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Pensions Bill

I thank the noble Lord, Lord Skelmersdale, for the amendment. Qualifying earnings will be calculated on earnings between £5,035 and £33,540, in 2006-07 earnings terms. The limits of the earnings band will be up-rated from its 2006-07 base, in line with changes in average earnings, to ensure the value of pension contributions keeps pace with individuals’ earnings. We shall have the opportunity to discuss that under a later amendment. The qualifying earnings band has two functions: first, the lower limit determines whether a worker qualifies to be automatically enrolled; and secondly, to establish the minimum necessary contribution to be made for each pay period thereafter, for those workers who participate, in the case of money purchase schemes. The issue of pension saving for those on very low earnings is clearly a difficult and complex area. Our decision to use an earnings band is based on research done by the Pensions Commission. In designing the reforms, the commission focused on the importance of replacement rates. For those on low earnings, the state system is designed to provide them with high replacement rates, which calls into question the appropriateness of workplace pension savings for this group. This is why, in designing this reform, we have ensured that those on very low incomes will not be automatically enrolled into a pension and are not incentivised to save by the presence of an employer contribution. In 2006-07, £5,035 was the threshold at which most workers became liable for statutory deductions—that is, national insurance contributions and so on. Removing the lower earnings limit would have the effect of making the employer contribution payable on earnings from pound one. This has an estimated cost of around £1.9 billion a year, increasing total employer contributions from £2.9 billion to £4.8 billion a year, a cost which I would hope that the noble Lord recognises makes such a proposal prohibitive. The earnings band for both employer and worker contributions is a key plank of the Pensions Commission’s recommendations. Removing the lower limit would unpick the core policy and the consensus on which we touched earlier, on which the reform is predicated. This, combined with the additional employer burden, leads me to ask the noble Lord not to press this amendment.