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Pensions Bill

This is another group of amendments that is rather like one of those cars that can be bought at certain scrap yards that have the front of one car and the back of another. The amendments refer to two distinct issues, so I shall separate them immediately. New clause 6 and all but one of the amendments are concerned with levelling down, which is the other massive issue that lurks throughout the Bill. I shall come separately to amendment No. 29, which is on another matter that was important in Committee: workplace pensions and group personal pensions. What do we mean by levelling down? We mean a scenario whereby, with the advent of personal accounts, finance directors advise their board that participation in their own defined benefit pension scheme could double almost overnight, with the cost implications that that would carry. Companies that had not already closed their existing defined benefit schemes to new or even existing members, assuming that there were any such companies by that stage, would then take the opportunity to say, ““Well, we are closing our scheme now, but there is a perfectly good new scheme called personal accounts, backed by the Government, that we would point you in the direction of.”” If I have learned anything doing this job as shadow Pensions Minister, it is that there is an active desire on the part of large tranches of the population not to know anything about pensions, or to find out what level of contribution they should be paying and what pension such a contribution would produce in later life. There is almost an unwillingness to engage in the issues. At almost every seminar to which I am kindly invited, some academic seems to get up and say that he or she has done a study and come to much the same conclusion—that the vast majority of people in this country do not really engage in the pensions issue. Almost any effort from any quarter to try to improve that situation has to be welcomed. However, when the moment comes, many employees may simply not inquire whether it would be sensible to move from a DB scheme run by their employer, in which the level of employer contribution may be much higher than is envisaged under personal accounts, and what difference it would make to their pension. This is not, by any stretch of the imagination, an attempt to reopen the Turner settlement, which was based on a series of compromises and took into account different views, including those of the CBI and all sorts of others. However, let us remember that an overall contribution level of 8 per cent. will not deliver a very comfortable retirement. It is a massive step forward for people who have no provision at all at the moment and should have, but there is concern that the mere arrival of personal accounts will have an effect on existing, more generous pension provision. The point of new clause 6 is straightforward: to say that there should be a duty on PADA to minimise the effects of the introduction of personal accounts on existing pension provision. I cannot really see why the Government should not accept a new clause along those lines with alacrity, because it has been pretty clear since the Turner report that we are all on the same wavelength and believe that we should focus on the so-called target group set out by Turner, which is predominantly people who have no existing pension provision. It will be the ultimate tragedy and irony at the same time if, after this process, we end up increasing the number of savers but not the amount of savings, and if all we do is recycle roughly the same amount of savings in the pensions system, or even worse. I shall come to that possible scenario in a moment. Our approach in Committee, and to some of these amendments, has been shot through with attempts of all sorts to erect a kind of Berlin wall between personal accounts and existing pension provision, whether by banning transfers in and out or by banning contributions above a certain level. It is still a matter of regret that the figure of £3,600 a year, which is firmly on the record as being the Government's position on the maximum annual contribution, is not in the Bill, but so be it. We have tried to put it in the Bill and, in true form, have failed dismally at every attempt. In other ways, too, we have tried to ensure that there will be no interference with existing provision by the new personal accounts system. We must turn again to our old friend the Pensions Policy Institute, which has done impressive work on levelling down. If I remember rightly, it was funded by the Nuffield Foundation. As the PPI put it:"““Levelling-down refers to the risk that, in response to the Government's proposals, employers may decide to close existing occupational pension schemes that offer more generous pension benefits to their employees and instead enrol employees into the new personal accounts.””" It went on to say:"““Levelling-down is an important policy issue.””" I entirely agree with that. It is one of the two most important policy issues surrounding the Bill. As the PPI said:"““There is a lot of uncertainty about how employers will respond to the reforms””." It modelled various effects: those of no reform, of employers continuing to offer pensions on their existing terms, of what it calls ““cost control””, and of the modelled employer response. Those models produced wildly different projections of what could happen. The PPI made the point that without any reforms at all"““there could be a decrease in annual total pension contributions from around £40 billion in 2006 to around £30 billion by 2050.””" So on one level, doing nothing is not really a sensible option. The PPI also looked at the very optimistic scenario of pension contributions increasing by about £10 billion annually. It then considered what it called a"““very pessimistic and extreme scenario””" that could involve the shrinking of the market below its current level, even with personal accounts being taken into account. That is an extremely sobering scenario, but, as the PPI continued:"““In reality, employers are likely to respond in a variety of different ways.””" It referred to work done by Deloitte and Touche in 2006 showing a possible total annual pension contributions increase of £10 billion compared with a position without the reforms. However, the worrying part is that the PPI then stated:"““But this initial increase could wane over time as employers respond to the reforms by closing existing schemes to new members””." To adopt the expression used by the Minister in the previous debate, I do not think that there will be some big bang, with levelling down happening between one day and the next. Much more likely is that there will be a gradual process of attrition, as people move from job to job and find that pension schemes are closed to new members. I cannot say what will happen, and neither can the Minister or the PPI. In its written evidence to the Committee, the institute said:"““Overall, the jury is still out as to whether the Government's pension policy will deliver both more people saving and more saving and better retirement incomes…However, the interaction of the reforms with means-tested benefits and the risks of employers ““levelling down”” their pension contributions both pose real challenges to the success of the reforms.””" That expresses better than even I can the concern lying behind new clause 6 and the other amendments. No one can predict how employers will behave, so any measure that will minimise the effects of levelling down—including the duty in new clause 6 that would require the PADA itself to minimise that effect—is to be welcomed. A related but separate issue is covered by amendment No. 29. Much concern has been expressed about workplace pension plans and group pension plans. If a solution is not found to the problem posed by GPPs, the process of levelling down could be turbocharged. The industry consensus is that we need that solution now, not in 2012. The National Association of Pension Funds said that the EU's directives on distance marketing and unfair commercial practices may prevent auto-enrolment being applied to workplace personal pensions."““We believe that the UK Government should continue to seek clarification from the EU on whether automatic enrolment can apply to WPPs in the UK under the proposed reforms. However, if agreement cannot be achieved, the NAPF believes that a solution can be found that would allow auto-enrolment in to WPPs in a manageable and affordable way, by establishing WPPs under master trusts.””" The Association of British Insurers shares the concern about the present uncertainty, although its alternative solution is to institute streamlined joining for those in GPPs. Some 2.5 million people are in those pensions, making up some 40 per cent. of all employer provision, and the ABI states:"““We are particularly keen to ensure that these schemes can be preserved within the new system as they tend to offer better arrangements to employees, and continuation will save employers from a costly and complicated review of pensions provision.""Given the current scale of the GPP market…the potential damage to pension savings is very high.””" The association concludes:"““Failure to secure a safe future for GPPs will prompt widespread levelling-down of pensions, something the Government is so keen to avoid. The average employer contribution to a GPP is 6 per cent. If this was reduced to the Personal Accounts 3 per cent. level, some £900 million of contributions would be lost by employees.””" That is incredibly important, as losing the more generous provision would give real impetus to the levelling-down process. The ABI goes on to say:"““A solution must be found now—not in 2012.""2012 is still four years away, and uncertainty in the GPP market now means that financial advisers…may hold back from recommending new schemes. The impact of this is very real, especially for middle-age savers—for a 40 year old man, such a break in saving could reduce retirement income by up to one-fifth.””" Similar concerns have been expressed by the CBI and by Norwich Union, while the Equality and Human Rights Commission said:"““We are concerned about Clause 3(5)…We understand that the Government is not entirely satisfied that auto enrolment is currently possible into commercially based personal pensions under European directives. The Government has recognised the concern that we and others have and we urge them to continue their discussions with Europe or investigate alternative solutions such as master trusts to ensure the vital principle of auto enrolment is not breached.””" It is clear that the Government should pursue a twin-track approach on this matter. They should continue to have discussions inside the EU to see what can be done. Resolving matters such as this usually takes some time, but the Government also need a plan B in case the talks do not work out. We need a workable exemption to automatic enrolment in GPPs, so that we can get the policy aims back on track—that is, to deter levelling down of existing provision, and to encourage people to continue in the schemes and to join them in the foreseeable future. There is a real worry in the industry, and an uncertainty that cannot be allowed to continue. The concern is that a gap in pension provision could have a real effect on the retirement income of many people. I hope that the Minister will tell us what progress has been made with the EU, and what his fallback position is if the talks do not work out. The problem of levelling down is a huge one, and I commend the new clauses and amendments to the House.