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Pensions Bill

My Lords, I am delighted to follow the noble Baroness, Lady Turner, who has a distinguished record in campaigning on these issues. I remind the House of my interests as the director of a life and pensions company and as a director of companies which provide workplace pension schemes. The test for this legislation is not the impact it will have on interest groups but what it will do for future generations of pensioners. On those grounds, like others in the debate, I welcome the objectives set out in the report of the noble Lord, Lord Turner, and the legislation that has followed. The issues are in the details enacted in the Bill and I wish to raise a number of points in this debate to which I hope the Minister will be able to respond. I wish to enlarge on some of the points that have been made about the impact of the Bill on existing workplace pension schemes. As everyone has said, it is important that these are not diluted. They have been an important part of savings in this country—and will be, it is to be hoped, in the future—and yet we have to accept the fact that most employers will not want to run two schemes side by side. Therefore, wherever possible, we must make it possible for them to meet the requirements of the personal accounts within their existing pension schemes rather than having the complications of running separate schemes and the interfaces between them. The Bill has a number of deficiencies in this respect. First, on the qualifications for automatic enrolment—which, of course, is necessary in order for an existing scheme to fulfil the requirements of the personal accounts—the legislation as drafted has a narrow restriction on the occupational pension definition which qualifies for automatic enrolment. I know this is due in part to difficulties with the European Union distance marketing directive. The Minister alluded to the fact that amendments will be brought forward to deal with some of the issues, which I welcome, but it is important to recognise that not only do we need the legislation to allow existing stakeholder pensions, existing group personal pensions and existing group SIPPs to be eligible for automatic enrolment but also that we need to follow through and ensure that secondary legislation—for example, in regard to the SFA conduct of business rules and the legislation on unfair commercial practices—also aligns with the intent of the Bill. We need to look at how the Government intend to provide that these personal pension schemes meet the requirement of employees not having to choose a fund, through a mechanism for a simple default fund, while still allowing personal schemes to encompass the wider choice that many existing members want. We need a great deal more clarity in the Bill in that area. The second area of difficulty relates to the complex rules envisaged in the Bill on whether an existing scheme provides benefits equivalent to those that a personal account will provide. The legislation is drawn up on the basis of having to meet 8 per cent of qualifying earnings as the reference test. But ““qualifying earnings””, as defined, excludes the first £5,035 of earnings but includes overtime, bonuses and commissions. That is completely different from the basis on which earnings on most personal pension accounts and employer contributions currently work. Trying to do such comparisons will create huge complications, particularly for firms with significant numbers of employees close to that threshold and where their earnings are of such a nature that they vary from week to week or from month to month. It will create a huge complexity which, I fear, will lead many employers to decide that it is easier to scrap their schemes and opt for the personal account. Another complexity about which I am not clear and on which I would welcome guidance is whether employers can carry out the comparison once every calendar year and then make up any differences, or whether they will have to make the comparison on a monthly or weekly basis as they pay cheques and make pension contributions. If it is intended that payments should be made on a weekly or monthly basis it would add enormously to the complexity and make it extremely difficult for this to be a workable proposition. I should like the Government to clarify that and, if necessary, amend the legislation to make clear that this can be done on a calendar-year basis. The difficulty here is not just the complexity for the employers but the fact that if employers scrap these schemes, the employee may end up worse off as a result. For example, an employer may be contributing 7 per cent to 9 per cent on their own to an existing scheme. If they opt to scrap that and go over to a personal account where the overall contribution is 8 per cent of qualifying earnings, they can drop their own contribution to 3 per cent and require the individual to make up the difference by contributing 4 per cent. The amount of contribution from the employer can be significantly reduced if they decide to scrap a scheme and go to the personal accounts system. The third area of complication with workplace schemes is the point about targeting, which the Minister mentioned. I was glad to hear him reinforce the idea that targeting is important to limit the scope of where personal accounts compete with existing provision. I was also glad to hear him repeat the commitment that there should be an annual cap of £3,600, but I note that that is not in the Bill. There is a question about whether that number should be in the Bill, as some other numbers are. In addition to that cap, Clause 61, as I read it, also lays open that there may be additional payments into the scheme on top of that annual cap, which may or may not be capped by order. That obviously leaves open the option that they may not be capped. I understand the point made by the noble Baroness, Lady Hollis, that we would want to ensure that there was provision for people who had missed payments to make those up. If that is the intent of the clause, that could be made much clearer in the Bill. If it leaves open the possibility of unlimited payments being made into personal accounts, it opens up a huge area of uncertainty about what their role is relative to existing providers. There is the issue of costs. We want a level playing field between this provider and existing providers. If the costs are truly lower then that benefit should be passed on to consumers, but the Bill contains provision for financial subsidies from the Government to the Pensions Authority. It should be clear that those subsidies, if provided at all, should be limited to the start-up costs. There is the question of whether they ought to be paid back over time, but there should be no question that there could be ongoing subsidies that would lead to a distorted competitive position where in effect we were subsidising one provider against another. There is the issue of the fines that can be imposed on employers who do not adequately meet the tests of whether their provision is better than personal accounts. As I read it, these fines can be imposed without any necessary preconditions having been met. I should have thought there was a case—although I may have misunderstood this—that there should at least have been a compliance notice given to the employer that they had ignored before there was any question of fines. So there are a number of areas where we need to be clear about exactly what the terms of competition are and how we can ensure we are not damaging existing workplace schemes by taking advantage of them to meet these objectives. My second major area of concern is the interaction with benefit schemes and personal debts and the advice requirements around that. There must be, as others have said, a significant risk that for many people who either are low-paid or have large debts, or both, personal accounts will represent a poor—or indeed negative—return relative to other uses they can make of their income. Another complication is raised in the interaction with the savings gateway that was introduced in the Budget, which we need to work though as well. It is not yet clear in the guidance notes. I should be grateful if, at some point early in the debate, the Minister was able to give us some data on the income levels below which the Government currently believe there is an issue of people falling into the benefit trap if they have not saved enough to get themselves above the means-tested benefit, and on how many people, in rough terms, the Government estimate will be in the position where, particularly taking account of debt, they may be taking out a product that is not the best one for them to enrol in, as a result of auto-enrolment. We need some estimate of those numbers in order to gauge what we should do about that. Following that, we have to take a view on how important it is for people to be made aware of that, and whether the generic advice that the Government are proposing can be adequate to deal with individuals’ detailed questions, when they may be ill-equipped to come to their own conclusions. If we want to avoid these becoming big issues, some of the solutions are, as others have said, expensive. One is to raise the basic state pension so that, over time, and as rapidly as possible, means-testing disappears. That clearly has merit. A second option is to concede that money from these pension schemes will not be off-set against means-tested benefits, so that people know that a pound saved will be a pound that they will benefit from in retirement. Both of those options are clearly expensive. There is a third possibility, which the Government might like to consider alongside those, and which the House might consider. This particularly concerns avoiding advice complexities. We do not want to get into a situation where the cost of advice outweighs potential savings and benefits to the individual, or one where the advice burden falls unequally between the pensions authority and private pension providers. It is important that advice can be given, on equal terms, to anyone, whether they are auto-enrolling in a personal pension or auto-enrolling in a personal account. One of the ways to simplify the advice system would be to set out the principle that means-tested benefits in retirement are not entitlements, but discretionary social support for those in need. It would be possible for the Government, in a sense, to take a moral view, and say that means-tested benefits should be disregarded and that individuals should be encouraged to make provision for themselves, with advice given on the basis that that is what they intended to do. Means-tested benefits would then be there as a support mechanism for those who failed to do that, but not as an entitlement that people take into account in deciding whether they should make their own provision. That would be a significant shift in attitude, but it may be worth considering. There are a number of difficulties with the Bill. There are a number of traps and a lot of detail that need to be worked through as the Bill is debated. It is incumbent on us to take the time and care to make sure that we get it right before the Bill leaves the House.