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Amendment 30, in clause 6, page 6, line 16, at end insert—
‘, except in the case of notices given under subsections (1) and (3), it cannot be longer than three months from the day on which the worker begins to be employed by E.’.
I look forward to serving under your chairmanship this afternoon, Ms Clark.
The amendments would undo the watering down of automatic enrolment contained in the Bill, and we question the decision to include a three-month waiting period. Amendment 29 would specifically reduce the proposed automatic waiting period before an employee is automatically enrolled from three months to one month. The Opposition have also tabled an amendment to eliminate the waiting period altogether, which will no doubt not have escaped the Minister’s attention, and that remains our preference. However, as a considered compromise, it is surely more appropriate for the delay to be limited to one month, first to limit the amount of people affected at any one time, and the extent to which they are affected over the course of their career, and, secondly, to reduce the risk of increasing opt-out rates. The Turner report is clear:
“The aim…is to use the power of inertia…to encourage individuals, and their employers through the matching contribution, to make at least minimum pension provision, while leaving individuals ultimately free to opt-out if they wish.”
Of the report’s options for the mechanics of automatic enrolment, the preferred one is for employees to have the first four weeks of a new job in which to opt out and, if they do wish to join, payments would commence only in the second month. Amendment 29 is therefore a compromise, which is in keeping with the all-important consensus that Lord Turner and his colleagues on the Pensions Commission came to.
In our earlier debate, I flagged the success of the KiwiSaver scheme in New Zealand; under it, pension contributions are deducted from a new employee’s very first pay cheque. As the Johnson review states, there have been strong and consistent calls from employers to introduce waiting periods. Employer groups have supported the introduction of waiting periods principally to reduce the administrative cost of enrolling people who are with the employer only for a short period, and to allow probationary periods to pass. Such groups believe that waiting periods would help employers to adjust the additional cost of the employer duties, minimising the need for refunds. However, the Johnson review also estimated that, compared with the status quo of no waiting period, at any one time an estimated 0.5 million fewer individuals would be automatically enrolled into pension saving and
“those that are automatically enrolled will not have contributed to a pension for the initial three months…they spend with any employer during their working life which will reduce their overall savings pot, unless they have opted in.”
My estimate is that, by having a three-month rather than a one-month waiting period, around 330,000 people would miss out on pension saving. That estimate is based on extrapolating from the 0.5 million who miss out if they wait for three months rather than paying from day one. I hope that the Minister can confirm whether that is roughly the number of people who will miss out.
The same argument applies to a one-month waiting period but, of course, the actual amount lost would be far less. Take people on average earnings of £25,000 a year. A three-month waiting period rather than a one-month waiting period would cost them around £260 in lost pension savings every time they changed jobs. If we estimate that people have 11 jobs during their lifetime, we are looking at a loss in pension income of some £3,000.
I want to further highlight the effects of this policy in two ways—first, its effects at the time of enrolment and, secondly, its effects over the course of an average career. On the first point, there is a concern from the Government that this amendment would counter the intention of the overall policy. Automatic enrolment exploits the inertia that people experience on pension savings. While we may be fully engaged in the subject, many people who could benefit from pension savings are sadly not. The default position of being automatically enrolled is intended to make savings the norm on an individual and collective level. Introducing a possible cliff edge after three months threatens to undermine that aim. Someone who works for three months before being automatically enrolled, unless they have opted in, will see their income drop in the first month that they are enrolled in the pension scheme. That is an incentive to opt out, compared with someone whose take-home pay remains constant throughout their employment period.
Habits do form and spending patterns are established. A person on an average income of £25,000 a year would see a drop of £70 in their monthly income once automatic enrolment kicks in. The drop would be much more noticeable after a three-month waiting period compared with a one-month waiting period. The impact assessment states:
“It is possible that waiting periods will increase opt-out rates. Individuals subject to a waiting period will receive a ‘full’ wage for some period, and will therefore be more acutely aware of the cost of contributing to a pension when they are eventually enrolled.”
It is also, in the worst case, an incentive for those employers with a three-month waiting period to get rid of their staff just before pension contributions kick in. That is why the legislation for temporary and agency workers is so important. Can the Minister clarify what regulation or enforcement he will put in place to deal with those concerns?
The second important issue that relates to these amendments is the effect on an average employee over the course of their career. The Johnson review shows that on average an individual has 11 different labour market interactions during their lifetime. If every employer were to opt for a waiting period, individuals would accumulate something approaching two years less savings over their career than would be the case under our amendment.
I wonder whether, in looking at the number of employments that someone has over their working life, we are in danger of looking backwards, which the Minister advised us against last week, and finding that people on average had 11 employments. If we look forwards, people might be expected to have more than 11 employments. That number may rise in the future and we should think about that in our consideration of the amendment.
My hon. Friend makes a very good point. I know we have spent a lot of time last week talking about our mums, dads, husbands, wives and sisters—although we should not remind my hon. Friend the Member for Erith and Thamesmead that she talked about her sister—but if I think about the working patterns of our parents and our grandparents, compared with mine, I have already had more jobs than my mother had during the course of her working life. Although I was not going to mention the point, it is true that looking forward we can probably expect people to have more labour market interactions during their working lives than people have had in the past.
Coming back to the issue of part-time jobs, which I phrase carefully, if people are more likely to mix and match between caring, part-time work, full-time work and part-time study to ensure that they have the skills needed for a modern workplace, they will have more interactions with the labour market over time.
On the different labour market interactions that I mentioned, 11 is the historical number, but we should be looking to the future. There is a risk of losing three months every time somebody changes their job. At the moment, 11 times three means missing out on 33 months of contributions. If the number of interactions goes up to 14 times, there will potentially be 42 months of missing pension contributions. That is a point worth making, and I urge the Minister and his Department to keep such trends in mind when considering the waiting period and the impact on the pension pots that people could expect to build up. Perhaps the Minister will come back to those points later.
Under the Government’s proposal, a person on average earnings with an average number of labour market interactions—11—would lose out to the tune of £3,200. Someone whose work pattern is a perpetual cycle of short-term seasonal work could miss out to a much greater extent. The review tells us that about 25% of individuals already have 14 or more employments during their working life. The review also identifies an impact on different ethnic groups. A greater proportion of non-white groups is employed for less than six months, with 8% of white people having been in work for less than six months compared with 14% of non-white individuals having been employed for less than six months.
The review found that young people are likely to move jobs relatively frequently, while those starting a job at age 30 to 34 are likely to stay with the employer for longer. Some 24% of 22-year-olds have been in work for less than six months. For a programme that should be about recognising and encouraging persistency in savings and the formation of habit, it is worrying. If young people move jobs frequently and are never automatically enrolled in the first few years of their working lives, they will not build up the habit, which is such a crucial part of automatic enrolment and nudge theory.
There are clearly some groups on whom the Government’s proposal has a detrimental impact. When this part of the Bill was debated in the other place, the noble Baroness Hollis talked about her research, which is worth repeating. She said:
“My previous research shows that the pattern of job turnover is different for men and women: men have more turnover in their earlier years and settle in their 40s or 50s, while women have a higher job turnover than most men by virtue of being much more frequently in and out of the labour market and more likely to re-enter into a different job… Interestingly, 26 per cent of the population on this model have between 12 and 15 jobs in their working lifetime, which would mean, on average for them…a loss of five years’ pension contributions. Furthermore, 15% have 16 jobs or more—up to 23— the Johnson review suggested up to 23 for some people—
—which would be an average of something like eight years’ loss of pension contributions.”—[Official Report, House of Lords, 3 March 2011; Vol. 725, c. GC210.]
As my hon. Friend the Member for Nottingham South said, it is likely that the number of labour market interactions will increase over time. It will be interesting to hear the Minister’s view on that.
Age UK has highlighted the impact on particular groups. It emphasised that among employers that traditionally use short-term staff—for example, call centres —there is a real risk that those who move from job to job will remain under-pensioned if the optional waiting period is taken by their employers. Reducing the waiting period from three months to one month would make a huge difference for people who have staying power, but none the less a rapid job turnover for whatever reason, and for people who move from job to job more frequently than others, either because of choice or necessity.
There may be a cycle between self-employment and employment. Take, for example, hairdressers, as mentioned by my hon. Friend the Member for Nottingham South earlier. Their conditions of employment are often rather obscure, whether they are self-employed or even if they work in a salon. None the less, the waiting period of three months can represent, over a lifetime, a significant loss of working contributions, matched by the employer, into a pension.
The hon. Lady is again raising the issue, which we discussed this morning, about people becoming self-employed or being required to become self-employed to avoid the auto-enrolment burden. Does that not reinforce our case for making it easier for employers to engage with auto-enrolment? If we cut the waiting period and reduce the threshold, more firms will find it to be more of a hassle, and they will be more likely to press people to become self-employed. Some will miss out on auto-enrolment altogether.
The aim should be to ensure that employers stick with both the letter and the spirit of automatic enrolment. Returning to the Turner report, on considering the evidence, it recommends that in the first four weeks, an employee should say whether they want to opt out, and automatic enrolment should go ahead in the second month. That would get the compromise right. The first month, in which people are making decisions, is the time for an employee to say whether they want to opt out. We would get the balance right by allowing the employer that month to do the paperwork. After working somewhere for a month, I think people deserve a pension contribution, which is in many ways deferred income.
The recommendation would also ensure that people who move jobs frequently, or just the average number of times—11 times—are building up a pension pot throughout their working life, rather than having three years in which they are not making pension contributions and so are missing out on £3,000 or so on of pension income that they would have got if they were automatically enrolled from day one or after one month.
I understand the concerns of businesses, which feel that the administrative burden would be great in sectors where there is a high staff turnover. For all the reasons that I have raised, I believe that the benefits to individuals and society outweigh the cost. The National Employment Savings Trust was designed to provide a simple and low-cost pension vehicle for all businesses, in particular to fill a gap in the market for pension provision for small and medium-sized enterprises. A company that offers a decent pension scheme, however small, should be more attractive to employees, create better engagement and reduce staff turnover. From what I have seen of NEST, I know that it is doing huge work to make its compliance processes—it is not even paperwork, because almost all of it is done on the internet—as simple as possible for employers to reduce the administrative burden that some businesses have complained about. It is for those reasons that I ask the Minister to reflect on whether he can make any movement back towards the original consensus to automatically enrol people earlier and enable them to build up their pension earlier on in their employment.
My hon. Friend the Member for Erith and Thamesmead tabled amendment 36, which has rightly been grouped with the other amendments, and I shall speak to it briefly. Amendment 36 would provide that the employer may give only one notice period to employees. My hon. Friend was responding to the concern that the operation of a three-month waiting period might have an impact on employees who stay with an employer, but whose earnings fluctuate. Let us take the case of someone whose hours are not fixed, such as the hairdresser whom we considered earlier. In the first two months of employment, they might earn enough to pass the threshold to be automatically enrolled, but in the third month, they might not. Would there be a risk that their automatic enrolment is perpetually deferred? I ask the Minister to clarify the position in response to the amendment, which is worthy of consideration. The hairdresser would represent the direct target of the automatic enrolment reforms, which is someone who does not tend to have much pension provision, but who could benefit greatly in later life if they did so.
The removal of the waiting period remains our preference, but the amendment seeks to find a compromise that would reduce the proposed waiting period from three months to one month. That would limit the number of people affected at any one time, limit the extent to which they are affected over their working lives by lost pension provision and reduce the risk of increasing opt-out rates.
I should be grateful if the Minister set out in more detail the research that lies behind the view that opt-out rates will not fall, because I am yet to be convinced. Can he elaborate on whether his Department undertook any assessment of alternative waiting periods of less than three months, such as one month as we recommend, or two months?
The Bill makes another amendment to the changes in the Pensions Act 2008, which were forged through the consensus of the Turner commission. The measure threatens to limit the scope of automatic enrolment and to undermine the purpose of the Act, which was to get people saving—persistently saving—throughout their careers. The settlement reached in the 2008 Act was appropriate, and subsequent changes to longevity mean that we need those provisions more than ever. We must not unravel the consensus.
Amendment 29 therefore aims to reduce the proposed waiting period to one month. The change would reduce the number of people being left out of automatic enrolment who are therefore also missing out on employer contributions and tax relief towards their retirement income. I hope that the Minister will consider the amendment and respond to my specific questions.
In discussing the amendments, it is important to keep in mind what we are trying to achieve, which is a total change of attitude to pensions, not only among employees, but among employers. It is as well to remember that employers and their organisations have supported a three-month waiting period, mainly, I believe, because of concerns about administration and red tape.
In addition, we must keep in mind that over the years employers resisted many changes that we now think were for the better: they resisted changes to the national minimum wage, to equal pay and to health and safety. It is natural for anyone in business to resist particular changes that they believe will stop them carrying out their work, will reduce their profits or will take up a lot of their time. It is therefore difficult to walk the line between changing people’s attitudes and creating a total sea change in how people view pensions, and trying to implement a measure with minimum disruption.
The amendment aims to ensure that the three-month waiting period is not abused by unscrupulous employers. Many employers are concerned about their staff and want the best practices in their businesses. They want a level playing field, so they want to ensure that employers who do not play by the rules are brought to book. For the sake of employees and employers who are going with the spirit of the Bill, we must be clear where the problems might lie.
My concerns are about seasonal workers and people in high-churn jobs, for whom the three-month cliff edge will be ever present. In addition, there might be a disincentive to employ older people. We had much debate last week about older women working for longer. The measures may well provide an incentive for employers to take on people who are under 22 so that they do not have to comply with the provisions in the Bill, which creates another worry for older women.
We must balance what is workable for employers and what is right for society. Most employers will comply, and as the measures are rolled out, the larger, more compliant employers will face the system first. That is the fair and right way to go, because it will show small and medium-sized employers that the system can work. We hope that any wrinkles or problems will be ironed out with the larger employers so that when the measure gets down to the small baker shop or hairdressers, lessons will have been learned and things will be easier.
I have a few questions for the Minister, because I seek reassurance that employers will not be able to manipulate the system easily. As I have said, I am concerned about people being employed only if they are under 22, which would disadvantage older women, who are expected to work for longer now. Will the Pensions Regulator be doing spot checks on employers? When employers open a pension scheme, is it at that point they become known to the regulator? If employers do not open a pension scheme, will they not be known and therefore not be able to be reviewed or policed? From reading the Bill, I am not sure how such matters will work.
As with the national minimum wage, there is the ability for employees to own up and complain if they are not receiving it. Will employees have the same ability to complain about an employer who is bullying them or not allowing them to access the pension scheme? Although there is a three-month waiting period, people are allowed to enrol from day one if they so wish. When an offer of employment is made, will it include information about the pension scheme and the fact that people can access it from day one? Can that be covered by legislation or guidelines? I am not sure how it would work, but if people do not know the facts, obviously they cannot access the scheme. It is up to the employer to inform people proactively.
My hon. Friend the Member for Leeds West, the shadow Minister, mentioned bogus self-employment. I hear what the Minister said about that, but bogus self-employment has been quite rife in several professions, such as the construction industry and IT. It results not only in people being unable to access their pensions, but in a loss to national insurance contributions and other employment rights. With a change in legislation, whether or not the onus is put on to employers, other drivers might push them to recommend that people become consultants not employees. I am interested to know whether there will be links with HMRC to investigate matters if an employer’s workforce decreases unexpectedly or if, all of a sudden, 80 of the 100 employees become freelance consultants. Will HMRC assist the regulator to make sure that sort of thing does not happen?
To return to what I said earlier, we have to think what we are trying to achieve. It is huge. It is a complete change in the thinking towards pensions. Given that trust in financial services and pensions is pretty low, now is not the best time to be introducing such measures but it is better late than never. Hopefully, it will mean that my children’s generation will automatically view pensions as part of their earnings and what everyone does rather than something that is only for people who are wealthy and can put extra money away. It should be part of people’s daily planning.
Before I entered the House, I worked for PricewaterhouseCoopers on tax investigations. My area of expertise was in employment, remuneration and pay-as-you-earn. Given what some employers would do to make sure that they pay the least tax in respect of their employees, nothing would ever surprise me. The measure will be regarded by many employers as a tax that they have to pay for employees. I therefore hope that the Minister has listened to my questions in the spirit in which they were intended. I hope that my worries are unfounded, but they are sincere concerns and have also been expressed by many trade unionists who are worried that the measure will be an extra reason why employers will put pressure on them. I look forward to the Minister’s response.
It is a pleasure to be in Committee under your chairmanship, Ms Clark. I do not want to add a lot to what has been said, but I have thought about the points made this morning about the burden on employers, and that should not be entirely ignored. It then occurred to me that even the smallest of employers—for example, someone who needs a carer—will have to take on direct payments and deal with tax, national insurance and many other matters from day one, and rightly so, because that employee needs protection. I am a little sceptical about direct payments, because of particular difficulties and issues that my constituents have had, but even the smallest of employers, for example the employer of one person, will have to operate PAYE.
My hon. Friend makes the important point that on day one of employment, the employer starts to pay the person’s salary and national insurance. Many people view a pension as deferred pay, so does she think that it is right that an employer should also start paying into the employee’s pension—the deferred pay for retirement—at the earliest opportunity?
I agree with my hon. Friend. Theoretically, those two matters are clearly linked. I was considering the practicalities, and the point that has been made is that such enrolment would create too great a burden and that, in needing to balance such burdens, we should not do it.
In the course of all the debate on welfare reform and universal credit, the Department has been confident that it will be possible to receive real-time information about people’s earnings, and also possibly about their hours of work, although that will depend on how the regulations are finally drawn up. We have been assured that one big advantage of universal credit over how tax credits have worked in the past is that problems—there have been issues of people being overpaid, and finding it very difficult to make repayments—will be avoided, because real-time information will be available from employers of apparently any size.
When we have asked about how easily that will work in practice, we have been assured that there should be no problems and that the Department was not concerned about its feasibility, so that the plans are operable. That means that employers will not only be operating current systems for deducting and remitting national insurance and tax, but also be supplying real-time information to Her Majesty’s Revenue and Customs, which will pass it on to the Department for Work and Pensions so that people’s benefits can be calculated and regularly recalculated. Some employers will regard that as a burden. If that really is feasible and practical, I wonder why it would be such a burden for people to be included in the scheme immediately.
In relation to time limits, the burden is less applicable than it is in relation to the threshold. Unless employees move on very quickly, which probably only a minority of them would, they will—provided that they meet the earnings threshold—be covered in due course. All the mechanisms to operate the system will therefore have to be put into place, whether that is from month one, two, three or four. On that basis, I hope that we will hear less of the argument about such enrolment being a burden on employers, in relation to its administration and practicalities, because there will be the same amount of work whether the employee is covered from the first month or from the fourth.
Unless an employer has very few employees, the chances are that they will be operating the scheme for some employees and not for others. If they have three or four employees, some might be covered by it because they will have been employed for the relevant length of time. I hope that those arguments about the practicality and the burden on employers will not now be repeated.
On a completely different matter, I have some information for the Committee. I referred to various adverts for chocolates and pensions this morning—I have not completely lost my marbles—and I have tracked down the chocolate advert, which was for Fry’s Five Boys chocolate. I am convinced that there was a similar advert about pensions, although which advert inspired which I do not know. I have not tracked the pensions advert down on the internet, but I would be interested if anyone can remember it. It was about the way that the poor man’s facial expression changed as he went from being a carefree youth who did not care about pensions, to a very worried man on the point of retirement. I would be interested in tracking that advert down; I know I remember it and it is not in my imagination.
It is a pleasure to serve again under your chairpersonship—if that is a word—Ms Clark. I admit to feel slightly nervous about standing up after my hon. Friend’s discussion of Five Boy’s chocolate. I have not heard of that since my childhood, and I am sure that today, such a description—or such a chocolate bar—would be deemed completely politically incorrect. It would have to be “five child chocolate” or something similar. I should probably move on.
This morning the Minister took Labour Members to task for not looking at some of the impacts of burdens on businesses and so on. As I reflected during the break since this morning’s sitting, there was a lack of Government Members jumping up and seeking to speak in support of businesses. In the interest of ensuring that we properly scrutinise the proposals as people would expect, I would like to reflect on some of the concerns raised by small businesses.
I am one of the few members of my family who does not run a small business—my family also includes the ubiquitous hairdresser who has been mentioned at various stages of our discussions. We have heard representations from business organisations that are concerned about the delay before people are auto-enrolled. I understand some of the concerns felt by businesses—particularly very small businesses—about the regulations, and that they may want time to get people on to the payroll. As my hon. Friends have suggested, the minute a business puts an employee on the payroll it has to start paying wages and national insurance. Would it be such a disproportionate burden also to have to deal with pensions? I accept, however, some of the points made by businesses. They feel that the last thing they need in the first few weeks of employing a new member of staff is more red tape.
One of the concerns expressed by larger businesses when the Government commissioned their “Making automatic enrolment work” review was that if smaller businesses are not included in the automatic enrolment, there will not be a level playing field. Those smaller businesses would have a smaller cost base as they would not have to pay into a pension. A similar argument could be made about the waiting period. An employer that changes its work force regularly will never have to pay into pensions, while an employer with a stable work force that pays into pensions would have a higher cost base. That might be another reason why automatic enrolment from day one or month two would be better.
I thank my hon. Friend for that intervention and I will come on to the issue of businesses that change their work force regularly. Her point is important, and as I know from my constituency, small businesses play a huge role in providing employment in local areas and we should not put unnecessary burdens in their way. On the other hand, however, it is important to recognise that people who work in those businesses keep them going and contribute to the local economy.
I am listening to the hon. Lady talk about small businesses. She must concede that small business men today are under great pressure, work extremely hard, and value their staff. Giving them three months will allow them to evaluate staff and to decide whether they can work together. To throw an extra burden on them immediately would discourage them from employing people. Having run a small business for 20-odd years, I speak with a reasonable amount of authority. The hon. Lady is being disingenuous about small business men, although I agree that they are the country’s engine room, and drive the country forward. We should bear their present troubles and strife in mind.
With respect to the hon. Gentleman, I was trying to be fair, and to put on the record some of the issues that small businesses have raised. I have not heard much about that from Government Members, but I will come to that. The Forum of Private Business has raised with Members on both sides of the House its worry about liability, and how to comply with the regulations that it believes the Government will introduce. It is aware that pensions are complex financial products, and that many small businesses will find it difficult to distinguish between what it describes as the good and the bad offerings. It is worried about the effect on small employers of auto-enrolment into pension schemes, and would like more support from payroll experts, and to have access to accountants and others who are familiar with the products. It wants help as the scheme is introduced because of its impact on businesses.
The forum believes that employees are unlikely to be happy at what they may see as lower take-home pay because money is paid into a pension scheme. It wants the Government to introduce an incentive package for employers to recompense them for their time and increased liability. It will be interesting to hear the Minister’s response to those points, which I have made simply to show the range of issues. Many small businesses are the life blood of local communities, and most of them understand their responsibilities to their employees.
It is important to scrutinise whether the three-month period is right, or whether one month would allow people the opportunity to deal with the issues that have been outlined, and to get people enrolled as quickly as possible. My hon. Friend the shadow Minister described situations that could become unintended incentives for opting out, and that would not be helpful. We heard some of that debate this morning on the thresholds.
I want to put on the record the fact that there is concern that some people would risk taking a short-term gain instead of planning for the future. We heard this morning about various situations, and if one has a family, current pressures may outweigh planning for the future. We do not want the cliff edge that my hon. Friend described. I hope that the Minister will reassure us on that. I may be accused of being cynical, but I live and work in the real world and regularly have to help people on fixed-term contracts and agency staff with employment-related issues. There may be a perverse incentive for employers who may see fit to get rid of staff within the three-month waiting period just before pension contributions kick in.
There may be employers who would lay staff off during the three-month period, but is there not also a danger that employers of staff whose hours and earnings fluctuate could deliberately ensure that an employee’s earnings fell below the trigger level in the third month, so that the waiting period would have to start again? Even if they continued to employ such staff, they could act in that disingenuous way.
I understand my hon. Friend’s point, and it is one concern that has been raised particularly by those involved in the trade unions, as well as others. I hesitate to use the word unscrupulous, but there might well be employers who seek to do that, because they would feel that it somehow absolved them from responsibility.
I find it unbelievable that the hon. Lady actually said that a small business man would get rid of an employee just before the three months only to avoid the auto-enrolment. I find it interesting what people call small businesses because my experience is perhaps on the smaller scale of micro-businesses, but if I had a member of staff who, after two months and 29 days, was good and could do everything that the business required, I would certainly not consider getting rid of such a person to avoid auto-enrolment. To be frank, I know small business men who would be quite offended by that remark.
I hear what the hon. Gentleman says but, if he had listened carefully, I was not specifically referring to small businesses in that context. I also made it very clear that I have had to deal with situations in which there are employers who, under existing employment legislation, have used the lengths of people’s contracts to get rid of employees at a point before which they would become liable for further employment rights or further burdens. I am sorry if he is upset, but there are situations in which employees suffer as a result. I simply want to ensure that the issues are raised and debated, and that we have some assurances from the Minister.
Perhaps I should declare an interest. Before I was elected, I ran a small business—a one-person business, but I was employing people on short-term contracts to do various teaching jobs. Everyone on the Committee would agree that small businesses try their best to adhere to the highest standards and, to retain staff, I was certainly adhering to those standards when I was involved. However, the problem is that the bad practices might drive out good, and we need to ensure that the systems that we set up do not allow that to happen, in as foolproof a way as can be managed.
I thank the hon. Gentleman for his intervention, and he perhaps put the case more eloquently than I did in outlining exactly what my concerns would be. If there are loopholes or any opportunities for bad practice to thrive, we should deal with them in discussion of the Bill.
The hon. Lady is being extremely generous in taking interventions. Is she advocating that we bind our businesses with even more red tape and regulation, stifling them instead of persuading them that now is the right time to take on additional employees? She seems to be forming her argument in a way that says to businesses: “We will burden you with more regulation and red tape, and you might want to think twice before you take on additional staff.”
I thank the hon. Gentleman for his intervention. I hope that he understands that I am pointing out what businesses themselves have said. Irrespective of the period of time for auto-enrolment that we are discussing, which they are concerned about, some businesses see it as a burden whether the period is three months or one month. We must dispel some of the myths and explain why auto-enrolment is the right thing to do. We clearly still have a job of work to do there, which the Minister I am sure will deal with in his summing up.
I would like to finish my point, if I may. Surely the purpose of our debate is to tease out and discuss the difference between three months and one month, and the best option to ensure that we meet the principles of the Bill, which is to ensure that as many people as possible are collected in to plan for the future via auto-enrolment.
I thank my hon. Friend for giving way and for her generosity in the number of interventions that she has taken.
Surely the point is to get the balance right—the balance between not regulating businesses to stop them taking on more employees, coupled with the importance of getting more people automatically enrolled. The figures that I quoted earlier suggest that about 330,000 people at any one time will miss out on automatic enrolment if we have a three-month rather than a one-month waiting period. When Lord Turner did his report—I do not think that his objective was to stifle businesses with regulations—he recommended that an employee could opt out in the first four weeks, but then in the second month when they receive the salary, they would be automatically enrolled. He thought that that was the right balance for regulating business and for ensuring that as many people as possible started contributing to a pension.
I am sure we all have examples of small businesses that we have worked for, or run, or that we know in our constituencies. I agree with Government Members that the vast majority of businesses, large and small, want to do the right thing by their employees, including paying into a pension for them. We can all agree on that point, but we must find the right balance between making sure as many people as possible benefit from automatic enrolment and making it as simple as possible, as I think the creation of NEST does, for employers to automatically enrol people into an appropriate scheme.
I thank my hon. Friend for that intervention. Once again, she has outlined her view very clearly. It is important that we get the balance right. The purpose of this debate is to tease out the issues the better to understand them from the perspectives of businesses and potential employees. It is important that we have the opportunity to do that. I favour a situation in which people are auto-enrolled as quickly as possible. That is important. I have concerns, which I raised on Second Reading, in relation to call centres, for example. I did not produce such concerns from nowhere. Age UK raised concerns about employers such as call centres that have traditionally used short-term staff because of turnover. People may be employed for a few months at a time, and then perhaps find that they have a number of short-term contracts throughout the year, none of which would be enough in this scenario to allow them to be auto-enrolled. People in certain professions or jobs could spend years without being able to benefit from having pension contributions paid. I have real concerns about that.
I listened with interest to the figures for the number of jobs that people are likely to have in their working lifetime—between 12 and 15. We have already discussed people who work in multiple part-time jobs. Many of them would have undertaken those 12 to 15 jobs very early on in their working life. Given the current situation, it is not too much to ask that we try to get them enrolled into the pension scheme as quickly as possible.
I want to reassure those who perhaps think that I have been criticising small businesses. As I outlined at the beginning, I come from a family that runs small businesses, so nothing could be further from the truth. I know exactly the contribution that they make. I know that people feel it is very important to have a system that is workable and straightforward. However, on balance, I believe that if auto-enrolment can be done after three months, it can be done after one month. That gives employees greater protection and also fulfils the principles of the Bill, which we all—hopefully—support.
It is a delight to serve under your chairmanship this afternoon, Ms Clark.
I come to the amendment from both sides of the fence. I was a former trade union official and my father was a bookmaker who employed a small number of people. The major tension in the amendment and in auto-enrolment is that we have to temper the rights of the employee with the rights of the small business man. I do not think that anyone here today has talked about larger businesses that already have pension schemes in place and will therefore not have to worry about the whys and wherefores of auto-enrolment. They will, more or less, be there.
We have not, however, looked at the issue of stakeholder pensions in our discussion of the amendment. I remember, when I was a financial adviser, many companies had stakeholder pensions, where the only members of those stakeholder pensions were the managing director and the executive. It was not set up properly. When a customer came to see me, they would say, “There is a pension scheme in the company’s name, but I don’t know how to join it.” I would say, “Who do you talk to?” and they would say, “I don’t know.” That issue needs to be looked at when we discuss auto-enrolment.
This is a massive project, on which I support the Government. I take the point that we should not burden small business men with more regulation and red tape, because I know that from when my father worked in the betting industry. There is no industry with more regulation than the betting industry, where operators have to buy licences and so on. I admire any small business man or entrepreneur who wants to go out there and set up their own business, because of the amount of hurdles that they have to overcome in accountancy and the regulatory burden they have to meet. I want to hear from the Minister what help we are giving them to ensure that the auto-enrolment system works properly for them.
I can recommend that the hon. Gentleman visits NEST, because the Work and Pensions Committee has been to NEST. I agree with a lot of what he is saying and I am not sure who that concerns more: him or me. NEST looks like a nice, simple package that will not burden small businesses. I was as concerned as he was on that point.
I thank the hon. Gentleman for that useful intervention. It reflects my major concern on this and the whole Bill. As I have said before, I sold pensions for a long time. They are complicated to explain and to understand. If there is a simple solution, that is a good thing.
Government Members might say that trade union officials are dinosaurs, but I must be a very young dinosaur, because I am 34 at the weekend.
Yes. I will probably end up like the man in the chocolate advert, full of ideas then a couple of years later bitter and twisted. Let us hope not. Where was I? I have lost my train of thought.
Yes. My dad’s life story. I gave my mother’s life story last time, didn’t I? I am working my way through the family. Tell you what, I was born in—I am sorry Miss Clark, I am being very frivolous. Please accept my apologies.
We have to temper the rights of the employer with the rights of the employee. Three months is a little bit too long, and I would argue that one month is right. The world of work is changing. People will not stay in the same job that they had when they were 16. I will indulge the Committee with more examples from my family. My grandfather started in the pits at 14 and was carried off at 72, because he did not want to stop working. That is probably the type of person the Government do not like. He was in the same job all his life.
We now have a more prosaic employment record, which we see a lot in the IT industry. My brother-in-law is an IT consultant and he was moved on from a company to become a self-employed consultant, so he is not eligible for auto-enrolment, as the Minister said. How do we ensure that companies do not encourage employees to become self-employed to avoid auto-enrolment? That is an important point and I see that problem in many industries. We have tabled an amendment that proposes no waiting period from day one, but we need some sort of compromise. I hope that the Minister will consider reducing the period from three months when he sums up or that he will discuss the matter beyond Committee stage.
I am not sure that my hon. Friends have touched on the small matter of the impact of waiting periods on opt-out rates. If someone comes into a job and is auto-enrolled after three months, they will have had three pay packets and will therefore know the size of their take-home pay. If they are auto-enrolled in month three, when their pension contribution comes out in month four, it will be far more obvious.
I note that the Johnson review said that it had limited evidence to help us understand the effect of waiting periods on opt-out rates. It says that the example from the US does not raise a concern, but such a view is obviously based on scant evidence. What might the Minister do to review opt-out rates? Will there be a review of the waiting period when auto-enrolment is in place?
In New Zealand, people are opted in to schemes after one month. After automatic enrolment is rolled out, and if the Government go with the three-month period, it might be useful if they compare opt-out rates in New Zealand with those in the UK. I share my hon. Friend’s concern that spending patterns become established after three months, and people will notice the drop in their income when 4% of it is diverted into a pension. People might not notice that drop so much after one month, because their spending patterns might be less entrenched.
My hon. Friend is absolutely right that we must find something to measure opt-out rates against so that we know what they might be and how they might differ if there were a shorter waiting period.
My hon. Friend the Member for Erith and Thamesmead touched on another issue. I am sure that the Minister will say that employees have the option to opt in even before the waiting period of three months is over. However, my concern is whether employees will be given sufficient information to enable them to exercise the right to opt in. Will the Minister explain what the Government intend to do to ensure that employers give employees such information, so that they can exercise their right and understand what it means?
A number of important points have been raised about the waiting period and there are some serious concerns about the trade-offs. Should we have a waiting period at all? If so, how long should it be? The Johnson review, as I indicated, tried to achieve a series of trade-offs and strike a balance between reducing the burdens on business while protecting the interests of consumers. The Government came under huge pressure to exclude micro-employers. We came very close to taking a million people out of auto-enrolment, but it was precisely because we could say, “We recognise the pressure on micro-employers, so we’ve provided a waiting period. We’ve provided an increase in the threshold and we’ve made various other easements,” that we were able to keep those million people in scope. That was the nature of the trade-off, and each time we try and unpick a bit of it, we risk undermining it.
The hon. Member for Leeds West is fond of talking about consensus, but we have managed to keep people together for the project, including employers, at a time when the economy is not in a good state, by recognising some of the burdens. The hon. Member for Islwyn asked what we are going to do for small firms, yet this morning he voted against a measure designed to help such firms by raising the threshold. I assume that he is about to support another amendment that helps small firms, but the difficulty is that he cannot on the one hand say, “Let’s help small firms,” and on the other, oppose all our measures that do so.
I thought the hon. Gentleman was the robust side of the room.
It is important to paint a picture of the auto-enrolment world, which will be very different from the current one, and that will slightly change how we think about these matters. That world will have a different culture and a different process. Every job in which people earn above the threshold and are above a certain age, will be an auto-enrolment job. That will be part of the process when people start a job. An employer might choose to use the voluntary waiting period. We must remember that the process is not mandatory. Employers can auto-enrol from day one if they want to. If it works for them, that is fine. To assume that it is 11 jobs times three months, times the average wage and so on will overstate the scale of such matters, firstly because people who auto-enrol do not, on average, earn the average wage, but quite a bit less, and for various other reasons. As people go from job to job in the auto-enrolment world, they will be going from a job with an auto-enrolled pension to another job with an auto-enrolled pension, to another one. While people may not be clued up in their first job, after 11 job moves—the average, and we have discussed possibly more—pensions will become much more part of the conversation on day one. It will become much more part of the portfolio that people build up.
People who work for a series of small firms will often have a NEST pension, and I was delighted about the positive response that members of the Select Committee received when they visited NEST. I have visited it myself and was impressed by its work, specifically to assist small businesses. If NEST is the scheme that many small firms choose, people who move from one small firm to another will go with a NEST pension. The NEST corporation will have been in contact with them and people will have been thinking about it. It will not be a situation when they say, “Pensions. Oh, what is that?” Such people will have a relationship with the pension provider, potentially a continuous one despite changing jobs, which means that there is not likely to be 11 lots of three months.
I hope that the Minister is right, but he is being optimistic. As I said earlier, when I was selling pensions, people accepted that they were a member of the company pension scheme. When the hon. Gentleman refers to people having a relationship with the pension provider, he is talking about a sophisticated relationship that does not exist at the moment. How do we get from a to b; from the point at which people are just looking at a job advert that refers to being part of the company pension scheme to asking the employer what the pension scheme is about?
The hon. Gentleman is right. We are not at that point yet, and nearly 10 million people do not have pensions. That is where NEST, in particular, and other providers come in. I am slightly darting about, but the hon. Member for Kilmarnock and Loudoun said that small firms were anxious about choice. The regulator will inform them of the scheme called NEST. Firms will be told that the Government have made sure that there is a provider that provides decent value for money, satisfies the requirements of the regulator in respect of the quality of the scheme and has been designed with them in mind.
We believe that, as a result of the majority of small firms not finding the market viable and the big commercial providers not finding it profitable, large numbers of people who work for small firms will find themselves with a NEST pension. The whole mindset of NEST and part of the reasoning for the caps and so on to be focused on that target market is that it has been designed with small firms and people who would rather be making widgets than filling in pension paperwork in mind. The idea is that it is for companies and providers who do not currently run pensions, as well as for employees who have never been in pensions.
Language and trying to get rid of jargon is being looked at hard, as is the interface between the individual and the scheme. I keep promising everyone that there will be a NEST iPhone app and an Android app, whatever that is. We are talking about young people, in particular. Nearly one quarter of those who should be enrolled are in the twenties, so we must think of new ways in which to introduce such things. I absolutely agree with the hon. Gentleman. NEST has not opened its doors for business yet but, by the time the scheme is in operation on a serious scale, it will have done. The cultural shift will not happen on day one, but over a lifetime of, say, 11 job moves, we will be moving into a period when people will be more engaged and the providers will be working much harder to communicate.
In relation to pension provision, apart from those in the public sector and the people in the larger blue-chip companies, the level of take-up of either a personal pension or a company pension is absolutely shocking. I am sure that the Minister will agree. However, he is saying that these provisions will change the whole culture and create a society where people look to provide for their future and their retirement.
My hon. Friend is quite right. Clearly, the public sector and big firms that run high-quality defined-benefit pensions on the whole have pretty good membership rates. However, unless you have auto-enrolment, take-up rates can be poor. I assume that hon. Members who are new to the House know that their parliamentary staff are entitled to 10% free—in the sense that the staff do not have to pay—contributions to the Portcullis pension scheme, but many staff do not take it up, even when it does not cost MPs anything to do it. That is free money. Whether it is because of awareness or barriers, or because the staff do not think that they will be here for long, there are huge barriers to getting people into that pension scheme. As he rightly says, the evidence from around the world, as cited earlier, shows that auto-enrolment completely transforms engagement and take-up rates. We get people in and then we have to work hard to engage them, but we get them in, as he rightly says.
What we have heard about amendment 29, regarding one month or three months, hardly addresses the issue of seasonal, casual and short-term workers. A season on average lasts three months. If we have a one-month cut-off, lots of seasonal workers will be auto-enrolled. The administrative cost of auto-enrolment is principally the one-off cost in choosing a scheme, getting people in and building up the relationship with the provider. The month-by-month process is relatively straightforward. If a company has to do that repeatedly for large numbers of short-term, casual and seasonal workers, there will be a considerable cost for particular employers, such as retailers. Sainsbury’s has said that it thinks that the three-month waiting period is a huge bonus, because it takes on a lot of summer and Christmas staff, who might work for six or eight weeks and are not lasting employees of the firm. If we accepted the amendment, we would put a huge administrative cost and a significant burden on the nation’s employers, while creating negligible benefit for individuals’ pensions, as six weeks of Christmas money will not earn much pension.
I would dispute the idea that such staff are not employees in a meaningful sense. If someone works somewhere for six weeks and they put in their effort and hours and are contributing, they are an employee, and they deserve some contribution to their future pension. Are they not the sort of people whom we need to capture through automatic enrolment? Let us say that someone works in a café on a beach front for three months in the summer, picks fruits and vegetables in the autumn and then does another job in the post office over the Christmas period when it is busy. People who move from job to job and do not stay anywhere longer than three months will not be able to build up a pension. Does the Minister think that that is the right way forward? Will that not mean that people who work hard, but do not work anywhere longer than three months, do not have the pension that they need in retirement?
The working patterns described by the hon. Lady happen, but they are often associated with particular periods in someone’s life, the classic one being a student who does a vacation job. Under-22s are not covered by auto-enrolment. The idea that people do a whole series of three-month jobs through their working life is not what happens. There will be odd cases and odd periods when that is the case. People can opt in—I will return to the point about how they will know about that—so no one will be deprived of anything if they want it, although they will have to be aware of it.
The crucial point of the regulations on the implementation of the waiting period is that to benefit from the three-month waiting period, a firm has to notify an employee immediately that they are about to go into a waiting period, and that during that period, the employee has the right to opt in. An employer cannot create a waiting period unless they tell their employee at the start of it about the right to opt in. That is how people will know.
Will the waiting period also apply when someone hits the age of 22 and becomes eligible for auto-enrolment? They may have worked for the employer for a long period, and are not a seasonal or casual worker. Would it make sense in that instance to enforce a waiting period?
The hon. Lady is the first person to refer to amendment 30, which refers to whether someone is already working for a firm. I do not think that the hon. Member for Leeds West mentioned that in her remarks. Let us say that there is a staging date for an employer who decides to apply a waiting period for the whole work force. Some people might not be eligible for auto-enrolment, for example a 21-year-old or someone under the wage threshold. If, as under one of the amendments in the group, we cannot have a second waiting period, then at the exact moment that someone turned 22 or passed the wage threshold, we would have to have auto-enrolment on that day, which might be in the middle of the month. Employers doing a monthly payroll or something like that would have to enrol the person two or two and a half weeks in, which means that they must deal with 23 31sts of the amount that month, for example, with the additional amount the next month.
The point of the provision is that it is an easement. The waiting period does not have to be three months; it can be up to three months but could be a lot less if the employer wants it to be. The reason for it, however, is to fit in with payroll cycles and to give employers flexibility, rather than pre-empting every possible combination of circumstance and devising complicated rules to foresee what might happen. We want a broad easement and the flexibility to get that balance right.
The Minister talks about the cost of automatically enrolling people. Obviously, there is the cost of paying into the pension but, given what has been said about the simplicity of NEST, does he have an estimate of the administrative cost of automatically enrolling someone in a pension scheme?
Also, the Minister says that people are likely to be more engaged with pensions in the future, with the roll-out of automatic enrolment and NEST. Does he have any estimate of what proportion of that 500,000 who would not be automatically enrolled would enrol voluntarily?
The figure that the hon. Lady has for less than three months is 500,000. To answer one of her other questions, she asked what the equivalent figure would be for one month. Not surprisingly, it is just under a third, so we estimate that about 150,000 would be covered under her amendment 36.
On the numbers of those who would opt in, no, we do not have an estimate, as it will change over time for the reasons I gave. At the start, all this would be new and people would not really be thinking about NEST when starting a new job. However, on their second and third job moves, that would start to change. Many people would take their pension with them, they would start to think about it and they would get the letter saying that they could opt in if they wanted. Initially, it might take a while for it to be taken up, but it will start to happen.
I am very glad that my hon. Friend asked me that—I will reflect and give a more detailed response in a second.
I am backing up my questions, so I will return to the cost of auto-enrolment. I do not have the exact figure to hand but we have produced an impact assessment which includes the cost to business, which I am sure that the hon. Member for Leeds West has seen. We estimate the cost of auto-enrolment for individual firms, varying it according to size. As one might expect, we found that for the giant employers with HR departments the cost per head is pretty straightforward. For the small firms, it is much more of a hassle, with the start-up cost that I described, although we hope that the ongoing cost will be relatively modest, especially as NEST and so on will be mainly online. From memory, I think that we are talking about several hundred pounds, but I will check that figure.
Going back to the big picture, under amendment 36 we are being invited to give employers a maximum waiting period of one month. What has not emerged in the discussion is that the existing legislation—the 2008 Act passed under the previous Government—includes a three-month period called a postponement period, but it only applies to what are called quality schemes. The previous Government therefore thought, “Actually, we will let people wait for three months, if we think that they have a really good scheme.” The Bill’s waiting period replaces the postponement period so, if we do nothing, there will be three-month waiting periods called postponement periods, but they will be much less flexible than what we are proposing, because the three-month postponement period does not allow people to opt in. Whereas we propose a waiting period during which people have the chance to opt in, the legislation we inherited deprives people of the chance to contribute at all during that period. What we propose is more beneficial and flexible. It would enable the employer to stagger auto-enrolment over a three-month period—which cannot be done with a postponement period—or make it coincide with pay periods. That is not a new idea; three months of waiting is already in the legislation, but we are making it more flexible and available across the board.
The answer to the question asked by my hon. Friend the Member for West Worcestershire about maternity pay is obvious to her, I imagine, if not to me. Statutory maternity pay is included in earnings as part of a total amount. If occupational maternity pay were to stop and a person ended up on statutory maternity pay, they could drop out of the system if they went below a certain threshold, but when their earnings went back up they would go straight back in. That is key to my hon. Friend’s question, and I thank her for raising the issue.
The key point is that each year there will be 2 million enrolments. Of those, 190,000 will be for workers who will leave within three months. If we do not make this change, nearly one in 10 enrolments will be for people who will be gone before three months have passed. The Labour party perhaps slightly understates the importance of buy-in by employers. At the end of this morning’s sitting, the hon. Member for Erith and Thamesmead said that employers have duties to pay tax and national insurance, and that it is part of their civic corporate responsibility to do stuff. That is true up to a point, but I would emphasise the issue of proportionality. It is fair to ask employers to do things, and in answer to the hon. Member for Kilmarnock and Loudoun, we are not planning to reimburse small firms for the cost of implementing the scheme. We think that auto-enrolment is part of employing someone, just like national insurance and tax, but we will try to minimise the cost. NEST has been specifically designed for small firms, and the Pensions Regulator has been working with software companies and will publish guidance to make it easier to set up schemes.
The Department has engaged with a range of stakeholders that represent small businesses, including the Institute of Chartered Accountants, and I have had meetings with small business groups. Rather than incur a heavy cost for the taxpayer, we are trying to minimise the cost. As the hon. Lady said, we recognise that it is part of an employer’s responsibility to participate in auto-enrolment, but we want to make it easy and flexible, which is where the three-month period comes in.
I have had a niggling concern throughout this debate about particular industries, one of which—the tourism industry—is over-represented in my constituency. Short-term, sequential employment of less than three months is fairly common and indeed might constitute the majority of some of my constituents’ records. That has implications for both employers and employees. Will the Minister address that issue, and tell the Committee what notice the Government have taken of the difficulties faced by that particular industry?
I guess that in Wales the summer may last for less than three months—I have spent many holidays in Wales over recent years. I would ask what the hon. Gentleman’s constituents do over a 12-month period. Provided that they have some sort of employment that lasts more than three months, they will be auto-enrolled. If it is true that some people spend their entire lives doing jobs that last only three months, they will not get auto-enrolled unless they opt in. That is the point. If I know that my life is a whole series of three-month jobs, the point will come at which I will start opting in as pensions become more important. That is the trade-off.
Does the Department have any information about the average pension savings for people who have permanent jobs compared with those who do part-time work? That might give us a better idea about whether there is an issue about part-time workers opting into pension schemes at the moment.
The hon. Lady asks about part-time work. Obviously, we are not talking about part-time work, but about temporary work. [ Interruption. ] She meant temporary work. One dilemma is that we do not have much longitudinal data. It is fairly clear that, at a point in time, pension scheme membership and contribution rates are very poor for temporary workers, but the question is whether people spend their lives as temporary workers or only have a period of doing so. We do not have a tremendous amount of data about what someone who is a temporary worker at 25 does at 35 or 45.
The hon. Member for Erith and Thamesmead asked me whether, because of auto-enrolment, firms will employ 21-year-olds rather than older women. Those aged 21 have the annoying habit of becoming 22-year-olds, so that would be quite a short-term strategy. In addition, not many 21-year-olds are perfect substitutes for her sister or others of a certain age. People often ask, “Why do you want people to work longer—aren’t you depriving all the teenagers of jobs?” However, there is very clear evidence that the contrary is true: making the most of the experience and skills of older workers benefits young people as well, and such crude substitution does not usually occur. If one thinks about why one takes someone on, the attractions of employing someone who would not have to be auto-enrolled for a year or two are a marginal consideration relative to the skills and experience of an older worker.
On how the regulator will know about an employer who is not complying, the staging process for auto-enrolment is based on PAYE records, so the regulator will know who is running a PAYE system and, based on that, if the employee does not report back with a matching scheme satisfying the duties, the regulator will see that the employer is non-compliant. It is not the case that if the employer does nothing, nobody will know about it; they will have to comply with the duty.
On spot checks, the regulator is currently working through the compliance regime, which will be risk-based. The regulator will not turn up on spec at a one-person firm in the middle of nowhere; the regime will be proportionate. However, individuals will be able to report grievances, as they can about the minimum wage and other matters. If someone is deprived of their rights or is unhappy, they can report that, but the regulator cannot be in 1 million places at once.
The hon. Member for Kilmarnock and Loudoun raised the issue about the choice of schemes. We have tried to strike a balance. We recognise that if we had put in an auto-enrolment duty and had not created NEST, we would have been asking the impossible. We would have told small firms to enrol their workers into a scheme, but the small firms might not have been able to find a scheme to take them. NEST will do that, as it has a public service duty and cannot turn any firm away, for which it receives a state subsidy. We have guaranteed that there will be a source, but firms are free to go elsewhere. The smallest businesses will often just not be attractive to commercial providers, in that it would not be worth the hassle of taking pension contributions from one or two lower-paid workers. On the whole, firms will find that NEST is easy, accessible and attractive, and although firms are free to go elsewhere, in practice they may not have much choice.
The hon. Member for Islwyn raised the issue of firms encouraging people to become self-employed. That is an important issue not only for auto-enrolment, but for national insurance and tax, and we are in conversation about it with our colleagues at HMRC. If 80% of a firm’s work force suddenly become self-employed, HMRC has a strong interest in that because it would lose shedloads of employer national insurance, so there is already a communality of interest between HMRC and us. At the margin, the existing incentives to make someone self-employed are the 12%-odd of employer national insurance and other factors, which are already substantial incentives compared with the 3% cost of auto-enrolment.
We will be doing ongoing research through the roll-out of auto-enrolment. We will monitor and research who opts in and who stays out, and compliance. A huge amount of monitoring, reporting and researching will be done because we want to get auto-enrolment right. If we identify any abuse of waiting periods, we have powers to take further action. The key is that we will be keeping a close eye on these things.
The crucial factor, which balances the new duty on firms, is the optional three-month period, during which people will have the chance to opt in. Although that period does not have to be used, it will give employers extra flexibility right at the start of an employment, when they perhaps need it the most. On balance, we think that is the right trade-off. On that basis, I encourage the Committee to reject the amendments and to agree to clause 6.
I would like to thank the Minister for some of the reassurance that he has given me, particularly when he referred to easement, and I am setting great store by 2017, when I hope some things may have improved along the lines that I want. Perhaps when we come to new clause 7, some of my other worries will be allayed, but in the light of the reassurance that we have had, I would not want to press the amendment to a vote.
We have had an extremely interesting debate this afternoon. First, the hon. Member for Edinburgh East told us that she had remembered that it was Fry’s five boys in the chocolate advert. She is still trying to remember what the similar pension advert was, but we have an hour and a half left this afternoon, and if she cannot remember by then, we will be enlightened on Thursday. We had our first consensus in the Committee on what a great job NEST is doing, and for that reason alone our sitting this afternoon will be memorable.
This afternoon’s debate has been about whether the balance of the waiting period is right. The Government propose three months, and we propose one month. We have had an intelligent and interesting debate about which period is right. Lord Turner suggested that employees should be enrolled automatically after four weeks, and Age UK suggest that they should be enrolled automatically on day one. The Government want three months, but the argument in the Johnson report, which has been heavily referred to this afternoon, seems to be finely balanced. This debate is important because the arguments are not clear-cut.
We have heard various arguments this afternoon. The first was that people have an average of 11 labour market interactions, but my hon. Friend the Member for Nottingham South said that that figure comes from the past, and that the number of such interactions is likely to increase in future rather than decrease. My hon. Friend the Member for Islwyn mentioned similar issues, and how he expects them to increase. My hon. Friend the Member for Erith and Thamesmead talked about part-time and seasonal workers, and the hon. Member for Arfon also touched on that. Those issues came up many times, including in the Minister’s response.
Although they are different from part-time and seasonal workers, the hon. Member for West Worcestershire mentioned women who take maternity leave, and how they will be treated under automatic enrolment. When responding to the issue of seasonal and temporary workers, the Minister said that he was not aware of comprehensive evidence, but he thought that what there was showed that temporary workers are less likely to be in a pension scheme. My argument is that such workers in particular will miss out if there is a three-month waiting period, but they are employees and making a meaningful contribution in their jobs.
My hon. Friend the Member for Edinburgh East said that employers pay national insurance and wages from day one of employment, and suggested that they should also contribute to a pension from day one. Many people see that as deferred income. My hon. Friend the Member for Nottingham South talked about opt-out rates, and said that if someone experiences a certain salary for three months and it falls by 4% in month four, the opt-out rate is likely to increase. He asked the Minister to keep a close eye on the trend to ensure that the three-month waiting period does not result in a higher opt-out rate. We all know that when we get our take-home pay, we tend to spend it and have nothing left at the end of the month. For many of our constituents, it is not even to the end of the month. We know that spending patterns become entrenched and that habits form. If someone sees a drop in income on the day that they are automatically enrolled, my hon. Friend and I believe that opt-out rates are likely to be higher.
While the minimum reduction in take-home pay would be 4% once one is auto-enrolled, can my hon. Friend confirm that that is always the case, or could it be more than that, because in some employer schemes the employee contribution is higher than 4%?
Yes, my hon. Friend is right. The minimum amount is 4%, but it could in reality be higher. The Minister is right to say that people can opt in in the three-month period, but the question that people have posed is, would they? Automatic enrolment has many values, one of which is to build on people’s inertia and nudge them into doing what is right for their long-term interests. Without that nudge, it is unlikely that many of them would voluntarily enrol before their enrolment was automatic, although I hope that they would.
I have put the case for the workers and why I believe that it is right for them to be automatically enrolled earlier. My hon. Friends the Member for Kilmarnock and Loudoun and for Islwyn, and the hon. Members for Nuneaton and for High Peak have also made important points about not burdening employers with regulations and red tape. Many members of the Committee have said that during these difficult economic times when we need small businesses to be the engine of growth, this might not be the time to burden them with additional regulation. However, we also know—the Minister has confirmed it—that smaller businesses will not be automatically enrolling employees until much further down the roll-out process during 2016 and 2017. We all hope that the economy is in much better shape by then. The staging approach, with big businesses automatically enrolling their employees first, is the right one.
I asked the Minister specific questions about the costs for businesses. He suggested that the up-front costs for administration purposes were in the region of hundreds of pounds, but he was not sure of the exact numbers. It would be useful if the Committee could see those numbers at a later stage, so that we are aware of the additional cost. All members of the Committee have emphasised that auto-enrolment is much less of a burden on small businesses because of the creation of NEST. The hon. Member for High Peak talked about his visit to NEST in south London and how he had been reassured that small businesses will not be burdened with the regulation and red tape that he had initially feared. That is good news for all of us, particularly for small businesses that will be automatically enrolling employees into their schemes.
We have had some heated debates, but the consensus is that small, medium and large businesses value their staff and want to do the right thing. Of course, we all have examples—from our constituencies and surgeries—of people who are treated badly by employers of all sizes. That is important. The Minister talked about the pressure that he came under to exclude micro-employers. It is right that there is a level playing field for small businesses, micro-businesses and medium and large businesses, but there should be a level playing field in terms of turnover of staff as well. That is one of the reasons why I would opt for an earlier automatic enrolment date, as my hon. Friends the Member for Kilmarnock and Loudoun and for Edinburgh East have also emphasised.
Today’s debate has been about balance. It has not been about whether automatic enrolment is the right thing. It has not been about whether the automatic enrolment period should be extended to six months, nine months or a year. It has been looking at whether it should be one month or three months and where the balance is to be found. It is a narrow window, but it affects some 350,000 people at any one time, according to the Minister.
When New Zealand looked at this and introduced the KiwiSaver, they decided to have automatic enrolment after a month. Lord Turner and his colleagues on the Pensions Commission also determined that people should be automatically enrolled after a month. My hon. Friend the Member for Islwyn said that the world of work is changing. We all know that people are likely to have more, rather than fewer, jobs in the future. That is why a compromise of its being one month before people are automatically enrolled is more appropriate to the changing world of work, to ensure that more people are brought into pension saving, particularly those who most stand to benefit from it—those who change jobs more frequently and those who work for smaller businesses. One month is a compromise that strikes the balance between employers and employees in a fairer and right way. I beg to ask leave to withdraw the amendment.