we have no reason to question the costs in the Bill. Clearly, the biggest cost is the cost to the employer making the contribution. Against that, the regulatory costs are much more modest.
David Yeandle: We certainly urge the Government to address the issue in Brussels, but I do not underestimate the difficulty and time that that might take. Of course, going to Brussels always opens Pandora’s box and we do not quite know where we will end up. In the meantime—we will have to do something in the meantime—I favour the streamlined joining approach rather than master trusts. That is the better solution and it is the one that would have the least adverse impact on employers and their recruitment policy. That is important. The less change that they have to make, the better.
Do you have a response? No, so perhaps it is an appropriate time to bring this part of our deliberations to an end. I thank our witnesses—David Yeandle, Neil Carbery, John Cridland, Ian Farr and Keith Barton— for their full and frank responses to the many questions that they have been asked.
Welcome to the final act, as it were, of the commission’s work. I have two questions. First, does anything in the Bill not sit comfortably with the conclusions in your report? Secondly, there has been a lot of debate recently about means-testing and the effects on at-risk groups. A consensus has now emerged that everyone agrees that issues need addressing. Solutions to those problems have been punted around, such as income disregard and fiddling with trivial commutations. Do you accept that there is a problem and have any of the solutions taken your fancy in recent months?
Lord Turner: Let me start with the first question. I shall then see whether John or Jeannie want to add anything. Is there anything in the Bill that does not fit well with our proposals? Overall, the answer is no. It is a fairly complete enactment of what we proposed. The only areas where it has some potential divergence—it is potential rather than actual—is when problems have emerged that we did not anticipate. We did not get to the level of detail. We can come back to it later, but clearly the proposal that the Bill has an enabling power on the Secretary of State to exempt personal pensions from the need to auto-enrol was not something that we had anticipated. We had not realised at that stage that there might—indeed, probably will be—a problem under European law about auto-enrolling people into personal pensions. We can come back to our attitude to that specific issue later.
One other more minor point that was in our initial proposals but is not here relates to the conditions that make a scheme one that is valid to apply to rather than a personal accounts scheme. We envisaged that there would be a requirement for the level of contributions to be in excess of 8 per cent. and for the administrative costs to be below a certain percentage to ensure that, post the administration costs, the scheme would be at least as good as the national scheme.
Those are the only two areas in which there is a difference from what we anticipated. Are there any others that occur to you?
Jeannie Drake: No, I agree with that. I would also add that as the Bill progresses its way through Parliament and additions are made that detract from the simplicity or add to the cost of running any new pension arrangements, that would work against the principles of keeping it simple and keeping the costs and charges down.
Lord Turner: If I turn to the issue of means-testing, we always recognised that, in our proposals on the state pension and in the variant that the Government took forward, significant progress had been made in reducing the role of means-testing. However, we have clearly not eliminated means-testing from the state pension system. The problem is that it is quite expensive to eliminate means-testing from the state system. It is for those who say, “You have not gone far enough” to come up with what they would specifically do to get rid of the remaining element of means-testing and to work out what that would cost. The issue, however, clearly remains whether the remaining element of means-testing is a problem when it comes to pay to save and incentives to save. It is important to narrow down the potential range of concerns. I am going to make some general points, and then suggest that you ask Professor Hills, who has looked at this issue in more detail, to comment on it as well.
It is important to narrow down the problem in two respects. First, under the present proposals for the state pension system, there will be a significant proportion of people who are subject to a 40 per cent. withdrawal rate of their savings credit during retirement as their private pension income increases. However, we do not consider that those people have a problem with incentives to save because the withdrawal rate that they are subject to in retirement is offset by the fact that the combination of the 3 per cent. employer contribution and the tax relief contribution on the way in more than overcomes that. The focus should be on those people who are subject to not just a 40 per cent. rate of withdrawal but to higher rates of withdrawal and, in particular, to the 100 per cent. withdrawal rate.
Secondly, you cannot treat the fact that some people post facto will not have done well out of saving as proof that it is a bad idea to advise them to save. An analogy would be that if at the end of the year your house has not been burgled, it does not mean that it was bad advice to buy a household insurance that year. None the less, we have a social commitment to ensure that, whatever mess people’s lives get into, we will pick them up to a certain absolute level of income in retirement. There will be some people whose life course means that, when they retire, they will not necessarily get the benefit of the saving that they have individually accrued. That is only a problem for incentives to save if it relates not just post facto to individuals, who are to a degree random, but to whole categories that we could have predicted in advance. Even if we could define categories of people in advance, by their home tenure, or their age or income, would it be right to say that it was poor advice to suggest to them that they should save?
What we need to know is how big that segment is. Indeed, are there segments or categories of people who are defined by those parameters and where there is a high probability that they will be subject to such high withdrawal rates in retirement that it would be poor advice for them to save? Once we have worked out what the figures are, we must zero in on one of two things; there are two possible responses. One is to ask whether there is an affordable package of measures that removes the danger for those categories of people, and the other is about whether it is possible to define reasonable generic advice regarding the people who opt out. Those are the general points I wish to make, and I suggest that Professor Hills provides some more details.
Professor Hills: Obviously I agree with everything that Lord Turner has said. It is important to remember where we have come from, and the transformation in the position on prospective returns to savers that the Pensions Act 2007 created, and how much you have all achieved by passing that.
There are two issues here. We should not leap from the possibility that we can all construct a hypothetical case and argue in advance that people, because of their particular circumstances, could get a rather low return if they were enrolled into a savings scheme. We need to compare that with how many people are identifiably in that situation and are really affected by it.
Looking at the issues that Adair just raised, first, it is important to remember the treatment of the money on its way in. We are not only looking at what happens when people’s savings come out; we need to think about how much it cost to contribute something to their pension pot in the first place. As Adair said, an important part of that for many people has been the impact of tax relief and the employer contribution.
However, another group of people are important in the cases that we might be worried about. They are the people who are on relatively low earnings and who possibly receive tax credits or housing benefit—that seems to me to be the most important issue—during their working lives. I am sure that you all studied in great detail the appendix of chapter 7 of our first report. That described some of the things that happen to your tax credit entitlement, for instance, or your employer national insurance contributions and so on. As the money goes in, many of those people who we are worried about and who may end up on means-testing in retirement, will, at least for a significant proportion of their working lives, have been in the situation in which, unknown to them, if they had made a bigger pension contribution, their tax credits would be higher. In effect, it costs them very little to contribute a pound into their pension pot and in all the calculations that I have seen so far, I have not really seen that effect taken into account very much. We need to bear it in mind.
We also need to look at the most worrying cases. Some people on very low incomes, who do not accumulate very much, might be caught by automatic enrolment, because in a particular pay period in a good year, they come within the scope of automatic enrolment. They will come within the rules of trivial commutation: their pension pot will not build up to more than £16,000, and in fact they will be able to draw it straight back out again. The point about means-testing that it raises is less important for them.
The people whom one really needs to concentrate on are those who end up on housing benefit in retirement. The most recent estimates that I have seen from the Pensions Policy Institute, which I think you have been speaking to, give a range of between 10 and 15 per cent of future pensioners who could be affected by housing benefit. Given how steep the taper is—65 per cent.—and given that those people are likely to be on council tax benefit as well, it is hard to construct a high return from that. However, within that 10 to 15 per cent.—and the Department for Work and Pensions may have its own view on whether those are realistic figures, but they are not anything higher than that—some of those people would not have been within the scope of automatic enrolment anyway, as their incomes are rather low. Some of them are precisely the cases that Adair was describing where it looks as if their lives were going fine, but something went wrong. Perhaps they were an owner-occupier in a couple, the marriage split up and they ended up as tenants in their working lives and on housing benefit. In that situation, the state comes along and helps them out.
It would be perverse to argue in advance that people should not make preparations for supporting themselves because something terrible might happen to them, and therefore they might need help. Then again, another percentage of them will be people who will have been on means-tested benefits in their working lives—for instance, if they were tenants or on housing benefit in their working lives. For reasons that I do not quite understand, you are allowed to set half of your pension contributions against your housing benefit entitlement and so, effectively, they do not cost you nearly so much.
That leaves a residual group for whom, with very detailed financial advice, you might be able to identify that, in their working lives, they were not on housing benefit or tax credit withdrawal, but they were highly likely because of their individual circumstances to end up on housing benefit in retirement. That will be a fraction of that 10 to 15 per cent., but the difficulty is that it is a fraction that is hard to identify without incredibly detailed advice and knowledge of people’s circumstances such as what their marital position is and what inheritance they will get. It would be very hard, without spending hundreds and thousands of pounds on financial advice, to identify them.
If that is the problem and those people are so hard to identify, even within these identifiable categories of people of a particular age, gender and housing situation, it would seem a mistake to set up rules that would deny the overall advantages to the group as a whole—prospectively, we are expecting the group as a whole to get quicker returns—that the Bill and the new mechanism set out. There is an issue here in which it would be better if we had a little bit more precision on the numbers of people who fit into the different categories, but we should not run away from saying that there are some cases that you can construct hypothetically where there will be a barrier for broad groups of people.
That was a full answer, and I am grateful. It may be beyond your current brief anyway, but have you had chance to think about any of the alternatives being floated about disregards? You mentioned trivial commutation. There is a view that a disregard itself extends means-testing, but you have other things to do these days, so you might not have got into that subject.
Lord Turner: In general, we had been attracted to looking at whether if one had a greater level of detail on the problems that John mentioned, one could then address those and alleviate them by, for instance, changing the wealth disregard levels or trivial commutation levels. It should certainly be something that people continue to think about to see whether there is an acceptable cost for a package of measures that at least alleviates some of those problems.
The issue of whether you just shift the problem further up the income schedule depends crucially on whether your disregards have cliff edges or not. I think that I am right in saying that on the trivial commutation, it is not a right of everybody to take £16,000 out of their pot and non-annuitise it—the rule is up to £16,000 but when you are at £16,500 you have to annuitise it all. We have the classic problem of cliff edges— where you shift these things around and you have another point where there is a high effective withdrawal rate. That said, I still think that those issues are worth looking at.
We have had evidence over two days now. The degree of consensus has been remarkable among the TUC, the CBI, the organisations that support older people, various small businesses and engineers and others. They have broadly supported the consensus that you created as a result of your report on pensions. Therefore, it would be really useful to have on the record your view as to why it is so important that these changes need to be made. What is your view about why this is so important?
Lord Turner: Let me say something about the background of the situation that we were dealing with and why we believe that these changes are so important. The changes that we have proposed were, of course, a combination of changes to the state system and to the private system.
We discovered a situation where the state system was heading towards being more and more means tested, was over complex and was also—this is not going to change—not going to provide sufficient for what most people want in retirement. It is a baseload of anti-poverty prevention, but not as effective as it should be. That has been the case for many years in Britain. We have relied on the story that we told ourselves: it was okay to have one of the least generous state pension systems in the rich developed world, because we had the most extensive system of private pension provision. Indeed, under both Conservative and Labour Governments, the proposition was that that extensive private system would not only continue, but would actually grow, and a larger number of people would be covered by it. Probably the single most important fact in our reports was that that was simply not occurring.
The percentage of the private sector work force who have no pension provision other than that provided by the state is significant and has gone up. It has gone up from about 44 per cent. to 56 per cent. over the past 10 years. To me, that was probably the most telling fact of all those that we brought forward: 56 per cent. of private sector employees were heading towards being totally dependent upon the state in their retirement, but did not really understand what the state was going to provide for them—in some cases, that state provision was inadequate—but felt that they faced disincentives for private savings because of the means testing in the state system. That is why the core of what we proposed was at least to take the state pension system and make it less means tested and simpler and fairer than it had been in the past—there will always be debates about whether one has been able to afford to go far enough in that—but on top of it, to do something to make sure that the people who have no private pension provision on top of the state do so in future.
We became convinced that that would never occur provided you relied on an entirely voluntary and private sector solution. There were no tweaks to the regulatory regime for selling or to the level of the stakeholder cap that were going to achieve what policy had failed to achieve in the past, which was to manage to penetrate that under-penetrated sector. The only way to get to that sector was to have a system that had two elements to it. One was automatic enrolment—we had to shift the balance of inertia around, so that people had to positively decide to opt out, rather than decide to opt in. Secondly, there had to be at least the option of a national system that was going to achieve economies of scale and, therefore, low administration costs.
In relation to the Bill, what we see as absolutely essential is a belief that we need automatic enrolment and the national scheme that PADA is now charged with making available. We need both of those in order to make progress into that 56 per cent. of the private sector work force who at the moment are totally reliant on the state. That is what we see as fundamental: automatic enrolment; and making sure that there is a low-cost savings option, which means that people get to keep as much as possible of the savings that they make.
Professor Hills: We believe and continue to believe that there is a great prize here. The reforms in last year’s Act and, potentially, in this Bill, offer the opportunity to open up low-cost savings for retirement to a group of people who opportunity to open up low-cost savings for retirement to a group of people who have never had that before, including people on low to medium incomes and a large proportion of the female work force of the country. The ability to create a single lifetime account that can cope with people’s varied working lives in a way that does not put huge costs on to the system—which is what happens within the existing system—would be a great move forward. I think the motivation for the kinds of ideas that are now embodied in the Bill lies in opening up that entirely new opportunity, which this country has never had before.
Jeannie Drake: One of our conclusions was that employer engagement with pension saving would potentially be in irreversible decline if one did not go beyond the current voluntary system. That is why the contingent employer contribution is so important, because auto-enrolment and contingent employer contribution as an inseparable whole is a core element of the policy. It is also important to remember that auto-enrolment and contingent compulsion on employers needs to work, because reforms to the state system are gradually removing the earnings-related element in the state pension provision. For that reason as well, it is very important that the auto-enrolment and contingent arrangements work. A very important part of this is the issue of carers in particular, and those who participate in the labour market on a broken record of employment. There would have to be a combination of the state reforms in order that they could benefit from the auto-enrolment and the contingent employer compulsion arrangement.
May I pick up on the point that Jeannie Drake just made about employer engagement being in inevitable decline unless reforms of this nature were put forward? How does that apply to the question raised by a number of organisations in relation to this Bill about the possibility of the levelling down of existing provision?
Jeannie Drake: Levelling down has to be seen in two dimensions. A lot of the debate has been around the employer contribution level of 3 per cent., but participation levels are also important. You want the number of people, as well as the level at which people participate in pension saving. There are elements in the reform package—such as the cap and the current transfer policy that has been proposed, with a review in 2017—which are intended as measures to inhibit levelling down. It is also important to remember that even under the current voluntary regime, the evidence coming out of the Association of Consulting Actuaries is that, among those good employers that intend to continue to be good employers, the contribution rate in their DC schemes has actually risen. Without the new regime, under the voluntary system, there are some good employers that would continue to be good employers. That is certainly consistent with the DWP’s evidence on employer attitudes.
In terms of participation rates, of the 18 million to 19 million employees in the private sector, around two thirds, I think, are not currently in occupational pension schemes. There is no levelling down risk there; they are just not participating in any scheme. Of those that do participate, about 2 million are participating with an employer contribution level of below 3 per cent., so the issue of levelling down in terms of the contribution rate is for those approximately 4.5 million cases where the employer contribution is above 3 per cent.
Those employers will be in, what I call, the upper quartile of good employers anyway. They will have good employment-policy reasons to remain good employers and to consider the provision of good occupational pension provision as part of their employment package. Although it is necessary, as set out in the Bill, that one of principles is that the reforms should not undermine good occupational pension provision, which was always the intention of the Pension Commission’s recommendations, you cannot eliminate all elements of potential levelling down in part. However, those are not reasons in themselves for not going ahead with the reforms.
Lord Turner: I shall add to that to reinforce what Jeannie said. We must recognise that there is at least some danger in some sectors of levelling down, but I think that it is relatively small. The net effect of what is being proposed in the Bill will result in a levelling up. One must reiterate the point that 56 per cent. of private-sector employers have, as it were, been levelled down to zero? For them, the availability of a contingent compulsion on their employer to put in 3 per cent., as long they accept automatic enrolment, will represent a significant increase. There is a large segment in which we will definitely have levelling up, not levelling down.
Secondly, as Jeannie suggested, there is a segment of the private-sector work force where I do not think that there will be a levelling down. Large, well-known companies, that are household names, competing for higher skilled people, will not suddenly say, “Well, the minimum national standard is 3 per cent., so we will come down to that”. They have positions in the labour market that are not compatible with that. I am convinced that there will be a large number of large companies that will continue to provide, in some form or another, pensions that are much better than the minimum standard.
There might well be a danger of levelling down among the sort of people who have a contribution of 4 or 5 per cent. in a medium-sized firm that sees the new standard and says, “That is what we will go for.” It is that intermediate slice—not those providing zero, where it is clearly levelling up, or the large slice of higher-prestige companies. However, there is probably an intermediate slice where there is a danger of some levelling-down. Having said that, those are the people who, left alone, might level down to zero in the future anyway. We have seen a gradual drift among those small and medium enterprises away from the idea that they should provide any pension at all. One could well see that in the future.
Certainly, when we did our focus groups of small and medium enterprises, a lot of them said, “Look, we don’t think that we get bang for our buck from the pension provision that we provide. We think that our employees might prefer straight cash. So although we are providing something at the moment, we might well not do so in five years.” I do not think that it would be right to deny that there is some danger of levelling down, but it should not be overstated. The question is what we do to minimise that risk. We must try to remind people of what a very sensible thing it is to get paid in pension contributions. Looking at the level of relief to the employee and employer combined, including the relief from employer’s national insurance—an issue not often focused on—it is clear that they are a very tax and national insurance-efficient way in which to pay people. We need to try and get that message across in order to minimise the danger of further levelling down. Overall, however, the Bill will produce far more levelling up from zero than levelling down to some new minimum standard.
Professor Hills: I simply endorse the point made about the reasons why paying people through pension contributions is a very effective way of remunerating them, which the larger and better-informed employers know, which are reasons why there would be no reason for them to go downwards, given that they have already done those calculations.
However, it will depend on what happens over the next four years. The climate of opinion, both for employees and employers, will determine a lot of those initial reactions. The Committee will have seen the initial research that the Department for Work and Pensions has done on immediate employer reactions to this, which as a starting point is relatively encouraging. The immediate reaction of the majority of employers is not to say, “Oh, well, in that case I am going to level down and get out of what I am doing at the moment.” If anything, it is slightly the reverse.
That is just the beginning of the process, but it does suggest that, as we know, that this is an area where people’s knowledge is very low, and that a potential effect of the debate that is going to occur over the next four years, assuming that the Bill is passed, is that there will be much more attention to employer responsibilities. Some of them may begin to realise that these arrangements are very much in their interests, and that could even lead to some levelling up among some of the people who are sensing a movement up, among the people who are already there. I would be cautiously optimistic, although I agree very much with Adair that that is not to say that there is not a danger there.
Lord Turner: They will predominantly be employed by small and medium businesses. I do not have the precise figures here, though they are in the background in the report. It will be small businesses in the sense of people who employ five, 10, 15 or 20 people, but it will also be lots of people in companies employing 250, some of which provide nothing. Of course, it will also be people in large companies who have chosen not to be in schemes that are available to them. You will find those people in companies of all sizes, but the percentage gets very high once you get down to small enterprises, say below 50 employees.
I have to admit that my knowledge of pension policy has all been gained during the past week. I shall concentrate on the mechanics. What are your greatest concerns about getting small business to understand? We know how important it is to all of them that their employees have the chance, but what concerns you most? You said that you have focus groups from small businesses. What did they say to you?
Lord Turner: We held a number of focus groups with individuals as individuals and also with some SMEs. We were trying to understand their attitude towards providing pensions. What transpired is that there is a large slice of smaller enterprises who do not think it is any part of their business, to be blunt. That is why previous attempts to make progress in that sector—for instance, through the stakeholder proposals—were not going to work. Essentially, there is a segment, however easy you make it and however much you try to encourage it, that does not think that it is part of their business. They are companies where there is no HR department. The head of HR is the finance director, is the chief executive, is the owner. He or she has a lot of other things going on in life, and one of the things that they do not want to have to deal with is pensions.
Of course, in that sector you will also find a lot of people who say, “I will find it difficult to afford the 3 per cent. employee contribution.” But we ended up believing that it is affordable provided it is brought in at an appropriate time, and that there is a segment of small and medium enterprises that will say, “Yup, this is the way to go. What we want is somebody to tell us what to do because we do not have the professional expertise to make a highly tailored decision about what is appropriate for our workforce.” So we have concluded that there is a segment of companies where you have to have contingent employer contribution, auto-enrolment and an easy-to-use national scheme because if you do not have those three things they will not provide pensions.
Have you thought about the mechanics of it? We talked before you started to give evidence about how this will have to be done not from central London but on a regional or even an area basis. Short of going in and sending people to jail—it does not matter what the law is—what is needed is constructive help from people who understand how the system has to work. I asked the employers’ representatives and they were reluctant to be involved in giving anything more than straightforward information, let alone in helping practically with the smaller companies. Who is going to do that?
Lord Turner: There are two points there. First, many small and medium enterprises do not want to be and will not be involved in the job of advising on pension provision. They quite rightly recognise that they have no particular competence to do that; they do not want the liability and they want someone else to organise them. Their attitude to pensions is that with the Pensions Bill they will have to make a 3 per cent. contribution—hopefully more—but that is it, it is not for them to administer it. In a sense that is sensible. What that means is that one of the key jobs of PADA is to design a system which, in terms of the way in which the paperwork flows and the money flows, is as simple as possible for small and medium enterprises.
I am sure that one of the key concerns is “Is this thing going to be administratively simple enough to work?”. I would be surprised if you had not heard that if you have listened to the Federation of Small Businesses and others. We believe that it can be made administratively simple, provided there is a clearly defined set of processes. But the core will have to be that the flow of any generic advice will be directly from the pension provider—in many cases the national scheme pension provider—to the individual. It will not typically flow through the employer because it is simply something that they do not want to be involved in, and they know that they have no particular competence to be involved in it.
I would first like to say to Professor John Hills that I am sure that I did study chapter 7 of his report but I cannot entirely recall right now what it said.
I want to take you back to your initial conversation on the issue of means-tested benefits and whether it is worth people saving or not. It flows on in a sense from the answers that Lord Turner gave to Alan Keen. One thing we are trying to grapple with is a scenario in which the employer quite rightly will not want to give advice—I think we are likely to conclude that that must be the case—but individuals will nevertheless have to make judgments based on the information provided. That can only be done in a generic information sense.
Among some of the earlier witnesses—the elderly charities in particular, on Tuesday afternoon if I remember correctly—there was concern that it has to be simple and straightforward, yet the questions in people’s minds are complex. You both referred to relatively low earnings, very low incomes. What do we mean by that? We will have to produce some numbers. Everyone who has been before us—the Minister is the only one left—has said that they think the scheme can work. He must be very happy about that.
It really would be a turn-up for the books if the Minister suddenly said, “We think that this is a lot of nonsense”. He will not say that. Everybody supports it. I said on Second Reading that my understanding of the industry is that people’s goodwill towards it is admirable, but is it your view that we can devise a system of generic information, which is not a too elaborate Christmas tree of questions by which people can judge whether the scheme is for them or not? There will be some for whom it clearly will not be.
You mentioned housing benefit. For a person aged 62, who is retiring in three years’ time and is already on housing benefit and who does not own his own house and is on a very low income, the answer is clearly no. However, at the other end there will be people—I appreciate that my question has been long, Sir Nicholas. This is my final comment—
Professor Hills: You have made an important distinction between generic information and detailed advice. The secret of much of this is that the moment we get into anything that suggests that individuals should seek a detailed, financial health check that would be hard and expensive to carry out, all of the advantages that we are trying to achieve of opening up a low-cost system to people would be lost.
You are then into what you can achieve by way of a huge improvement in the level of overall public understanding of financial matters in general, and pensions in particular. The provisions of the Bill will bring to a head something that was, in my view, a national issue anyway. When asked regularly, “How would you describe your knowledge of pensions?”, one of the things that struck me as we at the commission did our work was that the number of people who said in response each year, “little or none” had increased. It is not an area in which many people think themselves expert. Moreover, it is possible that some people who think themselves expert are not. The effect of that has been to reinforce the inertia that has kept people out of making pension provision. There are a lot of other things that people would prefer to think about than the niceties of making pension contributions.
In order not only to set up the scheme, but make it one that is popular and seen as a success, and something that, by and large, the word on the street is that people would be silly not to be part of it, there has to be a significant improvement in people’s understanding of the basics of what happens when they contribute to a pension, such as how they are likely to live and the different resources that are available to them.
I would not underplay the difficulty of the overall task. Such matters would have to be done by the time the scheme starts, but we should have been doing them in any case. Within that, the guidelines of circumstances in which people might want to think carefully about opting out would have to be quite broad. By the time that we start giving people detailed ready-reckoners and asking, “How much do you expect to inherit from Aunt Madge? What are the precise chances of your marriage breaking up?”, we will have lost it. There may be some groups to whom it could be said, “Think very carefully if you are in such a situation” but, going back to my earlier answer, those groups are probably rather restricted.
Lord Turner: Let us consider helping those who might want to stay out to know that they should stay out. It will also be important to establish the fact that a huge swathe of people should obviously stay in. For people on average, not low, earnings and who own a house, the likelihood that the system is bad for them is very low indeed. We have to create a realisation that many people, not just on low incomes, but bang in the middle of the income distribution, who are not saving for a pension. It is absolutely clear that it makes sense to do so.
Jeannie Drake: One small point to add—it is important that it is run on a generic information basis. We not only want the personal accounts system to work, we want good occupational pension provision to work as well. I think that 25 per cent. or so of current occupational trust-based schemes operate on an auto-enrolment basis. You have to have a generic information arrangement that employers are happy with. They will not move into complicated advice systems. Whatever the approach on generic information, it has to work across all occupational pension schemes, not solely personal accounts.
You stress, as many of our witnesses have, a need for simplicity in the administration for this to work. I understand that. We heard from some witnesses yesterday that many of us have “untidy lives”—people come in and out of work, they may be self-employed for a while, or they may have some previous pension provision, then perhaps that will stop and they will go into personal accounts—for example, what will happen to that? It struck me that there are five years before the measure comes in. I am sure that the three of you would want people to make provision now, if they are not making provision. Mindful of the need for simplicity, which I understand, what do you say about dealing with those issues? Following on from that, you were talking about the importance of people understanding the importance of pension saving. I agree with you. Do you think that part of achieving that might be some sort of annual statement showing the value of your employers’ contributions year-by-year?
Lord Turner: On the second question, the answer is yes. We said in the report that within the personal accounts system—within the national scheme—one should be aiming for an annual statement. We were very struck when we visited Sweden with what is called the “orange envelope”. The statements all go out at the same time of year, which manages to create a national discussion in the financial pages of the press about how well the pensions are going. It is quite a model; you see both how much money you have and a series of estimates of what that might buy you as an annuity—on certain assumptions as to the rate of return—at different ages. It is a very useful communication for people to understand when they get to their late 50s and they think about the retirement age how very different their pension will be if they retire at 63, 65 or 67. The annuity rates move quite dramatically as you make those different decisions. There are ways of making the communication helpful in educating people. Of course, it will not be as simple as it is in Sweden, because there it is all going through one national scheme, therefore that statement is the person’s consolidated account. We will not have that in the UK. Frankly, it is a trade off between the desire to keep flourishing private pension provision going, so that employers and individuals can be in something other than the national scheme and not interfering with the existing provision. That is a good objective, but clearly has the downside that somebody who goes through a set of employers throughout life may end up with several different pots of money, rather than one. I think I am right in saying that one of the crucial issues in the Bill is what exactly are the rules about the transfer of existing pots of money from one scheme into another to enable people to consolidate their pension pot. That issue is still open, because the Bill establishes the power of the Secretary of State to decide those things. That is an important remaining issue. I have a preference for allowing as much consolidation of pension pots as possible. I speak as someone who now has about six different pots of pension provision, and I am still trying to persuade one or other of those groups of people to accept the transfer from all the others so that I do not have six bits of paper. It is an important issue, and on whether we can make it easier for people to consolidate their pension pots, the details are yet to be decided.
Professor Hills: To reinforce your first point about keeping it simple, I have a feeling that as the Bill progresses, you and your colleagues in Parliament will all have particular enthusiasms for additions to the general provisions in order to help people in particular circumstances or to meet some particular need. I urge you all to be very careful about that, and to avoid, so far as you can, building bells and whistles and extra provisions into what is intended to be a simple, low-cost system of savings.
You will have heard separately from the Personal Accounts Delivery Authority, and I am sure that one of its concerns is to get the legislation set up so that it can be launched with the most straightforward administration. That will be a big task in itself, and what may seem like small, incidental additions could rapidly create the need for individual interaction such as telephone calls for people to check their position, which would rapidly increase the cost base of the people contracted to carry out the work. So, what you said at the beginning was absolutely right.
I shall try to be brief. We have heard from a number of witnesses about the different levels of risk, as they see it, in levelling down, and you gave a formidable presentation about why you thought that the risk would be lower rather than higher, as some witnesses said. The ACA, when it gave evidence, said that it had a real fear about the issue. Other than what you have said about the Bill, which should go some way to reducing the opportunities for employers to level down, have you looked at the ACA’s proposal for conditionally indexed schemes? Would that be another method of reducing the risk of levelling down further? Should it be included in the Bill?
Lord Turner: Let me comment, and then I suspect Jeannie Drake may want to say something, too.
The issue that the ACA is dealing with is not closely related to levelling down per se, because we are primarily dealing with larger companies that have DB schemes, and there is a danger that when they think about reforming them to make them affordable, and the risk acceptable to the company, they will move entirely to a DC scheme without thinking about the intermediate. The vast majority of companies that do so will not level down to 3 per cent. They are the sort of companies that take an existing DB scheme, a final salary scheme, which costs them 20 per cent. of salary, and put in a DC scheme with perhaps 8, 10, 12 per cent.—but something above the minimum.
The issue is less about levelling down to the national minimum contribution, and more to do with risk-sharing. Those companies feel that they have a choice between two states of the world: one is to continue to provide salary-related schemes, DB schemes, in which almost all risk, including the longevity, investment and salary progression risk of the individuals, resides with the sponsoring employer, and none resides with the employee; the other is to close the scheme and open up a DC scheme in which almost all risk resides with the employee. Even if the contribution is reasonably generous, for example 10 per cent., the risks have nevertheless been shifted.
The arena that the ACA is talking about here is not small and medium-sized enterprises. These are large household names. What is the nature of their provision? Do they go from very generous and very risky to reasonably generous but with all the risk on the employees’ DC. Therefore, can we do things to create more intermediate options, such as hybrid risk-sharing techniques? That is not an issue on which the commission took a collective view. John and Jeannie may want to comment on that.
From a personal point of view, I am sympathetic to the ACA’s suggestions in this respect. It strikes me that we have a fairly odd form of regulation at the moment. There is no requirement on an employer to provide a defined benefit scheme, but if they provide such a scheme, it has to be one in which pretty much all the risk resides with the employer. We have made it difficult for them to provide a DB scheme that shares the risks but leaves it open for them to close the existing DB scheme and open one in which all the risks are shifted to an employee. There is something prima facie slightly illogical about that form of regulation. If it was the case that we had a compulsory requirement for DB schemes, you might significantly regulate how good that DB scheme should be. If there is no requirement for an employer to provide anything, it is slightly odd to put too much of a regulatory burden on that.
Lord Turner: I think that it is something that should be looked at. I do not think that it will produce a revolution, but without the creation of hybrid risk-sharing schemes, the trend of DB provision in the private sector will be either a slow or a rapid decline, and the legitimate debate is between these. There is at least a chance that we could see the development of intelligent risk-sharing approaches. I would certainly look at ways that might make that easier.
Jeannie Drake: My immediate point on the conditional indexing is that it should be looked at rather than put in the current Bill. That is where my point of view differs. Where pension provision in the private sector is increasingly DC—there are fewer than 1 million active members of open DB schemes in the private sector and therefore the risk is shifted to the individual—there is merit in looking at, and facilitating, ways by which employers can re-engage with risk sharing. It is very important to be conscious of the action and the effect in the sense that any measures that are introduced should have the effect of increasing new forms of risk sharing and not simply accelerating the decline in the current level or nature of defined benefit provision because the existing legislation and regulation already allows various means of risk-sharing. If you look at the railway pension scheme and British Aerospace’s scheme, risk-sharing mechanisms are already in place.
On the railway pension scheme, it is sharing the total cost of the combined benefit pension provision. In British Aerospace’s scheme, it is in relation to increasing life expectancy. Therefore, it is not that there is not a facility, and that it is not already being used by some companies to do more innovative forms of risk-sharing. However, I would not want to see a specific legislative provision on conditional indexing at this stage. It would be better if there was a comprehensive look at the issues of risk-sharing. For example, to look at the better models and at what would better motivate behaviour. When you are introducing risk-sharing into a defined benefit scheme, you have to be careful. There is a DC world and a DB world. In risk-sharing in a DB world, you have to be careful what risk you are putting on the active members in relation to pensioners and deferred liabilities, which is an issue I found when I looked at the railway pension scheme. It is not an argument against the principle of looking at innovative ways, it is about asking whether there is a need to rush on this one specific measure at this point without taking a measured look. It is not that there are not options open to employers who do want to risk-share.
There are also other considerations that should be reflected upon. You have to think about what it means for transfer values of conditional indexing and at least reflect on what it means for the pension protection regime. I would want to give those involved in that the opportunity to ask about giving protections on defined benefit provision. It is not an argument against the principle of risk-sharing or considering whether it has merit, it is asking why you would to take one particular provision and make allowance for it in the Bill, when there are already some in place that employers are using. I would counsel standing back and considering what are the most effective means and what will have the greatest motivational effect on employers.
I have allowed slightly more than five minutes—perhaps mostly for my benefit—which is using the huge authority that rests in the person of the Chairman.
We now come to the last part of our evidence taking today. I say to our witnesses that I understand that there is an agreement across the Committee—all the Whips have agreed—that we might finish a little earlier than is scheduled, but that is up to the Government Whip, who may seek to catch—[Interruption.] He is here. It is up to the Government Whip, who may seek to catch my eye to move a motion. If he does, I shall give the matter proper consideration before I put it to the Committee.
We are very pleased to have the Minister of State, Department for Work and Pensions, Mr. Mike O’Brien, to give evidence, together with Caroline Rookes, director of private pensions in the Department for Work and Pensions. I welcome you. Nigel Waterson, the shadow Secretary of State for these matters, will put the first question.
Clearly, Government members of the Committee do not want to ruin their career prospects by quizzing the Minister, so it falls to us to start the ball rolling. Could I begin with a couple of questions? I have four points in all, if that helps, Sir Nicholas. First, how confident are you, Mike, that personal accounts will be up and running in 2012? You have made it clear you have given very bullish instructions to Tim and his colleagues at PADA, but how confident are you really that it can all be done in time, on the basis of the advice you are getting?
Mr. O’Brien: We have four years to deliver this, and the advice I am getting at the moment is that that is entirely achievable. If something changes in the future, obviously we will look at that advice, but the advice I have at the moment is that by 2012 we will be in a position to deliver personal accounts.
Thank you. Do you accept that when the dust has settled and the smoke has cleared, if, as well as an increase in the number of savers, there is not an overall increase in the amount of savings in this country, personal accounts will have been a failure?
Mr. O’Brien: The objective is to get more people saving, so that they are making proper provision for their retirement. We are talking about large numbers of people. There are various figures, but we heard from the Pensions Commission that up to 12 million people are doing inadequate or no effective saving for their retirement. We want more people to make that provision, so that they have the opportunity of a better retirement. That is the whole purpose of the core of the Bill. Our aim is that we should have not only more people saving, but a very substantial increase in the amount of saving. Our estimates are up to £10 million. Indeed, it is not just our estimates. The PPI—the Pensions Policy Institute—has suggested it could be up to £10 billion of extra saving.
I have two related points. First, why is the contribution cap figure of £3,600, adjusted for inflation, not in the Bill? Secondly, do you accept the broad principle, in setting up PADA and its successor body, of a level playing field and no public subsidy?
Mr. O’Brien: First, £3,600 is a 2005 figure, which will be annually uprated as we deal with issues in terms of the economy, inflation and other factors. Therefore, we want to ensure that we do not enshrine in statute something that we then plan to amend year on year. The figure that we in due course use, in 2012, will be a figure that we will have to determine, given the circumstances that arise during the next four years. For those reasons, enshrining that figure in legislation would not be wise, but we would intend to say that very clearly the policy is that that is the figure; we do not intend to increase it other than by the increases in the level of inflation. Your second question was about a level playing field.
Mr. O'Brien: In terms of public subsidy, our aim is that personal accounts should operate in the same way as most other pension schemes. They would not have a level of public subsidy which would be unacceptable. Indeed, it is the role of the members to pay for the operation of that pension scheme. We have been clear in saying that we believe we can get the costs of running the scheme down to 0.3 per cent., although I made it clear in my evidence to the Select Committee that it may well be 0.5 per cent., at least initially. We think that we can keep the costs low and that the costs of setting up the scheme could be met primarily from the private sector. Obviously, there are ways in which schemes are able to get money from the private sector to set up those schemes.
We have made provision, particularly in terms of PADA, which is essentially an advisory body and a preparation body. It will have a termination date, and will not actually run personal accounts. Personal accounts will be run by the personal accounts board, under an NDPB. PADA will therefore have a limited life span to just beyond 2012. PADA is receiving public subsidy and is responsible for the set-up costs of working out what the investment strategy will be and identifying how computer systems will be set up and how information will be dealt with. I am very clear that it is publicly subsidised because this is a public policy issue. PADA is responsible for advising Ministers on the set-up of the organisation, and it is right that there should be a public subsidy for PADA. Once we move into the new system, our aim is that it should operate on a self-funding basis.
Just to clarify, am I right in saying that in the last legislation, we specified a figure of £23 million for PADA? I think that is right, from memory. Is there any suggestion that that amount will be increased between now and PADA’s life coming to its natural end?
Mr. O'Brien: We are not planning to increase it at the moment; it is about £21 million for 2007-08. We will look at what costs PADA will need in the future, and it has an ability to raise funds if it needs to do so. PADA will have important obligations in terms of setting up a structure, and we want to ensure that it can carry out that role effectively. I want to make sure that once we get beyond that and into the personal accounts board and having an NDPB running a pensions scheme, we will have an organisation that is primarily self-funding.
We can return to this issue, so I will leave it there. I have one final question. If the ACA is right that it could make a difference to a number of DB schemes to bring in the flexibilities involved in risk sharing, such as conditional indexation, and if all this is trying to do is provide a possible route for people that is not obligatory and that they can choose for commercial reasons, why do I get the feeling that you and the Government as a whole are so unenthusiastic about it?
Mr. O'Brien: I think you have the wrong feeling. We are very interested in those ideas. The question is not whether we are interested in them, but whether they are fully developed enough to form part of the Bill. I share the views of the Pensions Commission—of both Jeannie Drake and Adair Turner. Adair said that he thought the ideas very promising. We need to explore the detail of them, but Jeannie added the caveat, which was well worth making, that although they are interesting, there are already shared risk opportunities out there for various pensions schemes. Before we start to legislate, let us look at some of the issues in relation to them, identify the better schemes and identify some of the legal changes that need to be made. The advice I have received is that the ACA are a bit optimistic in saying that all this requires is a few amendments. Actually, this may well be quite a significant venture into rewriting some of the pension legislation. If we must do that, then it is best that we do it properly, investigate these issues and see whether there are particular things we need to do and the best way of doing them.
I would want not only to have some analysis done of this, but also to have a period of consultation and discussion about exactly how it would be done. I do not think you are right in saying that we are unenthusiastic. We think this is a valuable idea which needs to be explored further. We would want to explore it further with the various stakeholders in the pensions industry, identify what needs to be done and see whether there is an opportunity for legislation some time in the future. I cannot give a definite view about when that would be, but I heard Ian Farr’s suggestion that it ought to be relatively soon. I cannot give a guarantee.
Jeannie Drake from the Pensions Commission mentioned at least two other schemes—the rail scheme and the British Aerospace scheme—that have found other ways of doing this. Is it feasible to ask your Department to try to publicise the information as to how this can be done so that we can then have a suite of ideas on which to consult, which the TUC and the elderly charities asked for on Tuesday? I would add that I personally think the issue is urgent, because the number of defined-benefit scheme members, particularly new members, is fast diminishing.
Mr. O'Brien: With respect, it will not be us—the Committee—that consult. I would want to look at this in good time. Officials are talking to the Pension Protection Fund and other stakeholders to see what the implications of this would be, as it might well have a significant impact in relation to the PPF and its levy payers. We want to work through these ideas and see what their significance is. It may well be that in a few months we and the various stakeholders can come up with a structured examination of them. I do not want to commit to a short time scale, because there are issues here. Most importantly there are quite complex—potentially very complex—legal issues that need to be explored properly. Some of those issues are quite sensitive. Let me put it as delicately as I can. Some people have suggested that some of the ways in which the current shared-risk systems operate have not yet been tested in the courts, and it may be that we have to look at how the courts might respond. Then the question is how we need to legislate to ensure that they respond in an encouraging way.
In the evidence we have heard, there seems to have been agreement that there are—at the very least—some people for whom it may not pay to save in personal accounts. What estimates has the Department made about how many people this might apply to? Part of the Minister’s reply will be that that is very unpredictable; has he identified particular groups that this particularly applies to?
Mr. O'Brien: I associate myself very much with the comments made by the Pensions Commission in early evidence and not just with that body, but with Dick Saunders of the Investment Management Association, who said:
“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.”——[Official Report, Pensions Public Bill Committee, Tuesday 15 January; c. 27.]
I agree with that. Mr. Saunders gave a particular example, which I will not repeat, but it is worth refreshing your memory about it, Danny, because we are looking at the vast majority of people benefiting: that is the result of our work on this. Our figures, in terms of our research, are slightly lower than the Pension Policy Institute’s in respect of those who might not.
I associate myself very strongly with the evidence that we heard from Professor John Hills, who has probably done more examination of the issue in this country than almost anyone else. He said essentially, if I can paraphrase it, that we may find in due course, at the end of the process, that there are some on pension credit who do not realise the return that they would have hoped for, but it is difficult to predict who those people will be. It is possible that some who are older and are automatically enrolled in a pension scheme might develop a pension pot that is quite small and therefore would be better off on pension credit, but they could, by and large, take the benefit of trivial commutation, which would enable them to take a pension pot out—not only their contribution but the taxpayer’s contribution and the employer’s contribution—up to £16,000 and, in relation to pension credit, there is a disregard of £6,000 on that. That would probably be the way in which they would deal with it if they were to lose out.
The difficulties of predicting in terms of much younger people were set out expertly by John Hills. You could probably have some element of prediction if you spent tens of thousands of pounds individually, talking to each individual and trying to predict what would happen. But this is not practical, because the Pension Commission has also said that the key to making this a success is that it is simple and does not have to have vast amounts of money spent on giving advice to individuals.
I shall mention how I envisage this operating in terms of advice, just to move on so that you can look at how somebody would get advice. People would be dealt with either through personal accounts or through one of the current pension providers. The employer would say, “I want to have a pension scheme.” Many employers will decide to go to a private sector provider, as they do now, and others will decide to go to personal accounts. They now provide information in relation to the product that they have. Personal accounts would do the same thing. That would be very basic information. Then there would be a referral to a website or whatever facilities that they have to give advice. A person who has a particular issue would then be able to get some basic information, access to further information and, if needed, access to some generic advice. But we are dealing with such a basic, simple product that, providing we keep it simple, we can ensure that there is no need for the sort of expensive detailed advice that would really seriously damage personal accounts, as Professor John Hills was talking about.
The circumstances of many of those who we are talking about here are difficult to predict. We are going to do research on what information people will need. We will have advice from PADA in terms of what advice it intends to provide on personal accounts and, obviously, the various insurance companies and other pension providers will be providing information on their own products. That is the basis upon which people could make a decision about whether they want to remain in an auto-enrolled system, whether personal accounts or another system, or to opt out.
The point that concerns me is about the advice, on to which you rightly moved the conversation. Despite what has been said, it remains unclear what range of advice will be available and of what the generic advice will consist. I agree that the scheme needs to be kept simple and that the involvement of PADA, and of the Personal Accounts Board, in due course, has to be kept to a minimum, for cost reasons.
Various proposals are on the table, however, including those being considered by the Thoresen review, for wider-ranging advice, not just on pensions, but on wider financial matter as well. Do not forget that someone’s decision about whether to enrol at a particular time might be based on their wider financial circumstances, such as, for instance, large credit card debts. I am looking for a sense from you that broader thinking is going on, not about advice provided by PADA—your point on that is correct—but on wider advice that would involve more than a website providing some information. People should have access to a system, whereby a conversation can take place over the phone or, when necessary, face-to-face—it does not necessarily have to involve hugely expensive personal financial advisors. That could be done through voluntary organisations. It would allow people to look into it in more depth and to make an informed decision. Simply providing information, however detailed, via a website, would not enable them to do that.
Mr. O'Brien: I accept that. We need to return to the important distinction between information and advice, although it is not always easy to make it in practice. However, it is important that we do so for the purposes of this discussion. We do not expect the Personal Accounts Board to give advice; we expect it to give information. There are sources from which people can get a degree of person-to-person advice about whether to do something. The Pensions Advisory Service can provide a degree of advice, and the citizens advice bureau has financial advisors. Otto Thoresen is looking, on the Government’s behalf, at how we can best provide generic financial advice, and we expect his report later this year. It will enable us to take this discussion much further forward and to look at how we can provide the level of reassurance that you seek for people who might be concerned about whether to opt in or out.
Mr. O'Brien: We considered that and took the view that it would probably be burdensome, because some people might choose to make alternative provision or to invest in property and risk the property market. Others might have made other personal provision and want to have a personal pension, rather than an occupational pension. When the Pensions Commission looked at this, it took the view that automatic enrolment would provide automatic entry into an occupational pension scheme and the ability to opt out, which would provide an element of choice. Nobody would be forced into it. They would not have to remain, although inertia to some extent will play a part; some will come in and just not bother to opt out. However, that happens at the moment.
On my conversation with Danny Alexander and the issue of forcing people in, I should mention that currently many people are automatically enrolled anyway. One in six people in occupational pensions schemes today are automatically enrolled. Those are often some of the better schemes, although they do not include just the well-provided ones. Some pension schemes for people who are relatively low-paid, such as some people who work at Tesco, are automatically enrolled into a pension scheme and able to make contributions. It is possible that some of those will end up in pension credit, but most of them do not and believe that they will benefit from being involved in the scheme.
It is not right for the Government to give a guarantee. It is not right that the Government should say that everyone, whenever they get involved in a pension, is always going to be compensated by the Government. It is an investment and it has some investment risks attached to it, and people know that, but it is right that the Government provide some sort of safety net for them.
In terms of forcing people into such a scheme, I do not think that that is desirable or the way forward. Certainly, that is not where the consensus that we have developed over recent years lies, and it is a remarkable consensus—you have seen it in the evidence that you have heard over the last couple of days. We have everyone from CBI to the TUC to organisations that represent the elderly to small businesses all taking the view that we need to move forward with these sorts of provisions. Part of that consensus is that we have automatic enrolment and that we should not move into a position of forcing people into pensions.
In answering Nigel’s point earlier, you quoted the Pensions Policy Institute on its more favourable projections that there could be £10 billion extra going into pension funds. At the same evidence-taking sitting, it also said that its worst-case scenario is that £10 billion less is going into pension funds because of levelling-down. Would you still consider it a success because more people have some form of private saving, even if there was less money going in, or do you think that that would be a problem?
Mr. O'Brien: The core objective is to get more people saving. What do you define as a success? Our success would be the best possible outcome, but there are various variations in terms of success. We want to see more people saving and increased amounts going into saving that would benefit investment more broadly, but what we most want to do is ensure that in years to come, people who retire, who are often those today who are on low and moderate incomes who have not got a pension provision, will in future have made a pension provision for themselves. It is important that we get more people investing and that we get towards the higher range of that figure, but our projections have been from about 4 million to 10 million people.
The optimal sums in terms of annual extra saving would be about £10 billion extra. That would be a good level of savings. In terms of the lower figures, we do not think that it is likely that there will be any reduction in levels of saving. On the contrary, we are having large numbers of extra people saving. The only circumstance in which the most pessimistic and most unlikely scenarios you describe would happen is if there was such a degree of levelling down, as has been discussed in the previous evidence, that we would see more people saving but overall saving less. The chances of that happening on the level that you suggest are remote. We have to work on what is likely. Many things are possible and there are things that are likely. It is more than likely, it is probable, that we will see a significant success as a result of this.
We all hope so, but sometimes we cannot always predict. We had a little bit of discussion in the evidence-taking sitting about the deadweight of people who are auto-enrolled but who are migrant workers. Is it the view of your Department that this is something that we are just going to have to put up with? There could be an awful lot of people who were auto-enrolled who then go and live in another country because we have a significant number of migrant workers in the UK. It would clearly add to the administration cost, but is that something that we have to put up with in order to have the advantages of auto-enrolment, or is there a way forward in the future?
Mr. O'Brien: It depends on whether they are small sums, and how significant they are. Some of them may be quite considerable, it depends what pension scheme they are in. The assumption that your question makes is that those sums will be in personal accounts. That may not necessarily be the case; it is not now. There are people saving in private pension schemes now, whether in trust-based schemes or insurance-based schemes, who are investing in those UK schemes. That money in turn is invested by UK companies and, not always but very often, our industries benefit. Investments tend to be made internationally in the global economy and often our economy will benefit from that and the money will come back.
There will be administration costs but, in terms of personal accounts, those costs will be very low—about 0.3 per cent. in the long term. In terms of the evidence that you have already heard, particularly from business organisations—John Cridland from the CBI gave evidence earlier—the issue of how much the administration costs is not the biggest problem. The issue is rather the 3 per cent. investment or, in the case of many businesses, a much higher contribution than that. Some employers make quite substantial contributions, well above 3 per cent. Many current employers employ migrant workers, who may well be in highly-skilled industries—computing and elsewhere—and they may well be making much higher contributions than that to their employees’ pension scheme. Those contributions are going into UK-based pension schemes and being invested on. It is possible to over-worry about that problem.
It might be the case that in due course, the issue of no transfers in and no transfers out of personal accounts could be looked at again. We believe that the whole issue can be reviewed in 2017. At the moment a number of stakeholders, particularly some of the insurance companies, take the view that it would be better not to have transfers in and out. There is some concern that transfers in and out personal accounts might be a problem. Therefore, as part of the settlement, as a compromise, we have said no transfers in, no transfers out. However, that starts up in 2012 and by 2017 it will have been operating for five years. People know what is going to happen and there is some evidence from a number of the people that we have heard recently, which suggests that, particularly if there are small pension pots—Tim Jones made this point—it may well be that some people would wish to transfer that elsewhere. I am not unsympathetic to that, but the time to review it is in 2017, not now. We had a consultation, we talked to large areas of industry and more broadly with the stakeholders, and we have a broad-based agreement which, as you have seen, is enshrined in the Bill. That is part of the way forward. In 2017 we may look at that again or we may not, but it will not be a decision for us during the course of the Bill.
Mr. O'Brien: We have said that it will not be exactly the same as PPF, but it will provide similar benefits to those 140,000 people who lost out. Just before Christmas we were delighted to announce that we were able to deliver justice for them and we will try to do that as quickly as possible. There are some issues that I want to put into the Bill, but what I have sought to do, and I will look for the co-operation of the Opposition in this, is to put in regulation where I can. With the co-operation of Members of the House we should be able to get regulations through more quickly. I want to bring forward regulations to enable payments to commence at 90 per cent.,—which is one of the key things—from the normal retirement age rather than 65. Some of them have an earlier retirement age. That should be brought through as quickly as possible, and I propose to bring forward the draft regulations in March. Normally I would need to have a 12-week consultation on that. I propose a two-week consultation period, and I shall look for the views of the Opposition Members and others. There is broad consensus that we should have the change, and I hope to bring regulations to the House in early May with a view to getting them through by the Whitsun recess, so that we can then gear up our officials to start payments. That will be the first important instalment.
I shall have to bring forward more detailed regulations over a longer time, because they will be much more complex and will require further consultation. I want to put a number of amendments into primary legislation. None will be substantial, but probably the most important one concerns the definition of a qualifying member of the financial assistance scheme. That will be important for identifying people in underfunded schemes, and the assets that we will take over. Trustees will have to agree that we take over their assets.
Lest anyone is of the view that no one loses, some accountants and lawyers who advise various pension schemes who will not receive the funding that they would otherwise have received may sometimes be tempted to give advice to trustees and say, “Well, for technical reasons, you don’t want to do it this way.” We need to reassure trustees and to give confidence to those who make the transfers that they can make them and that those in their schemes will benefit.
A number of schemes have a problem. One that springs to mind is Desmonds in Northern Ireland, the difficulty being that it does not fall within the PPF criteria or that of the financial assistance scheme. We may need to table amendments to clarify that, but I shall meet Mark Durkan and others to talk through some of the issues. They have asked for a meeting, and I hope to be able to give them some clarity on how we move forward. I may be able to bring forward legislation to deal with that in terms of the financial assistance scheme also.
That is very clear. So we can tell the people who know that they are in the financial assistance scheme that if they are due to retire at their scheme retirement age by June, they will have their money.
Mr. O'Brien: Yes and no. As with all things associated with FAS, the matter is more complicated. Last September, I said that trustees could make payments from the point at which someone retired from their scheme. Some trustees have taken advantage of that, but not many. We must give them some encouragement to make payments straight away, otherwise people will not get their money. I want them to have their money, and we may have to provide some legislative encouragement.
From my point of view, I have a few tidying-up points. Most of what I wanted to ask has been covered.
You made the point about the opt-in, opt-out review in 2017, and you and I had a conversation about this the other day, so I entirely understand the pressure you are under from both sides. I wondered whether you might like to say a few words about your intentions on lump sum investments. On Tuesday afternoon, we heard some quite polarised comments. Understandably, the Association of British Insurers and others feel that taking lump-sum investments without advice is not a good thing. On the other hand, people might want to start saving and to put in a lump sum in 2012. I would appreciate your views on that.
Mr. O'Brien: The first thing to say is that people today have lump sums, and they decide how to invest them. Some people take advice, and some do not. That is their right. The problem is not one that will present itself exclusively because we have created personal accounts or because of auto-enrolment. The question for us is, in a sense, the first point you raised. Do we have our lump sum payments in during the course of the running of personal accounts? Also, what about at the start? A question was raised during evidence about whether there should be an initial ability to make a payment in of about £10,000.
Mr. O'Brien: Indeed. There are two separate but important issues here. We have asked PADA to consult and come back to us.
I have some sympathy with the point about the initial payment, but I am concerned that it should not come from other pension schemes, because that is part of the arrangement that we have with the pension groups. If it were, say, the case that someone wanted to save for a pension scheme now, in an ISA perhaps, and then wanted to be able to put that money into a personal account once they were set up, there is an argument for that.
We want to be careful about the concerns that some in the industry have about levelling down—you have raised issue that several times. What we are not looking for is people transferring out of perfectly good and, in some cases, better schemes into personal accounts—transferring lump sums. So, we need to look at this with a bit more care. I have not ventured a conclusive opinion on it. The right approach is to say that these are important issues, we want to consult on them, we are not going to put them in the Bill—other than as a power—and then, in due course, Parliament and the various stakeholders will be able to express a view on whether the £10,000 should be allowed as an initial payment or legacies should be able to be put in late on.
The issue at the moment is that, as part of the consensus, we have developed an agreement that £3,600—2005 figures—is to be the amount that is paid in each year. If it is to go beyond that, we need to have wide consultation and a full understanding of how it is going to happen. Then Parliament should, in due course, be able to look at that issue in the round, with the benefit of consultation.
But judging by what you say, one possible restriction might be for people who are not in a pension fund now or for people who do not have access to a pension fund now, other than as a stakeholder. I suspect that all of us would think that if people know that they are going to be in a personal account scheme with lower costs and so on, it might be better to wait. That might be one restriction.
On that basis, and again thinking about where the lump sums might be invested, do you have a feel as to how many funds it is realistic for PADA to have in the personal account regime without again introducing the complexity of people perhaps needing advice as to which fund to go into? This issue concerns me.
Mr. O'Brien: I share the concern, but let me come back to that point.
Let us deal with your first question. An earlier question was whether we should have £3,600 or the equivalent on the face of the Bill. I gave an answer on that, but a second answer could have been that, if we were to make a decision to have a lump sum payment in, or a £10,000 figure, we would then come up against a statutory block, because the £3,600 would be in the Bill. Therefore, it is better not to have it there in quite that way. However, we have given a clear commitment that, as a matter of policy, that is the sort of issue that we intend to deliver on.
In terms of the number of funds, I share your concern that we must not have undue complexity in the variety of funds available for people to choose. There needs to be a level of discretion. When I asked Tim Jones about this, he suggested, if I remember rightly, that there would be a default fund that everyone agrees on, but that there then would be a number of others. My personal view, although it will be a matter for PADA to consult on and the Personal Accounts Board to make a decision on, is that there should probably be a handful of funds with perhaps one or two beyond that— perhaps sharia funds or something to do with the environment. Some people want higher-risk investment. There has been the suggestion that we should have various named types of account linked to particular commercial pension schemes. I am somewhat sceptical about that, but let us consult on it and let PADA give advice. In due course, a decision can be made.
Nearly all the evidence that we have received is that the key thing is simplicity. If we do not get that simplicity because we have such a variety of choices, not only might we confuse some people, more importantly we will add to the cost. That will mean that some people might not invest when we want them to.
Unscrupulous smaller employers who might feel encouraged to persuade employees to opt out and thereby save money are a matter that has come up during our evidence sessions. I have not thought this through myself yet, but I wonder whether you share my sense that, by making it absolutely clear that employers do not give advice but only information, there might be a means of ensuring that it is illegal under the Bill for them to advise people to opt out. It is your clear intention that they should not be allowed to advise people to opt out so might that not be one mechanism that we can think and talk about in Committee?
Mr. O'Brien: We have provision in the Bill that restricts employers’ ability to do that, but not the provision that you suggest. Your question is essentially whether we should ban employers from giving advice. I am reluctant to do that, because it may well be that some larger employers decide that they want to give advice from independent sources to their employees. They may well, as I suspect some do now, employ an independent financial adviser, or a number of them, to give advice.
Mr. O'Brien: Yes, they do, but in future employers will often decide to just bring their employees into the pension funds that they have now. The idea that, in 2012, everyone will suddenly sign up to personal accounts is just wrong. No doubt millions will do that, but many employers will say, “Look, we’ve got 30 per cent. of our employees signed up into x company or x pension fund, and we are just going to use that as the one to auto-enrol into. It is a good scheme, we have a good, long-standing relationship with it. We make a good contribution to it.” It may well be that some of those employers, if they are particularly good employers, want to provide proper independent advice and employ someone to do that. I do not want to block that from being done, because on the face of it there is nothing wrong with that provided that it is done scrupulously.
I am sceptical about the suggestion that we should have in the Bill some ban on advice, not least—I say this as a lawyer—because the difference between information and advice is easy for us to discuss in the abstract but in practice might not be so straightforward for an employer, or for personal accounts and commercial operations to determine. If they did an advert saying, “This is a really good scheme”, would they be giving advice? We need to be a bit careful about being too prescriptive. Let us make it simple and straightforward for employers, so that they can sign up and let us not frighten away the better, more capable employers who can provide high-quality advice. At the same time, we can ensure that most employers know that they are not in the business of giving advice; they are perhaps in the business of passing on information that comes from either personal accounts or a commercial operation, so they will not put themselves in a position of giving any advice at all.
I have two questions. First, on the discussion that we had about levelling down and the introduction of greater flexibility in risk-sharing, could you not introduce an enabling clause that would give you the time to consider and consult on the range of risk-sharing options, and then bring forward detailed legislation in the form of regulation?
Secondly, and completely unrelated, the Select Committee on Work and Pensions asked the Government to consider the idea of auto-enrolment for the self-employed, and you responded by saying, “No, they will have to opt in.” Why was that decision taken?
Mr. O'Brien: In answer to the first question, we do not know the impact that primary legislation may have on the various structures of shared risk which Ian Farr has identified. Others have different schemes from those which the ACA has proposed, and we have already heard some evidence about the various schemes. Therefore, we would not, by means of a power in the Bill coupled with regulations, be able to deal with all the problems that we probably would have to deal with if we were to move towards shared risk—a new, middle way of shared risk.
The issue is not just about statute, but about case law, which can be complex. There can be specific and detailed issues about the way in which a pension scheme operates, and although regulation might well provide for some ability to overrule it, regulation would not necessarily be firm enough. On pension funds, and particularly on trust law, we are talking about complex and detailed case law that requires a lot of examination. The lawyers who advise me, and myself as a lawyer, are very cautious about saying that we can undertake such work.
On the second question, about whether there should be auto-enrolment for the self-employed, who would auto-enrol them? They would only have to auto-enrol themselves, in which case they would be opting in. Would you say that everyone who is self-employed was obliged suddenly to join a pension scheme and then opt out? It would be somewhat burdensome for every window cleaner and small, self-employed business if they had to do that, particularly if they were setting up their business for a short period.
We would provide the opportunity and probably the encouragement for the self-employed to get involved, not particularly in personal accounts, although they are there if they wish, but in saving for their future and for a pension. Not enough self-employed do so. It would not be advisable to auto-enrol them and create an administrative hoop for them if they were running a small, temporary business.
But they are paying their class 2 national insurance stamp. Is there not a way of using that system? Most are paying that through direct debit, I guess. Is there not a way of encouraging them to, in effect, auto-enrol when they pay their class 2 stamp?
Mr. O'Brien: We have looked carefully at that and the issue of the self-employed. I am happy to encourage as much as we reasonably can people to make future provision for themselves. However, the variety of people who run small self-employed businesses is so great that we should leave it up to them, and not try to impose a straitjacket in the form of a provision that they have to have and to create another barrier to them setting up a small business for a short period. I would rather say, “We encourage you to make provision for your future pension. We will make it as easy as we can. You can get involved in personal accounts and we will encourage you to do that if that is the right thing for you.”
There is an added problem, particularly for the self-employed. Personal accounts are something that they would have to consider very carefully, because they will not benefit from the employer putting in the additional 3 per cent. They will have to put in the funding themselves. Therefore, there is no incentive to open personal accounts, and there is a £3,600 cap on the annual contribution. They would want to think about whether they should go into a private or commercial scheme. We want to say to them, “A personal account is there for you. We encourage you to make provision, but there are other commercial opportunities for you to make provision not only in the future, but now.”
May I take you back to an earlier point? You mentioned the possibility of a sharia fund and an ethical fund. Some people, for example, do not like to invest in tobacco companies. Others might not want to invest in companies that trade extensively in Burma at the moment. Will there be provision for such people?
Mr. O'Brien: That is a matter for PADA to advise upon. As regards to how personal accounts develop over the longer term, it will be up to the Personal Accounts Board to determine what further options it wishes to introduce. Opportunities already exist in the commercial market for people to have particular kinds of investments. If people have a view about where they want to put their money, I do not think that we should create a system of personal accounts that will have a multiplicity of choices. As I have already indicated to John Greenway, the costs of doing that would be substantial. We need to keep the costs low, the product simple, and the level of choice limited. People will have choice and whatever else they want in the private sector. We are creating a default system and a limited number of further options if there is a particular market that we know to be significant. If people want to go for a very narrow type of investment product, they will have to go to the commercial sector.
I am slightly surprised at that answer given that you have already mentioned sharia and environmental funds within the personal accounts scheme. Perhaps we should leave it there.
Moving on to another area. As regards to employers, particularly small employers and the mechanism by which they are going to make the payments, I understand that the PAYE system is not an option; the computer cannot cope. You are obviously the expert on that as your officials can advise you. In order to help small employers, is there any possibility that these payments could be made along with PAYE? I do not think that it could all be on the same form but it could be two parts of the same form to streamline this process and make it as administratively easy as possible, particularly for the smaller employers.
Mr. O'Brien: I suppose that the straight answer to that is that we may be able to create such an option. What I am a little cautious about doing is saying that we should create a level of preference for personal accounts that is not shared by commercial operations that are also in that market. There are a number of insurance companies, pension funds and other organisations that are already operating in the low income and moderate income area, and they are dealing primarily with medium-sized employers. If you create the type of opportunity that you described, where personal accounts could be treated in a particular way that did not apply to commercial operations, it would give personal accounts a level of preference. I would want to think about that issue with a great deal of care. Therefore, the straight answer to your question is that that might be possible, but it is not just the issue of administrative practicality that must be considered but that of commercial advantage. I would want to consult very carefully about whether we wanted to move into that area.
Let me just say that one of the things that I did, particularly regarding compliance procedures, was to get reassurance from Her Majesty’s Revenue and Customs that we would be able to access some of its information to ensure that compliance procedures were carried out by the pensions regulator. That is quite an important achievement, which will enable us to get some of the benefits of having access to the information that HMRC has in relation to who is an employer. At the same time, however, we would not necessarily need to use that information to carry out that work.
Mr. O'Brien: Before you ask another question, let me just say in addition that Caroline has just told me that I ought to make it clear, in answer to your earlier question, that we need to reassure employers that we would want to see these contributions dealt with as part of a payroll activity. Whether that is done in the way that you have identified is another matter, but it should be done as part of payroll activity, so that it is easy and straightforward and the costs are low.
Can you tell the Committee what the Government are doing at the moment to deal with the issue in Europe about the auto-enrolment of personal pensions not being possible? It strikes me that that should be a battle that it is possible to win, given that the European regulation was really intended to stop auto-enrolment of group personal pensions. Will you put some effort into trying to change that regulation?
Mr. O'Brien: I think that there is a possibility of winning that battle in the long term, but the long term does not necessarily mean by 2012. The difficulty is that changing EU regulations requires a high level of agreement. There is a review of some of these regulations in 2011 and that may well be an opportunity to say that we have a particular issue here, that this situation is not an intended consequence and that we need this regulation changed. We would have to get agreement on that change, but again it could well take us a year or two to get all the procedures in place. As you will know, things do not necessarily happen overnight in the EU. Therefore, the chances of getting a change in the regulations quickly are limited.
We are assessing the extent to which the advice that we have been given, which is that there is a serious problem here, is as certain as we have so far been advised. We are looking at this issue again.
The easy way to deal with this problem would be to auto-enrol everyone; I think that everyone would say that that is fair. The difficulty is that consumer protection measures from the EU, which everyone, on the face of it, thought were a good idea—it was thought that you should not have inertia selling into commercial organisations—did not anticipate that we would be setting up this method of pension collection. Therefore, we have considered whether there is a way of dealing with the fact that these rules are in place in our current law, without contravening European law, so that in due course we can perhaps make changes that we need to make in European law. In the meantime, we are considering whether it is possible to create an exemption that enables us to get, effectively, the benefits of auto-enrolment without using that particular scheme.
You have heard from the coalition that gave evidence, and also from the Pensions Commission, that there is serious concern about an exemption, and I am very conscious of that concern. They say that auto-enrolment is the absolute key here. The better approach would be to get an exemption that provides us with the benefits of auto-enrolment but enables insurance companies, who are particularly affected by this, to continue to sell to companies with whom they have a long-term relationship. I do not yet know—we are discussing it with them—whether we are able to create such an exemption and whether it would fit effectively within the legal constraints we are operating in. It would be good if we were able to create that exemption. [Interruption.]