Clause 10(2) has been drafted to give effect to the Government’s policy of enabling employers to phase in the requirements of employers’ duties so that they can better manage the additional costs that the reforms will bring. Consultation with small employers demonstrated that there was keen support for the phasing of the requirements. In particular, the Federation of Small Businesses—I note that its member is in his place in Committee Room—responded positively by saying that it welcomed the phasing in of the contribution.
However, the clause as drafted did not give employers certainty about the phasing arrangements that they would need so that they could start planning how they would discharge their duties. We have thus tabled one amendment and two new clauses to give employers a greater degree of certainty about the phasing arrangements for their qualifying schemes.
Amendment No. 138 proposes removing the broad power that would allow the Secretary of State to set out regulations on how employers’ duties would be phased in over a transitional period. The amendment will facilitate the introduction of the two new clauses, which set out the phasing arrangements for employers operating qualifying schemes.
New clause 12 will improve on clause 10(2) by giving employers that operate qualifying money purchase schemes the certainty that they need to plan how to manage any additional costs associated with their new duties. The phasing arrangements, which have been welcomed by employers’ representatives, involve a three-stage increase in the minimum contributions required of money purchase schemes. Essentially, with a direct contribution or money purchase scheme, the system is phased in over three years, with a percentage increase in each year. New clause 12 establishes that contributions in the first phase must be at least 2 per cent. of qualifying earnings, with at least 1 per cent. coming from employers. That will rise to 5 per cent. in the second phase, of which the employer must pay at least 2 per cent. Finally, the contributions will reach their permanent level of 8 per cent., including a 3 per cent. contribution by the employer. This will mean that employers will be able to meet the additional contribution costs in a series of steps—they will be given time to phase in the change.
New clause 13 sets out our intention to allow employers using the other main kinds of pension scheme—defined benefit and hybrid schemes—to be able to adjust gradually to the costs of the reforms. Existing legislation requires that defined benefit and hybrid schemes maintain appropriate funding for their liabilities. So, in effect, the scheme in new clause 12 of phasing in the amounts that employers would have to pay would not be able to work because the obligation on employers would be to maintain the appropriate funding level for their liabilities. However, employers must not reduce the contributions that they are committed to pay. Any provision that allowed employers to phase in contributions would interfere with the existing rules of the schemes and open up risks of under-funding. As such, it is not possible for employers with defined benefit or hybrid schemes to pay reduced contributions in the same way as new clause 12 will allow employers using money purchase schemes to do.
For those reasons, new clause 13 sets out an alternative approach. Employers offering final salary or hybrid schemes will be permitted to delay automatic enrolment into such a scheme for those jobholders who are eligible to join, but have not yet chosen to do so. They must automatically enrol those jobholders by the end of the transitional phasing scheme. Those who are currently in employment and have chosen, despite this being available to them, not to join a defined benefit or hybrid scheme would thus not have to be enrolled until the end of the transitional period. They would have already made their judgment: they could have joined, but decided not to. However, all other jobholders—new workers and those who were previously ineligible to join the defined benefit or hybrid scheme—must be automatically enrolled in the usual way at the start of the phasing period. There will therefore be a three-year phasing period before which an employer would have to sign up existing employees who had decided not to join the pension scheme.
I hope the Committee will feel that, particularly with regard to defined benefit and hybrid schemes, we have sought to give some flexibility. It is not possible to do the same for the employers in relation to DB schemes as it is in relation to DC schemes, but we have tried to provide some degree of flexibility to allow a certain degree of phasing in. We are also conscious that, as part of the process of automatically enrolling employees, we want all new workers enrolled and to ensure that those who were previously ineligible to join a pension scheme were able to join one. I hope that hon. Members will be able to agree to both amendment No. 138 and new clauses 12 and 13.