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Pensions Bill

My Lords, I thank all noble Lords who have spoken on this issue, and the noble Baroness, Lady Noakes, for the manner in which she moved the amendment. I fully understand that this is airing issues with a view to getting the right outcome. Clause 19 confirms that contributions into qualifying occupational money purchase schemes need to be at least 8 per cent on a band of earnings. The minimum contribution is based on the Pension Commission’s recommendations that an overall contribution of 8 per cent of qualifying earnings could set a median earner with solid state entitlement on course to achieve an income in retirement of around 45 per cent. Amendment No. 60A would alter the basis of this contribution-based test by enabling the scheme to require an average employer contribution of 3 per cent of qualifying earnings. Amendment No. 61B has a similar effect. It would enable a scheme to require an average total contribution of 8 per cent of qualifying earnings. We understand that some of our stakeholders perceive the quality requirements for money purchase schemes to be complex because most existing schemes use basic pay as the definition of pensionable pay rather than qualifying earnings. However, the amendments tabled do not simplify the quality test. If anything, they potentially complicate it. Employers and schemes would still be required to track the aggregate qualifying earnings for all jobholders to ensure that the correct contribution was deducted in each pay period. Furthermore, if there were a shortfall, it would be unclear to which members a top-up payment was owed. That could lead to greater complexity. What is more, these amendments would expose some jobholders to the risk of consistently saving well below the minimum proposed by the Pensions Commission. The noble Baroness acknowledged that. We are listening to stakeholders and understand their concerns about the application of the test. We will work with them to explore practical ways to make the test as workable as possible without undermining the minimum level of saving required by the reform. If we are serious about addressing undersaving this must remain sacrosanct. Amendment No. 61A would ensure that no more than 10 per cent of members receive a contribution below 3 per cent of qualifying earnings. Amendment No. 62A similarly requires that no more than 10 per cent of members receive less than the total contribution of 8 per cent required under the test. Taken alone, these amendments change the basis of the quality test in Clause 19. The test ensures that each individual in the scheme receives at least the default contribution required under the employer duty. A 10 per cent tolerance would mean that certain jobholders would not—or may not—be saving at the minimum level required under the reforms. This could make all the difference, for those at the margins who receive only the default minimum contribution, as they might not be able to save to achieve the income in retirement that these reforms aim to provide. Taken together, Amendments Nos. 60A, 61A, 61B, and 62A have a different impact. They would ensure that under a scheme-average test no more than 10 per cent of members could fall below the minimum level. While this would provide some protection against significant inequalities between members, it would nevertheless leave vulnerable members exposed to the risks of undersaving I have just outlined. As I explained during the debate on Clause 12, the definition of qualifying earnings is a core element of the Pension Commission’s proposition to set a median earner with solid state entitlement on course to achieve an income in retirement of around 45 per cent. Any measure that undermined this would put the outcome of the entire reform at risk. Amendments Nos. 61, 62 and 63 together could do exactly that by enabling employers and trustees to define earnings within their scheme rules. We recognise that many employers already provide generous contributions on basic earnings and would be likely continue to do so in good faith. However, these amendments would leave members vulnerable to changes in pay structures occurring for perfectly legitimate business reasons, which could reduce the value of the contribution below the level proposed by the Pensions Commission. Even if such an amendment were limited to apply to existing schemes only, under grandfathering arrangements, there would always be a risk that future changes to the scheme or the employer’s pay structures would reduce the value of the contributions. We cannot legislate to leave people vulnerable to saving below the minimum in this way. Not only would it put the outcome of reform in jeopardy, but by permitting the minimum standard for contributions to vary across employers, it could also potentially lead to discrimination against vulnerable groups. Amendments Nos. 64 and 65 operate in a different way. Taken together, they could provide for an easement to the application of the quality test for occupational schemes. Amendment No. 64 permits a pay period of, for example, 12 months to be set for the purposes of the quality standard. That would mean that a scheme could be assessed over a longer period to allow some smoothing of contributions where they might otherwise fluctuate above and below the minimum level, the spike to which the noble Baroness referred. Amendment No. 65 relaxes the requirement that scheme rules provide for 8 per cent of qualifying earnings over the pay reference period provided the employer makes up any shortfall in contributions himself so that the 8 per cent is met. We have been engaging with stakeholders on this issue and understand their concerns about the application of the test for existing schemes. We remain of the view that the quality standards laid out in the Bill will work for the majority of schemes on most occasions without the need for scheme rule changes. We expect that payroll software will support employers in monitoring that this is the case. Where it is clear that a scheme will not qualify for all its members, we are proposing an amendment to Clause 28 to assist employers in increasing contributions or the basis on which they are calculated. Amendments Nos. 64 and 65 do not fully address the issues stakeholders have raised. They would not apply evenly across occupational and personal pension schemes. Furthermore, Amendment No. 64 is already achievable by virtue of the powers in Clauses 14 and 116, which enable us to set a longer pay period for the purposes of assessing money purchase schemes. Amendment No. 65 raises additional questions about how compliance against the employer’s duty to make shortfall payments would be monitored and enforced because it could cause confusion about whether the scheme itself fell below the qualifying standards or whether it was a matter of a failed payment by the employer. We recognise that employers and schemes still have concerns and that these amendments represent genuine attempts to address them. We are keen to minimise any disruption to current arrangements, which is why the qualifying test must be designed in the simplest way. As noble Lords know, the Government are determined to ensure that all savers receive at least the new minimum level of pension contributions. For this reason, we have not been persuaded that grandfathering is the right answer. We do not want to disrupt the smooth administration of existing arrangements that offer good pension outcomes for many savers. Therefore, if it were possible to perform the test in a way that reduced employer administration, perhaps by enabling the use of a range of assessment periods, that is something we would seriously want to consider, provided that it also preserved the new minimum level of pension saving. The noble Baroness asked specific questions in moving the amendment. She asked how much disruption we want. We want minimum disruption to existing schemes. These proposals are designed to achieve that and to do all we can to prevent it. We are mindful of the risks of that, which is why we need to address the issues that she identified. In all of this, we should be mindful that personal accounts would be a money purchase occupational scheme and the qualifying test will apply. If the qualifying test were to be changed to enable minimum contributions on aggregate earnings where only 10 per cent of individuals could fall below the minimum, that could seriously affect the scheme. First, as drafted, the minimum contributions into personal accounts would be considered across the membership as a whole. Given that the scheme is expected to be used by many thousands of employers, it would be complex to do that, and it would raise problems in identifying where an employer had failed to make sufficient contributions. Secondly, we estimate that 4 to 7 million people will be saving in personal accounts under the reform, and a system that would permit up to 10 per cent of those people to be saving at very low levels below the minimum would expose up to 700,000 people to the risk of undersaving in personal accounts alone. The noble Baroness also asked about defined benefits schemes and qualifying earnings. Employers with a contracting-out certificate have met the scheme standard and will not have to do anything further. Employers will need to look at a jobholder’s qualifying earnings in assessing the scheme against the test scheme standard. However, given the generosity of existing DB schemes, we expect the vast majority to meet the standards. What is more, we expect that the test will be conducted on a one-off basis for DB schemes and will be reviewed as an exception when circumstances change. We acknowledge the challenges in making sure we get the right answer to all this. I think the noble Baroness will acknowledge that the specific proposals put forward do not do that, although I do not think there was an expectation that they would be received in those terms. We are determined to work with stakeholders to make sure that we can get through this. There are ways that we might do it. We have some time before we get to Report. On that basis, I hope the noble Baroness will not press her amendment. We acknowledge there is more work to do on this to see whether we can reach a proper outcome. We are aware of concerns in the industry. I am sure there is a way through this.