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Pensions Bill [HL]

My Lords, I thank the noble Baroness and my noble friends for bringing the important issue of the NEST contribution limit to the attention of the Committee. I shall deal with the amendments in the order they were raised. The noble Baroness, Lady Hollis, has raised, through Amendment 36, a vital point about the ability of NEST members to make contributions to their retirement pots that exceed the minimum contributions required by automatic enrolment. NEST has been designed to provide a low-cost, portable pension scheme for low to moderate earners. We want to encourage people, where possible, to save more than the minimum. The NEST order and rules already allow a member to make contributions up to the annual contribution limit in the financial year in which the contributions are made, as the noble Lord, Lord McKenzie, pointed out. The current limit is already set at such a level that it enables median earners to contribute as much as twice the minimum contribution requirement in a tax year. Allowing NEST members to make use of unused annual contribution limits in subsequent years would undermine the purpose of the annual contribution limit. This limit was designed to ensure that NEST does not adversely impact on existing good-quality pension provision. While I understand the principle behind this amendment, we should not forget the purpose of NEST. This is to enable millions of people to participate in pension saving from which they are currently excluded because they do not have access to suitable workplace pension provision. Filling this supply gap requires NEST to be both low-cost and as straightforward a scheme as possible. Adding to the complexity of administering NEST through complex arrangements for calculating the maximum annual contribution would undermine those aims. Moving on to Amendment 37, the noble Baroness raises another important point, about how the annual contribution limit should be calculated. The limit, alongside the transfer restrictions, is designed to focus NEST on its target market of low to moderate earners. This is to ensure that NEST will complement existing good-quality pension provision, not replace it. The baseline contribution limit was set at £3,600 in 2005 terms, following wide consultation on the proposals in the White Paper, Personal Accounts: A New Way to Save. Responses on the appropriate level for an annual contribution limit were based on analysis of several factors, in particular, the potential impact on existing schemes and the ability of individuals to save flexibly for their retirement. In line with the provisions in the scheme order, NEST Corporation has adjusted the contribution limit for 2011-12, prior to scheme launch, to £4,200. The current method of setting the annual contribution limit strikes the right balance. It ensures that NEST focuses on its target market of those excluded from pension savings as a result of market failure, while providing for a level of contributions that is sufficient to allow employers and individuals to contribute more than the minimum required. I turn to Amendment 38, tabled by my noble friends Lord Stoneham and Lord German. This puts forward the recommendation from the Making Automatic Enrolment Work review that the Government legislate now to remove NEST’s annual contribution limit from 2017. That review recognised the importance of the NEST contribution limit during the introduction of the reforms. It acknowledged that there was broad consensus behind the reforms, and that NEST’s role was to fill the supply gap that those in the existing industry currently find difficult to serve. The review saw the contribution cap as a key lever in ensuring two things: that NEST remains focused on this target market as the reforms are staged; and that during this important period it does not adversely impact existing good-quality pension provision. However, the review team considered that once the reforms were fully implemented it may be appropriate to remove the cap. This is both to ease the administrative burden on NEST and to avoid any unintended message that there was somehow a maximum appropriate level of pension saving. Great minds think alike. Section 74 of the Pensions Act 2008 already requires the Secretary of State to appoint a person to review the effect of the annual contribution limit in 2017. By this time, the reforms will have been fully implemented and we will have more evidence on the effect of the reforms as a whole, including the impact of NEST on the marketplace. I am not saying that the review team was wrong. I am saying that, given that it saw 2017 as the right time to remove the cap—by then we will have much more evidence of the impact of NEST in the real world—2017 is also a more sensible time to consider changing or removing the NEST annual contribution limit. Since this can be achieved by secondary legislation, there is no need to legislate now. I understand the principles behind these amendments. However, now is not the time and, given the scope individuals already have to make additional contributions and our intention to review the contribution limit in 2017, I urge the noble Baroness to withdraw this amendment.