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Pensions Bill

My Lords, I have Amendments Nos. 21 and 32 in this group, as the Minister said. They also address qualifying earnings, but from a slightly different perspective from the government amendments. We are content with the government amendments, but we believe that they do not go far enough, as the Minister implied, to resolve the issues that remain about qualifying earnings. Let me say at the outset that we recognise that during the summer the Government remained in dialogue with the organisations that have expressed concern about qualifying earnings and the way they are worked out in the Bill. Those organisations include the ABI, the CBI, the Institute of Chartered Accountants, the Society of Pension Consultants and the NAPF. We had also understood that dialogue was continuing, though I gather that last weekend’s reshuffle—which fortunately did not involve the Minister—may have caused some delay. I hope that the Minister can confirm that discussions will now continue in the search for a satisfactory solution. When we discussed these issues with the Minister last week—I thank the Minister for the time that he made available during the Recess for those discussions—we recognised that further discussions with the industry participants were both necessary and desirable. That meant that matters would not be resolved by Report stage and would have to remain open until Third Reading. I hope that the Minister will confirm that the Government accept that further amendments on this subject can come forward at Third Reading. Neither of us can predict what those amendments might contain or indeed which side of the House might move the amendments. On that basis—I hope that the Minister will confirm that it is agreed—I have grouped my amendments today with the government amendments. I regard my amendments as probing for today. Before I explain the amendments, I should like briefly to outline the nature of the concerns with qualifying earnings. The Bill’s approach to the calculation of pension contributions uses two concepts which most, if not all, existing schemes do not use. First, the Bill uses in-year banded earnings. Banded earnings are not unknown in existing pension provision, but I am advised that banded earnings for in-year calculations are never used because of the very complications that the Bill creates. Where banded earnings are used in existing pension arrangements, at present they operate off previous years’ data and hence are not affected by income variation in the year. Secondly, the Bill uses a definition of qualifying earnings that includes the volatile elements of earnings that most workplace pension schemes avoid; in particular, bonuses. Again, existing schemes tend to use salary bases, which are stable and predictable, which is why bonuses are rarely included in earnings, at least in modern schemes. If employees have income volatility in-year, there will be peaks and spikes in contributions as calculated under the Bill, which is where part of the problem arises. Taking those two factors together—in-year banded earnings plus variability—the Government have created a system that is likely to produce a variance between the Bill’s minimum calculations and the employer’s scheme calculations. Of course, in many cases, the employer’s scheme will be more generous than the Bill’s minimum, because few private schemes stop at the earnings level that the Bill uses, but for some employers there will be a negative variance. That is not in dispute between the Government and the various bodies that have been making the case. I understand that the number of employees involved is relatively small; possibly 30,000 at most. Putting that in context, the Government’s regulatory impact assessment puts the number of people enrolled in workplace pension schemes following implementation of this Bill at between 9 million and 11 million people. Some 0.3 per cent of employees might have lower contributions than the calculation in the Bill. The question that the Government need to answer is whether they believe that requiring calculations to work for every employee down to the last penny is the right approach. It is easy to argue, as the TUC has done, that every employee must be entitled to the minimum set out in the Bill, but there is another side to the coin, which could be much more damaging to employees generally—namely, levelling down. We are told that, whatever the early research on employee attitudes shows, as the details of the implications of the Bill have become clearer, there has been a hardening of view about the administrative pain that employers would be prepared to shoulder in terms of continuing with their existing provision. The economic climate is playing a part in influencing employer attitudes to the sustainability of costs and other burdens. At present, employers prepare their payroll data for their businesses, but have to meet two sets of rules—those operated by HMRC for income tax and national insurance. If the Bill were passed in its present form, it would require another set of data to meet the pension contribution rules for every employer whose calculation methods differed from those in the Bill, not just the employers of the 30,000 or so people who might be affected. One does not know that there is no difference until the last decimal point has been calculated for the last employee. There has been a suggestion that modern software can provide the solutions at the touch of a button, plus software updates and implementation costs. But that misses the point. Businesses hate complexity. Complexity costs money and creates an environment in which it is difficult or costly to avoid errors. If the Bill becomes too complicated for employers to deal with, they will seek a solution that avoids the problems. The solution is simple and obvious: level down to the Bill’s calculation methods or, probably more likely, close the existing scheme and hand it all over to the personal accounts system. That is a rational approach and one which the employer groups and their advisers are telling us is what may well happen. If it does, every employee could end up receiving the minimum specified in the Bill, but hundreds of thousands of employees, or even millions, would get only that as well—to their detriment. A levelling down is not a theoretical possibility, but a racing certainty. The only question is: how much will occur? It is also pretty clear that it will hurt more than 100 per cent coverage or benefit. That is the background to these amendments. Clause 16 has a quality test for qualifying schemes calculated for every member. That is the effect of paragraph (c) of subsection (1). My Amendment No. 21 introduces a further way of qualifying by reference to equivalence established at the level of the scheme as a whole. That is already established in Clause 22 for that dying breed, the defined benefit scheme. The effect of my amendment is to extend that approach to defined contribution schemes. Amendment No. 32 backs that up by inserting a new clause after Clause 27 to set out a regulation-making power, whereby the Secretary of State could set up a self-certification scheme on equivalence to be enforced by the regulator. The Minister will be aware that the Association of British Insurers, on behalf of itself and other organisations who have an interest, is discussing how such a scheme might work in practice and might be turned into a practical scheme for the regulator. I know that the ABI is keen to continue those discussions. No one wants to create loopholes through which rogue employers can avoid their proper obligations. For that reason, we have not constrained the regulation-making power in my new clause. The approach is designed to enable employers comply with their obligations, the vast majority of whom will want to do that in a way which fits with their business. The more we try to make employers retrofit their businesses to the concept of pension contributions in the Bill, the more we put at risk existing, more generous provision. The Minister will not be surprised that I am not wedded to the wording of the amendments, which I have already said are probing for today. However, we are wedded to trying to find a solution to this problem that goes with the grain of reasonable business practice because we do not want the Bill to create incentives for employers to level their existing provision down. We do not want the Bill to create a presumption that future provision should always be based on the minimum in the Bill, and we do not want the Bill, in its search for perfection, to end up being the enemy of good pension provision. I look forward to hearing whether the Government’s approach is capable of shifting by the time we reach Third Reading in order to avoid these problems.