Clause 13

Pensions Bill – in a Public Bill Committee at 2:00 pm on 24th January 2008.

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Pay reference period

Photo of Andrew Selous Andrew Selous Shadow Minister (Work and Pensions)

I beg to move amendment No. 22, in clause 13, page 6, line 27, leave out from beginning to ‘twelve’ in line 28.

This amendment seeks to elucidate from the Minister the Government’s intentions relating to pay reference periods. The wording on the face of the Bill in clause 13 is quite open, and given the understandable concerns that employers have about how they are going to make the calculations relating to these payments, it would be useful to hear that the Government intended to make their pay reference periods as simple and straightforward as possible so as not to add to their administrative burdens in any way.

I hope for the vast majority of employers it will be quite clear and simple: either their financial year or the tax year. But I wish to be reassured by the Minister that the Government do not intend to impose on employers any strange or unusual periods that would cause them any difficulties.

Photo of James Plaskitt James Plaskitt Parliamentary Under-Secretary, Department for Work and Pensions

The hon. Member for South-West Bedfordshire seeks my reassurance on this in respect of simplicity and I hope I will be able to give that to him. Clause 13, an important clause in the Bill, enables Government to set the period, or range of periods, during which qualifying earnings are to be assessed for the purpose of calculating contributions to workplace pension saving. Many headline figures associated with these reforms are expressed in annual amounts: the limits to the qualifying earnings bands, for example. That is why the clause provides for a default pay reference period of 12 months, so that those annual limits make sense.

However, as set out in clause 11(2), the annual limits of the earnings bands are to be varied on a pro rata basis when qualifying earnings are being assessed for a pay reference period that is more or less than 12 months. Therefore, in line with the preference of employer lobby groups, especially the CBI and the Engineering Employers Federation, we have included the flexibility to establish an array of pay reference periods, so that the assessment of qualifying earnings and the calculation of contributions for the purposes of workplace pension saving may be aligned with the range of pay periods used by employers today, which in some instances are weekly or monthly. In essence, we are asking employers to do what they are already doing. That is the common-sense approach.

If an employer pays its workers monthly, that is the period it should use for the purposes of calculating pension contributions. The amendment, however, would remove that flexibility by locking employers into a pay reference period of 12 months—only 12 months—which would delay the point at which some jobholders qualified to be automatically enrolled. The flexibility to be able to prescribe pay reference periods as a week or a month is important for another crucial reason: it simplifies the administration for employers by making the calculation and collection of contributions to pension saving part of those companies’ normal pay cycles. Clearly, forcing companies into administering that out of line with their ordinary pay cycle would be an added burden. We will work with stakeholders to ensure that the linkage between pay reference periods is tailored to achieve the best fit for employers.

The measure brings forward the point of automatic enrolment, to the first pay period for most workers, enabling them to save as they go and to take advantage of compound investment returns. It avoids the need for larger periodic or reconciliation payments, which would  affect affordability at the individual level and might deter people from saving. Finally, and importantly, it enables temporary workers, who move frequently between employers, to be able to take advantage of workplace pension saving with an employer contribution, even if the total earnings with that employer fall below the default annual threshold—in other words, if they earn £3,000 for three months’ work.

I hope that I have demonstrated the importance of retaining the flexibility. The measure fits with employers’ current practices and best serves the interests of the people that we anticipate will come into the schemes. With those reassurances, I hope that the hon. Gentleman will feel able to withdraw his amendment.

Photo of Andrew Selous Andrew Selous Shadow Minister (Work and Pensions)

Yes, I am reassured by the Minister, particularly about the intention behind clause 13 to mirror the pay periods already being used by employers. If the clause has been worded in that way at the behest of the CBI and the Engineering Employers Federation and others, I am doubly reassured by what I have heard. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 13 ordered to stand part of the Bill.