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Pensions Bill

I suppose that I ought to thank noble Lords for the questions they have just pitched at me, but the number is such that I can only do my best to answer some of them. The first issue is what the staging and phasing will do. The two ideas get, in a sense, mixed up. The phasing will consist of two phases: phase 1, specifically in the defined contributions scheme, will be a 1 per cent year for employer contributions; and phase 2 will be a 2 per cent year. The Bill itself specifies that both will have to be a minimum of a year. There have been conversations about the total of the two, and much of those conversations suggests that the two added together may be three years, but that is to be defined after further conversation with stakeholders. How does the staging and phasing fit together? Staging will be a process whereby all employers will not be required to meet their duty on day one of phase 1. The staging will divide employers into groups. The Bill is not precise about what those groups are; that will once again be the subject of consultation. The only groupings that have been used so far—they have been used by HMRC and the former DTI to introduce complex regulations, changes of regulations or changes of charging—have essentially been based on size of firm. So the most probable grouping—it does not mean that it will happen; it will be decided after consultation—is by size of firm. Large firms will come in early, some on day one to make the whole process sensible, and smaller and smaller firms will be staged in. This will give special relief to small firms. While small firms will participate in, say, the 1 per cent period for only a short time, in the early part of that period there will be no burden on small firms. The burden of the questions from the noble Baroness, Lady Noakes, was how we got our sums and who we involved. In the December 2006 impact assessment our estimate of employer administrative costs were £291 million for the first year and £96 million per year in the steady state. In the December 2007 impact assessment, those estimates were revised upwards to £310 million and £101 million. That is an increase of around 20 per cent for the first-year costs and 5 per cent for the ongoing costs. The impact assessment published alongside the Bill included a detailed explanation of the changes to our estimates since 2006. They reflect changes in our methodology rather than additional requirements on employers. In the December 2006 White Paper, the Government announced that they were setting up a cross-government group of experts to improve understanding of the cost impact of the reforms on employers. As the noble Baroness, Lady Noakes, said, the composition of that group was internal. It included the DWP, the then DTI, the Better Regulation Executive, HMRC and the Small Business Service. The group carried out a robust challenge of DWP assumptions, bearing in mind all the available evidence. It gathered and applied evidence from colleagues at HMRC and from commissioned research by Durham University and Middlesex University’s business schools that sought views directly from employers and payroll providers on likely administrative costs. Some of the changes that resulted from the detailed scrutiny carried out by the group were: updated wage estimates and the inclusion of a 30 per cent non-wage cost of employment; increased estimate of the value of the time of owners and managers for microfirms using new analysis of dividend payment; more robust estimates of the cost of collecting monthly contributions validated by commissioned research; inclusion of the opportunity cost of employees’ time as a cost to the employer; inclusion of extra processes that employers are likely to carry out, such as time spent deciding how to fulfil the employer duty and communicating the change to staff; reflection of the new evidence on the scheme that employers will choose to use; and cost variations between employers using personal accounts and those using other things. We think that those estimates are now robust. However, there will inevitably be uncertainty this far from the introduction of the reform, and the estimates will be updated as new databases are received. I have given our estimates of administrative costs. For a microfirm—I believe that we have defined that as five or fewer employees, but I will correct that in a letter if I am wrong—there will be costs of £200 for the first year and £70 thereafter, with some £300 and £80 thereafter for small firms, and rather more for the medium and larger firms but in proportion a good deal less, as noble Lords have pointed out. On the issue of financial help, we recognise that the reforms should impose the fewest possible burdens on employers of all sizes, and small employers in particular. In developing the policy framework for the reforms, we have engaged with employers and their representatives to ensure that we balance our objective of increasing access to pension savings with minimising employer burdens. As I have explained, the phasing policy is explicitly designed to smooth the increased costs for employers as a result of the reform. Our expectation is that it will be of most benefit to those employers who do not currently offer workplace pension contributions. The majority of small employers will fall into this group, so will benefit disproportionately from phasing. In that sense the phasing policy is targeted on the smallest employers and has a cost-reducing effect. Introducing a further support payment would duplicate that effect. Looking beyond the phasing policy, we recognise that the operational approach taken by the Personal Accounts Delivery Authority and the Pensions Regulator is crucial in minimising burdens. Clause 62 requires the Personal Accounts Delivery Authority to have regard to minimising burdens on employers in implementing the reforms. The delivery authority has already established an employer panel for ongoing consultation on the design of the scheme. That is evidence of how seriously the Personal Accounts Delivery Authority takes that principle. Of course, we have already produced working estimates of the administrative costs to employers in the cost-benefit analysis in the impact assessment. Those are based on the cost of the activities that we believe employers will undertake and, as I have said, on robust methodology. As is normal with major reforms, they were scrutinised by the Better Regulation Executive and Small Business Service within government. We recognise that small employers have limited capacity to respond to regulatory change and that fixed administrative costs per firm affect them disproportionately. Our analysis reflects that. This strengthens our resolve to design the reforms with them in mind, but it does not automatically point to a package of compensation. Until operational systems are more fully developed we cannot predict reliably the final costs of potential administrative burdens. There is no evidence at this stage that financial support would be appropriate for small employers. It would therefore be unwise to commit future Governments to spending taxpayers’ money in this way. I should like to re-emphasise our belief that we have taken and will continue to take the necessary steps to get the design of the reforms and the scheme right. Any decision that financial support for employers was necessary should rightly be left for future Governments to make based on the evidence available at the time.