(b) the Secretary of State may by order approved by resolution of both Houses of Parliament amend the lower limit of the total contribution paid by the jobholder as the employer set out in paragraph (1)(c) of this section.’.
It is a pleasure to serve under your chairmanship, Mrs Anderson. These two amendments get very much into the nitty-gritty of the Bill. As we all know, basic pay is a standard for pensionable elements of pay in the UK labour market and the basis on which contributions are calculated for many employees who are offered good schemes. In the earlier clauses that we agreed last week relating to all personal pension schemes, we broadened the definition of eligible pay to include all earnings. Clearly there is an issue there, in terms of employers, about how much effort will be required to work out whether a particular scheme would be exempt. On the information that we have been given, for example, an employer would have to make sure that they were going to pay at least 6.8 per cent. of all earnings to ensure that that overall 3 per cent. threshold was met. That is overcomplicated. It would produce an awful lot of additional work and not necessarily deliver what we all want.
There is a much simpler way of doing it. We acknowledge that the CBI accepts the principle that working on basic pay rather than gross earnings is a much simpler way of working out the equation. The CBI would like the figure to be 3 per cent. of basic pay, but that is far too low. Five per cent. is much nearer the percentage paid by employers in existing schemes. We are extending the remit, so there will be an additional cost, but that would be a much fairer way of working out whether a scheme should be exempt. We hope that the Minister accepts the principle—it is first of all a principle—that working out exemption and the higher threshold needs to be simple.
The problem with using gross pay rather than basic pay is that gross pay fluctuates for many people at both ends of the employment scale: low-paid people who might do varying amounts of overtime; and people at the other end of the scale for whom a large element of what they earn might be paid as a bonus. That would produce an awful lot of additional work for an employer. A 5 per cent. basic pay threshold seems a much easier way of working. I appreciate that there are costs involved and I am interested in what the Minister has to say about what thought has been given to the issue. I cannot support what the CBI says about levelling down to 3 per cent. of basic pay. That would not deliver the benefits that we want to see.
I am following what the hon. Gentleman says closely. He will obviously come on to the question of extra costs. Before he leaves the point that he is making, will he tell the Committee whether he has any concerns about moving away from the overall Turner settlement, which, as part of the package, settled on a 3 per cent. contribution from employers? This is not a pick-n’-mix exercise, as Lord Turner would have said if he had been asked during the evidence session. I think that he would have put it as, “A package that hangs together.”
I accept what the hon. Gentleman says. The argument is finely balanced between accepting a 3 per cent. figure on gross earnings—using gross earnings is fairer when assessing what the exemption rules should be—and accepting that that 3 per cent. will produce a burden for employers and a lot of additional work. If the scheme will be exempt anyway, why should they have to go through the calculations in the first place? That is why, although Turner did not recommend it, it is worth exploring whether a 5 per cent. threshold on basic salary is a fairer way of delivering the benefits that we all want to see. I am interested in what the Minister has to say about the additional work and costs involved in working on—although the CBI wants to move to 3 per cent. of basic earnings—3 per cent. of gross earnings.
Amendment No. 90 is important. It would enable the lower limit of the employers’ and employees’ contributions to be amended by order. We are making calculations for the long term and certain assumptions about take-up and how these schemes are going to operate. The market might change, as might people’s perceptions of what is acceptable. The amendment would give the Secretary of State—with the approval of the House by resolution, because we believe that these are important matters that should be debated—the power to amend the set level of contributions. That is important.
Many employers’ schemes pay more than the 3 per cent. that we are talking about. If there is evidence of levelling down, we believe that we should have the ability to amend the contributions that are made. There is certainly evidence that that could happen and it would be very regrettable. We are not saying that it is going to happen—we are not saying that it is inevitable—but, given that research has raised concerns about whether there will be levelling down, we would like to be able to have a debate in the House to set those figures. The decision may well be taken a long way down the line when evidence becomes clearer. However, we believe that such a provision in the Bill would allow for a proper debate in Parliament.
I am sorry to start today’s proceedings on a slightly churlish note, but I am afraid that we are not able to support either of the Liberal Democrat amendments. I am not for a moment saying that it is not right to have this debate and I hope the Minister will have some fairly detailed figures to share with us about the extra costs involved under amendment No. 92. It might seem churlish of me, because I have not entirely embraced the new concept of explanatory notes, but I could not help noticing that the explanatory statement attached to amendment No. 92 says:
“The purpose of this amendment is to ensure compliance with the new system is not too demanding for employers.”
That reminds me of the story that after the atomic bombs were dropped on Japan, the very first time the Japanese people heard the voice of their emperor on the radio—or at all, for that matter—he gave a speech with a remarkable wording that must have been an early example of spin. He said there had been a development in the war that was not necessarily to Japan’s advantage.
Although on a much more modest scale, this explanatory note comes into the same category. Needless to say, reference has been made elliptically to the CBI, which, as far as one can tell from the written page, seemed to have steam coming out of its ears about this subject. During last week’s debates, I dealt with the CBI’s concerns about the standard pensionable element of pay in the UK labour market and the basis on which many employers with existing schemes do their calculations. It says:
“The wide definition of pay used by the Bill at present will cause those who run exempt schemes to have to reassess each employee's pay packet to calculate a contribution rate each month and work out whether their scheme qualifies.”
It says that it would like the Bill in its final form
“to allow firms to measure their schemes against the percentage of basic pay they offer.”
That is a debate that we have had and will no doubt have again. The CBI welcomes the fact that amendment No. 92 “acknowledges these concerns”, but it does not
“support it, as it significantly escalates the employer contribution as a percentage of basic pay.”
It goes on to say:
“Lifting the level to 5 per cent., as the amendment does, is a significant escalation of employer cost. The sentiment of this amendment is correct, but the figure should be 3 per cent.”
We broadly agree with that judgment.
We have two objections to the amendments: the question of extra cost on employers; and the broader issue of the Turner settlement. Although it is very easy to fall into the habit of regarding the second and final report of the Pensions Commission as holy writ, poring over it as if it had some sanctified existence, on a more basic level, it is important to remember that the package put together was about what happens not only to the state pension, but also to private pension provision in this country. Within that package are other packages, and the commission weighed the ingredients carefully. One was the package for contributions—the commission alighted on a figure of 8 per cent. for the overall level of contributions.
We can argue, and no doubt will, about what sort of standard of living in retirement an overall package of 8 per cent. will deliver, but the broad Turner argument is that that is much better than nothing, which is what a lot of people are staring in the face at the moment. However, within the overall 8 per cent., the 3 per cent. employer contribution is the result, again, not only of careful of calibration, but also of a fair bit of give and take between the various bodies involved, particularly those representing employers, such as the CBI. We have to be careful about starting to unpick the very basics of the Turner package and, if Lord Turner were here, I am sure he would argue fiercely against that—I feel his ethereal presence hovering over all our debates on this and other Pensions Bills.
I turn, finally, to the second report of the commission, which falls open at page 277—I must read it fairly often—and makes it clear:
“We recommend that employers’ minimum contributions should be 3% of earnings above the Primary Threshold”— going on to explain why. That explanation includes, because,
“contributions are not subject to employers’ National Insurance, it will add only about 2% to the cost of employing a median earner, and less for lower paid earners, for those companies not presently making contributions in excess of that level.”
Then there is an interesting discussion further on, in chapter 10, on pages 356-357, about the effect of that level of contributions on companies.
The balance is difficult to strike. I will be the first to admit that. We have had discussions—more later this morning—about so-called levelling down. There is a balance to be struck between the extra burdens to be heaped on employers and the knock-on effect of employers being incentivised to close their existing, more generous pension schemes. That is a difficult balance, but I think that if we start unpicking the basic Turner proposals, then that way madness lies. Therefore, with all due deference to the hon. Member for Rochdale and the measured way in which he put his argument, the official Opposition are unable to support his two amendments.
I, too, wish to rescue the hon. Member for Rochdale from madness. The amendments cannot be supported by the Government either.
Clause 18 sets out the quality criteria for UK occupational money purchase pension schemes, which include personal accounts. To meet the quality requirements, a scheme must have a rule requiring a contribution of at least 8 per cent. of a member’s qualifying earnings, of which at least 3 per cent. must come from the employer. The clause is important because it establishes the minimum levels required, as recommended by the Pensions Commission. The Pensions Commission, as has been said, was clear that the 8 per cent. was on all earnings and is the basis of the calculation that delivers the 45 per cent. replacement rate to a median earner with solid state entitlement. It is part of the consensus around which we have been able to get broad support. There are all sorts of arguments from some, particularly in the trade union movement, who might wish to see this increase; some who lobby for pensioners might wish to see this increase; but everyone broadly accepts that, as this policy stands, we have the key group of people needed to implement it on board. That is the business community.
The Federation of Small Businesses and the CBI are prepared to support the policy as set out in the Bill. If we were to make the sort of changes that the hon. Gentleman proposes, there is a real risk of that consensus being undermined. I hear the way he puts his motion, and I am grateful to him for putting it as an inquiry, rather than pushing it hard. It is important that we have these debates, but also that we recognise there is a consensus which needs, to some extent, to be protected. Let me deal with the two amendments in more detail.
Amendment No. 92 alters the parameters of the quality requirement for money purchase schemes, and could increase the contributions paid by employers. If, under this amendment, employers were required to make a contribution of 5 per cent. of all basic pay, then all individuals would receive more employer contribution, provided that their basic pay made up at least around 50 per cent. of their gross pay. A median earner whose gross pay equalled their basic pay would see their employer’s contribution more than double. They would receive around £650 extra from their employer each year. The amendment would therefore increase cost to employers in that sort of situation. It would increase it most in cases where basic pay makes up the highest proportion of employees’ gross pay, and would therefore create an incentive for employers to make greater use of bonuses and overtime rather than basic pay, which I do not think the hon. Member for Rochdale wishes to do.
The real problem here, and the reason we are using the overall level of pay, is that employment situations vary considerably. Some employers pay much of their employees’ salary or wage in overtime and bonuses. For example, ministerial drivers working a lot of overtime do rather well out of it. Their basic pay, sadly, is not high. It is the case that many employers, for all sorts of reasons, believe that paying overtime is the best way of dealing with these issues.
Of course, if we move to basic pay, the hon. Gentleman is quite right, because he is increasing the percentage payment from 3 per cent. to 5 per cent. If we were to calculate our figures based on basic pay, it would affect the lower parameter and the higher parameter in terms of those who were automatically enrolled. That would have all sorts of implications for the Bill, but it would also mean that there would be incentives for employers to look—in ways we would not necessarily regard as desirable—at the way in which they pay their employees. We want to see employees paid pretty much the way they are now, as a result of the Bill. There may be all sorts of reasons we would want to change things in other Bills. As far as this Bill is concerned, we do not want employers to start changing their practices merely because it is passed.
I am grateful for the Minister’s explanation. I was listening very carefully to what he said. He concentrated very much on median earners, and, yes, additional cost is a disadvantage of the amendment I am proposing. When I moved the amendment, I was concentrating—and it is a particular concern for us—on the effects on low earners and people whose income varies wildly. I was going to say that it also affects high earners, but the cut-off limit has an effect on them.
Does the Minister not accept that for those people who, unlike his drivers, may not be able to earn lots of overtime, that is a better deal? It is a slightly increased cost, but in terms of the overall cost of a pension scheme across the company, it is not going to be a huge percentage. I accept we may not have got the amendment right, but in that sense it was looking more at low earners rather than medium earners, who would benefit under these proposals.
I am not entirely with him on this. For a start, some workers—particularly those on lower incomes—have more of their wage paid as commission or overtime payments, and if we start excluding those components, it will have an effect. It depends on what percentage of their final pay is calculated on the basis of such components, because he is excluding, by his criteria, those payments from the calculation.
Yes, I see it is increasing from three to five per cent., but if the amount paid to workers in retail, telesales or parts of the motor industry by way of commission payments, overtime or bonuses, is a substantial part of their wage, perhaps over 50 per cent., then the end result would be that these people could be worse off . Furthermore, there would be an incentive for employers to move more and more of the wage into this area, so that he would be able to pay less money. So I think there is a perverse incentive here, which actually works against the lower paid, not in favour of them.
I can see how some of the lower paid might benefit, but it seems that, given that the lower paid are by and large people who are sometimes in quite vulnerable employment situations, and often not trade-unionised, they are the ones who would be most at risk of employers shifting into precisely the sort of payment methods that would result in a smaller overall contribution to their pension than the hon. Gentleman hopes.
I think there is a balance here: the Pensions Commission took the view that it was better to calculate these things based upon all earnings. One of the reasons they did that was that it better protected the lower paid. I do not disagree with the altruistic view that he is putting forward: we would like to see lower paid people have a bigger contribution to their pension. That would clearly be desirable, but we also need to keep on board the employers who make these payments, and to ensure that we do not make changes to the overall consensus on this unless it is necessary to do so. I entirely agree with the hon. Member for Eastbourne, who said that it is not a holy writ just because it was in the Pensions Commission report. We need to look at that report with a critical eye, but at the same time we have been able to fashion a consensus with employers and others, and this particular clause is a key part of this consensus.
Moving on to amendment No. 90, this falls short of our public commitment, by allowing contribution levels to be amended through an affirmative order without full public debate. Under this amendment, any change would be subject to parliamentary debate and scrutiny, but it falls short of the full public debate on primary legislation that we believe would be appropriate. I have given the cost to business of the employer contribution and the importance of the overall contribution rate on income replacement rates—the benefits that will go to the pensioner in due course. It is right that any pressure for amendment in the future should be subject to the fullest public debate through the legislative process. Any change along the lines of the amendment would undermine the consensus that we all worked so hard to build.
That consensus relies on the assurances that we have been able to give to employer organisations about the level of employer contributions. Moreover, it is important that contribution levels are confirmed on the face of the Bill because this provides the employer community with the certainty they need to prepare for the commencement of these reforms. I have received all sorts of lobbying, from the trade unions in particular, saying we need to be able to increase these levels.
The Government’s view is that we have established that broad agreement with the employer community and we want to stick to that agreement. Perhaps the figures will be looked at again in 2017, when there is a review, or at some other time in the future when there is another Parliament and perhaps other Members of Parliament. That is a debate for another time. On this occasion, we have a view about how we will proceed. It is a view that is broadly supported and I hope that hon. Members will be able to be part of that support.
Does the Minister agree not only that employers want the certainty of having that in the legislation, but that, whichever Government were in power in the future, if there were to be an overwhelming argument for change upwards or downwards from the 3 per cent. figure, there would be at least as much discussion, consultation, lobbying and everything else to reach the right figure as on this occasion? That could never be achieved, with all due respect to our procedures, in an hour-and-a-half debate on a regulation in a deserted Committee room.
There is an argument for what the hon. Gentleman says. This has been a key area of discussion over the past couple of years and one of the issues that has produced angst among our various organisations in reaching the agreement. There has been a lot of compromise and I am anxious that the efforts that people have made in reaching that level of compromise and broad support for the Bill should not be undermined by the amendment. I hope that the hon. Member for Rochdale will feel able to withdraw the amendment.
‘(3) The Secretary of State may by regulations make provision for a scheme to continue to satisfy the quality requirement notwithstanding a shortfall in the contributions over a pay reference period if the shortfall is paid within a prescribed period after the end of the reference period.’.
Clause 18 deals with quality requirements for UK money purchase schemes, and the amendment would add a subsection that would enable any scheme, when there was a shortfall in contributions for whatever reason, not to fall out of the threshold, provided that any shortfall was made up in the short prescribed period. The amendment is small and helpful.
We all want certainty and to be able to ensure that the schemes that are set up continue and develop. We accept that there are fluctuations and that they can affect the workings of a scheme. The amendment would mean that if the threshold was not met, the scheme would remain in the quality threshold, provided that any shortfall was made up. We have not yet prescribed the time period, but the amendment is sensible.
So far, so good. This sounds like a sensible amendment that has been designed to be helpful, but that was what the hon. Gentleman said about the last one. I appreciate that he has not put in a prescribed period and that that would be a matter for regulations, should the amendment be passed. Does he have a feel for the length of time that would be appropriate? It would be helpful to know what we might be talking about if the Minister was to accept the amendment.
One reason why we have not put in the time is because, taking on board what the Minister has said, it should be the subject of further debate and discussion. Looking at changes over a cycle might be a better way of considering how a scheme was operating, rather than looking at a snapshot of a very tight period. Things change and move up and down. I would want to have a proper, broad discussion about that area—the quality threshold—because it has not necessarily had the scrutiny that other aspects have had. By having a debate on what would be an acceptable prescribed period—and introducing it—we might have a better consensus on how to proceed.
I will not accept the amendment, mainly because the mischief that the hon. Gentleman seeks to correct does not exist. Any shortfall in contributions paid in a period will not result in a scheme losing its qualifying status because that money will be owed, even if it has not been paid. Therefore, the qualifying status will not be lost.
I am with the hon. Gentleman in theory, but there is no mischief to correct because the loss of contributions does not mean that the qualifying status is lost. The regulator will just have to go after the employer to get the contributions.
It will be interesting to see what happens when we get to that discussion. This part of the Bill talks about quality. We are saying that people can carry on owing sums of money and that the viability of the scheme does not matter, but I am thinking about the Robert Maxwells of this world. I can imagine what such people might do with that flexibility. The whole point about a prescribed period is that while we accept that there can be difficulties and that companies can go through bad periods whatever, we ultimately want things sorted out within a defined period. Leaving things open, which is what the Minister is saying, means that that can go on for ever. As I say, people will exploit that.
I will be interested to see how the pensions regulator will regulate the situation without a definition in the Bill. That is the point of saying what the prescribed period should be. We are not saying, “Here, now”, but that there needs to be some agreement. Earlier, I said that that period should be a cycle—I accept that there is an economic cycle to things. That cycle should be defined and acceptable. I do not know whether it would be a three, five or 10-year period—the actuaries would have to work that out—but we ought to be saying that that is the period in which any shortfall should be made up. To do otherwise would leave the door open for certain people to go out and take advantage.
Clause 18 sets out the quality criteria for UK occupational money purchase pension schemes. Requiring minimum contributions to be encoded in the scheme rules enables any shortfall in contributions to become a debt on the employer that is owed to the trustees, who are then responsible for pursuing it in the normal way. That is what happens now. It is not, however, that responsibility for the pursuit of unpaid contributions is a matter solely for the trustees, particularly with personal accounts.
The Bill enables the regulator to issue an unpaid contribution notice under powers in clause 30. Unpaid contribution notices are statutory notices requiring the employer to pay any unpaid contributions to the scheme. Fixed penalties can then be applied for non-compliance—the matter becomes one of compliance. The hon. Member for Rochdale assumes that the lack of contributions will result in the scheme no longer qualifying, but that is not so, because it will still qualify. The employer will be pursued for the money—perhaps as Maxwell ought to have been—and will, if necessary, be the subject of appropriate legal proceedings.
The amendment would allow a scheme to continue to meet the quality requirement for a certain length of time in the absence of the minimum contribution, but the rules of the scheme already give effect to the quality requirements. A shortfall in contributions paid to a scheme would not disqualify the scheme. However, the intention behind the amendment appears to be to allow a period of grace when, for whatever reason, the employer has failed to pay the minimum level of contribution. The amendment also stipulates that that period of grace would be finite, thus ensuring that the scheme member would be protected against unscrupulous employers. The balance of allowing the employer some flexibility and employees sufficient protection is a position with which I have some sympathy, but I believe that it has already been captured in the Bill. We are already dealing with the mischief that the hon. Member for Rochdale thinks is there, but it does not exist in relation to this part of the Bill.
We recognise that making the right amount of contributions to a money purchase scheme on time, and making sure that those contributions get in there, is absolutely vital for the growth of an individual’s pension fund. Any shortfall could result in a reduction of the member’s pension and a subsequent return on investment. We want to build confidence in the security of individuals’ retirement savings. However, we are not convinced of the need to make further changes to the arrangements that are already in place. Therefore, as now, scheme trustees will be primarily responsible for monitoring payments into the scheme and for initial follow-up action on any shortfall in due contributions. When that is not successful, they will be able to ask the pensions regulator to help. Our current practice is that trustees report a late payment that is likely to be of material significance within 90 days.
The powers in the Bill give the regulator flexibility in how it applies the regime. They build on and strengthen the regulator’s current approach to following up late contributions, enabling it to deal with the higher volumes expected after 2012. One of the regulator’s new powers will be the ability to issue unpaid contribution notices, which will start the process of obliging the employer to contribute.
I see where the hon. Gentleman is coming from with the amendment. I have sympathy with the principle, but there is not a problem in this part of the Bill that needs addressing because the effect that he thought was happening will not happen. We want to ensure, however, that employers who fail to pay the appropriate contributions are dealt with appropriately—they will be, by another part of the Bill.
With this it will be convenient to discuss the following amendments: No. 93, in clause 19, page 8, line 35, at end add—
‘(5) The Secretary of State must report annually on the extent to which employers operating schemes defined under subsection (1) have reduced their contribution.’.
No. 94, in clause 22, page 9, line 41, at end add—
‘(5) The Secretary of State must report annually on the extent to which employers operating schemes defined under subsection (1) have reduced their contribution.’.
These amendments are significantly more important. With the previous amendments, I was probing the Government on their intentions to see what parts of this quality clause were doing.
The Turner report sets out a minimum entitlement, and that is enshrined in the Bill. As the Minister said, for people who do not have access to a pension scheme at the moment, there will be one with an 8 per cent. defined contribution, which will be made up of contributions from the employer and the employee and tax relief from the Government. That will capture the 6 million to 9 million people who are not enrolled in a pension scheme. We have raised questions about how those people will be captured under certain circumstances relating to their work and how much they earn. We are now talking about a smaller group of employees, but none the less a significant group: employees who have a pension scheme that delivers much more than the scheme proposed here. While we might have a broader consensus that deals with the majority, the big concern with setting a minimum is that we will see levelling down. Employers will be able to opt out, or to wind up their schemes and opt into the proposals in the Bill.
If that is the case, rather than seeing an improvement in the basic position, we will see pensions getting worse for a significant minority of people. I think that the Government are deluding themselves if they believe that that is not likely to happen. Some research carried out a couple of years ago by David Blake is still relevant. It suggests that if a scheme such as the one that we are putting forward in the Bill is on the cards, there will be a levelling-down process, and employers will opt to use the basic scheme in the Bill, rather than their own schemes that might cost them significantly more. The end result might be that more people are in pension schemes across the whole range of employment and have the rightto a contributory pension, but the net result for a significant minority would be that their pension no longer delivered what they would have been getting before the Bill was enacted.
For a number of reasons—not least to preserve the consensus that the Government have done a very good job of building—we believe that it is important that there is a defined minimum. We hope and expect that those employers who pay beyond that see the benefits of doing so for the motivation and retention of employees. Nevertheless, we want to have something in the Bill that acts as a clear warning shot that if there is a movement away from the current situation, the Government and Parliament will act.
I believe that employees are looking to us to ensure that such safeguards are introduced. This should be about not levelling down, but ensuring that people are levelled up. That means ensuring that those 6 million to 9 million people who currently do not get an occupational pension scheme can benefit from the Bill. However, if the 3 million to 4 million people who already have pension schemes are levelled down, that would be the worst of all worlds.
Amendment No. 114 would only require the Secretary of State to report annually on the operation of schemes. It might be that the pensions regulator, in the course of its normal duties, produces the figures in its annual report and looks at what is happening across the market. We believe that that sort of report is important for monitoring what is going on and ensuring that levelling down is not taking place.
Amendments Nos. 93 and 94 would amend clauses 19 and 22 along the same lines. This is an important safeguard. We are not saying that employers cannot vary their schemes, which would clearly be a nonsense, but we do not want the whole process to result in worse payments and pensions for those who currently enjoy a good scheme. The amendments do not set a percentage or say, “Beyond this line you must not go.” They say that we should monitor the situation so that if there is the possibility of levelling down—as suggested by the evidence from David Blake—Parliament will be able to address that.
The consensus that we have achieved on 8 per cent. sends a powerful message. The other message that is needed—the unions are right to request it—is that we are going to monitor what happens and that if there is a deterioration for that significant minority, Parliament will have to look at the consensus and whether we are achieving what we originally set out to do.
I hope that the Minister will accept the amendment. Of all those that we have considered today, this is the most important. It is vital that we address these concerns now, rather than when things start to move in the wrong way.
I agree with the hon. Member for Rochdale that this is an important group of amendments. The Conservative party supports the amendments in principle. Indeed, to an extent, they mirror some of ours relating to clauses on the duties and responsibilities of the Personal Accounts Delivery Authority. They are important because they raise the issue of levelling down, which outside bodies such as the Pensions Policy Institute identify as one of the two really major issues relating to the Bill.
That being the case, I make no apology for trying to deal with this issue in some detail. As the hon. Gentleman said, various surveys have examined the prospects of levelling down when personal accounts start in 2012. The problem is that every single survey rightly identifies a large degree of doubt because they are trying to determine the likely behaviour of employers in 2012. However, we do not know what the general economic background will be in 2012, or the extent to which existing schemes will continue to close, to either new or current members.
It is worth considering to whom we are asking these questions. It is fair to say that some of the Government’s research was based on asking human resources directors what was likely to happen with levelling down. It seems to me that the key people in all this are finance directors. They are the ones who will be faced, almost overnight, with a possible doubling of participation in their existing schemes. I forget the exact figure, but I think the National Association of Pension Funds has reached a figure of 30 to 35 per cent. as the average participation in an average defined benefits company scheme. With auto-enrolment, that is likely to shoot up to 70 to 80 per cent.—or an even higher figure if auto-enrolment works as we all hope it will. That is a very big increase in costs for any employer, regardless of the financial or economic position that they might be in. Any finance director worth his salt will already be focusing on this issue and making recommendations to the main board of their company.
In May 2006, the Government estimated:
“only around £600 million of the £2.6 billion cost to employers of a three per cent. contribution would fall on firms currently contributing three per cent. or more.”
The trouble with that is it assumes that everyone joining these firms’ schemes only as the result of auto-enrolment would receive the minimum 3 per cent. contribution. In reality, many employers might want to use the same pension contribution for all their employees. Therefore, the Government have subsequently estimated that automatically enrolling people into existing schemes on existing terms would add £1.8 billion to these employers’ pension costs.
The surveys actually come up with an alarmingly large range of conclusions, which is hardly surprising for the reasons that I have mentioned. The Department published a fact sheet alongside the Bill—I can make no complaint about the amount of paperwork with which we are being supplied by the Department and Ministers—containing what were called “emerging findings” from a new Department for Work and Pensions and BMRB survey. Although the Minister might want to deal with the survey in more detail, in a nutshell it concluded that 51 per cent. of employers contributing 3 per cent. or more said that they would be likely to maintain or improve the contribution rates offered to new employees following the reforms. Thirty per cent. said that they might reduce contributions for new employees, although smaller employers tended to say that. Some 86 per cent.—a startling figure—said that existing members of the pension scheme would continue to benefit from contributions at today’s levels as long as they remained with the company.
A little while ago there was a study by Deloitte that asked 488 employers contributing 3 per cent. or more whether they would reduce their contributions. It was published with an introduction by Mr. Stephen Haddrill of the Association of British Insurers, who gave evidence to the Committee. He summarised the situation by saying:
“one in four employers who currently contribute over 3 per cent. of earnings to employees’ pensions said they would introduce a new, lower rate of contribution. This represents reduced employer pension provision for 2.4 million employees.”
Another detailed finding in the comprehensive report was:
“At present the average employer contribution rate for existing members of pension schemes is 6.2 per cent. The average employee contribution rate stands at 3.8 per cent.”
A further finding was that 23 per cent. of employees said that they were likely to close the existing scheme to all or some employees. Some said that they would reduce contributions for new or existing schemes, and 30 per cent. were unsure of their response. That is perhaps an indication that many employers are not yet even focused on the knotty issue.
The report goes on to say:
“24 per cent. of employers who are currently making contributions over 3 per cent. say they will offer a lower contribution rate ‘than the one they offer their staff generally in their open pension schemes’. This represents reduced provision for 2.4 million employees”.
That is particularly marked in different parts of the country—I will not weary hon. Members with the details. The report continues:
“the average employer contribution rate post reform might rise by almost 100 per cent. (2.1 to 4 per cent.), as more employees gain access to at least 3 per cent. employer contributions. However, this welcome overall rise masks a likely fall in contribution levels for existing schemes of up to 8 per cent. (6.2 per cent. to 5.7 per cent.).”
I am not sure how helpful it is to talk in averages. The concern, which is also dealt with by other surveys that I will touch on, is whether significant numbers of employees who benefit from generous employer contributions in their existing schemes will find that those are no longer available and that they will be reverting to a 3 per cent. employer contribution.
The Deloitte report touches on another important issue. I have never been one of those who believe that the problem of levelling down will be a big-bang problem that will happen almost overnight, although no doubt it will with some employers. My concern is that there will be a gradual process of attrition. I will cite one final quote from page 5 of the report:
“over time, job turnover is likely to increase the amount of levelling down. Employees who leave schemes with high contribution are unlikely to be eligible to participate in schemes with such high contribution rates at their new employer.”
That is the real concern. The worry is that as people move around the jobs market, they will find their employer contributions gradually reducing.
Another interesting survey is from the consulting actuaries, not least because it drives their whole impetus for simplification and risk-sharing. The Association of Consulting Actuaries surveyed employers—those for whom its members worked professionally, I guess—54 per cent. of whom said they would auto-enrol all those eligible into an existing company scheme, rather than into personal accounts; of those, 23 per cent. said that they expected to revise the benefits on offer to reduce the costs associated with higher participation. So, only 42 per cent. said that they would auto-enrol staff into existing scheme on existing terms. Overall, 68 per cent. of employers thought that the Government’s proposals would lead to a general levelling down of employee pension contributions by organisations presently offering better pension schemes. Given that those advised by consulting actuaries must be a reasonable cross-section of British employers, that figure of 68 per cent. is extremely worrying.
I am listening with interest to the hon. Gentleman’s figures. If I have been paying proper attention, the 68 per cent. who think that things will level down is higher than the around 50 per cent. of individuals who were asked if they might level down. That rather suggests that, when people are asked what they will do, they might not be giving as honest answers as when asked what they think the industry will do. Therefore, the problem is more worrying than we would like it to be.
That is a valid point. I am grateful to my hon. Friend. It is like the bad old days, when Conservative support in opinion polls was consistently understated, because people did not want to admit to the intention of voting Conservative. Those days, of course, are long gone. There is an issue there, and a related issue, which I have already touched on and so do not want to labour the point. A lot of people have not focused yet. It is 2012, and that seems a long way a way—unless one is Mr. Tim Jones, of course. To most people 2012 is a long way a way, but as companies begin to focus, then we might get more definitive figures.
The Minister and I were both honoured to be at the launch of the PPI’s report for the Nuffield Foundation. As one would expect of the PPI, the survey is painstakingly detailed and well thought out, basically looking at three scenarios. One is that all employers, after auto-enrolment comes into force, would maintain contribution levels at the same level as they are at the moment, which in the vast majority of cases would be significantly more than 3 per cent. of employer contributions. The second scenario—the “central scenario”—was based on the Deloitte report, which was a kind of measured model as to how employers might react to the changes over time and produces a different figure. The “pessimistic scenario” is extremely worrying—as the name might suggest—and is based on the projection of 50 to 60 per cent. of employees opting out of work-based saving, in line with estimates made by the New Zealand Government for KiwiSaver. It is important to bear in mind that, potentially, even the pessimistic scenario could result in 4 million to 5 million new savers in work-based pension schemes—but much fewer than the 7 million to 10 million target market for the reforms.
The PPI stresses over and over again:
“There is a lot of uncertainty about how employers will respond to the reforms, and the projections illustrated in this paper should not be taken as forecasts. The analysis seeks to illustrate the potential impact of a range of possible scenarios.”
Their scenarios are, indeed, rather sobering, particularly the pessimistic scenario. As it says:
“This poses the question of whether the reforms would be considered successful if they did not increase annual total pension contributions but did increase the number of people saving and made the distribution of saving more equal.”
I can understand that there might still be some old-fashioned, red-blooded socialists in the Labour party for whom a redistributive effect would be a plus, taking the current amount of pension savings and redistributing it around a larger number of people. However, when I put this to the Minister, during his oral evidence to the Committee, he was good enough to accept that that would not be a satisfactory outcome for these reforms. I do not have his exact words in front of me, but no doubt he recalls what they were. The PPI makes the point that, in any such survey, some five years in advance of the reforms, it is difficult to predict with certainty how employers will act five years on. That is a very fair point.
It is important to look at the scenarios. There is the scenario of enormous success, with many billions of pounds of extra savings going into personal accounts, and into pensions overall. There is what the PPI calls the “modelled employer response scenario”, partly based on Deloitte’s work, which shows that the size of pension funds in personal accounts could reach £300 billion by 2050. Then there is the pessimistic scenario, which actually shows a fall of around £450 billion in the aggregate size of the pension funds in existing provision. These are worrying projections, not least because they are so difficult to be clear-cut about.
May I just touch on one or two of the issues around levelling down raised by some of the witnesses who gave oral evidence? The ABI, in particular, had some useful comments on levelling down and their own concerns about it. In its written evidence, the PPI said:
“Overall, the jury is still out as to whether the Government’s pension policy will deliver both more people saving and more saving and better retirement incomes.”
In her evidence, Niki Cleal talked about the pessimistic scenario, which is what would happen if all employers levelled down to 3 per cent. contribution. She said:
I do not think anyone would disagree with that. She also said:
“At this stage, it is very difficult to see how employers will respond.”——[Official Report, Pensions Public Bill Committee, 17 January 2008; c. 64, Q87.]
Again, something we can all agree with.
The concern about levelling down was, indeed, picked up by other witnesses who came before us to give their views. Mr. Stephen Haddrill, director general of the ABI, in answer to a question from me, said that
“there is going to be a risk of levelling down the more an employer has to decide and the more complex that decision is. If employers face a situation where, for instance, they are potentially going to end up with an existing pension scheme and having to set up a personal account, they are going to think quite hard about whether they want to carry on with an existing pension scheme that has a higher level of pension contribution from the employer than the personal account will do.”——[Official Report, Pensions Public Bill Committee, 15 January 2008; c. 24, Q31.]
That mirrors the concerns raised by bodies such as the ABI and the NAPF about what is likely to happen in terms of levelling down.
One reason we might not in the end support these amendments in a division is that it might be the case that the Government accept this position anyway. It is in the impact assessment of this Bill that they make the point that these issues are difficult to estimate in advance. They use the phrase:
“is itself subject to a considerable degree of uncertainty.”
They go on to say in paragraph 2.83:
“In taking forward this work, the Government and the Personal Accounts Delivery Authority will continue to work with employers and gather evidence on the economic context within which these reforms will be introduced to ensure they can achieve their aims whilst minimising burdens on employers.”
We think that is very important. On the specific issue of levelling down, I do not think I have ever heard this Minister suggest for a moment that this is not a distinct possibility. Certainly, all the evidence we have had suggests that this is potentially a major problem and, if we take the pessimistic scenario, could fundamentally and fatally undermine the whole success of personal accounts. As the Pensions Policy Institute has said, we could actually end up with a situation where total pension savings in the entire country are less than they would otherwise have been. This would not be a satisfactory outcome.
The Government are not trying to avoid this issue, and whether they accept the solution suggested in these amendments is neither here nor there. But I would like to hear from the Minister—even if does not accept the pessimistic scenario—whether he agrees that there are these concerns. Secondly, I would like him to confirm that he acknowledges the need to continue to monitor the situation because these surveys from 2006 and 2007 are all very well, but it is the run-up to 2012 that really matters. That is when employers will begin to focus on these hard decisions within the economic and pensions climate of that time.
Thirdly, will the Government in some way be sharing with the rest of us the projections as they are updated and refined? The latest figures talk about emerging trends and figures and that is absolutely right, but I would like to be sure that that process will continue in the Department, and continue in a public sense. If it seems we are headed for a major problem on this, then clearly action will be need to be taken by the Government of the day, whoever they are. But I commend the hon. Member for Rochdale for introducing these amendments. They have resulted in an important debate which is fundamental to the likely success or failure of this legislation. I look forward to hear what the Minister has to say.
The hon. Member for Eastbourne has put the most pessimistic gloss upon the evidence that he possibly could, particularly in terms of the PPI evidence. I would not be surprised if the PPI was more than a little surprised, because its evidence and the launch of its report suggested that up to 9 million people would be enrolled in pension saving as a result of these changes. Indeed, what we are likely to see—far from a levelling down—is a levelling up. We will see millions of people saving for pension schemes who did not previously do so.
The millions of people who will be better off as a result of this Bill are the reasons why Help the Aged, Age Concern, and a vast array of organisations supporting the elderly, are behind it. The same is true for various business groups, the trade unions and others who want to see effective savings.
One person who was not quoted by the hon. Gentleman was Lord Turner. The noble Lord said in his evidence:
“We must recognise that there is at least some danger in some sectors of levelling down, but I think it is relatively small. The net effect of what is being proposed in the Bill will result in a levelling up...I am convinced that there will be a large number of large companies that will continue to provide, in some form or another, pensions that are much better than the minimum standard.”
——[Official Report, Pensions Public Bill Committee, 17 January 2008; c. 103, Q126.]
Lord Turner has looked at that issue with considerable care, as have his colleagues on the Pensions Commission who are broadly in support of the proposals and want to see the changes.
Let me refer to the Department for Work and Pensions survey that was quoted by the hon. Member for Eastbourne. He finished by derisively, I thought, suggesting that it was done by a bunch of HR directors. It was not; that is not the case. Two thirds of the respondents were managing directors, chief executives, owners or partners, or at director level. They were not just, as he claimed, HR people. Our evidence is that only one in 10 of them was a HR person. The rather disparaging way in which he put it was somewhat unfair.
I do not have the figures for finance directors, but two thirds of them were managing directors, chief executives, owners or partners, or at director level; so no doubt some of those were finance directors. Finance directors will have a say, but so will the other members of the board. Certainly I would have thought that chief executives and managing directors would have a say and getting their view as well is therefore important. Regarding his suggestion that our survey was perhaps unreliable, I would not say that the responses to the survey are likely to be totally reliable but I am saying that the survey produced some evidence that the way in which employers are likely to look at the situation will not be as pessimistic as he suggests.
The hon. Member for Bromsgrove intervened to suggest that perhaps an even worse scenario could be constructed out of employers saying that they expected other employers to level down but that they themselves did not propose to do so. It could be the opposite; they could be wrong being so cynical about other employers and more employers than they think could be likely to react like them and not level down. That is an issue.
I do not accept that; I think that the hon. Lady is looking at Deloitte’s statistics rather than the DWP’s.
Levelling down is an issue that we need to have cognisance of. It is an important part of the debate and that is why we have taken steps to see if we can minimise levelling down.
Let me outline what we seek to do. Our research shows that most employers with good schemes support our reforms and the majority, particularly the larger employers, would maintain their schemes at current levels, or in some cases improve them. Among employers who already make contributions of 3 per cent. or more, the overwhelming majority—86 per cent.—plan to maintain or even increase contributions for current employees, and half plan to extend, maintain or increase contributions for new employees. Nevertheless, we are not complacent; it is an important issue and we will continue to track employers’ responses to the reforms and trends in the existing pensions landscape as we move towards 2012 and beyond.
The DWP has an extensive, ongoing research and data collection programme, which will inform the evidence base for monitoring and evaluation of the reforms. That includes: Government support for the new wealth and assets survey, which will provide a rich source of data on a range of pensions and savings issues; a regular survey of employers to examine trends in and the extent and nature of pension provision, scheme types, contribution rates, joining mechanisms used, etc.; regular surveys of public attitudes to pensions and financial planning for retirement; and surveys of individuals’ and employers’ attitudes and likely reactions to the private pension reforms. Such surveys are extensive, are going on and will continue to go on between now and 2012, and beyond that. They are not secret, but public. Parliamentarians will be able to see the data.
Also, we plan to continue to actively engage with external stakeholders—members of companies—in helping to improve the evidence base for pensions and retirement provision, to ensure that appropriate evidence is gathered and that the whole pensions landscape is properly monitored and evaluated for the purpose of the Government’s pension reforms. External stakeholders will have a key role to play in helping to build the evidence base, as well as in identifying gaps. A full evaluation is planned once the reforms have bedded in, and that will continue on an ongoing basis.
The proposed amendments would sit on top of a vast array of existing safeguards. The sorts of things that the hon. Member for Rochdale is suggesting are not necessary, mainly because they are being done in another form and with other reports. He can see them whenever he wants. No doubt he can raise in Parliament, when appropriate, concerns about whether levelling down is taking place and the extent to which it is. Those are real issues, but we have also taken steps to try to reduce the propensity for levelling down: the rules about transfers in and out of personal accounts; the amounts of contributions; and how the whole process of dealing with automatic enrolment will operate. None of those is likely to facilitate levelling down and, indeed, is likely to reduce the propensity.
Taking that point, why can we not, for example, put into the legislation the £3,600 figure for annual contribution limits—uprated from 2005 to the present, of course?
We know that the figure of £3,600 is not the figure that we are going to be using in 2012. We know that that £3,600 figure relates to 2005—it is out of date now. We do not yet know the precise figure that we will be using in 2012, but we wanted to give some reassurance to employers about the level at which we plan to set the figure. Therefore, we have regularly quoted that figure. Employers understand that we will not set it in the primary legislation now, because it is otiose before it begins. We will set a figure in regulations as we move towards 2012, so that employers will have the certainty. They already know the level at which we plan to set the figure, so they are able to estimate where the figure is likely to be in 2012. We want to be able to set the appropriate figure in 2012, so that we can be as precise as possible. That is why we will not set the figure now.
There are lots of other reassurances on levelling down in the text of the Bill and in Government commitments to employers. We will be monitoring closely any steps taken to level down. We will then be able to discuss what steps can be taken to deal with that. However, we must set the issue in perspective: for millions of people out there, the Bill will level them up. Millions would not be in pension schemes at all but, as a result of the Bill, they will be—they will be levelling up. A significant number of others, about a million, are in schemes where the employer contribution is less than 3 per cent.—they will be levelling up.
The numbers affected are just under 1 million. The hon. Gentleman has asked me the proportion of employer schemes, so I would have to know the total number of employer schemes and do the calculation. Will he allow me to come back to him with that figure? I do not have it in my head. The number of employers who make that very low level of contribution is quite small, but the number of people who will benefit—either because their contribution is quite low or because their employer’s contribution is quite low—is well worth while. The biggest group that will benefit is the up to 9 million people who will be saving for the first time, or saving more. Those figures are the more optimistic level which the PPI refers to in its report.
We have therefore taken steps to reduce the propensity for levelling down. we have acknowledged that it is an issue, but our research among employers suggests that it is not a substantial issue, and that most employers will not be involved, and that in many cases they will go in the opposite direction. I do not deny for a moment that this is a legitimate debate, but I reassure the hon. Gentleman that the pensions industry is being monitored. I have set out how that is taking place. That monitoring will provide opportunities for us to keep a careful watch, not just in the next four years but in the years after that.
If issues arise, and if there are ways in which we can affect them, assuming that—as I think all Members of this Committee want—a clear message goes out that we do not want to see employers levelling down as a result of the Bill, that is the best way of approaching the whole issue. Where employers provide good quality provision, we want to see them all continue to do so. The best approach is to take the steps we have taken, ensure that we continue to monitor, and ensure that, if problems arise in the future, we are able to evaluate the best way of dealing with them. I say to the hon. Member for Rochdale that the amendments are not necessary. In a sense, this sort of thing is being done, albeit in a different way from that he proposes. There is nothing secretive about the various researches that are going on, and he will therefore be able to do the monitoring that he hopes to do.
We have had a very good and important debate on this. I understand the assurances the Minister has given and the steps that have been taken in the run-up to this Bill to try and reduce the possibility of levelling down. I accept his point about the vast majority of people being better off, and I also accept that the DWP commissions a range of research. The problem is—and the hon. Member for Eastbourne went through this very eloquently—when you compare the DWP’s research with what others say, there is clearly a discrepancy.
I accept that we will never know the genuine position until we get to the starting gate. Nevertheless, I think the amendment ensures a proper reporting mechanism: not just research, not just something that may or may not be done, but something that has statutorily to be carried out. I believe that is the best safeguard for ensuring that, in this situation whereby, as the hon. Member for Bromsgrove said, what people say and what people do are not necessarily always the same thing, we get an actual report of what they are doing. It is neither optimistic nor pessimistic; it is saying, “there are so many schemes, x per cent. of those opted to level down; x per cent. stayed the same”. That is the sort of report that I believe and that gives a concrete certainty, so I shall have to disagree with the Minister on this particular occasion and press the amendment.
‘(3) A scheme does not fail to satisfy the quality requirement under this section merely because the trustees or managers of the scheme may on any occasion refuse to accept a contribution below an amount prescribed for the purposes of this section on the grounds that it is below that amount.’.
Clause 18 establishes the quality requirements for UK occupational money purchase pension schemes, including personal accounts. Clause 24 provides the same for qualifying personal pension arrangements. Under those provisions, the quality criteria for occupational and personal pension schemes include a requirement for a minimum contribution. The minimum overall contribution will be an amount equal to 8 per cent. of the jobholder’s qualifying earnings. Of that sum, at least 3 per cent. must be provided by the employer.
Amendments Nos. 139 and 140, which are to clauses 18 and 24 respectively, introduce a power to enable the Government to establish a ceiling for minimum contributions to money purchase schemes. In other words, the same scheme trustees and managers could refuse to collect contributions below that minimum on the grounds that they were too small to be economic to administer. In effect, that would mean that employers would not be obliged to pass over contributions below the ceiling and would not be considered to be in breach of the employer duty. However, if such flexibility were not legislated for, schemes would be required to accept contributions calculated on any level of qualifying earnings. For example, in an extreme case, a jobholder would be automatically enrolled with qualifying earnings of just £1 a week, on which the contributions would be 8p. In that case, the cost of collection would be considerable.
The collection and administration of trivial amounts would be unlikely to benefit the scheme or members because the administrative costs would be likely to be greater than the value of the underlying contribution. Providing schemes with an opportunity to alleviate some of the administrative costs might have a beneficial effect on charges. Obviously, if substantial charges result from having to accept small contributions, that will affect the overall amount that some schemes have to charge for administration. That particularly applies to schemes that want low charges, such as personal accounts.
The effect of these changes could be that people who are above the £5,035 level, at which point contributions start, will perhaps make quite a small contribution in the first year because the first year rate will be at 1 per cent. of the employer contribution. The costs of collection would be considerable. We have considered that issue and the numbers of people who are likely to be affected. In due course, we will consult on and set out the costs and the process of setting the minimum contribution levels. We will consult on what those levels should be. I cannot give the hon. Gentleman the figure that he is seeking because until we set the minimum contribution levels, it will be impossible to do so.
We know that the usual approach of pension schemes is to set such contribution levels. They are often set at around £20 a month. That is quite a small contribution overall because the cost of collecting less than that might be more than the contribution. My view is that the figure will be far lower than that. My aim is for people to start saving, especially in the early years. I do not want to load any substantial extra costs on to personal accounts or any other scheme, so I am fairly cautious about setting a figure just by giving a Government view. I would rather have proper consultation with the industry as a whole and get PADA to express its view about what the minimum contribution should be. I will then take a view on setting out the figures in regulations. If we do not do it in that way, we are likely either to end up with quite a high minimum contribution level, or to set the level so low that the administrative cost is a significant burden.
I am also concerned about the phasing-in process because we will have three years in which contributions are quite low, which presents some quite difficult issues. Contributions are quite low in the first three years, but will, in many cases, go above a level that would be of significant benefit to the pensioner after three years.
Should we therefore say that we would be prepared to tolerate a certain level of administrative burden on personal accounts for a year or two on the basis that people will be encouraged to save in the longer term? Let us say that we took that view and that the Government intervened and said to PADA, and in due course to the personal accounts board, “You will have to adopt a far greater public service role than other pension schemes apply.” We might want to do that, but before we get into doing it, we need to talk to the rest of the industry and to PADA about whether we want to take that route. It would be quite a significant step for us.
The position at this point is that we want minimum contribution levels so that we can ensure that a judgment can be made in due course about the point at which the administrative cost of collecting a small amount outweighs the benefit from encouraging people to save that tiny amount, given that in most cases they will not significantly benefit themselves by saving much of a pension pot with that minimum contribution. I hope that that answers the hon. Gentleman’s question and deals with the issue more broadly.
Government amendments Nos. 141 and 142 are technical and consequential on the amendments that I have mentioned. They insert a definition of “trustee or manager” into the general interpretations in clause 77. I hope that, with those suggestions, we can agree the amendments and ensure that the changes that the Government seek are put in place.