‘(1A) In section 1 (meaning of “stakeholder pension scheme”), omit subsections (7) and (8).’.
Let me welcome you back to the Chair, Sir Nicholas. We also welcome my hon. Friend the Member for Rochford and Southend, East to the Committee. I would like to put on record all Members’ sympathy for the Minister for Pensions Reform, who is not with us due to a family bereavement.
Clause 68 brings in necessary reforms to stakeholder pension schemes, principally to remove the statutory duty on employers to have a designated stakeholder pension scheme in the light of the introduction of personal accounts though the Bill. We support what clause 68 seeks to do because the pensions landscape will have moved on and stakeholder pension schemes will not be necessary in the way that they once were.
Genuine and understandable concerns have been expressed, however, about what will happen to existing stakeholder schemes, particularly in 2017. In the early evidence sessions of the Committee, Tim Jones and the Minister for Pensions Reform both said they were keen to look at whether the personal accounts trustee corporation would be able to allow transfers out of personal accounts, probably in around 2017. We understand the reason for that. One very good reason is that there could be hundreds of thousands of very small personal account pots, perhaps belonging to foreign workers who have been in this country for a matter of months and have returned to their home country and are never going to come back. The personal accounts trustee corporation will be forced to maintain those small accounts for all time if there is not the option to transfer out.
The concern is that these transfers-out may end up being pushed on to the existing stakeholder pension schemes because current legislation, which is not being rescinded, prevents the winding down of these stakeholder pension schemes, even if the stakeholder provider might not want to keep them going. Clause 68 would force stakeholder pension schemes to accept transfers-in of possibly large numbers of very small amounts. There is concern that this may lead to an increase in the charges stakeholder pension schemes.
Such charges were initially brought in and capped at 1.5 per cent. for an initial 10-year period. I am sure the Minister will tell us this when he responds, but my understanding is that 2017, when we are looking at the potential for transferring out, will be beyond that 10-year period in most cases. Therefore, the stakeholder schemes will have the option—and indeed they might be forced—to increase charges to cope with the administration of perhaps a very large number of small pension accounts being forcibly transferred in.
This could have serious consequences for the existing members of those stakeholder pension schemes, who might find their returns to be less than expected because of higher levels of charges being imposed on them because of these transfers-in, which clause 68 currently allows.
My hon. Friend is clearly very knowledgeable about these matters. Will he help the Committee by explaining what he thinks is the rationale behind requiring this move out of personal accounts and into stakeholders? Why stakeholders; why not some other vehicle? What is the rationale for doing it this way, because I completely take on board his concerns about the downside of this particular move?
I thank my hon. Friend for that intervention. My understanding is that personal account holders will not be forced to transfer into stakeholder schemes specifically, but the point is rather that these stakeholder schemes will be unable to refuse to accept these many small pension pots. Account holders can choose to take their personal accounts elsewhere, so they will have that choice.
What I am arguing for, in amendment No. 158, is giving stakeholder schemes the freedom to operate that any other pension provider would ordinarily have. Clause 68 really seems to be dumping obligations on stakeholder providers quite unfairly, and in a way that could be prejudicial to the existing members of those stakeholder schemes.
Amendment No. 158 would remove the obligation on stakeholder providers to accept transfer values and give them the discretionary freedom to determine whether or not it would be viable to accept certain low-value funds. They might very well decide that they are quite happy to accept these personal account transfers—they could be very keen to receive them—but, given that stakeholder pensions were legislated for and brought into being by this Government, we are concerned that the providers of these schemes should be treated fairly going forward. I know that we are talking about events that are some way off, but it is important to raise this issue now, and I look forward to hearing what the Minister will say about these issues.
Good morning to you, Sir Nicholas. It is a pleasure to be serving under your chairmanship again. May I express my thanks to the hon. Member for South-West Bedfordshire and my sympathy for the Minister for Pensions Reform, who is obviously unable to be with us today for sad reasons? May I also welcome the hon. Member for Rochford and Southend, East? It is nice to know that our Committee’s deliberations are attracting new members because of the reputation that our proceedings are earning.
I turn now to the amendment that the hon. Member for South-West Bedfordshire has moved. I understand why he is raising the issue, but I think that there is a danger that he is over-anticipating—and potentially inflating—the problem that he sees. I will explain why a moment. I fear also that, by seeking to head off the problem that he anticipates, he is possibly inadvertently suggesting something that would be harmful to the existing rules for stakeholder pensions. By potentially inflating the scale of the problem, he could be causing a problem somewhere else. Let me go into that in more detail and try to explain why I have that view and why I hope that he will not press the amendment to a Division.
As the hon. Gentleman said, the amendment would remove two important conditions that define a stakeholder scheme: flexibility and portability. It would mean that stakeholder pension scheme members would no longer be able to pay money into their pension when it suited them, subject to the £20 minimum contribution limit provided for in existing regulations. That possibility is important because it enables people who have irregular or intermittent employment patterns to save when they are able to do so. The amendment would also remove people’s entitlement to transfer other pension rights into their stakeholder scheme, thus consolidating small pension savings that they might have elsewhere.
Both the flexibility to make payments and the ability to transfer pension funds would instead fall to the discretion of the pension provider, who could therefore make substantial changes to the current position. That would affect all those people who had bought the products on the understanding that their stakeholder pensions would continue to provide a flexible and portable pension vehicle. That would be a significant number of people, given that 3.9 million stakeholder contracts have been taken out since April 2001 and there are just under 2 million active members. The potential knock-on effect to existing holders of stakeholder pensions would therefore not be insignificant.
The case that I was making was slightly different to the one that the Minister is rebutting. I am purely arguing for stakeholder providers to have some flexibility. We know that by law they cannot close the schemes down; I am not seeking to change that. For anyone who wants to stay in a stakeholder and pay money into it, that will be absolutely secure. I am just saying that the providers of the stakeholder schemes, who have done a useful, necessary job and have obligations going forward, should not be forced to accept business that might be uneconomical, and which might have a much better home somewhere else.
But the problem is that the hon. Gentleman would do that by removing some of the current conditions of the stakeholder scheme, which could have other consequences. That is why I urge him not to press the amendment to a Division. I also urge that he does not do so for a second reason. In 2017, we will undertake a review of the prohibition on transfers into and out of the personal accounts pension scheme. It is obviously not possible at this stage to anticipate what will come out of that review, but I think that he understands the reasons why it is there.
I understand the concerns that have been raised about the possible knock-on effect on stakeholder pensions should that review recommend lifting the ban on transfers out of personal accounts. Clearly any recommendations that come out of the 2017 review will be carefully considered by the Government at the time, including any potential consequences for other forms of pension provision.
I will expand on the problems that the hon. Gentleman cited. There is the question of whether everyone with small pots will want to make transfers. A lot of people might conclude that they are happy to leave them where they are because they might come back to them to make further contributions in the future. They will therefore not see the necessity of relocating those pots. They might also have other vehicles that are not necessarily stakeholder schemes to which they can relocate the pots. They would be able to consider or make a transfer into a stakeholder pension only if they already had a stakeholder pension.
As the possibilities are widened, the scale of the potential problems that the hon. Gentleman anticipates are reduced. It makes more sense to wait until the 2017 review, when the scale and nature of the issue will be more apparent. That review will take into account, in considering whether to lift the option on transfers out, the potential impact on other funds to which those pots might be transferred.
Perhaps if I had let the Minister carry on, he would have answered the point that I was going to make. Can he reassure the Committee that, following the 2017 review, if there were serious negative consequences for existing stakeholder schemes—we all want them to be successful—they would be dealt with by regulation or some other means to ensure that whatever was proposed was not too injurious to the stakeholders?
I am not sure what the hon. Gentleman means, but the issue will clearly have to be considered. If there were a serious consideration in 2017 that the restriction on transfers out would be removed, questions would have to be asked about the consequences, not just on the stakeholder schemes, but across the whole pension provision market. It will not be possible to begin to make any sort of judgment about either the scale or the nature of that until we have got to 2017 and those funds have been in place for five years.
Is the Minister saying that those people could be in the stakeholder scheme already, but that they will be in a company that then takes out a personal account and therefore that they will have two schemes that they might want to consolidate into one? I am trying to work this out. Are existing stakeholders involved, or people who do not have a stakeholder pension and want to buy one, because they want to transfer it to a personal account? I am just a bit confused about who those people are.
It is not quite as complicated as the hon. Lady thinks. First, we have to remember the criteria about qualifying schemes. It may well be the case that perhaps all the existing stakeholder schemes will qualify under the Bill as qualifying schemes. There is sometimes misapprehension about whether auto-enrolment applies only to the new brand of personal schemes that the trustee board will bring into existence. A range of schemes could qualify. So I do not think that people will be forced into a couple of schemes, which is what the hon. Lady was suggesting. I hope that she is reassured by that.
I am arguing that it is not desirable to promote the changes that the amendment seeks, because they have other consequences that we do not want. I also think the amendment is driven by over-concern about the scale of the challenge that might be presented. This is all very conditional on what happens in 2017. Mindful of these real issues, the sensible thing to do is to wait for the 2017 review and see what decisions are made at that point in respect of whether the opt-out and the restriction on taking funds out of such schemes are lifted. With those reassurances, I hope the hon. Gentleman will agree to withdraw the amendment.
I note what the Minister has said about other possible consequences of amendment No. 158. As my hon. Friend the Member for Eastbourne said—and as he often says to the Committee—we do not have all the clever people that the Minister has working behind the scenes, so he may well be right that there are perhaps other consequences. In the light of that and the commitment that he has given to the Committee to consider what he described as the real issues that relate to stakeholders in 2017, and the fact that he said that he would be mindful of those issues in any proposed solution, I beg to ask leave to withdraw the amendment.
This is a probing amendment: I want to find out exactly what is meant by the phrase “regular intervals”, which is used twice in subsection (4). It just struck me that it might be possible for unscrupulous employers to try to keep their employees in a stakeholder scheme by saying: “Don’t worry, contributions are being made at regular intervals”, when that interval is every decade or every fifteen years. A regular interval might not be often, but it could be as regular as every week, every month or every year. It is probably unlikely that anyone would seek to do that, but there are employers of all different types and characteristics and “regular” is a vague word, so I would like a decision to be taken on it and look forward to what the Minister has to say.
It is a pleasure to be here in Committee again today; I apologise for being slightly late. I would like to pass on my good wishes to the Minister for Pensions Reform and welcome the hon. Member for Rochford and Southend, East to the Committee. He has been here for only a short period, but I am none the less grateful that the Committee’s deliberations are attracting new interest even as we reach the latter stages of the Bill.
This is a very simple probing amendment, but it makes an important point, because the phrase “regular intervals” is obviously open to interpretation. It is clearly right to ask the Minister to clarify the position to ensure that employees cannot reschedule payments to very long intervals to avoid the obligation to make auto-enrolled contributions or for employers to ask them to do so. The one-year interval suggested in the amendment seems a sensible limit—it would certainly be hard to describe making a contribution less than once a year as regular—so I look forward to the Minister’s clarification.
I am grateful to hon. Gentlemen for speaking to the amendment, because it gives me the opportunity to provide the clarification that they seek, and it is important that I do so. But there is a very good reason why that word is used, and I will try to explain it. Clause 68 will amend section 3 of the Welfare Reform and Pensions Act 1999 to end the current stakeholder pension employer designation requirements when the new personal account provisions take effect. All the existing employer designation requirements will cease, except one transitional provision that relates to the payroll deduction facility.
Employees have bought their stakeholder pensions on the understanding that they can benefit from that payroll deduction facility. Employees who are paying into their stakeholder pensions via the their employers’ payroll when these reforms take place will continue to be able to benefit from that arrangement. It is right that they should continue to be able to make such payments for as long as they are employed by their employers or until they stop making contributions via the payroll.
The amendment would change the criterion that sets out when an employee is no longer able to benefit from the transitional provision. Instead of the provision ending when the employee stopped making regular contributions, it would happen when the employee stopped making contributions at intervals of less than one year. The explanatory note to the amendment states that its purpose is to “prevent employees from rescheduling”—[Interruption.]If the hon. Member for South-West Bedfordshire wants to intervene, that is fine—otherwise, I am just getting barracked.
I see the point that the hon. Gentleman is making, but I am quoting his explanatory note, which states:
“to prevent employers from rescheduling payments to very long intervals to avoid the requirement to make auto enrolled personal account contributions.”
Just for clarity, he is talking about the potential for an unscrupulous employer to go for very long payment intervals. I entirely understand; I have not misunderstood him.
There should be no easy way out for employers who do not wish to fulfil their duties under this legislation, and I want to make clear that stakeholder pensions are not one of those routes. An employer who wishes to continue to run a stakeholder scheme must ensure that it is a qualifying scheme that meets the policy requirements set out in the Bill, which may require an increase in their contributions to the scheme. If the scheme does not qualify, the employer must provide an alternative arrangement that does and enrol the eligible job holder into that scheme.
If a job holder does not wish to participate in pension savings, they do not have to. That is as true for personal accounts as it is for stakeholders. Once enrolled, the job holder can opt out of the scheme and will receive a refund if any payroll deductions have been made during the opted-out period. So the only way that a job holder could avoid being automatically enrolled is if they were already a member of a qualifying scheme. If the job holder were a member of a stakeholder scheme that met the quality requirements, he or she would not be automatically enrolled. If the job holder then wanted to reschedule their payments, their employer might permit that as long as the total employer and job holder contributions made were equivalent to 8 per cent. of the job holder’s qualifying earnings over the pay reference period.
I understand what the Minister is saying. The 3 per cent. figure applies whatever the period of time, so if an employer has to pay their 3 per cent. for a whole year at once, that is the same as paying 12 monthly payments throughout the year. However, what he says raises a further concern in that another option could be open to unscrupulous employers, of whom we know there are very few, but there is a risk none the less. If an employee opts out of being automatically enrolled, they might have a stakeholder scheme into which the employer, if he chooses, could make a lesser contribution on a voluntary basis.
The test still applies in respect of any scheme—it must meet the qualifying criteria for auto-enrolment—so I am not sure that that problem exists. I want to reassure the hon. Gentleman about the unscrupulous employer. The interaction between the 8 per cent. total requirement and the pay reference period will prevent anyone from going through the loophole that the hon. Member for South-West Bedfordshire had in mind when moving the amendment.
In short, rescheduling payments in stakeholder schemes could not help a job holder to avoid being automatically enrolled or help employers evade their duties. The provisions in the Bill mean that employers will ensure eligible job holders are in a qualifying scheme receiving minimum contributions and that job holders remain in that scheme paying contributions unless they decide to opt out. So there is a belt-and-braces provision within the legislation, but I appreciate his raising the issue, because it gives me a chance to clarify that and to reassure him sufficiently, I hope, to enable him to withdraw the amendment.
I am reassured by what the Minister has said about payments being made equivalent to 8 per cent. of qualifying earnings over the pay reference period. Put together, that is satisfactory. That was not clear to me in the Bill, but the Minister’s explanation has been helpful, so I beg to ask leave to withdraw the amendment.