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Pensions Bill

moved Amendment No. 60A: 60A: Clause 19, page 9, line 2, leave out ““jobholder’s qualifying earnings”” and insert ““aggregate qualifying earnings of all jobholders in the scheme”” The noble Baroness said: I shall move Amendment No. 60A and speak also to the other eight amendments in this group. These are, for today's debate, probing amendments, dealing with the difference between qualifying earnings as proposed in the Bill and earnings definitions widely used in existing pensions provision. We had a first canter round the course on this at the very end of our first Committee day when my noble friend Lord Skelmersdale moved Amendment No. 42. The Minister said that this was work-in-progress, but he gave no hint of what the finished product might look like and so I shall use this group of amendments to test him a little further. I apologise in advance for the length of my remarks but this is an important topic. It raises complex issues for which the solutions that my amendments explore are, in turn, not easy. I have tabled these amendments to the quality requirements for money purchase schemes in Clause 19, but the issues apply equally to personal pension schemes in Clause 25. When we return to these issues on Report—I think it is fairly certain that we shall—our amendments will cover Clause 25 as well. There is also the issue of whether the definition of qualifying earnings in Clause 12, which is the definition which drives both Clauses 19 and 25, ought also to be amended because of its impact on defined benefit schemes, and I shall be asking the Minister about that as well. There is a basic question behind these amendments: how much disruption to existing pensions provision are the Government seeking to make and, linked to that, how much levelling down are they prepared to risk? The Committee will be aware that the approach to contributions in this Bill is not in line with pension practice at present. The use of an upper and lower limit, while understandable in the context of the default personal accounts scheme, is not used in private sector money purchase schemes. Typically, they have no such limits or bands. However, the most significant difference is the definition of earnings. The Bill uses a definition which includes commission, bonuses and overtime. Definitions vary in private sector schemes, but the practice now is overwhelmingly to focus on a definition of basic earnings. Sometimes some elements of variable pay are included, but these are increasingly rare. So the problem is that the way private pensions work at present does not fit easily into the Bill's view of qualifying earnings. Because the private sector schemes do not have lower or upper thresholds, contributions will generally be calculated on a higher amount than the Bill requires, but there will be exceptions, particularly among lower paid employees with a large element of variable pay such as commission. The problem is exacerbated by the pay reference period which we expect the Government to set in line with the payroll periods used by employers; that is, weekly or monthly. Where an individual has a variable element of pay in one or two pay reference periods, the calculations under the Bill may well produce a spike in required contributions which, in that pay period, and that pay period alone, are higher than the amounts that the employer calculates under his existing pension scheme. Taken over a whole year, the employer's scheme may produce a higher amount of contributions, but it would fail the test set out in Clause 19 because of its focus on the pay reference period. I am sure that noble Lords will have seen the rather complicated calculations that produced that result, and a number of submissions from outside organisations have exemplified the problem. I hope that the Committee will not ask me to make mathematical proof of the issue. There is a consensus among both employer groups and those associated with pension provision that there is a real problem here. My amendments in this group set out a number of ways of tackling the problem, and I shall spend a few minutes of the Committee’s time explaining the amendments and the solutions that they offer. Amendments Nos. 61, 62 and 63 are the ideal solution from the employers’ perspective. They allow the quality requirements to be met by reference to the definition of ““earnings”” as used in the employer’s own scheme. I expect that the Minister’s answer will be along the lines of, ““We must not let employers manipulate the definition of earnings in order to evade the obligations that the Bill sets out””. Of course, the vast majority of employers would not even think about doing that. In any event, the compliance regime in Chapter 2 could easily be expanded to cover the case of deliberate manipulation of earnings components to avoid the basic intent of the Bill, if that were the only objection to using the employer’s definitions of earnings. My other definitions are less than ideal but try to preserve the employer’s ability to operate schemes with different definitions on a modified basis. Amendments Nos. 60A, 61A, 61B and 62A propose that an aggregate test be adopted, so that if the employer could satisfy the tests over the whole of its workforce, the quality requirement would be met. In effect, swings and roundabouts between employees would be tolerated. That might well mean that some employees ended up getting less than others in terms of individual contributions allocated to them, but the employer would at least be meeting the overall 3 per cent limit. The Minister cannot accuse employers of cheating with this group of amendments, but he may respond to them, as well as to those for basic earnings, that a definition that resulted in less saving for some jobholders would be unacceptable, and that the implementation of the Bill in terms of producing replacement income in retirement must be tested at the most granular level of each employee. It has been put to me that the Government’s approach is nothing like the usual 80-20, where you try to get 80 per cent of the benefit for 20 per cent of the effort or the cost. It is not even based on getting 99 per cent of the benefit, but it seems to be based on an absolute need to avoid disbenefit to some infinitesimally small fraction of employees overall; at least that is what we understand the Government’s position at the moment to be. I warned on Second Reading about the best being the enemy of the good, and I hope that the Minister is mindful of that when he responds. Amendments Nos. 64 and 65 attempt other ways of solving the problem. Amendment No. 64 says that the Secretary of State could fix the pay reference period for the purposes of the quality requirement in Clause 19 as a different period, so that the quality requirement for the employer schemes could be tested, say, annually, instead of by reference to the individual pay reference period linked to payroll. That is not the same as the aggregate test, as it would still require the test to be met at the level of the individual employee, but it would be established over a longer period, which would allow employers to get the benefit of not having their schemes ruled out because of the spike effect of particular variable pay in certain pay reference periods. Amendment No. 65 is a last-ditch attempt to preserve existing schemes and says that if, when calculated over a longer period, there is still a shortfall in contributions, the employer can make up the difference within three months. It is far from clear that employer-based schemes will be preserved if we cannot use employer-specific definitions. The NAPF has pointed out that there are big legal and actuarial costs involved in changing scheme rules to meet the Bill’s definitions and that the monthly calculations will add administrative costs. If employers adopt the Bill’s definitions to replace their own, the DWP will have forced employers onto a path that leads inexorably to levelling down. It will not be surprising if employers decide that if they have to change the definition of earnings, they might just as well change the bands as well and, if they go that far, why not just use the minimum percentages or the personal accounts scheme? Levelling down is a big danger and, whatever the DWP’s surveys from last year show, now that employers are confronting the detail, the NAPF and the ABI are reporting that levelling down is now the most likely path. Currently, employers pay an average of 6 per cent into DC schemes, which is double what the Bill requires; that is what is at stake. The issue is not just one of the complexity and cost of handling pension contributions on a different basis than current practice, though that is certainly important. We also have to add the cost and complexity that will be caused for the compliance regime, especially for small and medium-sized employers. Employers are concerned that the Government have not appreciated the real burdens that build up under the Bill. I said at the outset that I would be asking the Minister about the definitions of qualifying earnings and defined benefit schemes. My initial thought was that the issue of qualifying earnings had no relevance to defined benefit schemes because, unlike DC schemes, the calculation of contributions does not drive benefits, but Clause 22, which sets out the criteria for a DB test scheme, also defines the accrual rate of pensions by reference to qualifying earnings, which is simply not in line with how DB schemes work in practice. Why on earth is the DB test scheme standard phrased in a way that is alien to the workings of DB schemes currently in existence? Are the Government really set on the destruction of the vestiges of private sector DB provision? My amendments seek to amend the Bill to give flexibility for both existing and future occupational pension schemes. We on these Benches want employers to own the concept of retirement provision for their employees. There is another route, which is based on protecting existing schemes, but forcing new ones into the Bill’s straitjacket; grandfathering. The Minister expressed concerns at our last Committee day that grandfathering has its own problems for sustainability and complexity over time, but it is another possible route and it should be carefully considered. I hope that the Minister will agree that we need to amend the Bill and that he will have something positive to say in response to my amendments. I beg to move.