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Pensions Bill

moved Amendment No. 42: 42: Clause 12, page 6, line 40, leave out paragraph (a) The noble Lord said: I am afraid that this one is not a quickie. We now come to the other side of the earnings bands. I emphasise to avoid doubt that this is a probing amendment about the sort of earnings that will count as qualifying, which will be exempt, and the effect that the decision will have on existing employers’ pension schemes of whatever sort. The issue is that in personal accounts a total contribution of 8 per cent of earnings between £5,035, in other words the LEL, and £33,500 must be paid, of which the employer must pay at least 3 per cent. We all know that. Earnings include additional benefits such as overtime, commission and bonuses. If an employer wants to continue to operate their own scheme, rather than enrol staff in personal accounts they much check each pay period, either monthly or weekly to ensure that the contribution made to their scheme is at least as great as that which would have been made to personal accounts. That is a problem because most private pension schemes currently use full basic earnings from £1 upwards rather than ignoring the first £5,035 and using a different sort of qualifying earnings. Those schemes rarely take into account bonuses, overtime and commission. This adds administrative complexity and additional costs for the employer. Each month the employer needs to check that both the total contribution and the employer contribution made are at least as great as would be made to a personal account. There are also communication problems and potential employer-employee tension. The employer needs to explain this change to employees and may ask employees to pay additional contributions in pay periods where commission and bonus is earned. This is exacerbated by the fact that bonus and commission are often not paid evenly over the year. Employees may have to pay variable contributions, which might influence their decision on whether to stay in the scheme or opt out. I believe that employers have three choices: accept the additional cost, complexity and communication problems caused by these changes; change their schemes to the same earnings definition as personal accounts; or close their schemes and enrol all employees in personal accounts. The Government—indeed, all of us—have made a point of trying to ensure that nothing in this Bill encourages employers to level down their schemes. The third point is therefore particularly important. How does this affect employees? Employees may need to pay higher contributions in pay periods when bonuses or commission are paid. Contributions could change month to month or week to week. As the first £5,035-worth of earnings are disregarded, employees who earn less than that amount in bonuses, commission and overtime will have less money paid into their pension funds. In addition, it is likely that employers will only have to pay the minimum contribution necessary and so employees may receive a lower employer payment. Employees who receive bonuses, commission or overtime of less than £5,035 are most at risk of losing out—in other words, low earners, the majority of whom are women. The question of whether bonuses, overtime et cetera should count towards qualifying earnings has a big impact in particular on money purchase schemes, and will be raised by my noble friend Lady Noakes later in her amendments to Clause 19. There are myriad perks that a jobholder can get from his employer that do not fall clearly into the definition given in the Bill. One obvious example is a car provided by the employer for his employee’s use. Some employers give mileage payments for travel in the course of employment; others pay for all petrol used by their employee. I am sure that noble Lords can think of other perks, such as free plants from a nursery. This last example may be a little extreme, but noble Lords who know my background will see why I use it. The same point applies to any product made or sold by a firm and supplied to an employee for free. What advice will be given to employers to help them decide whether to count a payment? I am afraid that there is, as my noble friend Lady Noakes has just said, another complication. Earnings are calculated in different ways for income tax, where benefits of all kinds are counted, including those that I have just mentioned. However, in the calculation for national insurance, they are not. By using the lower earnings limit as the threshold for minimum earnings that qualify for auto-enrolment, do we not have a recipe for confusion? Subsection (3)(a) talks about what is included in the calculation: salary, wages, bonuses and overtime. As I pointed out at Second Reading, many existing employer pension schemes operate on the basis of any basic earnings, starting at £1. Do the Government really want these employers to restructure their schemes so dramatically before they are given approval as qualifying schemes? Over the weekend, Joanne Segars, the chief executive of the National Association of Pension Funds, said: "““We support the Government’s 2012 reforms but it is important that they do not add unnecessary costs to existing pension provision. All that is needed is a common sense change to the definition of Qualifying Earnings and we should see a good outcome for everyone. Ministers have underlined that they want the new Personal Accounts scheme to have a minimal impact on existing provision so we are hopeful that they will try to accommodate our concerns””." I agree with her. That is why I tabled this amendment and why I have spoken rather more lengthily than I normally do. I beg to move.