Clause 10 - Certification that alternative to quality requirement is satisfied

Pensions Bill [Lords ] – in a Public Bill Committee at 6:00 pm on 12 July 2011.

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Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 6:00, 12 July 2011

I beg to move amendment 9, in clause 10, page 8, line 25, leave out subsection (2) and insert—

‘(2) For the heading substitute “Certification that quality requirement or alternative requirement is satisfied”.

Photo of Katy Clark Katy Clark Labour, North Ayrshire and Arran

With this it will be convenient to discuss Government new clause 2—Certification for non-UK schemes.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

The issue of certification is important and substantive, so I will explain what it is, why the provisions in the clause make certification easier and why we have gone a step further in amendment 9 and new clause 2 in response to the debates in the House of Lords.

This is the first time I have been a Minister in a Committee, and I am amused because I did not realise that Ministers are given a paper stating that the amendment will be “Moved by: Steve Webb”, that my “Party” is “Liberal Democrat” and that at the top is the word,  “Accept”. I am greatly heartened that I am being advised to accept the amendment—I will listen to the debate and then decide.

What is certification all about? The idea is that firms have to auto-enrol a set of workers, but what do they auto-enrol them into? They have to auto-enrol them into a scheme that is good enough. It does not have to be perfect; it has to be good enough. The 2008 Act envisaged certain quality thresholds for schemes that satisfy auto-enrolment quality standards. The problem with the 2008 Act is that it is quite rigid, which is a recurrent theme. A firm might have a pretty decent scheme, but if it did not exactly fit with what the Government thought it should look like, the firm would fail the pretty decent scheme test—as it is known in the trade. The employer would then have to amend the scheme to fit the Government’s framework or think, “Blow this for a game of soldiers—I will shut my scheme and do the bare minimum.” We want to avoid the situation of firms that are running schemes that are good enough feeling moved to close them or to level down.

The idea of certification and the reforms in the clause is that we will allow different sorts of schemes to pass the good enough test. We are proposing a range of thresholds to allow schemes to be certified as good enough, and there are three variants. First, if a firm provides 9% of basic pay, its scheme is good enough. Auto-enrolment is based on one definition of pay—on earnings in the band above the £5,000-odd threshold—but many pensions are based on another definition of pay, such as basic pay, which can create problems in that basic pay might be very different from total pay, because of overtime and bonuses. We do not want an employer who is running a basically decent scheme to have to shut it or amend it because of those differences in definition. Therefore, in response to a lot of consultation, tier 1 of the certification test, which we will be introduced in regulations, states that if at least 9% of basic pay is put in, including at least 4% from the employer, the firm will have a tick as being good enough.

Secondly, if the firm contributes at least 8% of basic pay, including a 3% employer contribution, that will also be good enough. Thirdly, if the firm contributes at least 7% of total earnings—basic pay plus bonuses, overtime and so on—including 3% from the employer, that will again be good enough. That is different from the 8% of band earnings, which is the bit above the uprated £5,000 or whatever the threshold finally is. As I said, the certification test is to give firms that run schemes that are good enough but do not exactly fit our blueprint a tick in the box, so that they can get on with running those pension schemes and making widgets.

Clearly, some people in some firms will get less money put into their pension because we have made that easement. For some individuals, 8% of band earnings will be more than what is allowed under the certification rules, and the question is whether we are disadvantaging too many people. We did not design the thresholds and come up with numbers off the back of a fag packet; they were based on studying basic pay, total pay and what firms were putting in, and making a careful analysis of that. We always intended for the vast majority of workers to do better—or as well—in these tests as they would have done in the original tests.

There was a debate on this issue at some length in another place, which we welcomed and found helpful. It was suggested that reassurance was needed that the new certification tests will not water down the protection received by workers. We therefore tabled amendment 9 and the linked new clause, which will ensure that over 90% of employees, based on survey data, will do better or as well in each of these tests as they would have done in the original tests. We have looked at the annual survey of hours and earnings for private sector firms, and applied the two tests—the original 8% of band earnings test and the different tiered tests. With the tier 1 test, we found that 95% of employee jobs will get as much money or more; with the tier 2 test, that was true for 91% of employee jobs. It must also be true for the tier 3 test because that involves 7% of total earnings. Any individual to whom that tier applies will save at least as much as they would have done had contributions been calculated using qualifying earnings.

Photo of Rachel Reeves Rachel Reeves Shadow Minister (Work and Pensions)

I applaud the work done by the Minister and the evidence that he has cited. He gives the percentages of those who are likely to be better off, and I am pleased with those numbers. Does the evidence suggest that those who will not be better off belong to a particular group? Will it be those right at the top, for example, or those right at the bottom? I have worked for firms where people on lower incomes have a lower proportion of their income paid into a pension by both employer and employee. Is there a risk of that happening?

It is good that schemes that pay in from pound one are not invalid under this scheme because they do not fit specifically into the banded earnings. From his conversations with employers, can the Minister tell us what proportion of businesses will pay in from pound one? Will most wish to do that, or will they prefer to use banded earnings?

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

The answer will be different for each of the tiers. Some involve payment from pound one, and some take differential account of overtime. To clarify, tier 1 involves 9% of basic pay and tier 2 involves 8% of basic pay. There is, however, a second condition that I forgot to read out a minute ago and the record will look a bit bizarre. As I was reading it, I thought, “How can that provision be as good as the other one?”, but the second requirement for tier 2 is that basic pay must be at least 85% of total pay. We do not want manipulation or a situation in which somebody reduces basic pay to nothing and pays everybody in bonuses—or does the opposite—and thereby gets round the rules. That is why we have the different tiers.

One problem with private sector occupational DC schemes at the moment is that many would fail the tests under discussion. These tests are not watered down. For tier 1, we think that around 50% of private sector DC schemes would pass and 50% would fail. It is not a weak test and requires a certain amount. We think that about 25% of private sector schemes would pass either tier 2 or tier 3 tests.

In terms of the people who do not get as much, we do not have strong evidence either way, but it will be different for each scheme according to whether account is taken of total pay, basic pay or whatever. In terms of how many schemes use contributions from pound one,  my anecdotal impression is that it is quite common for schemes to be based on that. We think that people might use certification to have a scheme, which could be NEST, from the first pound so that some of the matters that we discussed earlier about when people fluctuate above and below thresholds will not be an issue for the firm, because it will just pay 7% or whatever it is every month. It will not have to worry about whether someone is above or below the threshold, or about re-enrolling, waiting periods and so on. It will just say, “Blow this, we’ll just put 7% in every month.” That will be possible because of certification, but if it had to be 8% of band earnings, it might not have that flexibility.

Photo of Rachel Reeves Rachel Reeves Shadow Minister (Work and Pensions)

I thank the Minister for his detailed response. I would expect the majority of employers who currently contribute to a pension scheme to pay from pound one. That is certainly my experience from talking to employers, and it would be good to think that they might do so under automatic enrolment. I realise that there might not be any quantitative analysis as we do not yet have automatic enrolment, but having talked to NEST, I wonder whether the Minister’s understanding is that many employers who do not currently have schemes might consider automatically enrolling from pound one.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

The short answer is that we have not had a significant amount of feedback to that effect, but as we discussed a moment ago, it might be attractive. Although it might be slightly more expensive to pay 7% from pound one or whatever, it might make life a lot simpler for firms, and that is partly the point of the exercise.

I might stop there. Although I could speak about the clause, I want to focus on the amendments, which are in response to discussion in the other place, and seek to provide the reassurance that we will regulate to provide easements, but that we will check annually against the data for the survey of hours and earnings to ensure that we are meeting the 90% threshold all the time.

Photo of Rachel Reeves Rachel Reeves Shadow Minister (Work and Pensions)

When the Minister is reporting back to Parliament on the success of automatic enrolment, it would useful to see what the proportion of paying in is from pound one, the lower earnings limit, or some other limit. That will say a lot about how much employers have engaged with it, and, as the Minister said, the burden on business could be reduced if fewer people are moving in and out of NEST, especially if there are high set-up costs for moving someone into NEST and then perhaps taking them out.

Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions

It is certainly the case that if an employer is using certification easements to get clearance from the regulator that they are compliant, we will have statistical data on that, and I am sure that we can make such data available as appropriate.

On reflection, I have ranged fairly freely over the clause, but in summary the key thing that it will do when it is amended, as we hope it will be shortly by amendment 9 and new clause 2, is to give us the power to introduce a certification test for employers for money purchase schemes, personal pension schemes, and the money purchase equivalent element of hybrid schemes, and it requires the Secretary of State periodically to review operation of the test. I have described the test and the easements, and our proposed amendment. Let me make it clear what the test is.

The Secretary of State will be satisfied before publishing regulations that no more than 10% of individuals will receive contributions less than the statutory minimum. The key point of clause 10 is that it allows employers to continue to calculate their pension contributions on their scheme definition instead of switching to band earnings, and the alternative tests broadly replicate the minimum quality requirements for money purchase and personal pension schemes, and the money purchase element of hybrids. We are trying to protect individuals but give flexibility to employers. I hope that the Committee accepts that the clause takes us in the right direction, and that amendment 9 will provide the reassurance that has been sought by hon. Members, and in another place.

Amendment 9 agreed to.

Clause 10, as amended, ordered to stand part of the Bill.