Amendment No. 19, in clause 11, page 6, line 11, at end add—
‘(4) For the purposes of scheme contributions by and on behalf of members of a qualifying scheme other than that established by Chapter 4 of this Act, subsections 11(1) to (3) may be disregarded if contributions are calculated and made in relation to the individual’s basic earnings.’.
Clause 11 is very important, and sets out the band in which wages will be subject to the personal account scheme. At the moment, the vast majority of pension schemes use total basic earnings when they calculate contributions. This is not true in all cases, but certainly in the vast majority of cases. In my former life, my pension was calculated on my basic salary, rather than on any additional payments that I was fortunate enough to be paid from time to time.
I understand the concern, raised by the TUC and others, that there may be some employers—unscrupulous or otherwise—who will seek to avoid paying the correct amount into personal accounts by transferring what would ordinarily be paid as salary into commission, bonuses and overtime. I am aware of that, and I would be sympathetic to anything the Government could do to stop employers doing so, in a way tantamount to deliberate manipulation of normal commercial practice, with the aim of not paying the appropriate contributions into personal accounts. Does the Minister know of any evidence of that sort of avoidance happening now? Are employers paying remunerations that would ordinarily be part of salary or wages as commission bonuses or overtime?
How does the Government currently treat bonuses paid to civil servants and other public sector workers? The whole area of bonuses in the public sector is somewhat new to me, but one reads from time to time of significant bonuses paid to civil servants—not always civil servants who have done an amazing job. There are one or two examples of people being given bonuses when that, perhaps, was not justified, but I am sure that in the vast majority of cases it is richly justified. What happens in relation to public sector pension schemes where this is current practice?
There is a worry that clause 11, as drafted, may lead to some form of levelling down, for the following reason. The administrators of current pension schemes generally supply the information on the schemes’ members in relation to the basic salary that those individual employees receive. As I read clause 11, it looks like there is going to be an onus on the administrators of current pension schemes to get in touch with employers and find out the exact amount of commission, bonuses and overtime paid to each employee. Administrators of current pension schemes will not ordinarily have that information.
The requirements of clause 11 will place significant additional burdens on employers who have to provide the information, information that is likely to change from month to month because employees and employers cannot say in advance exactly how much overtime will be worked. Pension scheme providers do not hold that level of detail on earnings and so the employer will need to perform the check. If that results in employers getting bogged down in the monthly bureaucracy of having to provide a pension administrator with that level of detail on the overtime of every employee, which they currently do not have to do, some employers might decide that it causes too much difficulty and will perhaps level down from their current scheme.
A further complication is that administrators of current pension schemes need to know whether their scheme meets the quality requirements in clauses 18 to 24, which we will debate shortly. How will they be able to tell whether their scheme meets those quality requirements if they do not have to hand that level of detail on overtime, bonuses and commission that individual employees might be receiving month by month? It will be complicated, and it will be difficult for them to know whether existing schemes meet the quality requirements that the Government have quite properly put in the Bill. I understand exactly why commission, bonuses and overtime are included here, and I am mindful of the need to prevent employers deliberately manipulating the way in which they pay their workers to avoid contributions that they should be making—the Government would be right to ensure that those contributions were made. However, there are a number of technical and practical difficulties on which we need some assurances from the Minister. If he is not able to give full reassurance now I would be grateful if he would take the issue away to consider at greater length.
The Government, in drafting clause 11, have been mindful of some of the concerns. We have all talked about wanting to ensure that we develop a quality scheme that is simple and easy to administer. As the hon. Member for South-West Bedfordshire said, that has the potential to be a bit of a minefield, which could present some difficulties. Nevertheless, the safeguard is important for employees, so that the less scrupulous employer will not see if there is a way of saving money. Those companies that do not have schemes at the moment will be introducing a scheme and will have to pay the 3 per cent. employer’s contribution. If they can switch some of what someone earns into bonuses or not count overtime as actual earnings—predominantly affecting those on low pay—that will enable them to get below the £5,035 threshold, resulting in less of an employer’s contribution.
The Government have got it right by making sure that the clause is in the Bill. Nevertheless, I would be interested, as the hon. Gentleman said, in how they would intend to operate it. Clearly we want an easy-to-use system, which does not impose too great a regulatory burden on employers, but the safeguard is important. I support the clause as currently written.
I am grateful to the hon. Member for South-West Bedfordshire for his amendments, allowing us to look at the clause in more detail.
The clause defines qualifying earnings by establishing an earnings band, and by setting the range of pay components for the purposes of calculating those qualifying earnings. Qualifying earnings, in conjunction with the minimum 8 per cent. overall level of contributions for money-purchase saving, as set out in clause 18—which we will come to—establish the new minimum level for pension saving and underpin the whole package of reform. Together, they should enable a median earner with solid state entitlement—a good number of years—to achieve a retirement income at a replacement rate of around 45 per cent. Those arrangements, including the minimum employer contribution of 3 per cent., only work if the calculation is based on the full value of gross earnings, as was pointed out by the Pensions Commission in its report of 2005.
Pension contributions need to reflect the full value of underlying earnings if workers are to stand a real chance of saving for an adequate income in retirement. However, both amendments Nos. 17 and 19 would reduce the range of pay components that need to be taken into account when calculating the minimum level pension contributions due to a worker. On average, commission, overtime and bonus payments make up around 8 per cent. of the earnings of those jobholders who will be eligible for automatic enrolment. If pensionable earnings became limited to basic pay, as would be the affect of applying the amendments, the overall value of pension saving would fall. We estimate that the reduction in savings could be around £900 million a year at a steady state, once the impact of the phased introduction of the employer duty has passed through the system. That would mean that people who save throughout their working lives will fall below the replacement rate that they are otherwise expecting to achieve.
That is a core problem with the hon. Gentleman’s amendment. Although he said that he supported the obvious intention to deal with any potential unscrupulous practice by which employers might seek to prevent payment from qualifying for their contributions to the scheme. In a sense the hon. Gentleman is trying to have it both ways, by watering down the protection, which would potentially open up the opportunity for unscrupulous employers. I think that we have the balance right and that the affect of the amendment would be to unbalance it in ways that I am sure he would not wish.
Some workers rely on commission and overtime payments. To exclude such pay components would reduce the benefit of the reforms for such workers. For example, commission payments often form a significant proportion of the overall income of those people who work in retail, telesales and parts of the motor industry.
Amendment No. 18 would prevent the Government from being able to react to any pay practices that developed simply as an attempt to avoid pension contributions. The hon. Gentleman asked if I thought that that practice was widespread at the moment, but there is no evidence to suggest that it is. It is important, when legislating in this way, to anticipate possible developments and to choke off those that would be undesirable. The amendment would open up a loophole that could be used for unscrupulous avoidance by enabling employers to reclassify their workers’ earnings, thereby reducing the contributions that the employer was required to pay.
The core pay components set out in the Bill already cover the majority of workers’ earnings, so any additions to the list are unlikely to have much impact for most employers. Nevertheless, we want to be able to consider additions such as allowances that relate to the skills that workers have, or to the working patterns that they adopt, such as data processing and shift allowances.
I want to reassure the hon. Gentleman and other hon. Members that we appreciate that many employers with existing schemes tend to define pensionable pay using fewer pay components—here I come to his point about the possible burden. We shall, therefore, provide guidance to help employers to work out whether their arrangements meet the minimum requirements. We could perhaps base that on look-up tables and other simple tests, which should address the point that he rightly raised about the potential for difficulties in computation. However, I should add an important point: no employer will be required to change their definition of pensionable pay because qualification relies on the value of contributions paid, not the basis on which they are calculated.
At present, the median employer contribution for workers in defined contribution schemes is 7 per cent. That provides those employers with considerable head room in the test. We therefore fully expect many existing arrangements to qualify, even if, for example, they do not take account of overtime as part of the pension calculation, because that could easily be offset by a higher employer contribution than the minimum 3 per cent. We plan to provide, I am pleased to say, a plain English guide for employers and schemes to assist them when applying the tests. That might involve simple illustrations of how the earnings band or higher contributions could be offset against a different definition of pensionable pay. There will be plenty of scope for further discussion as part of the normal regulation-making process.
In addition, qualifying earnings form part of the definition of jobholder. Tinkering with the definition of qualifying earnings would have an impact on the eligibility for automatic enrolment, and might mean that some people would miss out on workplace pension saving.
I think that I have addressed all the points made by the hon. Gentleman and I hope that he will now feel free to withdraw the amendment.
We have had a useful debate because there are concerns among current scheme providers about some of the computation difficulties that the Minister spoke about. I am glad that he is seized of the salience of these issues for those providers. He said that there could be £900 million less in contributions if the amendment were accepted—I would certainly not want that, and that was not my intention. I would, however, say that if the Minister was not on to the computation difficulties and was not able to do something about them, there would be a real possibility of levelling down from existing good provision above the level of personal accounts. There could have been a reduction had those computation difficulties not been taken into account.
I am reassured by what the Minister said about the guidance and leaflets, and especially reassured that they will be in plain English, which is something of which we are all in favour. I therefore beg to ask leave to withdraw the amendment.