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Pensions Bill

I thank the noble Baroness, Lady Noakes, for moving the amendment and the noble Lord, Lord Kirkwood, and my noble friend Lady Hollis for their contributions. The provision in Clause 70(2)(d) reflects our commitment to low charges in the personal accounts scheme. It requires the delivery authority to take account of the effect on members’ charges when making decisions relating to the design and implementation of the scheme. The amendment gives me an opportunity to explain more about our intentions and why it would be inappropriate to set a specific charge structure or level at this stage. As we made clear, low charges will be at the heart of the personal accounts scheme. Charges can have an important affect on people’s pension income—my noble friend Lady Hollis has just expanded on that point—and it is important that this should be reflected in the authority’s work. I know from my meetings with Paul Myners and Tim Jones that they fully agree. However, it is too early to specify both the exact structure of the scheme and the level of the charges. Let me explain why. While our aim is to create a low-cost pension scheme, we have also made it clear that the personal accounts scheme should be self-financing in the long run. We expect its set-up and operational costs to be recouped from member charges. During the scheme’s early years, before revenue flows from charges mature, costs will inevitably exceed revenues. The funding strategy for the scheme will therefore need to find a way of funding this shortfall until revenue from charges is sufficient to cover costs. PADA will advise on the funding strategy, but the exact funding solution will not and cannot be known until the design of the scheme is finalised and the commercial process is under way. In making its recommendations, the authority will need to consider how to strike the best balance between repaying this shortfall quickly, which could put an unreasonable charges burden on earlier members of the scheme, and taking too long to do so, which could mean passing the cost of additional interest and charges on to all members of the scheme. A limit on membership charges in the early years could restrict revenues of the scheme in the early years and in turn extend the time it will take for the scheme to become self-financing. This would add to the cost of financing, potentially to the detriment of scheme members. In addition, a limit on charge revenue could make private sector engagement in the scheme less attractive, as restricted revenue flows in the early years may mean that contractors have to provide more up-front financing and have to wait longer before they are paid back for their services. Aiming to set the charge level in this way might therefore compromise the authority’s ability to drive best value from the market through its commercial and procurement strategies. Further to this, noble Lords will be aware that the delivery authority has been consulting on the best charging structure for the personal accounts scheme. Previous analysis has shown that there is no easy answer: no structure scores best for members’ outcomes, encouraging participation and the sustainability of the scheme. Instead, trade-offs have to be made. It is not wise to pre-empt these careful deliberations by requiring the authority to have regard to an annual management charge. The authority’s consultation document explains that there could be other more suitable charging structures for the personal accounts scheme. We should give the authority the opportunity to explore these as part of its wider work on funding the scheme. Therefore, while I agree with the spirit behind this amendment, it is important that we give the authority scope to decide how the set-up and early years’ costs of the scheme should best be met. The noble Baroness asked about the membership figures in the financial model. We are exploring a range of options for the financing of personal account schemes, but it is too early to publish our current assumptions about costs and revenues due to inherent uncertainty and commercial sensitivity at this stage. The department has published a fact-sheet that, with the impact assessment, sets out our assumptions about potential participation, which are that between 4 million and 7 million people are expected to become members of the personal accounts scheme from day one. The authority’s estimates of the costs involved in setting up the scheme are being continually updated to reflect new understanding of the detailed scheme’s design, but actual costs will not be known until later in the procurement process. The noble Baroness also mentioned the figures of £21 million and £36.1 million. The £21 million figure that was included in the impact assessment that was published with the 2006 Pensions Bill was an early estimate of the funding requirement to support the delivery authority during its advisory stage, and was intended to cover the period from Royal Assent of that Bill, which is now the Pensions Act, up to July 2008. It was our best estimate at the time, but it was made early before the authority even existed and hence before it had a formal budget, a chairman or a chief executive, and at a time when our thinking on the work programme was still developing. Since PADA was established, spending in connection with the authority up to 31 March 2008 was around £12.5 million. Noble Lords will be aware that until 29 February 2008, the authority’s costs were met using DWP resources, but since 1 March has been grant-in-aid funded and is now responsible for accounting for its own expenditure. This year’s departmental estimates include an initial budget of £36.1 million for the 2008-09 financial year, and is intended to cover the authority’s continuing advisory role and anticipates the funding that PADA may require once the delivery role is extended to allow it to set up the personal accounts scheme. As we have made clear, our intention is that the costs associated with PADA’s role in setting up the personal accounts scheme will be recouped from members’ charges, and the scheme is intended to be self-financing in the long run. The authority will therefore account separately for scheme-related expenditure. The noble Baroness referred to the number of consultants involved in this project. Given that PADA is going to have a finite life—until 2013 on the basis of amendments in her name, although I note her indication that she does not intend to move them—as she knows full well, it is often better to buy in a range of experience from consultants than to recruit people, particularly if their skills are needed for a relatively short time. There are of course some quite specialist skills involved in all this. I should say that how personal accounts are funded is an important decision, and the delivery authority is evaluating various options to identify the most appropriate method of financing. But noble Lords must accept that it will not and cannot be known until PADA has completed the scheme’s detailed design and undertaken commercial negotiations to obtain the services that will underpin its delivery. That can begin only once the Bill reaches Royal Assent. At this stage, revealing information about the scheme’s costs or possible funding arrangements could, I believe, prejudice PADA’s ability to secure value for money during commercial negotiations. But I urge both the noble Baroness and the noble Lord, Lord Kirkwood, to take up the opportunity of a meeting with Tim Jones at PADA, who I am sure will be able to brief them as fully as he is able. The set-up of the compliance regime will be funded by the Government by way of a grant-in-aid funding stream, which will be kept completely separate from the regulator’s current expenditure funded via the general levy and subject to parliamentary scrutiny. In terms of ongoing compliance costs, as I touched on in our debates last week, we are exploring further how these will be funded. Finally, on the question of whether a 0.3 per cent annual management charge is achievable, we expect that the charge level that will apply in the personal accounts scheme will be in line with Pensions Commission estimates in the long run. But I stress that the charge structure of personal accounts has yet to be decided. The delivery authority is responsible for advising on the charge structure for the scheme and will be consulting on the options. The final decision will be dependent on the end design of the scheme and the commercial procurement process. I am conscious that that will not satisfy the noble Baroness’s demands for ever more information and I understand that because we would be asking the same questions in her position, but I hope she recognises that a lot of work has to be undertaken to get this scheme designed and to organise the funding arrangements. Until that is done, it would be foolhardy to commit to precise figures. For those reasons, I hope that the noble Baroness will withdraw the amendment.