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Pensions Bill [HL]

Uprating and revaluation measures, especially for pensions, can be challenging to get right and hotly debated. The uprating arrangements for automatic enrolment are proving no exception. However, before going into those arrangements, I need to make clear to the noble Baroness, Lady Drake, that nothing in the Bill introduces a power to change the age criterion of 22. The flexible uprating power in Clause 8 applies only to the earnings trigger and thresholds. It does not apply to age criterion. We agree with her that 22 is the right age for automatic enrolment to kick in. I return to uprating and thresholds. As we have discussed, the Johnson review was commissioned to test whether automatic enrolment had been designed to target the right people at the right time. We welcomed the findings of that review and believe that its recommendations are sensible and balanced as a package. The review concluded that the automatic enrolment earnings trigger should be aligned with the tax threshold, which was then £7,336. We accepted that proposal and have committed to a figure of £7,475, which is an update to Johnson to reflect the personal tax threshold for next year. The presumption of that review was that the trigger would remain aligned with the tax allowance unless future action by government resulted in a fundamental change in their purpose or in the relationship between them. The Johnson review took a clear view on the right direction of travel. But for reasons that I shall continue to outline, we believe that we need to retain flexibility. We do not want to tie the hands of this or future Governments in this area. We have listened carefully to employers and pension providers and taken note of their views, both on the most appropriate thresholds and the potential for deregulation. We have retained a core building block from the pensions commission, and taken the views of the trades unions into account, in setting the threshold for qualifying earnings— earnings on which contribution levels are based—at the national insurance primary threshold. The economy has changed since the pensions commission reported. The automatic enrolment threshold of around £5,000 that was set back in 2006 will not be relevant for 2012, so we have changed the entry point. The amendments seem to be in search of a guarantee: that the trigger for pension saving will be set in complete isolation from prevailing personal tax thresholds. Two of the amendments from the noble Lord, Lord McKenzie, and the noble Baroness, Lady Drake, go one step further by seeking to limit future rises in the value of the automatic enrolment trigger to rises in the general level of earnings or the percentage increase in the national insurance lower earnings limit. But setting the right trigger is not about a relentless chase towards alignment with a possible £10,000 tax threshold. The rate must be right for the time. Automatic enrolment is about targeting the right group. For those on sustained low earnings throughout their working life, state benefits can replace most income in retirement. It does not seem logical to force, encourage or—if noble Lords prefer—apply asymmetric paternalism to such people to save in a private pension. As the noble Baroness, Lady Drake, pointed out, beta savings might not be a good thing right now given the state of the markets; I think that I would prefer a few alpha returns at the moment. It is in practice very hard to distinguish a clearly identifiable group or individual who should definitely not be saving. Therefore, the level at which we set the automatic enrolment trigger must strike a balance. We think that the proposed threshold of around £7,400, the current tax threshold, strikes the right balance between maximising pension saving for those for whom saving is valuable and minimising the number captured for whom it is not worth while to save. The state pension minimum income guarantee already provides an annual income in retirement of around £7,100, with housing benefit on top. However, an earnings trigger of around £7,400 may not be right in the future. The relationship between prices and earnings is changing. The Government have a commitment to remove the lower-paid from the tax net. Further, the shape of state pensions may change in future, although I cannot discuss that much more.