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Pensions Bill [HL]

My Lords, I shall also speak to Amendments 29 to 32. Please forgive me if I take a little of your Lordships’ time on this matter, because I feel strongly about it. The policy of auto-enrolment—or asymmetrical paternalism, because we should give the friend of the noble Lord, Lord Freud, his due recognition—has the broad support of all the main political parties and stakeholders. That broad support and consensus are important. However, let me capture our concerns, which led to the tabling of this and the associated amendments. The definition of the workforce who should be auto-enrolled into a workplace pension and benefit from the contingent employer compulsory contribution and the tax relief or credit is the product of both thorough analysis and the iterative process required to deliver such a widespread consensus. The definition of the workers to be covered by the new employer duty to automatically enrol, the band of qualifying earnings and the minimum contributions are all captured in legislation. The intended outcomes include the need to achieve a very wide coverage of the working population, including low-income to moderate-income earners, to facilitate them saving from a relatively early age given the long years of saving needed to achieve an adequate income in retirement, and for the design of the private pension system, as well as the state system, to work for women. On taking office, the Government commissioned Paul Johnson and his colleagues to review the auto-enrolment policy and its provisions. I commend and thank the Government for holding to the main thrust of the policy that was enshrined in that consensus and captured by the previous Government through the 2008 Pensions Act. I am sure that maintaining that position did not come without its challenges, not least, no doubt, in exchanges with the Treasury, so I would be the first to acknowledge my thanks to them for holding to the main thrust of the policy. Our concern, however, is that Clause 8 gives to a Secretary of State too great a power to significantly change the population of workers who will be the beneficiaries of auto-enrolment—in particular, the power to raise the age requirement for a qualifying worker above the current age of 22 and the power to raise significantly the earnings threshold at which a worker would qualify for automatic enrolment. The purpose of Amendment 28 and those associated with it—Amendments 29 to 32—is to probe why and in what circumstances the Government would wish to raise the qualifying age. It is also to limit the Secretary of State’s powers on the extent to which he or she can increase the level of the earnings threshold at which the automatic enrolment of a worker would be triggered and to require the Secretary of State to provide an impact assessment to accompany any order to increase or decrease any of the amounts that he is empowered to increase or decrease under this clause. I turn to the qualifying age for auto-enrolment, which is 22. It is recognised that very young workers and students frequently change jobs. To avoid too many small pots in a concentrated period of time, and to avoid young people getting into a cultural habit of opting out when auto-enrolled, it is reasonable to set an age of around 22, which also has a synergy with the minimum wage provisions. However, one would not want to set the qualifying age too high because an individual would lose valuable early years. We know that people need to save for a very long period to build up a reasonable pension pot, and that an early start allows the pension pot and the value of investments to build up. Furthermore, given that women are more likely to work full-time in their 20s, but that there is a peak of part-time working in the female labour force for those in their 30s and 40s, excluding these earlier years will reduce many women’s pension savings in periods when their earnings will be higher. Given that we need to hold to a private pension settlement that persists over the long term because pension savings are a very long-term project, I ask the Minister why the Government want even to consider raising that age of 22. Reserving powers to make short-sighted or pragmatic adjustments to the qualifying age for auto-enrolment does not appear very desirable. I turn to the matter of the earnings threshold that has to be reached for a worker to be eligible for automatic enrolment into a pension—the earnings trigger. The Government intend to set this at £7,475 in 2011-12 earnings terms so that it is aligned with the threshold for income tax. However, Clause 8 amends Section 14 of the 2008 Act and explicitly allows the Secretary of State to increase this earnings threshold in line with increases in the income tax threshold. Given the Government’s aspiration for a future income tax threshold of £10,190 in 2011-12 earnings terms, if the threshold were to rise to this level it would exclude a further 800,000 workers in any one year from auto-enrolment, 76 per cent of whom would be women. It would have a disproportionate impact on those working part-time. Consequently, of the group targeted to benefit from workplace pension reform, 66 per cent would be men and only 34 per cent would be women. One has only to look at the figures on women’s employment. Some 7.63 million women work full-time and 5.87 million work part-time, compared to 13.54 million men working full-time and 1.94 million working part-time. These figures also show two peaks in part-time working by women, one of which straddles the 30s and 40s age group and one which is post-50. The latest labour market figures reveal that some 27 per cent of the workforce is now part-time. So many workers should not be excluded from the benefits of auto-enrolment by the earnings trigger tracking such a high increase in the income tax threshold. My arguments for not raising the earnings threshold to £10,190 in 2011-12 earnings terms are supported by the Government’s own impact assessment documents and the findings of the Johnson review. Excluding 800,000 people and losing £40 million per annum of employer pension contributions does not support the overarching objective of the reforms to enable low to moderate earners to save. As has been said several times in various debates on amendments, many or most very low earners are women who live in households with others with higher earnings. I repeat the quote from the Johnson report: "““These may well be exactly the people who should be automatically enrolled””." Rather than excluding large numbers of women from auto-enrolment, the Government should look at innovative ways of increasing their participation. I know my noble friend Lady Hollis has several proposals. To paraphrase my noble friend’s excellent and concise sentence from her Second Reading speech, on a threshold of £10,190 a woman on half of average earnings will not be auto-enrolled into a workplace pension, so a woman on half of average earnings may have no pension pot at all. The hard-fought-for European part-time workers directive gave many women access to their employers’ workplace pension scheme for the first time. It would be a truly retrograde step if the earnings threshold rose to the level that reintroduced a barrier to so many women participating in workplace pensions. We know that, increasingly, women approaching retirement are not going to be part of an on-going relationship, so many will not be able to rely on their partner’s income. They must and need to save in their own right. A key principle of pension reform, a very important part of the consensus—and one should not underestimate it—is that it should enable women to build up pension benefits in their own right. The higher the threshold of earnings for auto-enrolment, the less the reforms will work for women. But raising the earnings threshold too high, and certainly to £10,190, also affects the persistency of savings for men as well as women. For both, the Johnson review and the Pension Policy Institute confirm that earnings are not static. Relatively few people have persistently low earnings over their lifetime; most low earners go on to earn more. Saving while on a lower level of income will still be beneficial—first, because of the contribution the pension saving makes over the individual’s working life, and secondly because of the enhanced persistency of saving resulting from someone remaining qualified for auto-enrolment. They remain locked into that culture of auto-enrolment. Persistency of saving is as important as investment returns in achieving a decent pension pot. To put it at its simplest, or even crudest, beta returns on 40 years of saving is better than alpha returns on 10 years of saving. I do not wish to argue against changes to the income tax system that would benefit those on low and modest incomes, but it is not necessary for what may be considered meritorious reforms to the tax system to result in unfairness or inefficiencies in the design of the private pension system. Raising the earnings trigger in line with significantly increased income tax thresholds denies access to incentives to save for men and women. All of an individual’s pension contribution is disregarded from their income when calculating entitlement to tax credit, but tax credits for some can produce an implied rate of tax relief as high as 50 or 60 per cent. Amendments 28 to 32 in the names of my noble friend Lord McKenzie and myself not only seek to express our concern about the qualifying age; but also seek to restrict the Secretary of State’s ability to raise the earnings threshold trigger for auto-enrolment to no more than either the general level of earnings or the percentage increase in the lower earnings limit for national insurance purposes. The intention is to keep broadly stable the proportion of the population covered by auto-enrolment. I recognise that Amendment 33 tabled by my noble friend Lady Turner is seeking to achieve a similar outcome. Under the provisions of this amendment, the ability of a future Secretary of State to issue an order which carves out a significant section of the workforce from benefiting from automatic enrolment into a workplace pension is constrained. The noble Lord, Lord Turner, argued that successive post-war Governments had introduced changes to the UK pension system which made it both unfit for purpose and unsustainable. He said there needed to be a broad consensus within society as to the pension settlement, so that it would hold over the long term, across successive Governments, as it needed to be sustainable. People needed confidence and saving for adequate pension provision was long-term. I often used to put it more crudely: death by incremental adjustment that lost sight of any strategic outcome. I am worried that we see signs of repeating that error, because what might be meritorious in a tax system does not necessarily drive what is sound in the design of a private pension system. It is important that the parameters set for the workplace pension system give the coverage and the confidence to the workforce. It is also important that any fundamental changes to those parameters are driven by the needs of the pension system itself, and that the reasoning for them and the impact of them are transparent and supported by a consensus. That is why we have tabled Amendment 32, which requires a full impact assessment to accompany any order that increases or decreases any of the amounts covered by this clause. I beg to move.