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Pensions Bill

My Lords, the House is grateful to the Minister for his introduction of this very important Bill—so important that, unlike the 2004 Bill, it will go into a Committee of the whole House. I welcome that decision, and the overall tenor of the Bill. The Minister mentioned consensus; we do not resile from what our honourable friends said in another place. However, it is no good for the Government to assume that everything in the garden is beautiful. There is a collective view among parties—and, as the Minister just said, among stakeholders—that it is right to introduce personal accounts, and as soon as is practicable. He mentioned 2012, just three and a bit years after Royal Assent—a tight timetable if ever I saw one. I wonder whether it is achievable. Consensus works both ways. Dogmatism on the details will not maintain this consensus. It is the details that worry me and my noble friends. Your Lordships are in for a lot more explanation from the Minister before we can agree on the way forward for personal pensions. I hope that the House will forgive me if I look back. When this Government took over running the country in 1997, they inherited a pensions industry that was the envy of the world, with 6.2 million employees enrolled in private sector workplace pensions, 5 million of them in defined benefit schemes. Savings were high, with a total saving of £54.39 billion and a savings ratio of 9.5 per cent. Today the position is very different and the EU recently reported that Great Britain was fourth from bottom of the pensioner poverty league. Only pensioners in Spain, Latvia and Cyprus are more likely to fall into poverty. In 2007, total savings were only £26.413 billion and the savings ratio was 2.9 per cent. The number of active members of pension schemes has fallen from 5.1 million to 3.3 million. Only 900,000 workers are in defined benefit schemes in the private sector. These schemes have closed not only to new members, but to existing employees as well. Workers have had to suffer a reduced income in retirement after being forced into DC schemes. State employees, though, have on the whole retained their DB schemes, resulting in much greater retirement income. No wonder jealousy abounds. There are two reasons for this downgrading of private sector pensions. The main one is affordability—affected, obviously, by increased longevity. Firms have found that they have to put more into their pension schemes to maintain the status quo. Secondly, there is the effect on pension schemes of the Government’s decision to remove advanced corporation tax in one fell swoop. This brought an extra £5 billion a year into the Treasury—£55 billion to date. I admit that not all of this was attributable to the investment income of pension schemes. However, the Government have never admitted that there was any effect on schemes, although the Pensions Policy Institute—it is very well thought of—believed the figure was between £2.5 billion and £3.5 billion a year. What prospective pensioner has gained from this? Have pensioners really benefited to the tune of £2.5 billion a year from, for example, the National Health Service? The Government recognised, even in those early days, that one group of employees was not saving for a pension, so they invented stakeholder pensions, which we were told would be applied for by 4 million to 7 million employees. By May 2006, according to the Government’s White Paper, only 2.7 million of them had been sold. I do not believe that that is to be seen as a prognosis for this Bill, most of which covers personal accounts along the lines of the scheme envisaged by the noble Lord, Lord Turner of Ecchinswell, and his Pensions Commission. The Minister has revised the figures to the top end of the original figures; the first impact assessment that I saw referred to between 6 million and 9 million employees but the Minister mentioned 9 million employees alone in his speech. However many employees are involved, the Government believe that they will have pensions savings for the first time because of auto-enrolment, by which workers have to be make a positive decision to opt out, but not on day one. An added twist is that employees will pay into the scheme from their first pay date after day one and get their money back if they opt out. Knowing this Government, I assume that that will be without interest. Ministers in another place have stated that the decision to opt out must be taken within a month. This may be time enough if you are paid weekly, as you will be able to see the effect of the withdrawal of 4 per cent of your pay cheque on your household income, but what about those who are paid monthly? Will it not take more than one pay period to establish whether they are doing the right thing by remaining in a personal account? We will discuss that in Committee. I am glad to hear, though, that the Minister intends to amend the Bill to allow any firm to auto-enrol its employees into its existing workplace pension. We will look, too, at the very curious drafting of the Bill, which, although it is all about personal accounts—or 90 per cent of it is, at least—does not even mention them until Clause 58, some half way through. The Minister could save himself an awful lot of trouble by telling me why that is so when he winds up, as well as why it is necessary to have quite so many regulation-making powers, which are as yet pretty opaque. I counted 11 of them in the first 28 clauses, which must be a record. I read the comments of your Lordships’ Delegated Powers and Regulatory Reform Committee with much interest, and I am interested to hear that the Minister is going to accept all its recommendations. Certainly, the Government’s response to that report did not give me that impression, so this is looking on the brighter side. As for the scheme itself, the Government are rightly seeking to contract it out to the private sector, to be overseen by a board of trustees. On their own figures, 60 per cent of moderate to low earners, earning from £5,000 to £35,000 a year, are not saving for their retirement, so a low-level pension scheme is certainly needed. However, especially at the top end of the range—let us say from £20,000 to £35,000—personal accounts will be competing with existing schemes. There must therefore be a level playing field. It is of particular note that for personal accounts wages are counted as gross, whereas for any workplace pension that I have heard of they are counted as net. We will investigate that in Committee. There is, too, a particular worry that firms will be tempted to downgrade their existing schemes to or near the basic minimum of 4 per cent from employees and 3 per cent from themselves. I am glad that government amendments are promised to stop employers inducing their employees to opt out. There are also concerns about the qualifying schemes, which, if you are a member of them, may absolve you from enrolling in personal accounts. Can a private pension scheme with no employer input, for example, be a qualifying scheme? Many of the earners that we are talking about are likely to take career breaks, either voluntarily or involuntarily, in which case their contributions will cease. We will seek to change the Government’s mind on whether top-ups are to be allowed when people are back in work. After all, that is exactly what is allowed with state pensions. On the subject of state pensions, I believe that in the dying days of last year’s Pensions Bill the Government behaved shabbily in persuading the noble Baroness, Lady Hollis, to withdraw her amendment on women being able to make up more contribution years than is allowable on the basis that they would review the position, giving the distinct impression that something could be done. The Minister was then forced to come to the House to say that the Government had reviewed the position and decided to make no change. I have no doubt that the issue will be raised again in our debates, and that the thorny issue of compulsory annuities at 75 will figure in our discussions. There is also the tie-in between state pensions and personal accounts because of the date of increasing the former by earnings gross, which the Pensions Commission said was intrinsically entwined with personal accounts. Had my party won the last election, it would have already happened, but the Government have been very coy about the start date. Should not the change be made at the same time as personal accounts start in 2012? I readily understand why it will take at least that long to prepare the ground, to arrange the contracting out, and for the pensions industry to prepare the individual funds from which to choose, which include a Sharia fund but I note no ethical fund. Nor indeed, apart from a default fund, has there been any announcement of other sorts of funds. There is a balance to be struck here and we need to work it out in Committee, somewhere between caution at the beginning and things that employees will want to do with their contributions. However, the more funds there are, the more confusing the scheme will be for the employees it is aimed at. We believe that the KISS principle should apply. Is it, for instance, right that it is only after personal accounts are up and running for five years that a decision will be made about whether an employee’s extra funds can be put into the scheme or, indeed, small amounts of money taken out? That is almost 10 years away. That will not give confidence to many people, especially migrant workers, who are on the whole only in the United Kingdom for a short time before returning to their country of origin. Is Brussels turning a blind eye to this as it applies to EU citizens, or do they not know about it? We also have concerns about the cost of personal accounts and when the scheme will be self-financing. To what extent will the start-up costs fail to be paid back by the trustees when it is up and running? As to the overall cost of the scheme, I hope that the Pensions Commission’s suggestion of 0.3 per cent a year can be adhered to. However, that cannot possibly cover advice to employees, which the noble Lord mentioned briefly, so who will provide this? We will certainly be looking at that in Committee. My noble friend Lady Noakes in particular will be looking critically at the new trustee body and the length of time that the Personal Accounts Delivery Authority will survive after the former is set up. Your Lordships will remember only too well the plight of the 125,000 pensioners whose firm had become broke, and the fact that the Government were forced by the ombudsman and the High Court to bring in the distinctly mean financial assistance scheme in 2004 by means of a clause in the Pensions Bill of that year, and only then at the last minute after the threat of a major rebellion by Back-Benchers. That clause was purely and simply an order-making power, a Henry VIII power. All the operative legislation on the FAS has so far been by affirmative instrument. These have included the much better terms and conditions that the Government were forced into yet again and which my noble friend Lord Taylor and the Minister debated the week before the Recess. It is always nice to welcome a reformed sinner, and I congratulate Ministers in the DWP on achieving them. No doubt a tremendous battle ensued with the dead hand of the Treasury, but they got there in the end to the great relief of a large number of people who believed their pensions to be safe and discovered that they were not. I only mention this because I note that part of the Government’s most recent changes involved changes to the definitions of ““qualifying member”” and ““qualifying pension scheme””, and those cannot be made by order, even an affirmative one, which is why we find them in this Bill. It has become a part of the pensions arena that occasionally pension funds get bought by insurance companies and others, and that could be said to be a case of business models running ahead of the regulatory framework. Ministers have said that they intend to give the regulator draconian powers over this perfectly legitimate activity, which can be to the benefit of both existing and future pensioners, affording them more security. I do not know how far these plans are advanced or whether they are even intended for this Bill or some future one, perhaps next year’s welfare Bill. To allow pension schemes to be sold extraterritorially where there is no robust control by the regulator needs thinking about extremely carefully. I am also concerned that such powers are to be so draconian as to prevent perfectly reasonable sales and so throw the baby out with the bath-water. In some ways, one can liken this Bill to a train journey. We know the starting point—the Pensions Commission’s report. We know where we want to get to: the pension scheme for low-to-middle earners that does not exist at the moment. These are likely to work in small and medium-sized enterprises and there are concerns about the costs of personal accounts to them. Although we welcome the proposals to phase in personal accounts, this remains a worry. Continuing with my metaphor, the vague regulation powers are like scheduled stops in the middle of the night where you cannot read the station signs. Indeed, some of the stops are as yet unscheduled. We have to investigate a lot more before we arrive at our destination—which I am sure after several weeks we will.