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Pensions Bill

I wish to raise the issue of the burdens that this Bill will impose on employers, in particular on SME employers. The contents of Clause 26 are welcome as far as they go. They allow employer and employee contributions to be phased in over a period of at least three years and possibly longer. I am sure that employee phasing will help to minimise the amount of opting out in the early phase, and will thus give inertia a better chance of succeeding. Employer phasing is an essential part of letting employers adjust slowly to the additional cost burden that this Bill will inevitably impose. The latest regulatory impact assessment estimates that, once the transitional period has been completed, the central estimate of the extra direct cost will be £2.5 billion each year. However, the cost will fall disproportionately on small and micro-firms, which will bear £1.2 billion of the total, adding around 1 per cent to their labour bill. The relative impact for medium and large firms is much smaller, at around 0.5 per cent of labour cost. Of course, these are averages. Businesses of all sizes vary in their labour intensity. Those that use more staff will bear a higher relative cost burden. There is also the indirect cost burden. The Government apparently set up a cross-government group of so-called experts to look at administrative costs. I should be interested to hear from the Minister why the Government thought that a group of civil servants alone, with no business representatives, was the right body to carry out this exercise. This group found that the costs were now predicted to be higher than estimated for the December 2006 White Paper; and, in particular, that year one costs had increased by more than 20 per cent to £350 million, while ongoing costs had shaded up to £101 million. The important part of the analysis is that it starts to reflect more accurately the impact on the smaller end of the business community. All of the increase in start-up costs is focused on the small and micro-firms, which now account for £280 million out of the total of £350 million. These cost estimates produced by the department are not uncontroversial. The British Chambers of Commerce estimates that the ongoing annual cost is more than £300 million, not £101 million as shown in the regulatory impact assessment. Of course, there is a rather weary scepticism among businesses about government estimates of the burdens being placed on them. Real businesses have rarely been able to identify any reality behind the calculations that appear in regulatory impact assessments. That is part of the broader picture of the Government not fully reflecting the reality of regulatory burdens on business. The Prime Minister, when responding to my honourable friend Sir John Butterfill in a debate on the Queen’s Speech in another place last year, said that there would be special arrangements for small businesses. However, so far as I can see, the Bill has no arrangements for small businesses. The transition arrangements set out in Clause 26, which I have said are welcome, seem to be available to all employers; hence, nothing special has been done for smaller businesses. The Engineering Employers’ Federation has done a lot of work on a scheme that would compensate smaller businesses for some of the extra costs that they will inevitably incur. This scheme involves payments to the smaller employers to offset some of their costs over a three-year period. I gather that this has had a somewhat dusty response from the Treasury, which does not surprise me as the Treasury does not like spending money and has little or no understanding of the SME sector. Will the Minister say what the view of his department is of the need to provide a mechanism to support smaller employers? What does he think of the EEF’s proposals? Instead of making payments to smaller employers, another way of dealing with the problem would be to extend the transitional provisions for small and medium-sized employers so that they got a higher amount of relief from the full costs or got it for longer. This might mean that the pension pots of their employees took longer to get going at the full rate, but, as I have already said, we should not let the best be the enemy of the good. The successful implementation of auto-enrolment across all sizes of business would be a very great prize, and it would be a shame to spoil it because of some dogmatic view that every employee or every employer had to be brought along at exactly the same pace. The Treasury is also said to be wary of relief for SMEs because of the dangers of abuse and of companies fragmenting themselves to take advantage of preferential treatment. In this, it is rather like the DWP, which sees abusive employers lurking in every corner. The EEF has discussed the Treasury’s concerns with RSM Robson Rhodes, a significant accounting firm, which has advised that a combination of the additional burdens on fragmented business entities plus the judicious use of an associated company definition, which is well known in tax law, would overcome those concerns. That is, companies do not have a natural incentive to fragment themselves. In any event, it can be overcome by an associated company definition. Does the Minister think that the Government can achieve more flexibility in this way? It might need an amendment to the Bill, but we would be happy to support him in this. If this sort of flexibility does not work, what are the Government going to do to ease the burdens on small businesses? They need more than fine words. The Minister will doubtless cite his department’s research, which shows that businesses will be coping with the cost pressures that the Bill will introduce. I remind him that this research was conducted from July to September last year, which was before the credit crunch started to work through the economy. Even then, only 20 per cent thought that they could recover their costs in prices. I doubt that the figure would be anything like that today. We do not know what the economic environment will be in 2012, but we hope that it will be considerably better than the one that we see in the medium-term outlook. Then again, we could have another two years of this Government and their way with the economy, so we cannot be confident. I look forward to hearing from the Minister that the Government are fully aware of the cost problems facing businesses as a consequence of the Bill, and indeed the administrative burdens that come with it, and that they have some concrete and constructive proposals to help small and medium-sized businesses.