This group of amendments will take a bit more time. They are all around the issues of contribution caps and transfers into and out of personal accounts.
I will quickly go through what the amendments seek to do and then give a bit more background. It is logical to start with amendment No. 29 which incorporates an absolute prohibition on transfers between the pension scheme—the personal accounts—and other schemes and also says that the contributions of the jobholder should be limited to £3,600 in any one year. Amendment No. 77 deals with how to maintain the value year-on-year of that contribution and I will return to that in a moment. Amendment No. 30 seeks to take out subsection (3) which would allow an order to change contribution levels. Subsection (5) would be taken out under amendment No. 58 which gives the Secretary of State power to repeal this section.
There has been a long and fairly fierce debate about contribution limits. There are very powerful arguments on both sides. On the one hand are ranged the consumer organisations and others, such as Age Concern, who argue the case for more flexibility in either a lifetime limit or a higher annual contribution cap or transfers in, either a one-off in year one or subsequent years of capital amounts.
Some of the arguments focus on people who want to catch up contributions—perhaps some of the people I talked of earlier who do nothing between now and 2012, assuming that is the date—or people who want to put savings, an inheritance or divorce settlement into personal accounts. I apologise to people whose arguments I am paraphrasing. I will perhaps touch upon one or two in more detail and perhaps in their own words in a minute.
Ranged on one side are a group of people, especially those representing the industry, who argue very strongly and persuasively that we must take every step that we can in legislation to ensure that personal accounts, even if they are a success in their own right, do not erode existing pension provision and compete as a non-advice, low-cost alternative to other pension savings. We have debated at length the nightmare scenario, which was conjured up by the Pensions Policy Institute, of personal accounts being quite successful, but the overall pension savings in the country sharply declining because of levelling down and so on.
On the other side of the argument is the mantra of simplicity. Mr. Tim Jones seems to be getting a good run today. He raises this every time I have any kind of conversation with him, and I am sure the same goes for Ministers. As he and Paul Myners have said to me—and, I am sure, to everybody else who takes an interest in these things, including the Minister—every extra bell and whistle will add to the cost of personal accounts, and might add to the risk of them not being ready by 2012. As will become apparent when I deal with these amendments in more detail, I side with those who say, “Let’s not take risks about implementing personal accounts. There might be reasons for reviewing things later, but we need to be absolutely sure that this is ready to go in 2012,” and those who say, “We have a pretty good private pension set-up in this country as it is. It has taken a few knocks, but it is still a lot better than many other countries’, and we do not want to see that eroded or threatened by this new personal accounts system.”
Let me deal first with the annual contribution cap. The Pensions Commission originally proposed an annual limit of about £3,000, in support of which it said:
“This approach would mean that lower earners would effectively be free of any cap (since they would be unlikely to be able to use the freedom) while limiting the extent to which higher earners could use the NPSS as a low-cost alternative for pension saving that is already in many cases occurring.”
It is clear from that that the commission sussed out quite early on that there was a risk of levelling down and that that had to be dealt with clearly.
We then made a quantum leap to the December 2006 White Paper, when the Department for Work and Pensions suddenly popped up with the suggestion that the limit should go up to £5,000. It also proposed that the Personal Accounts Board should be able to review the limit, and suggested a higher limit of £10,000 in the first year. I know that the Minister has been turning that over in his mind, so he might have something to say about it. The Work and Pensions Committee also examined at the issue.
The £5,000 announcement caused, to put it mildly, a bit of a flurry in the industry, because it emerged that a £5,000 cap would, in theory, incorporate something like 94 per cent. of all existing pension provision, which was not at all what Lord Turner had in mind. We in the official Opposition were quite taken aback by the proposal. We did not know where it came from, what was behind it and who was in favour of it—it was certainly not the industry—and we did not think that it was sensible. We made it very clear, both in public and in private, that if the Government wanted to proceed with that figure, they would jeopardise the whole consensus process and that we would certainly not sign up to it. The Government got their mind right, to quote another famous film, and came up with a figure of £3,600 at 2005 prices, which we were content with, and a mini-consensus has grown up around that figure since, which is good news. We would still urge the Government to keep the £3,600 figure, and the Minister has made it abundantly clear that that £3,600 at 2005 prices is still the policy.
We are trying to help out the Minister with amendment No. 77, which deals with uprating the figure. However, the figure does not appear in the Bill, or even, I believe, in the explanatory notes. We think that it should, and some of the witnesses agree with us. I will cite what some of them said in a moment.
I give credit to the Engineering Employers Federation and Mr. David Yeandle, who came up with the wording of amendment No. 77. It is designed to make it clear that the Government will not only carry through their commitment to an annual limit of £3,600, based on 2005 earnings levels, but that they are committed to that limit
“being uprated with earnings from that point to implementation from 2012.”
It cites that the precedent for such tight drafting as section 34 of the Employment Relations Act 1999, which is used to implement, among other things, the maximum weekly pay that is used for calculating statutory redundancy pay annually in line with the retail price index. This is not rocket science.
In our evidence session, I was underwhelmed by the Minister’s response when I quizzed him as to why £3,600 was not mentioned at all in the Bill. He said:
“£3,600 is a 2005 figure”,
which is correct,
“which will be annually uprated as we deal with issues in terms of the economy, inflation and other factors. Therefore we want to ensure we do not enshrine in statute something that we then plan to amend year on year. ”
That is fair enough, up to a point. He continued:
“For those reasons, enshrining that figure in legislation would not be wise but we would intend to say that very clearly the policy is that that is the figure; we do not intend to increase it other than by the increases in the level of inflation.”——[Official Report, Pensions Public Bill Committee, 17 January 2008; c. 113, Q138.]
Why am I not convinced by that? All sorts of pieces of legislation are peppered with examples of figures that change. At the moment, £3,600 may not be the right figure. However, I have never claimed that any of my amendments or new clauses is the ultimate. We do not have all these clever people working for us, and if the principles are accepted, the parliamentary draftsmen can go away and sort it out.
However, given that this is such an important issue, why can it not be in the Bill? The argument that one should not put a figure in legislation because it will change is, with respect, completely bonkers. Figures have been put in all sorts of legislation, such as tax and minimum wage legislation, and those figures change. There is almost invariably a formula in the legislation setting out how they are to change. With respect to the Minister, I do not think that that is a valid argument against the amendments.
The EEF supports a £3,600 limit. Originally, it lobbied the other way and wanted the limit to be more open and flexible, but its attitude now seems to be, “We have now alighted on this figure and there seems to be general agreement—perhaps some of it grudging—that that should be the figure, so let us make sure that it is in the legislation.”
There is also a question of lump-sum contributions and transfers. Although I intellectually understand the arguments that are put forward in favour of them, I think that there are real arguments against. I have dealt with simplicity and the erosion of existing provision. If someone had a £10,000 inheritance and decided to put that into their personal account scheme, there would be two major problems.
A lump sum would not attract the employer contribution. I do not want to reopen the whole debate—important though it is, and we have had it more than once—about the groups that will benefit from personal accounts, not benefit, or not benefit as much as they expect. Those three groups—those that will benefit, those definitely at risk and those in the middle, as identified by the PPI—will be part of the ongoing process at which we will be looking on a cross-party basis. Part of the definition of whether people are going to be better off will be based purely on an employer contribution, because that will make all the difference to whether they are going to get something out of this or not. However, with a £10,000 lump sum, there will be no employer contribution.
We also keep coming back to the issue of advice. No one is going to give any of those people specific advice on their particular situation. Otto Thoresen, as people keep reminding us, is wrestling with the oxymoron of generic advice. We will see what he comes up with in his final report—I think that the Minister said that other day that it might be published in March. Someone might well be advised not to put that £10,000 in personal accounts and to do something completely different, but there will be no one queuing up to give such specific advice.
Let me come back to what some of our witnesses said about the subject. When we saw Mr. Stephen Haddrill of the Association of British Insurers on 15 January, I asked him what he thought should be in the Bill to minimise the erosion of existing provision. He talked about his concerns on levelling down and the need to ensure that the personal account remained
“targeted at the people it is really designed for...Money speaks, and we fear then that personal accounts will get delivered for the people with more money”— rather than the target group. He went on to say:
“That is why we do not like the idea of high levels of contribution being allowed during the year—the Minister has given assurances on that, but we do not see that £3,600 figure on the cap actually on the face of the Bill. We— this is the view of the ABI—
“would much prefer that to be in the Bill.”
He continued to say:
“We do not see anything about transfers in from other schemes on the face of the Bill in terms of them being stopped, which is what we would like to see. I think that we should also be very cautious indeed about random lump-sum contributions—in fact, not allow them—into these schemes, because they will not be matched by an employer contribution”—
I have made that point already—
“and they will not necessarily be the right thing to do. This is an advice-free zone”— here is the chilling bit for Ministers—
“so people will be making mistakes, and, in 20 years’ time, liabilities will be laid at the door of the Government as a result.”——[Official Report, Pensions Public Bill Committee, 15 January 2008; c. 24-25, Q31.]
I do not know who the Government will be in 20 years’ time. All that I can say with some confidence is that neither the Minister nor I will be in our posts.
I do not know whether that is significant, coming from the ABI, but I should touch on something else that Stephen Haddrill said. When he talked about additional contributions, he said:
“The real reason why we do not like additional contributions is because we think it complicates matters. We think it will be taking money out of financial pots where people have had advice and where they have got good investments and are putting them in something on which they will have no advice.”——[Official Report, Pensions Public Bill Committee, 15 January 2008; c. 37, Q52.]
That was all he has to say on that particular issue. Additionally, the written evidence of the Engineering Employers Federation stated:
“We are therefore very surprised and disappointed to see that, whilst Clause 53 of the Pensions Bill refers to the introduction of an annual contribution limit, there is no reference to the level of this limit in either the Pensions Bill itself or the Bill’s Explanatory Notes. We consider that both the £3,600 annual contribution limit and its uprating in line with earnings between 2005 and 2012 need to be set out clearly in the Pensions Bill as we feel that the absence of this detail will inevitably reopen the debate on this important issue which we felt had been resolved.”
I will take the Minister at his word when he says that he does not want to reopen the debate, and, certainly, we do not. However, the sure way of ensuring that that does not happen is to put it in the Bill. I have already said that I cannot see the remotest technical problem with a clause that takes account of £3,600 at 2005 prices.
The Investment Management Association, which has similar views, hardly surprisingly, to those of the ABI, says:
“Key to keeping the costs of the system low is ensuring that individuals can be confident that they can participate without seeking regulated financial advice.”
It goes on to talk about complications because of other contributions. It says:
“IMA therefore supports a strict annual contribution cap, with £3,600 a reasonable level, (uprated annually as appropriate) and that this should be specified in the Bill.”
Interestingly it goes on to say that it would accept a higher limit
“for the first year in which Personal Accounts come into operation...We also oppose Amendment 103”
—which we will be hearing about—
“since this would allow annual contributions of up to £30,000, taking the system well beyond its core purpose.”
I agree with that. I am delighted to see that the IMA supports my amendment to remove subsection 5, which it describes as
“an unnecessary power to repeal by Order the section dealing with contribution limits.”
It says that:
“This would be required only if Parliament were not committed to keeping Personal Accounts focused on their target market of those without current access to long term saving. While there may be a need for flexibility in the event of a future review that leads to a different consensus about contribution limits, there are sufficient powers in Clause 53 to allow the Secretary of State to change the limit in any direction. We cannot see however why it might ever be necessary to consider abolishing the limit altogether.”
There are powerful arguments on both sides of the debate. We have come down on the side that I have described. This is the purpose behind our part of the group of amendments and I hope that those arguments will commend themselves to the Committee.