Pensions: Automatic Enrolment

Lord McKenzie of Luton Excerpts

Thursday 10th June 2010 Lords Chamber

[Lord McKenzie of Luton]

My Lords, I join other noble Lords in thanking the noble Lord, Lord Kirkwood, for initiating this debate, which gives us a timely opportunity to understand the proposed direction of travel of the coalition Government on this important matter. I thank both him and the noble Baroness, Lady Noakes, for their kind comments.

The debate gives us a chance to test whether the broad consensus around pension reform hitherto still holds. Noble Lords will be aware—it has been referred to today—that this was anchored largely in the work of the Turner commission. It is a particular pleasure to note that another member of that commission, Jeannie Drake, will shortly join your Lordships' House on the Labour Benches.

It has been a very good, if short, debate. The noble Lord, Lord Kirkwood, called on the Government to show some enthusiasm for auto-enrolment—I certainly endorse that. He and others have pressed on the scope of the review, to which I should like to return in my contribution. I congratulate the noble Lord, Lord Fowler, on his upcoming 40th anniversary. I am delighted that he will soon be reunited with John Prescott.

We had a fascinating trip down the memory lane of pensions: graduated pensions, SERPS and S2P. I say to the noble Lord that S2P has been simplified, squeezing out some of the earnings-related component of it. Perhaps we might find another opportunity, together with the noble Baroness, Lady Noakes, to debate what has happened to defined benefit schemes. I might just ask the Minister whether the so-called tax raid on pension funds will be reversed by the coalition Government.

As regards the need to annuitise at 75—or the need not to do so—I have been an agnostic on that because it has nothing to say to those who are likely to benefit for auto-enrolment. Auto-enrolment is to deal with people who undersave, who need their income in retirement and who do not have the opportunity to store it up and pass it on as an inheritance. When the proposals come forward, we will look at the tax treatment of pots that are left and then passed on as an inheritance, and whether that properly takes account of inheritance tax. It would be quite wrong to use it to open up a tax loophole.

My noble friend Lady Hollis, as ever, made a thought-provoking contribution, stressing particularly issues around longevity and the huge potential for auto-enrolment. She spoke of the challenges of small pension pots and the emerging consensus around a new state pension. I take the point exactly that, if that were to be achieved, it would help on issues around the interaction of benefits.

The noble Baroness, Lady Greengross, remains supportive of auto-enrolment, and again stressed the importance of consensus, on this issue of the interaction with the benefit system. Consensus was an issue that the noble Baroness, Lady Noakes, also acknowledged. I am intrigued about proposals on the scope of coverage and all employees not necessarily having to be covered. I accept that issues around self-certification, trying to give administrative easements to employers while still encompassing a broad range of employees, have proved a challenge. I think that there were a couple of goes at it and would acknowledge that it was unfinished work in progress when we left office.

The Turner commission was established to consider the long-term challenges facing the UK pension system, characterised by undersaving for retirement, inequalities and complexity in the state pension system and demographic and social change. Changes to the state pension, making it fairer and more generous, were implemented from April this year, providing a firmer foundation upon which people can build savings for their retirement. Notwithstanding these improvements to the state pension system, including the coalition Government’s announcements about uprating, which I welcome, it will not provide the retirement income to which many people aspire. It is estimated that around 7 million people are currently not saving enough to obtain a reasonable replacement rate of income in retirement. In excess of 40 per cent of working-age employees are not contributing to a private pension.

The reasons for that are complex, but they include issues around low financial literacy, inertia, lack of provision especially for those on low and moderate incomes, as well as declining employer provision away from defined benefit schemes towards contract-based DC schemes—hence a role for government intervention. That government intervention had two key components. One was a system of automatic enrolment requiring employers to make a minimum contribution to their workers’ pension funds and a new national pension scheme designed to provide a simple, low-cost way of saving for low to moderate income earners—originally personal accounts. Put simply, that was our starting consensus, enshrined in primary legislation in the Pensions Act 2008. Like the noble Baroness, Lady Noakes, I remember it well. But the consensus did not just involve political parties; it involved a significant range of stakeholders, including the CBI, the TUC and the ABI. By and large, that consensus has held, which is to be welcomed.

As ever in these matters, the challenges come in the detail of the earnings on which employers’ contributions are to be made; what the mechanics are surrounding the process of auto-enrolment and the right to opt out; what safeguards there are in the system to discourage employers with existing provision from levelling down and what existing provision satisfies the auto-enrolment tests; what information should be provided to employees; whether advice should be provided to all or any groups of individuals being auto-enrolled; and what compliance and anti-avoidance measures are required. On the low-cost national scheme, there are issues around not being favourably treated so as to prejudice private sector providers; the funding and charging arrangements; the sheer operational and governance issues of a trust-based scheme with potentially 1 million employers and several million members; the nature of the investments of the fund; and how lifestyling is to be organised for so many members—indeed, how the scheme administration is to be accomplished.

Much of this, subject to any review which the Government may wish to undertake and advise us of today, is settled. Regulations are in force which prescribe the arrangements which the employer must follow to comply with the employer duties on automatic enrolment. I believe that there was a broad consensus on that; we had two goes at it to try to improve the original draft, and I thought that there was an acceptance that there was a considerable improvement. There were issues around information requirements, opting out, and duties towards voluntary savers. Existing regulations also cover the point in time at which employers will have to start to comply with their duties and the minimum contribution level which employers and employees will have to make.

Arrangements have been made for the national scheme which provide for the winding up of the Personal Accounts Delivery Authority, as it has completed its task of providing its advice and designing and developing the infrastructure of the new low-cost scheme. Statutory instruments have given effect to the scheme order, which will actually create the new scheme—to be called the National Employment Savings Trust or NEST—as a trust-based, occupational pension scheme. This is currently due to inherit property, rights and liabilities from PADA in July 2010 and thereafter to be responsible for implementing and running the scheme.

A lot has been accomplished but there is a lot of work still in hand. Like other noble Lords, I acknowledge the desire of the coalition Government to take stock and review matters, and this obviously raises a number of questions. We have heard some of this from other noble Lords, but I should be grateful if the Minister would deal with the following points, either in responding to this debate or later in writing.

We understand that there is to be a review of aspects of auto-enrolment. Like the noble Lord, Lord Kirkwood, and the noble Baroness, Lady Noakes, I ask the Minister to tell us a little about the scope of the review and what drives its timing. I think that this is a separate review from the 2017 review. I take it that the coalition Government remain committed to the concept of auto-enrolment, and that this is not to be abandoned. I accept that already from the tenor of today’s debate.

Is it envisaged that the scope would remain as currently planned, or are there any proposals to curtail the range of employers subject to the duty or limit the range of income to which the duty applies?

As currently planned, the auto-enrolment process would commence in 2012 and be staged over a four-year period so that all employers would be within the duty by 2016. As for employer and employee contributions, the phasing currently provides for an initial period where minimum employer and employee contributions would commence at 1 per cent each and not reach the full 3 per cent and 5 per cent respectively until October 2017. Is it envisaged that either of these would change, and is it the Government’s desire to accelerate the employer duty obligations, leave them unchanged or introduce them at a slower pace?

Fears of employers with existing provision “levelling down” have been ever present, despite DWP research that shows that this is generally unlikely. Are the Government contemplating any further arrangements to allay any such concerns, which we have heard expressed again today?

On a wider point, one of the commitments in the coalition programme is the undertaking to explore opportunities for people to access part of their pension early, presumably looking at the New Zealand and US experience. I know that this concept is much beloved of my noble friend Lady Hollis, although of course not beloved of the Treasury, but I am interested in the Minister’s view on this and on whether shifting emphasis from something that is overwhelmingly about provision for retirement to an effective lifetime savings account will change the paradigm with regard to employers’ willingness to contribute beyond statutory minimums.

Another concern expressed about auto-enrolment was the risk of mis-selling because individuals would not get full value for their contributions as they would lose benefit—possibly, in some cases, pound for pound for any pension income secured—and this despite detailed analysis demonstrating that overwhelmingly individuals would get positive returns. At the time of the legislation there was much debate about whether people should be able to access advice as well as just receive information. There was a Lib Dem amendment, as I recall, that suggested that anyone of 50 or over should get one hour of free financial advice. In this regard, I note and welcome a commitment of the coalition Government to create a free national advice service, apparently to be funded by a levy on the financial services sector. Is the Minister able to tell us more about this, such as when it is expected to be up and running and the likely structure and level of the levy? Will this overlap with the proposed banking levy?

Whatever else the review is to cover, we understand that it will cover the suitability of NEST as a delivery mechanism for auto-enrolment. We know that NEST is well advanced in its preparations: it takes over from PADA in July, trustees have been appointed, arrangements for the scheme administration are in hand and an impressive team has been assembled to address the full-range challenges of running a scheme of this magnitude.

So what are the concerns? Is the suggestion that NEST has the wrong business model, or is the contention that the existing private sector providers could serve the target market better? The latter would be surprising, as they have lamentably failed to do so in the past. Will the Minister give us an assurance that there is no intention to move away from the universal service obligation envisaged for NEST or indeed that the scheme should be other than a low-cost scheme?

Securing dignity and security for tomorrow's pensioners is the business of Government. The reforms that we initiated were founded on the principles of personal responsibility, fairness, simplicity, affordability and sustainability, which has helped build the consensus. We hope that that consensus will endure. We look forward to hearing what the Minister has to say and seeing the results of the review in due course.