I was referring to automatic enrolment from day one. However, there is an exception, which we come to now. What we have at the moment is a number of employers who provide perfectly good pension schemes for their employees. They make a contribution that may be above the 3 per cent. minimum that we are requiring. We want to cause the minimum possible disruption to current good-quality pension provision. Therefore, the objective of the clause is about where an employer is making a fairly good-quality contribution—we reckon at least 6 per cent., or double the minimum—and there is a deferral of entry.
For example, Tesco defer for a year at the moment before someone is automatically enrolled into their pension scheme. One has to be employed for a year and then one is automatically enrolled, as I understand it—I can be corrected if I am wrong. The result is that we would say that we do not want to change it unless we need to. However, one year is rather a long time and we would rather have a period of about three months. We do not want to put that in the Bill now and we have time to discuss it with employers and to consider the sort of period that will be best for ensuring that we keep a good quality provision. Some employers have very strong views; if they make a contribution of, say, 12, 13 or 14 per cent., as some good employers do, there may be an argument for giving them a longer deferral period.
We need to have a sensitive discussion with employers. We want to give ourselves flexibility in the coming months or possibly even a year or so. To have such a discussion would ensure that we get the detail of regulations right. Three months is the sort of period we are considering as a reasonable maximum but I am not being dogmatic about that as we are prepared to discuss it further as part of a consensus-building approach when we may consider some sliding scales or say that three months is right.
The amendments clarify what we are doing. We want employers using a deferral period to follow the arrangements set out in clause 3. We want automatic enrolment and we want it to be done properly; amendment No. 117 puts that clearly in the Bill so that employers know that there is another procedure.
Amendment No. 118 is uncontroversial. It clarifies the fact that employers can get a deferral period for a reasonably good scheme, but they cannot then switch the employees to another scheme that is not so good; in other words, they cannot manipulate the system. Employers can keep the deferral period provided that they keep their employees in the scheme for which they are seeking the deferral. They cannot use it to move in and move out of a scheme.
I doubt that many employers would be tempted to use that trick but we want it to be clear in the Bill that they cannot do so. If they seek a deferral it must be to enrol someone in a better quality scheme than the minimum. In those circumstances we accept that an element of deferral may be possible if current arrangements are in existence.
The provision would particularly benefit employers who have a high turnover, but it will mean that in order to take advantage of the clause and the amendments they would need to have a better quality pension scheme than the absolute minimum. There is a reasonable trade-off, which has been discussed with various stakeholders. It is fair to say that stakeholders have different views but what is proposed is a sensible compromise that enables us to make a reasonable provision.
I have looked with care at the percentage level at which we enable the deferral period to come in, given the employer contribution. It has been suggested that the level should be 9 per cent., 10 per cent. or 6 per cent. I chose 6 per cent. primarily because I want a minimum of churning, of decision making and of opportunity for people to decide to level down. The proposal is part of that process; the less we require employers who have reasonable provision to do, the better in terms of levelling down.
I hope that the Committee will accept the amendments and the clause.
I am grateful to the Minister for his explanation of the amendments and clause 4. The amendments are entirely sensible. Amendment No. 117 is a way of tidying up and ensuring that clause 4 is in line with what is stated in clause 3, and the strengthening provision of amendment No. 118 is sensible also, so I understand where the Minister is coming from. However, I have a couple of questions about the Minister’s introduction to clause 4. I am grateful for his comments on clause 4 generally because he has provided a lot more information than I have been able to obtain, either from the explanatory notes or from the House of Commons Library brief. I would be grateful if he provided a little further clarification on a number of points. He mentioned, by way of example, the Tesco scheme. If I understood him correctly, he said that employees are not enrolled in the scheme at all for the first year, but that after that year they are and it would pass his test of what counts as a good scheme. I am unclear whether Tesco would retrospectively make contributions for their employee for that first year. Perhaps he can respond later, unless he wants to intervene now?
I will not pre-judge whether the Tesco scheme will fit our criteria or not, I want to look at it in more detail. I have had discussions with Tesco, it runs a defined contribution scheme on which employees are auto-enrolled after a year. In those circumstances Tesco would not make back-dated contributions to the start, but from the point of enrolment. In terms of the people who would be automatically enrolled if we moved to three months, they would receive their employer’s contributions as from three months, not as from day one. There would be the option of a deferred period for automatic enrolment and contributions.
I am grateful to the Minister for that clarification. I must admit that when I first looked at clause 4, I assumed that schemes that paid an employer contribution of 3 per cent. or more would fit the Minister’s criteria for an acceptable scheme. I now realise that that is not the case and we shall have to wait for specific regulations from the Minister on the exact balance of employer contribution, when the scheme kicks in and various other factors to determine whether a scheme will pass a reasonableness test. He mentioned a 6 per cent. contribution figure; I do not think that he totally committed himself to that, but that is perhaps a helpful general clarification for employers in this area.
I am fairly clear that 6 per cent. is the level at which I want this to kick in. The pressure on me, in terms of the views of stakeholders, has been that we should set the figure higher rather than lower. I have tended to take the view that in order to minimise disruption for employers and levelling down, we should set it at the lower level of about 6 per cent.
We are going to have to take on trust what the Minister is doing. I have no reason not to extend trust to him in this particular area. In terms of not wanting to disrupt existing good provision as the Minister suggests, we are in agreement with him. We shall have to wait to see the specific regulations that he brings forward, having had further discussions with those in the industry—employers and specialist interest groups.
Like the hon. Member for South-West Bedfordshire, I think that the amendments are sensible. They are intended to strike the right balance between not giving employers undue incentives to level down and preserving the right of pension holders, employees, to get a decent pension.
I have one question to ask the Minister. What process does he have in mind by which employers will register to take advantage of the deferral period? In the light of the conversation that we had on the previous clause, there will clearly be some benefit to doing so. The Minister hinted that it would be a quasi-automatic process based simply on employer contribution. Will there need to be a one-off registration process administered by PADA, for example, or will a record of the level of employer contributions mean that a deferral applies? Businesses will have to be notified if they are eligible for the deferral period, so that they can make use of it if they need to. I should like a little more detail on the practicalities and reassurance that they will not be unduly burdensome in delivering a potential benefit to employers.
The whole idea is that the employer can self-certify his scheme. There will not be a registration process. We want to make the rules explicit so that he can make a judgment that his scheme enables him to self-certify, and he will then be responsible for it. He will be able to get advice if he wishes, but that is essentially the approach.
PADA would not give him a certificate, because in a sense it is just another provider, although it has wider obligations. If a certificate were to be issued, it would have to be by the Pensions Regulator, but we do not intend that to happen. The employer will examine his scheme and see whether he is making contributions above a certain level. We want to make the rules as clear as possible so that he can say, “Right, I don’t have to be concerned about having to enrol everyone and set up a pension scheme on day one. I have got my three-month deferral period”—for example—“before I have to enrol everyone, because I go over the level.”
The Minister has put some good arguments for his plan. From the opposite perspective, why is he excluding schemes that make contributions of between 3 per cent. and 6 per cent.? After all, those are companies that have been doing the right things and providing something for their employees by making a contribution that, if an employee stays there for a considerable period, will make a considerable difference to their pension pot because it is above the 3 per cent. state minimum. If there is to be a three-month waiting period, why cannot all schemes that already exist qualify?
That is a good point. Part of the process of deciding on the level was to consider all the circumstances of pension schemes, because they have administration costs and running costs. It would be very easy to set up a pension scheme with a high running cost. For example, personal accounts could have 0.5 per cent. or 0.3 per cent. running costs in the long term. Employers’ contributions can be used up in that running cost, so the employee does not get the benefit of them. In order to create therefore a cushion, we need a certain amount of flexibility, and some trade unions, for example, are concerned that the level at which the exemption—the provision—kicks in should be higher than 6 per cent., because the cost of running the system could be quite high. Some systems, if they allow a lot of choice or are complex, will have high administration costs.
Essentially, the answer to the hon. Lady’s question is that I do not want to create a set of complex rules that say things like, “You can self-certify if your contribution is at 4 per cent. and your administrative costs—your pension scheme—remain at 0.3 per cent.,” among other conditions. I would rather have a clear and straightforward set of rules, so that a small employer who has enrolled his employees in a scheme that operates before 2012 and is fairly straightforward can just say, “They’re all signed up, I’m paying over 6 per cent., I can self-certify, it’s fairly simple and straightforward. That gives me a deferral period of this long, and I know what the situation is.” He does not have to get advice from an independent financial advisor. The issue is about getting the balance right between that level of protection against administrative costs, and making self-certification as simple and straightforward for a small employer as I possibly can.
Amendment made: No. 118, in clause 4, page 3, line 8, leave out from beginning to ‘within’ in line 10 and insert
‘Where a person becomes an active member of a scheme in accordance with regulations under this section, the employer must not take any action, or make any omission, by which the person ceases to be an active member of the scheme’.—[Mr. O'Brien.]
‘(7) The length of any such postponement shall not exceed 6 months.’.
The amendment would add new subsection (7) to the clause and stipulate the maximum time for which automatic enrolment could be deferred. The Minister has mentioned three months on several occasions during earlier debates, which is half the time that the amendment stipulates, at six months. The amendment would ensure a level playing field for all employers, because there is a competitive advantage for employers who do not make any automatic enrolment contributions to a scheme. An employer, in a business in which margins are tight, may compete against another who does not make such contributions, and 1 or 2 per cent. can make a difference to winning business and getting orders.
Paragraphs 2.38 and 2.39 of the regulatory impact assessment mention a possible three-month limit for the postponement of automatic enrolment, but it became clear from our earlier debate that we will have to wait for regulations. We would feel more comfortable if there was a time limit in the Bill, so it would be helpful if the Minister said when he expects to bring forward regulations on clause 4, because it raises significant issues, particularly about competitive advantage for employers.
I have been asked when the regulations were likely to be brought forward. We would want to have a proper discussion with stakeholders, and it will be some time before we are in a position to do that. I cannot give a clear view on a time scale, but I would guess that we would be able to have that consultation during the course of this year. We need to have discussions with employers, and to have the regulations drafted. I would like, then, to consult on the regulations; so it will be the early part of next year before anything is brought before the House. Bear in mind that we have a time scale of 2012, providing that people have sufficient warning and the ability to contribute to the discussion.
I am afraid that I would reject setting a six-month period, although I assume that the amendment is a probing one in any event, so I will not spend any more time trying to rebut the arguments. I understand the position that the hon. Member for South-West Bedfordshire has taken.