Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order 2015
Debate between Lord Bourne of Aberystwyth and Baroness Drake(9 years, 2 months ago)
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Lord Bourne of Aberystwyth (Con)
My Lords, I am pleased to introduce this instrument, which was laid before the House on 19 January. I am satisfied that it is compatible with the European Convention on Human Rights.
The order amends the automatic enrolment figures that will set minimum savings levels from April of this year. The automatic enrolment earnings trigger sets the automatic entry point to determine who saves in a workplace pension. The qualifying earnings band then determines how much people save and sets employer minimum contribution levels. These figures must be reviewed annually; indeed, this is the fourth such annual debate we have had.
Given that automatic enrolment is in its fourth year, I think that it is a good time to take stock. To date, more than 5.1 million workers have been automatically enrolled by around 43,000 employers. Automatic enrolment has been a significant success, with opt-out remaining significantly lower than expected, but there are still important challenges ahead. Next year, small and micro employers will be brought into automatic enrolment for the first time. It remains as important as ever that automatic enrolment and the figures we are debating today remain easy to explain, understand and administer. It is also important that we target the right people. There is a balance to be struck between those who should save and those who can decide to save. As such, the Government decided that the timing was right to conduct a formal consultation as part of this year’s review. We wanted to learn about employers’ experience of live running and to test whether it remained right to maintain alignment between the earnings trigger and the income tax personal allowance in the light of proposed increases to the allowance and lower than expected earnings growth. The earnings trigger is key to targeting and striking the balance that I have outlined.
Automatic enrolment is a tailored policy. It does not force pension saving on to everyone, regardless of earnings. Our overall aim in setting the figures in this instrument is to maximise the number of people saving who can afford it, while excluding those who cannot. The new state pension full rate of nearly £7,900 per year is a significant factor in determining who should save. The Pension Commission suggested that for those earning around £10,000 a year, a sensible replacement rate in retirement would be 80%. As my honourable friend set out in another place, once you disregard national insurance, those earning under £10,000 will already receive around an 80% replacement from the new state pension. Therefore, this order does not amend the earnings trigger and it remains frozen at £10,000 for 2015-16.
As part of the consultation and review, we considered some alternative options for setting the trigger, including increasing it in line with the income tax threshold, as we have done in previous years. This option has the benefit of administrative simplicity for some but, given the above inflation rises to the tax threshold, we did not believe it was the right approach in 2015-16.
In the recent debate in the other place, it was suggested that the trigger should be lowered. We disagree. Automatic enrolment should continue to exclude low earners for whom saving, on top of the pension they will get from the state, may not make economic sense, and they should be relied on, instead, to opt in. It is important to stress that we are not excluding people from pension saving; people earning under the threshold can choose to opt in or join a pension scheme. It has also been argued that we should enrol everyone and rely on opt-out instead. Again, there is a balance to be struck. As I told noble Lords earlier, opt-out is currently somewhat unusual. The risk of having a much lower threshold is that opt-out will become much more common and start to undermine the principle of automatic enrolment. Opt-out also comes with an administration overhead. Employers have to refund moneys and unwind membership. High opt-out rates increase nugatory work, so we firmly believe that it is better not to enrol people who are likely to walk away.
I am aware from previous debates on this issue that noble Lords will be interested in the impact that this instrument will have on the number of women savers. Freezing the trigger at £10,000 represents a real-terms decrease in the trigger, resulting in around 20,000 extra people being brought into automatic enrolment in 2015-16. Fourteen thousand, or 70%, of these are women.
The automatic enrolment earnings trigger does not exist in isolation. It is the entry point to pension saving that works alongside the qualifying earnings band. The band sets a minimum definition of pensionable pay. If you earn £10,000 a year, you will pay pension contributions on anything over £5,824. The qualifying earnings band also needs to cap minimum employer contributions for higher-paid staff and let existing arrangements cater for this market. The Government believe that aligning the qualifying earnings bands with the national insurance lower and upper limits remains the right approach.
The Secretary of State has a lot of discretion to determine the right level for the automatic enrolment thresholds and what factors to consider. This year, we consulted on these factors and on a number of options for setting the earnings trigger. Freezing the earnings trigger in 2015-16 strikes the right balance between administrative simplicity for employers and ensuring that the right people are brought into pension savings. Continuing to align the qualifying earnings band with national insurance thresholds ensures that people continue to build meaningful pension pots. It is straightforward to administer and caps minimum employer contributions for higher-paid staff. I commend this instrument to the Committee.
Baroness Drake (Lab)
My Lords, each year with some predictability, I am sorry to say, I contribute to the debate on the relevant statutory instrument to express my concern that in linking the earnings trigger for auto-enrolment to the income tax threshold it is being set too high, and that too many women are excluded such that only one in three workers targeted for auto-enrolment is female. So many women are excluded because their earnings are below the level required to trigger the new employer duty to auto-enrol a worker into a pension scheme.
Given my persistency in raising this issue, it would be lacking in grace not to say that I am therefore pleased that the Government have chosen to freeze the trigger at its current level and not increase it further. I understand that as a consequence 20,000 people, 70% of whom would be women, will no longer be excluded from auto-enrolment when they otherwise would have been. Therefore, the Government’s decision to break the link between the earnings trigger and the income tax threshold is welcome.
I am also pleased that the Government’s decision supports the argument that it is wrong always to say that simplicity for employers, by linking the trigger to the tax threshold, is worth the price of excluding yet more thousands of women from the benefits of auto-enrolment.
I also welcome the Government’s decision that it is not right to maintain the alignment between the earnings trigger for auto-enrolment and the income tax threshold in the light of the proposed increases and the relatively low earnings growth. Low earners are likely to have lower earnings growth, and the UK has a greater concentration of low-wage jobs than some other advanced European economies, so the earnings trigger remaining linked to a rising income tax threshold would exclude even more workers over time. Those excluded, who are mostly women, would suffer a loss in lifetime pay because they would not have received the employer contribution, but they would still lose out due to any general reduction in wage levels that flowed from the cost to the employer of automatic enrolment contributions. Those are my positives, and they are three or four things that I welcome.
However, I remain concerned that, even with the freeze on the trigger at £10,000, far too many people will still be excluded from auto-enrolment. I would have liked to have seen it decreased under Section 14 of the Pensions Act 2008, as is permissible. I do not agree with some of the arguments which have been deployed by the Government for retaining it at its current level. The Government have argued that low earners for whom saving on top of their state pension does not make economic sense, and because the state pension gives them a high replacement income in retirement, should be excluded from auto-enrolment, but earnings are not static for many workers—men or women. They can change significantly over a lifetime. Most low earners go on to earn more—a point confirmed in the Johnson review commissioned by the Government. Therefore, auto-enrolment would be beneficial because it would increase persistency of pension contributions over their working lives.
Millions of women have a life pattern in which periods of full-time work are interspersed with periods of part-time work when caring responsibilities are at their greatest. But the effect of a high earnings trigger is a policy which asserts that women should not be auto-enrolled when they are working part-time and caring. That is in fact the consequence, and the figures confirm it. Almost half of those in the lowest earnings group are in couples where one works part time and the other full time. Most very low earners are women who live in households with others on higher earnings and they are receiving working tax credits. As the Johnson review confirmed—it is his analysis as much as my observation—these are precisely the people who should be automatically enrolled in saving, yet they are excluded.
The Government argue that if people on low earnings are auto-enrolled, they will build up their pots in pennies, not pounds, and that anyway the state pension gives them a sufficient replacement rate. But the problem with that argument is that pension savings are no longer reserved for pensions or replacement income. Freedom of choice means that the purpose of private pension saving is wealth accumulation. People can do what they wish with their money. There is now a complete separation between pension saving and securing a replacement income, which makes the Government’s support for a high earnings trigger even more tenuous. Why should low earners not be allowed to accumulate assets to build up their pot of wealth for their personal use? Why should an asset accumulation facility be available only to the better off?
Talking about “pennies, not pounds” resonates with that outdated and now unacceptable argument that women working part time are doing it only for pin money. It is possible to lower the earnings trigger below £10,000 without running up against the pennies argument. If, for example, the lower value of the qualifying earnings band is £5,824 and the earnings trigger is £8,000, then on a default contribution of 8% this would produce pension savings of £174 per annum. Taking a nominal value, this would produce £1,740 after 10 years and £5,220 after 30 years. For persistent low earners, that is a pot worth having, and it is arrogant to apply an analysis that because you are on low pay, asset accumulation even of that modest pot—which to them will not be modest—should not be available. That is simply a base case. It assumes a persistent low earner with no other changes but ignores that many employers are contributing above the minimum statutory level and that most low earners go on to earn more. I am sure that, over time, the employers’ statutory minimum contribution will rise. Excluding so many low-paid workers from auto-enrolment is another example of the weakness of public policy in assisting low-paid workers to accumulate capital or assets.
Lord Bourne of Aberystwyth
My Lords, I thank noble Lords who have participated in this debate on the clearly important issue of auto-enrolment and the trigger. I shall seek to deal with the points made by the noble Baronesses in the order in which they were raised. The noble Baroness, Lady Drake, was extremely gracious—at least initially—in welcoming the change, and I welcome her welcome. I appreciate that the noble Baroness, Lady Sherlock, would want to go on a historical journey rather than review the current good news in the present order, but 20,000 more people being brought within auto-enrolment, 70% of whom are women, is of course good news.
On the issue raised by the noble Baroness, Lady Drake, of whether the trigger should be set at a lower limit, such as the national insurance limit—I think that she used £8,000 as another example—it is worth restating that this does not prevent people opting in to a pension. Auto-enrolment means that they will not be automatically enrolled, but it does not stop them saving. If they are above the national insurance limit they can opt in to their scheme and their employer will be obliged to contribute the 1%, as they currently are. Those figures are on an upward trend. I will ensure that I write to noble Lords about the percentage figures in future years because they are set to go up for employees and employers. That is an important point to nail. Also, if your earnings go above the threshold in a particular year, you will of course be automatically enrolled. The assumption is then that you can opt to stay in the pension, even if your earnings dip. You are not automatically de-enrolled; if you want to stay in, you can. That is a significant point to make, and one that I am perhaps able to clarify here.
On the fluctuating income argument, if you are above automatic enrolment in a particular year you can stay in the scheme if you want to do so, provided that your income does not dip below the national insurance limit. You could even stay in then, but you would not be entitled as a right to the employer contribution—although, anecdotally, quite a few employers pay it if an employee is in the scheme. It is a relatively low cost and while that is not a statutory obligation, it is happening. There is some good news there. We have clearly broken the link with the income tax threshold, so there is of course no question about whether we can break it. We will look at the experience of this.
We should restate that auto-enrolment has been a massive success. It has been supported by all parties; I pay tribute to the support that has been given. The priority now is to make sure that small and micro-employers are brought within the system. As noble Lords would expect, we will look at the evidence on how it is progressing. In answer to the noble Baroness, Lady Sherlock, on how many people will be covered by automatic enrolment, we estimate that 8 million to 9 million will be newly saving or saving more. I will write to her on the percentage of women; of those, I think that it is roughly 3 million.
Baroness Drake
I think that the Government’s figures will show that their estimate is now 37%. Allowing for error, I am not far wrong with one-third.
Lord Bourne of Aberystwyth
I think that is borne out. I will write with a more detailed figure if we have it. I thank the noble Baroness for her helpful intervention. As I was just saying, we believe that it is roughly 3 million, which I think would be consistent with the figure that she presented.
With that, if there is anything that I have missed I will write to noble Lords who have participated in the debate. I thank them for the general support and welcome for what we have done this year and commend the order to the Committee.
National Employment Savings Trust (Amendment) Order 2015
Debate between Lord Bourne of Aberystwyth and Baroness Drake(9 years, 3 months ago)
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Lord Bourne of Aberystwyth (Con)
My Lords, I am pleased to be introducing this instrument, which was laid before the House on 16 December 2014. Subject to the approval of this instrument, the Government also intend to lay before Parliament the Transfer Values (Disapplication) (Revocation) Regulations 2015, which follow the negative procedure. From 1 April 2017, these instruments together will remove the annual contribution limit and the transfer restrictions on the National Employment Savings Trust, commonly known as NEST. I am satisfied that the order is compatible with the European Convention on Human Rights.
As noble Lords know, NEST was established to support automatic enrolment, which ensures that all employers have access to a low-cost workplace pension scheme with which to meet their duties. NEST was specifically designed for, and targeted at, low to moderate earners and smaller employers that the pensions market failed to serve adequately. So far, only large and medium-sized employers—those with over 50 workers—have implemented automatic enrolment, and NEST already has in excess of 1.8 million members and more than 10,500 participating employers. As is acknowledged by us all, I think, this has been a tremendous success. However, we must not be complacent. Around 1.2 million small and micro employers will start to enrol automatically around 4 million workers from June 2015. It is this segment of the market where there is most likely to be a supply gap. This underlies the rationale for establishing NEST and is one of the reasons why NEST is afforded state aid approved by the European Commission. Between 45% and 70% of small and micro employers are expected to use NEST during the period June 2015 to February 2018. For automatic enrolment to be successfully implemented, NEST must focus on ensuring that supply gaps have been addressed for this large number of small and micro employers. As the Government set out in the Command Paper, evidence shows that the constraints are not preventing NEST delivering its public service obligation for its target market during the rollout of automatic enrolment, although there is a perception that this is the case.
The annual contribution limit is £4,600 for 2014-15 and is uprated annually in line with average earnings. The evidence showed that 70% of small and medium-sized employers expect to contribute no more than the legal minimum contributions. Until October 2017 minimum contributions are 2% on a band of qualifying earnings—between £5,772 and £41,865 for 2014-15—and 84% of workers in the target group for automatic enrolment earn under £30,000. Based on contributions above the lower limit of qualifying earnings a low to median earner—that is, a worker earning between £15,000 and £26,000 per annum—would need contribution levels of between 48% and 22% to breach NEST’s annual contribution limit. A median earner on £26,000 whose employer makes a minimum total contribution level of 2% would contribute £405 per annum. This leaves a substantial amount of headroom for individuals to make voluntary contributions before breaching the annual contribution limit.
I turn now to transfers. The restrictions on transfers limit the circumstances in which transfers into and out of NEST can take place. But even where they can do so, individuals in other schemes rarely make transfers. More than 80% of workers fail to transfer pension funds when they change employer. This is why the Government intend to introduce automatic transfers to facilitate the consolidation of small pots. Further, the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 only allow what are commonly known as “bulk” transfers; that is, transfers without a member’s consent in certain limited circumstances. Evidence shows that only around 14,000 of small and medium-sized employers are currently providing trust-based, workplace pension schemes that could be transferred to another scheme. Of these, around 5,000 would consider a transfer to NEST—less than 1% of all firms.
I shall explain what the order actually does. Together with the Transfer Values (Disapplication) (Revocation) Regulations 2015, which as I said earlier are subject to the negative resolution procedure, the main changes this order makes from 1 April 2017 are as follows: removal of the annual contribution limit, allowing NEST members to contribute at the same levels as other schemes; provision of discretion for the trustee of NEST to allow individuals to initiate a transfer of their accrued pension rights into NEST; reinstatement of the right of a member of NEST to transfer their accrued pension rights out of NEST and into another pension scheme, replacing the limited circumstances in which a member of NEST can transfer their rights in and out of NEST at the moment; and, lastly, provision of discretion for the trustee of NEST to bulk transfer a member’s accrued rights into or out of NEST without the member’s consent in the same way as other occupational pension schemes.
I turn now to why we consider the date of 1 April 2017 to be the right time. Even though the evidence demonstrated that these two constraints were not in practice a barrier for NEST’s target market, there was, as I mentioned at the outset, a perception that these constraints might complicate scheme choice for small and micro employers. However, removing these two constraints as the result of a perception and the potential consequences flowing from this would not, in the Government’s view, be a proportionate response. Conversely, leaving the constraints in place beyond 2017 would not be consistent with the Government’s long-term policy objectives of encouraging increased saving and the consolidation of pension pots.
At the start of this Government’s term, we commissioned an independent review of automatic enrolment and NEST, the Making Automatic Enrolment Work review. The review recommended the following: that NEST should go ahead as planned to support the successful implementation of automatic enrolment; removal of the contribution limit once staging of employers is complete and legislating for this at the earliest opportunity; and lastly, that by 2017 the general issue of pension transfers should have been addressed and NEST able to receive transfers in and pay transfers out. This order does what that independent review recommended, and therefore legislating now to remove these two constraints in 2017 is a balanced approach. It will ensure that NEST can focus on its mission of successfully supporting the introduction of automatic enrolment while reassuring employers and signalling now that NEST will be put on a similar footing to other providers in just over two years’ time.
I know that noble Lords are interested in the implications for the state aid provided to NEST. This issue came up during our consideration of the Pension Schemes Bill. It has been suggested that the subsidy provided to NEST no longer qualifies as state aid because NEST now meets all four of the Altmark criteria. I believe that this point was made on Report on the Pension Schemes Bill. The Commission considered whether the Altmark criteria were met in its original decision in 2010 approving the state aid for NEST. In its decision, the Commission indicated that NEST did not meet all the criteria.
The second Altmark criterion requires that the undertaking receives no economic advantage which may favour the recipient over competing undertakings. The Government’s view is that we would be unlikely to meet this criterion, and the Commission’s decision said that there was an advantage because NEST would not exist without government support. In any event, we would need to make the case to the Commission that the Altmark conditions are met, as we have an existing state aid case and decision. This process is likely to take considerable time and would require persuasive evidence. The annual contribution limit and transfer restrictions were clearly cited by the European Commission in its approval of state aid afforded to NEST as important to reducing market distortion.
The department’s call for evidence suggested that the constraints were working to focus NEST on its target market during the rollout of automatic enrolment. Following just over a year of negotiations, the Commission confirmed that removing these constraints from 1 April 2017 would be compatible with the state aid provided to NEST. The Commission also confirmed that the restrictions on individuals initiating transfers could be lifted earlier to align with the introduction of automatic transfers. Again, that is a point that we discussed at some length on Report on the Pension Schemes Bill.
If we wanted to lift these constraints sooner, we would need to refer back to the Commission because this would be outside the terms of the Commission’s decision. Without the Commission’s agreement, there is a risk that the state aid provided to NEST would be unlawful. I commend this instrument to the Committee.
Baroness Drake (Lab)
My Lords, while all progress towards allowing transfers into NEST and removing the contribution limit is to be welcomed—and it is—and even if some of us would prefer a greater speed of progress, I rise not to make a political point but to raise my concerns about inefficiencies that will remain in the private pension system because of the rules around transfer into NEST.
This statutory instrument will allow bulk transfers of members’ assets only where the employer is a participating employer in NEST for the purpose of contributing to employees’ contributions. This excludes bulk transfers where the employer is not a NEST participating employer; that is, it is discharging its new employer duties through another scheme. This restriction produces two inefficiencies. The first is that employers will increasingly have closed DC schemes. As companies merge or take over, they will close DC schemes, or they may set up less generous new DC schemes in the light of the coverage of the workforce that flows from auto-enrolment, or they may set up new trusts that set the rules giving the employer more powers. Whatever the reason, there will be some employers who will look to bulk transfer out a DB scheme that is closed to new members. I do not make these up as hypothetical examples; I have experience of all these issues, and I think that they are a growing phenomenon.
Employers may transfer out the assets in these closed schemes into a product proposition that is not covered by the charges and quality standards set for auto-enrolment schemes because, of course, they are no longer being used for auto-enrolment purposes. Such employers will be denied access to NEST, so what could have been an efficient, quality-controlled means of bulk transferring the assets of closed DC schemes is denied because of the way in which the transfer rules are set.
Lord Bourne of Aberystwyth
I am not aware that we have gone back to the Commission about that. Clearly, I do not think that there is a difference between us for there to be a need to go back in some shape or form to the Commission for an earlier date. I do not believe that we have done that because, as I say, we believe that the key focus of NEST should be on auto-enrolment. So there are, as it were, two strands to the Government’s position, and the first of those is that we should focus on the key function of NEST.
If I have missed anything in relation to the three helpful contributions from noble Lords, I will ensure that of course they receive full responses.
Baroness Drake
Perhaps I may take advantage of the noble Lord’s kind reminder to declare my interests. I made a full confession at the start of the Pension Schemes Bill, but I realise that it does not travel over to the statutory instrument. I am a trustee of the Santander pension scheme and the Telefónica O2 pension scheme. I sit on the board of the Pensions Advisory Service and that of the Pension Quality Mark.
Lord Bourne of Aberystwyth
That underlines the great experience that the noble Baroness has in this area. I commend the order to the Committee.
Pension Schemes Bill
Debate between Lord Bourne of Aberystwyth and Baroness Drake(9 years, 3 months ago)
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Lord Bourne of Aberystwyth (Con)
I thank the noble Lord, Lord Bradley, for his contribution and recognise that “decumulation” might be jargonistic—I am sure that I have used jargon myself—but “rip-off” certainly is not, and I think we agree that we do not want rip-off charges. The Government are as much against them as the Opposition, I am sure. I will do my best to answer the specific points that the noble Lord raised.
This amendment was tabled by the noble Lords, Lord Bradley and Lord McAvoy, also in Committee earlier this month, so noble Lords will forgive me if I have dealt with some of this previously. As I mentioned on that occasion, the Government take the issue of charges on pension products very seriously and are committed to taking action where there is evidence of consumer detriment. I can reassure the noble Lord on that point.
I am pleased to be able to say that the Government have powers under the Pensions Act 2014—specifically, Section 43 and Schedule 18 confer them—to limit or ban charges borne by members of any pension scheme, including any new flexi-access draw-down funds, if this proves necessary to protect consumers.
Similarly, the Financial Conduct Authority has wide-ranging product intervention powers, including the ability to cap charges on flexi-access draw-down funds. These existing powers cover all the institutions that could offer such draw-down arrangements.
Flexible draw-down is a relatively niche product, aimed primarily at those savers with large pension pots. HMRC data from the start of 2014 showed that only 5,000 people per year have entered flexible draw-down, which has been in place since 2011. Flexible draw- down is clearly not currently a mass-market product.
With the introduction of the new flexibilities from April of this year, we expect this to change. We have given the industry a great deal of flexibility to develop a range of more flexible retirement income products and offer consumers greater choice. We want to see a vibrant and competitive marketplace, bringing forward products that meet consumers’ needs and enable consumers to make reasoned choices. The Government believe that a competitive market is the best way to ensure that products are well priced and we expect the expansion in take-up of draw-down products to exert a downward pressure on charges. Moreover, as scheme members can withdraw variable amounts, draw-down products generally require more administrative activity than accumulation-phase products. With the introduction of the new pension flexibilities, none of us can be absolutely certain how this market will develop. This was a point made quite fairly by both the noble Lord, Lord Bradley, and the noble Baroness, Lady Drake, in Committee.
Imposing a charge cap on draw-down at this stage, before we have seen the charges on the new products that are currently under development, could therefore risk setting a new norm and arrest any reduction in charge levels, or set a charge that is too low to be deliverable and stifle the draw-down market altogether. We therefore need to monitor how this market develops from April to gather further evidence about average charge levels before making any decision on what would be an acceptable charge level. The Government and regulators are therefore monitoring the development of new retirement income products, including the next generation of draw-down products, very closely.
Innovation and flexibility in the retirement income market must, of course, be for the benefit of consumers, not at their cost. The Government welcome the FCA’s commitment in its recent policy statement that it will commence a full review of its rules in relation to the retirement income market in the first half of this year. If these measures reveal evidence of sharp practice—rip-off charges, in the noble Lord’s phraseology—the Government and the FCA have the powers to act quickly to protect consumers. Along with the Financial Conduct Authority, we are also legislating to require reporting of charges and information on transaction costs by trustees and independent governance committees respectively of all workplace pension schemes from April this year. We are also committed to consulting further in 2015 on the transparency of additional costs and charges, to enable comparability across schemes; we will be considering draw-down funds as part of this work programme. We covered some of these transparency issues in Committee.
Baroness Drake (Lab)
The Minister made the point that I had not heard before that, from April 2015, the independent governance committees will be invited to report on draw-down products, which is to be welcomed. Could he clarify whether the full remit of the independent governance committees will apply to draw-down products, or is it just a question of reporting?
Lord Bourne of Aberystwyth
As I understand it, it would certainly cover the point that the noble Baroness makes about draw-down products; it will not simply be a question of reporting.
To conclude, while the Government share the concerns about member-borne charges, the Government and regulators are equipped with the powers to cap charges in all pension schemes, including draw-down products. We feel that intervening in the market at this stage would be wrong: intervention must be based on evidence, but it is an intervention that the Government have not shied away from making elsewhere in the market. We are closely and proactively monitoring developments in the decumulation market to consider whether there is need to use those powers.
In the closing remarks of the noble Lord, Lord Bradley, in Committee, he stated his hope that we would act in the interests of consumers if we were to see excessive charges in the new draw-down products that come to market. I can reassure him that this remains our intention. I therefore respectfully ask the noble Lord to withdraw his amendment.
Pension Schemes Bill
Debate between Lord Bourne of Aberystwyth and Baroness Drake
Baroness Drake (Lab)
My Lords, I have some sympathy with the thrust of Amendment 1, under which my noble friend seeks to protect pension savers from purchasing an annuity which is not good value for money or appropriate to their needs. If there was any doubt about the nature of the problems in the annuities market, the recent FCA report has clearly put those to rest. It makes evident the need for assisted paths for consumers through the annuity process. Notwithstanding the new freedoms, annuities still have an important role to play in securing retirement income, and we need the FCA urgently to push ahead with tackling the conduct of providers in the market. With the new freedoms and the anticipated product innovations that will flow from that, the Government and the saver are still very dependent on the market to make them a success and mitigate consumer risk.
The issue of assisting the consumer through the annuity process—the role of the employer, the responsibility of the saver and the role of the provider—is complex. No doubt later in Committee—at least, I hope we will; I hope that an amendment is winging its way—we will debate a second line of defence provision to control the conduct of providers selling retirement income products, including annuities, trying to enhance consumers’ protection when they are in the purchasing process. I hope that we can pursue in more detail how the Government can mitigate the pension saver’s risk when purchasing an annuity, when, I hope, we can get into a wider debate on a second line of defence across all retirement income products.
Lord Bourne of Aberystwyth (Con)
My Lords, in opening for the Government on this, I welcome the comments of the noble Lord, Lord Bradley, regarding jargon. We certainly agree on that and I suspect that we will agree on much more as we proceed through the Bill. I, too, will try to avoid jargon and too many acronyms, which seem also to be a feature of the pensions landscape.
We fully appreciate the intention behind the amendment and agree that consumers must be given the necessary information and support on their retirement choices in this new flexible landscape, which I think we all welcome. As the Financial Conduct Authority’s Thematic Review of Annuities and recent published findings from its market study concluded, competition in the annuity market is not working effectively—as the noble Lord, Lord Bradley, said. That means that many consumers are not getting the most out of their hard-earned savings.
To be clear, annuities can be good value where the individual member selects a product that meets his or her needs. That is why the Government are legislating in the Bill to deliver a service providing the public with guidance. That will ensure that individuals can access the support that they need to understand and navigate their retirement choices—for example, to help them decide whether an annuity product is the right choice for them at all. Where they decide to purchase an annuity, they must be encouraged and supported to shop around for the best deal. Those are key objectives for the guidance and the Financial Conduct Authority’s rules will underpin it. I will come back to those issues shortly.
Turning to the specifics of the noble Lord’s amendment, I am not convinced that imposing additional costs on either some schemes or members is the best way to facilitate the increase in shopping around. The amendment would effectively require all schemes that offer an annuity to provide or source an independent annuity broker run by independent trustees and overseen by the Pensions Regulator. What is less clear from the amendment is who is to meet the extra costs of this provision. Although some 52% of schemes already offer an annuity broker service, requiring all schemes that provide annuities to their own members to offer or source such a service must come at an extra cost. These additional costs must either be met by all the members of the scheme, whether or not they use the service, or by those members who do so, on some kind of fee or commission basis. If it is the former, then clearly scheme costs increase for all members even if they were going to go and purchase their annuity or other product elsewhere. If it is the latter, then the effect would be to increase the costs of selecting annuities from certain schemes, making them less attractive, or requiring members to pay fees for a decision that they may have made in any event.
Lord Bourne of Aberystwyth
If I might first take the noble Lord up on one point, what is being proposed by the noble Lord, Lord Bradley, opposite is an alternative to the guidance service which is in the Bill. The guidance service will guide people and there will be a wake-up call via the literature provided before a member’s retirement telling them of the guidance service and with clear signposting to it of the options that face them on retirement and afterwards. It will not just be explained what you can do on day 1 but later on. We anticipate that many people will take that up. Some will not choose to do that, but it is clear that that sets out the pathways for the future. It is only guidance; any advice taken, whether immediately or later on, will of course be subject to the market. We believe that the choice being offered here—supported, as I understand it, by the Opposition—is important and that we can depend on a developing market with innovative products, in which members will be able to shop around not just on retirement but afterwards. All this will be set out in the wake-up call and the guidance that will follow once a member retires.
Baroness Drake
If I may presume to comment on my noble friend’s amendment, the Minister made the comment that it was being proposed as an alternative to the guidance. I do not think that it is. It is basically saying that guidance is guidance; that is what you would receive but you then move into the purchase or decision activity which flows from that guidance. It is what happens at that stage—the relationship between the consumer and the person providing the annuity, whether it is a scheme or a retail provider of retirement products—which is causing a lot of people anxiety. Some refer to it as the second line of defence; this is another way of addressing that. It is trying to regulate the quality of the exchange between the provider of the product, be it an annuity or in some other form, and the consumer at that point. That is a post-guidance activity, not a substitute for guidance.
Lord Bourne of Aberystwyth
I take the point that the noble Baroness, Lady Drake, is making on this issue, but it is clear that the guidance will set out the options available on annuities and, where appropriate, signpost people to taking advice. If they want to compare the annuity product being offered by their own provider with that of somebody else, all that will be set out. Whether it is an adjunct to or a substitution for it is somewhat academic. There is a cost associated with this and we believe that the proposals in the Bill, setting out the opportunities for guidance which will come at no cost to the consumer, are the right way forward. They will set out the options available to the consumer on retirement.
Baroness Drake
My Lords, for the purposes of all of today’s business on the Bill I refer to the interests which I have registered as a remunerated trustee of both the Telefónica O2 and Santander pension schemes and the board of the Pensions Advisory Service, and as a non-remunerated member of the board of the Pensions Quality Mark and a governor of the Pensions Policy Institute. I am also a member of the Delegated Powers and Regulatory Reform Committee. That is like an act of cleansing; I hope that I have stated all possible interests that could appear to conflict with anything I might say today.
I support Amendment 2 and very much share the spirit of the contribution made by the noble Lord, Lord German, particularly his comments about the estimable chair of the Delegated Powers Committee. I accept that it will be a very significant challenge to get collective benefit schemes established in the first instance. As we heard from the NAPF and the ABI, there is little observed appetite from providers or employers, certainly at this stage, for engaging with such schemes.
There are other barriers and constraints to be overcome because collective benefit schemes require an assured flow of new members, excellent governance and full transparency, and the new freedoms with their emphasis on individual freedom rather than risk-sharing may well act as a further deterrent. None the less, for those of us who are genuinely interested in seeing the development of more efficient ways of risk sharing, the Bill provides the opportunity to set the founding legal framework and is therefore worthy of proper scrutiny. In fact, not to scrutinise would be a failure to engage with the work that has been done by the Minister for Pensions and the Department for Work and Pensions.
However, Clause 8 is a key and critical provision because it sets the definition for what are collective benefits, on which the rest of the clauses in Part 2 and many of the associated delegated powers depend. That is why it is so critical in its construct and its definition of the delegated powers associated with it. In my view, the power to set regulations under Clause 8(3)(b) should be subject to the affirmative procedure because the definition of what is or is not a collective benefit makes it so critical to the scope of the whole of Part 2, which deals with collective benefits.
Clause 8(2) defines what a collective benefit is but Clause 8(3)—the subject of this amendment—defines what it is not. It is not a collective benefit if it is a money purchase benefit or, more particularly, some other benefit of such a description to be specified in regulation.
I understand the Government’s reasoning when they indicate that with-profit arrangements, for example, provided by some insurers should not come within the definition of a collective benefit scheme. It is perfectly reasonable for the Secretary of State to want some flexibility to respond as the market develops and innovation occurs in scheme or benefit design.
Clause 8(3)(b) would allow the Government to use regulation to avoid schemes being subject to the expense of meeting the detailed requirements set out in Clauses 9 to 35 if they are deemed not to be proper collective benefit schemes. But the clause, in granting the Government power to significantly alter by regulation the constituent benefits that are not included in the definition of collective benefits, has the ability therefore to potentially remove members of schemes out of the protection of the requirements in the other clauses in Part 2.
This, of course, could have considerable implications for members and the scope of the whole of Part 2. The potential of this regulation to remove members from the protections they may already have by being in a designated collective benefit scheme, which subsequently a change of regulation deems that they are no longer in, makes it compelling that this remains a power that should be subject to the affirmative procedure. This should be as a general practice, not just in first use, because if collective benefits take off—one hopes that they do and we therefore have wide coverage and scale—any review or change to the definitions of the benefits embraced by such collective schemes will be of outstanding importance to the members.
Lord Bourne of Aberystwyth
My Lords, I confirm to the House and to the noble Lord, Lord Bradley, that the measures under the budget flexibilities are still intended to come into effect for April 2015. This is not the case for the measures relating to collective benefits.
The Bill is deliberately a framework Bill, which is generally the case with pensions legislation. As my noble friend Lord German indicated, it is not unusual to have significant delegated powers in pensions legislation; it is often the norm. The Delegated Powers and Regulatory Reform Committee has made recommendations concerning the powers in Part 2, and I will come on to look at those. I share the enormous respect in which the noble Baroness who chairs that committee is held by the House.
I confirm that the Government accept the views of the committee in respect of the powers in Clauses 9, 10, 11 and 21. We intend to table amendments on Report which will make regulations under those clauses subject to the affirmative procedure the first time those powers are used, as the committee recommended.
This amendment relates to the committee’s recommendation about the power in Clause 8(3)(b). This power allows regulations to specify benefits that are not to be considered collective benefits and therefore exclude such benefits from the provisions of Part 2, as the noble Baroness, Lady Drake, just indicated. The committee recommended that this power be subject to the affirmative procedure. I will now explain how we are unable to accept that recommendation in full, although we recognise that there is a strong case for affirmative procedure on first use. We have therefore accepted that.
Let me first give some background on collective benefits. Collective benefits are provided on the basis of investing members’ assets on a pooled basis, in a way that shares risks across the scheme’s membership and has the effect of smoothing out fluctuations, to a degree at least. The collective asset pool is managed on behalf of the members by trustees, or, in non-trust based schemes, by managers. We intend to use powers under Clause 9 to require that there will always be a target attached to collective benefits and that initial targets need to be achievable within a specified probability range. We will ensure that schemes offering collective benefits operate in a transparent and accountable way using a range of powers we have taken in Part 2, together with regulation-making powers in existing pensions legislation. Decisions about the rate of benefit ultimately paid to the member will be for the trustees or managers to make in line with their policies. We will consult fully on how best we use the powers in Part 2 to provide the appropriate framework for these benefits and to ensure good governance.
As the Government set out in the memorandum to the Delegated Powers and Regulatory Reform Committee, there needs to be flexibility to respond to new developments in scheme and benefit design that result in benefits falling within the definition “contrary to policy intention”, as I believe the noble Baroness, Lady Drake, recognised. This power was included in the Bill to ensure that, from the outset, the definition of collective benefits would not catch any personal pension schemes set up by insurers that offer with-profits arrangements that might otherwise fall within the definition.
The Government recognise that the committee rightly considers this a key provision, as it frames all that follows in Part 2 and defines it scope, that should be subject to parliamentary scrutiny. However, there are circumstances where the Government may need to use the power at a later date if new developments in scheme and benefit design result in benefits falling within the definition “contrary to policy intention”. This latter use of the power might require a very quick response to avoid members’ benefits being affected and to avoid schemes being subject to expensive requirements around the setting of targets, actuarial valuations and so on, which are not appropriate. I trust that noble Lords can see that the affirmative procedure could result in delay, leading to significant distress for members, who would wish the matter to be resolved as quickly as possible. This is why we believe that the affirmative procedure is inappropriate across the board.
As I have indicated, the Government therefore propose that, as with the powers in Clauses 9 to 11 and 21, the power in Clause 8 should be subject to the affirmative procedure on first use, allowing Parliament the opportunity to debate the scope of the collective benefits provisions when the regulatory framework is first set up, but that subsequent use should be subject to the negative procedure so that the Government can act quickly if necessary.
Turning to the noble Lord’s amendment, I hope that I have clarified the Government’s position on the Delegated Powers and Regulatory Reform Committee recommendations and my commitment that the Government will return on Report with amendments that will implement its recommendations on Clauses 9 to 11 and 21 in full, and in Clause 8 in part. I hope that the noble Lord will feel able to withdraw his amendment.
Baroness Drake
I come back to the point on which I was seeking clarification. If the affirmative procedure is used in the first instance on something quite straightforward, such as that an obvious with-profits policy arrangement is not to be included in collective benefits, but the subsequent use of the regulation under the negative procedure went to the heart, such as saying there is an existing collective benefit scheme and we take the view that it should cease to be a collective benefit scheme therefore retrospectively those members would lose the protections under Part 2, could the regulations not be used to weaken the protections that scheme members had?
Lord Bourne of Aberystwyth
The noble Baroness will be aware that the negative procedure will still provide a measure of protection. We are concerned about the protection of members where there is a need to move quickly. In those circumstances, retaining the negative procedure is the appropriate protection for those members.
Baroness Drake
I push the point as a courtesy because I care about establishing collective benefit schemes. I am assured by the chair of the Delegated Powers Committee—I wish he were standing next to me—that even under the affirmative procedure there is a provision which allows us to move quite quickly.
Lord Bourne of Aberystwyth
That would be an exceptional procedure. It is important for the industry and pensioners that we can provide assurance now that, where there is a need, there is provision to move quickly to ensure that collective benefit schemes are successful. I share the noble Baroness’s feeling that it is important that we give this a fair wind. We therefore recognise that there will be circumstances where the negative procedure is appropriate because of the great need to move quickly.
Baroness Drake
My Lords, I rise to support and speak to Amendment 10 in particular. I expressed the view at Second Reading that at some point, unfortunately probably later rather than sooner, the Government will inevitably have to place in statute a clear fiduciary duty on pension providers and asset managers to put savers’ interests first.
Why one goes through all the regulatory complication of setting up independent governance committees, giving them fiduciary responsibilities to monitor the behaviour of private pension providers, while exempting the private providers themselves—the people who make and implement the decisions—from such responsibility is a little beyond me. If the responsibility of the independent governance committees is an attempt to align scheme governance with the interests of savers, why should that responsibility not be put directly on to the decision-makers in the pensions industry? But we are where we are.
John Kay, in his review commissioned by BIS, also concluded that all those looking after someone else’s money or advising on investment should be subject to fiduciary standards of care. Many times from these Benches I have argued the case for extending a clear fiduciary duty to those who have discretion over the management of other people’s money. It is a principle that the Australian financial regulatory system has embraced and applies to retail pension providers, including an unequivocal requirement that conflicts of interest must be resolved in the beneficiaries’ interests.
Each time I try to present the arguments in a slightly different or novel way but increasingly the FCA appears to be providing the arguments for the proposition. We have had numerous reports on how the market is not serving pension scheme savers well, be it legacy schemes, annuities, lack of transparency on charges, and many other examples. The new FCA study, which examined how market conditions may evolve from April 2015, found that greater choice and potentially more complex products will weaken the competitive pressures on providers to offer good value. The chair of the FCA has said that the increase in regulatory rules has failed to prevent misconduct and does not seem to “prevent further problems arising”. The FCA director of enforcement and financial crime, Tracey McDermott, speaking at the FCA’s recent enforcement conference in London, referred to the need for a cultural shift among firms similar to the change in public attitudes whereby drink- driving was, in the past, avoided through fear of being fined, but is now seen as a moral issue.
It is clear from the flow of pronouncements from the FCA that the behavioural and cultural challenge within the pensions industry remains a major issue. They are telling us and demonstrating to us that regulatory rules have failed to deliver the cultures that embrace the ethic of care towards the customer. Time after time, reports, reviews and investigations confirm that the private pensions market is dysfunctional, with a weak demand side that cannot be expected or fails to self-remedy, and where the process of trying to provide for the savers’ interest in a competitive fashion does not work well. One is tempted to ask: how many reports of market failure in the pensions market do we have to receive before it is accepted that writing yet another set of rules will not solve the problem? What is needed is a game-changer to force the pace of change in providers’ behaviour by strengthening in law the principle that they must act in pension savers’ interests.
The advent of auto-enrolment raises the bar. At the heart of the governance structure for the private pension system must be the interests of the pension saver, and the law must require that providers identify and manage conflicts in favour of the saver. An alignment of interests is not sufficient. The saver’s interests must come first. It will be a major regulatory failure of public policy if millions of citizens are auto-enrolled into pension schemes but Parliament has not ensured that sound governance is in place.
Turning specifically to collective benefit schemes, which Amendment 10 targets, the case for the oversight of the management of such schemes resting with trustees with a clear fiduciary duty to the members of the scheme that takes precedence over other interests is even more compelling. Collective DC schemes are more complex in that they are designed to smooth income and manage intra- and intergenerational risk-sharing between members. The individual does not have a well defined pot over which they have individual ownership. Consequently, transparency is a key challenge and provides a potential breeding ground for conflicts of interest. Collective benefit schemes do not automatically guarantee higher retirement incomes. In order to be sustainable, collective DC schemes need scale, an assured flow of new members, full transparency and, in particular, excellent governance. If these schemes are not well run or if risks are unfairly shifted—for example, across different age cohorts—young savers could be subject to lower payouts.
The Bill has a significant number of delegated powers so there is much still to be understood. On governance for collective DC schemes particularly, the Bill is largely silent. But the complexity of what needs to be addressed is captured in Clauses 9 to 18. The Government appear to recognise the particular nature of the governance challenge in collective benefit schemes and the possibility that things could go wrong because they have added Clause 37 to enable the Secretary of State to impose a duty on managers of collective benefit schemes to act in members’ best interests. But that is not sufficient. If the Government are serious about encouraging and building collective benefit pension provision, the governance rules have to be robust right from the very beginning. The risks are too great to do otherwise and that means requiring a body of independent trustees with a clear fiduciary duty to the members of the scheme, which takes precedence over any other duty, to oversee the running of such collective benefit schemes.
Lord Bourne of Aberystwyth
I thank noble Lords who have participated in the debate on these amendments. The amendments in this group all relate to governance, and the Government recognise and agree that governance is key to effective choice in the pensions arrangements that are being brought forward. The amendments relate to governance in relation to various types of pension schemes in some way, shape or form, and, as I say, the Government recognise and agree that this is important. However, we believe that the new measures that we are delivering under the Bill, under the Pensions Act 2014 and under the Financial Services and Markets Act, as well as the proposed draft Financial Conduct Authority rules, seek to address the concerns raised in the most appropriate way.
Pension Schemes Bill
Debate between Lord Bourne of Aberystwyth and Baroness Drake
Baroness Drake
My Lords, I do not want to spend too much time on this. Obviously I am not unfamiliar with the issue of NEST, and the restrictions on NEST. We are now in a position, in 2015, where the continued bans on the transfer into NEST are clearly to the detriment of pension savers. It will be increasingly difficult to mobilise the argument that continuing those bans is in the pension saver’s interest. It denies many people a good home for their legacy savings and is unquestionably increasing the proliferation of small pots, particularly in the SME community. One of the merits of NEST is that it would reduce the proliferation of small pots. It is not benefiting the employers any more, who want the flexibility to use NEST and bulk transfer the accrued pension savings of their existing employees or scheme members, which they are denied. As far as I can see, the main beneficiaries of the continued ban are still predominantly the private pension providers that benefit from restricting NEST’s market proposition.
The Government have dealt with the EU state aid requirements, which no longer pose a barrier. The desire to get NEST to focus on a target market of small and medium-sized employers has been achieved. The auto-enrolment market is well under way. A cursory look at the figures will show that the private providers have secured a very large proportion of the new pension business, which is likely to grow. NEST is hardly tipping the market against them any more.
It is difficult to see why the Government are taking so long to make a change that would benefit pension savers and, particularly, facilitate efficiency among the employers who are bearing the responsibility of having to establish workplace pensions and cannot pick up what may be a preferred position in NEST because they are left having to run an arrangement for the legacy savings of their existing scheme members or employees.
Lord Bourne of Aberystwyth
My Lords, I thank the noble Lord, Lord Bradley, for moving this amendment and the noble Baroness, Lady Drake, for her contribution. As noble Lords will be aware, NEST was established to support automatic enrolment by ensuring that all workers have access to a low-cost workplace pension scheme. Its design, including the annual contribution limit and transfer restrictions, focuses NEST on its target market of low to moderate earners and smaller employers who the market found difficult to serve. Since October 2012, when automatic enrolment began, NEST has fulfilled its role very successfully. I am happy to reinforce the statements made by my noble friend Lord Freud. We think that it has done an exceptional job. It already has more than 1.8 million members and 10,500 participating employers. NEST is doing what it was set up to do—supporting automatic enrolment.
During the winter of 2012 and the spring of 2013, the Department for Work and Pensions undertook a call for evidence. This sought to assess whether there was evidence that the annual contribution limit and the transfer restrictions placed on NEST were preventing it serving the market that it was designed for. The evidence showed that these two constraints were not preventing NEST serving its target market. That said, the call for evidence revealed that the constraints were sometimes perceived as a barrier to using NEST. Smaller employers have limited experience of providing pensions for their workplace. A perception among smaller employers that using NEST is unduly complex could make choosing a scheme unnecessarily complicated. This could damage confidence in automatic enrolment and undermine its aims.
With that in mind and taking account of the evidence, the Government determined that removing the annual contribution limit and the transfer restrictions that we are debating to address the perception of restriction would not be a proportionate response at the time, given the importance of the role that NEST was fulfilling in ensuring automatic enrolment. We conceived that to be its core function and where we thought that it should focus. We therefore concluded that legislation to remove the constraints in 2017 was a balanced approach. I think that it is scheduled to happen on 1 April 2017, which is some two years away.
The noble Lord, Lord Bradley, raised the state aid situation. It is our understanding that we would have to reapply to vary the state aid consent that we have. Bearing in mind that it took us a year to get the original state aid clearance, that is clearly a significant period of time. We will double-check that in light of the comments made by the noble Lord, but I have had that confirmed while we have been debating this matter. We will reassess that, and I will write to the noble Lord and others who have contributed in the debate to confirm that position or otherwise.
Therefore, we consider two issues to be at the forefront of this. The first is that we want NEST to fulfil its core function. We believe it is doing that very well and do not want to disturb that. The second is that 2017 is only two and a bit years away, and we believe it could take a significant amount of time to vary the state aid consent, but we will have another look at that issue. In the mean time, given that I have undertaken to examine that, I ask the noble Lord to withdraw the amendment.