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Pensions Bill

I thank the noble Baroness for giving me the opportunity to set out the Government’s policy on this matter. As we have already discussed, these reforms have been structured to set a median earner on course to achieve an income in retirement of around 45 per cent of their working-life earnings, in line with the Pensions Commission’s recommendation. The qualifying earnings band establishes a link between working-life earnings and pension saving. We selected the primary threshold and upper earnings limit for national insurance contributions in 2006-07 as the starting limits for the qualifying earnings band. These limits avoid automatically enrolling people on very low earnings, for whom state pensions already provide high income-replacement rates, cap compulsory employer contributions at the upper end and help focus these reforms at job holders on moderate to low earnings. Having made this important link between earnings and pension savings, we need to maintain it. That is the key driver. We recognise the administrative simplification that sticking with the national insurance thresholds would provide. However, as we know, not all earnings bands are uprated by changes in average earnings. The upper earnings limit was increased in the 2008 Budget as part of a programme of tax simplification. This change would have widened the qualifying earnings band for pension saving had we at that point retained a link to the national insurance limits and significantly increased the costs to employers. As the noble Baroness acknowledged in our discussions on the National Insurance Contributions Bill, we have confirmed our aspiration to relink the primary threshold with personal allowances and the upper earnings limit with the point at which higher rate tax is payable. Once aligned, the working assumption is that these are more likely to be uprated by prices than earnings. Indeed, the noble Baroness pressed an amendment on us to that effect in Committee. That would mean there would be a divergence of the increase in those bands by prices and the increase in these bands by earnings; therefore, we would have broken the link with earnings relationship, which is the important component of this measure, to ensure that we reach the 45 per cent replacement rate in retirement. We recognise that this policy means that employers will have to work with a new earnings band. However, payroll software will be able handle the calculations with ease. I hope that that has explained our policy to the noble Baroness.