Clause 36 - Automatic enrolment: transitional period for hybrid schemes

Pensions Bill – in a Public Bill Committee at 3:00 pm on 11th July 2013.

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Photo of Steve Webb Steve Webb The Minister of State, Department for Work and Pensions 3:00 pm, 11th July 2013

I beg to move amendment 4, in clause 36, page 19, line 21, at end insert—

(i) ’.

Photo of Anne Main Anne Main Conservative, St Albans

With this it will be convenient to discuss Government amendment 5.

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

It would make sense if I also addressed clause 36, to which amendment 4 applies, because we have to understand why the clause is there in order to understand why it needs to be changed.

Clause 36 corrects an error in the Pensions Act 2008, which allowed certain sorts of pension schemes—essentially, defined benefit or hybrid pension schemes—to defer automatic enrolment. It was sensible to allow them to do that, partly because they are generally higher quality schemes, so, as an easement for firms providing higher quality pension provision—those firms were at the end of the queue when it came to automatic enrolment duty—that seemed to be a perfectly proper thing to do.

The other reason was that the phasing up of the 1%, 2%, 3% employer contribution did not make a lot of sense in the context of a DB pension scheme. A DB pension scheme has to be funded at the level of the employee contribution, whatever that is, plus the employer contribution to make up the shortfall. Saying that the minimum contribution is 1%, 2% or 3% does not make much sense in the context of DB or hybrid schemes. The principle of deferring DB and hybrid schemes to the end of auto-enrolment, when the full 3% had come in, seems entirely unobjectionable.

However, unfortunately, it was pointed out to us that the 2008 Act, passed under the previous Government, was deficient. It does not work as intended, because the existing provision does not work properly where both money purchase and defined benefit pensions are payable under a single hybrid scheme. If the legislation is left uncorrected, job holders who are eligible only to be enrolled into the money purchase arrangement under a hybrid scheme will lose the benefit of pension contributions from their enrolment date until the end of the DB transitional period.

To translate that into English, if a pension scheme has a DB section and a DC section, the fact that it has a DB section enables the scheme to defer automatic  enrolment. However, there might be an individual who cannot be enrolled into the DB section because it is not open to new members. They might only be able to have a DC pension, but they will not get the benefit of auto-enrolment until the end because somebody elsewhere in the scheme is in a DB pension. That does not seem right to us, so clause 36 deals with that problem. It corrects the error and ensures that members of hybrid schemes are treated correctly under the transitional arrangements. Or, it would have done, but we did not get it quite right, which is why amendments 4 and 5 are necessary.

To clarify, clause 36 brings in people who are in a hybrid scheme where they can go only into the DC section. However, we would still have a problem because the clause does not cover individuals with historically defined benefits in a scheme who would only be eligible to accrue money purchase benefits in the future. These are people who are actually members of the DB bit of the scheme, but cannot build up new DB rights. The first correction, in clause 36, means that just being in a scheme where somebody is in DB does not mean that the firm does not have to auto-enrol that person. Amendments 4 and 5 say that even if someone has DB rights under the scheme, they must still be auto-enrolled if they cannot build up new DB rights. In a sense, the intuition is fairly clear. If a person can build up only DC pension rights, regardless of who else is in the scheme or what other rights that person happens to have, that person should not have to wait to be auto-enrolled. Clause 36, as amended by amendments 4 and 5, delivers the policy intent that I think the drafters of the 2008 Act probably always intended. Hopefully, the 2014 Act, which I hope the Bill will become, will deliver.

Photo of Mark Reckless Mark Reckless Conservative, Rochester and Strood

If someone is not accruing further DB benefits because they have already reached their maximum pension entitlement—perhaps half of their salary—would they be auto-enrolled into the DC section or not?

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

The situation would be where a firm has had a DB scheme in the past, the individual who was a member of it has accrued rights, and the company has closed the DB section not just to new members, but to new accrual. It is not that anyone has hit a limit, particularly.

Photo of Mark Reckless Mark Reckless Conservative, Rochester and Strood

That was not the example I was giving. I was taking the example of someone with quite long service in the scheme who has already built up enough accrual so that their pension would be, say, half of their pay, for which reason they are not accruing any more. Would that force auto-enrolment into a DC scheme on them?

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

Obviously other clauses would allow us to exempt certain categories of people from the auto-enrolment duty, such as people who have exceeded the lifetime tax limits. If someone is simply not eligible under the rules of the scheme to build up any more pension under the section of which they are a member, the employer will still have a legal duty automatically to enrol them into something of the employer’s choice. Sadly, such cases are very rare. We are trying to ensure through the amendments that, where somebody cannot  be enrolled into a DB or a hybrid scheme and build up rights under that scheme, they are enrolled into something. That is the point of the amendments.

Amendment 4 agreed to.

Amendment made: 5, in clause 36, page 19, line 22, leave out from ‘scheme’ to ‘are’ in line 23 and insert ‘and

(ii) all the benefits accruing in respect of his or her membership’.—(Steve Webb.)

Clause 36, as amended, ordered to stand part of the Bill.