Clause 14

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

Alert me about debates like this

Qualifying earnings

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

I beg to move amendment No. 2, in clause 14, page 7, line 9, leave out paragraph (c).

This is another probing amendment, to find out a little more about the current usage of average salary benefits. Many of us are familiar with final salary schemes. I am aware that there has been a significant demise in such schemes for various reasons in recent years, but I am not aware how widely average salary benefit schemes are being used. Therefore, I am seeking some elucidation from the Minister on that point and, in particular, on the likely impact—on the possible payments received on retirement—for personal account holders of average salary benefits being used.

Photo of Mike O'Brien Mike O'Brien Minister of State (Pension Reform), Department for Work and Pensions

In answer to the hon. Gentleman’s question, there are 9.6 million people active in occupational schemes, of whom 8.5 million are in defined-benefit schemes, and 1.1 million are in defined-contribution schemes. Around 200,000 people are in defined benefit schemes where pension benefits are based on a fraction of the individual’s average earnings across their career. These earnings are generally uprated in line with prices. This seems to be a probing amendment. Let me set out what we are seeking to do.

Clause 14 is the first of a series of clauses that set out the minimum standards for schemes to be used under the employer duties. This clause introduces the concept of qualification. Qualifying schemes must be occupational personal person schemes, tax registered under the Finance Act 2004, and must meet the relevant quality criteria in relation to a jobholder who joins the scheme. It is crucial to ensure that there is a statutory duty for  schemes offered by employers to provide suitable contributions or benefits to those who join them. This amendment would remove a key element of the protection required to safeguard the quality of qualifying and automatic-enrolment schemes.

Clause 14(2) gives the Secretary of State the ability to disqualify, through regulations, certain schemes that would otherwise meet the quality requirement. That would allow regulations to disqualify schemes that require prohibitively high member contributions—ones where the employer will contribute so much, but the member must contribute a very large amount—and those which levy excessive administrative charges. It would also allow regulations to disqualify career-average schemes of a certain type, as set out in paragraph (c).

I can reassure the ACA, and others who have raised the issue, that we will allow career-average schemes to discharge employer duties. We are aware that career-average schemes are becoming increasingly popular, and provide a compromise for employers who want to retain defined-benefit provision, but do not want to do so through final salary schemes. Many career average schemes provide generous benefits to members and help employers control the cost of pension provision. We want to support and encourage such schemes.

It is our intention, however, to apply these regulations to career average schemes that do not appropriately revalue the earnings on which the pension is based. We have designed the quality requirements for defined benefit schemes to be as easy as possible for employers to apply. The intention is that this can be done by assessing the value of the benefits payable at a particular point in time. Some schemes may meet the quality requirement based on the value of benefits at that time, but those may not maintain their value over time to retirement without revaluation of earnings. I am sure Members will agree that, given the risk that such schemes would lose their value over time, they should not qualify to accept members under the statutory duty established by the Bill.

We are providing reassurance that we have the ability to prevent employers using schemes that are not of the sort that Parliament intends: poor schemes that will give poor value, or schemes that are intentionally created to discourage people from joining them. That is the aim of the powers we are taking in the Bill to bring forward regulations. I hope on that basis that the hon. Gentleman will feel able to withdraw his amendment.

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

Certainly. I am grateful to the Minister for setting out some of the figures that describe the different types of pension saving that are going on at present. I am also grateful to him for what he said about the capacity of this clause to deal with schemes with extortionate costs, and schemes which would require an overly high employee contribution. With that, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 14 ordered to stand part of the Bill.