§ (" . Participation in a stakeholder pension scheme shall not preclude participation in other pension arrangements.").
§ The noble Lord said: This amendment standing in my name and the names of my noble friends is to insert a new clause after Clause 1. This matter has excited some interest outside the Chamber and raises an important question. I presume that it is not the Government's intention, within the limits set by the Inland Revenue concerning contributions to a pension scheme, that if someone takes out a stakeholder pension scheme that person is not allowed to take out other forms of pension arrangements. They may be varied, for example they could be a system of ISAs as well as a straight pension arrangement of the personal pension kind or something else. In particular, it is important to consider whether—and I should be interested in the Government's view—they should stand alongside pension schemes which are operated by a company in addition to a stakeholder pension scheme.
§ One of our concerns is that some of those already with company schemes will cease to operate them if they think that they can simply treat the government scheme as theirs and abandon schemes which may be preferable to the stakeholder scheme. I should be interested to hear what the Minister says and whether it is the Government's intention that stakeholder schemes should be held alongside other schemes, especially in relation to the state second pension which we discussed earlier and which the noble Baroness regards as totally separate from the stakeholder pensions. I beg to move.
§ Lord Goodhart
My Lords, Amendment No. 21 standing in my name has been grouped with this one. My amendment is more elaborate than the one moved 100 by the noble Lord, Lord Higgins, and contains a second element. It proposes a new clause, subsection (1) of which says that:Nothing in regulations … shall prohibit the payment to stakeholder pension schemes of contributions up to the [tax] limit".That is the maximum amount that can be subscribed to a pension scheme by a prospective pensioner, an employee. It varies according to the age of the employee.
I put that in because it was originally proposed by the Government that they would provide that a person could pay up to £3,600 to a stakeholder pension but not more than that, even if they were entitled by the tax rules to contribute more than £3,600. Of course, if that had been the case it would have affected a great many employees. For example, someone aged 51 to 55 need only have had an income of £12,000 a year to find that they were entitled to contribute more than £3,600 under the Inland Revenue rules.
However, as the noble Baroness said earlier—and it has been confirmed to me that this is the case—the Government have changed their mind and will now allow contributions to be made to stakeholder schemes up to the relevant tax limits, even though they are higher than £3,600. They will keep the £3,600 limit if that is higher than the revenue limits.
That seems to me to be a substantial step forward because it involves what would otherwise have been the serious problem of what would happen to someone whose earnings made it possible for him to contribute more than £3,600 under the Inland Revenue rules. It would have compelled him at least to take out another pension if that had been possible, which it might not have been. It is now clear that somebody will not have to leave the stakeholder pension altogether or take out a separate pension with another provider under another scheme once his or her income reaches a level where he or she can contribute more than £3,600 a year.
However, the remainder of the amendment is something about which I am still anxious to inquire. It raises the same point which was raised by the noble Lord, Lord Higgins: what is the Government's position about membership of more than one scheme? It appears that there is no obvious reason why it should not be possible for somebody, if he or she wishes, to belong to both a stakeholder scheme and a personal pension scheme provided the total contributions to both schemes do not exceed the Revenue limit. I hope that the Government will be able to confirm that that is so. It may be a little more complicated in the case of somebody who belongs to an occupational pension scheme which is on a defined benefit basis. In that case it may be very difficult to work out how to ensure that the Revenue limits are not exceeded. That does not seem to me to be beyond the wit of the very clever brains in the Inland Revenue. For that reason, subsection (4) of our proposed new clause provides that the Secretary of State and the Board of Inland Revenue must lay before Parliament proposals for 101 legislation to enable somebody to be a member of both a stakeholder scheme and the defined benefit occupational pension scheme.
Having said that, like the noble Lord, Lord Higgins, I await with interest the Government's response. I very much welcome what they have already said in response to the first point that I raised about the upper limits of contributions to stakeholder pensions.
§ Baroness Hollis of Heigham
My Lords, I am grateful to both noble Lords for the thoughtful way in which they have spoken to these amendments. I agree that in terms of the implications for pension holders this is one of the most important issues that we are discussing tonight. I am grateful that both noble Lords have recognised the degree to which the Government have responded to representations made not only by the industry but in your Lordships' House. I shall try to spell out the position, because this matter is absolutely pivotal to the implications of how the stakeholder pension fits into the web of other pension provision. As I said in the earlier debate, the consultation document came out on 16th September.
These new proposals will introduce a simpler integrated tax regime for personal pensions and stakeholder pension schemes. The proposed new arrangements will allow members to contribute up to either £3,600 a year or the age and earnings-related limit for personal pension schemes, whichever is the higher. This removes the potential awkwardness that someone who starts to pay into a stakeholder scheme and subsequently wants to pay in more than £3,600 may otherwise have to close down his or her stakeholder pension.
Where the personal pension limits would be higher they will also be available to stakeholder scheme members. There will be nothing to stop people from holding more than one such pension at the same time subject to the relevant overall contribution limits; in other words, one can have concurrent schemes. For example, people already with a personal pension will be able to take out a stakeholder pension as well if they wish. This could help those who are committed to contribute a certain amount to a personal pension but with heavy cancellation penalties who might prefer to pay any further contributions into a stakeholder scheme.
The noble Lord, Lord Higgins, asked whether one could have a stakeholder pension and also pay into the state second pension. Yes. As with SERPS, a member of a stakeholder scheme will have the option of contracting out of the state second pension and receive a rebate, but it will also be possible to be in the state second pension and make contributions to a stakeholder pension—like a personal pension—on top of that.
These proposals should help all stakeholder and personal pension schemes by reducing the costs of checking against the Revenue limits and helping to make advice simpler for potential members. The proposals also sweep away the limitation which has until now restricted pension provision to those in 102 employment. We propose that any adult will be able to pay up to £3,600 a year into a stakeholder or personal pension with the benefit of tax relief, irrespective of his or her employment status. For the first time carers, people with disabilities and non-working partners will be able to build up pensions in their own right with the same tax reliefs that are on offer to the employed. This also has a very positive read across to pension sharing. It allows one to continue to build on a pot that may have come from a pension share even if one is not necessarily in the labour market. We believe that this is a major improvement which we hope your Lordships will welcome.
As to the interaction of stakeholder pensions and personal pensions, I hope your Lordships accept that these proposals fully meet the concerns which prompted the amendments. The amendments also seek to deal with the issue of dual membership of occupational schemes and stakeholder pensions. During Committee the noble Lords, Lord Good hart and Lord Freeman, set out the arguments for dual membership. I have much sympathy with what they said. The consultation paper does not rule out dual membership, but it does make clear the practical problems which can arise when a final salary occupational scheme is held alongside a money purchase arrangement. Clearly, there are no problems if both are money purchase arrangements. A final salary arrangement is more complicated. The noble Lord, Lord Goodhart, recognises that the nature of the tax limits is quite different in final salary schemes and, therefore, dual membership is not a simple matter. We must be careful that in trying to give people the flexibility of dual membership we do not add an undue degree of complexity to the operation of schemes.
The claret/burgundy consultation paper proposes that occupational pension schemes which operate on a money purchase basis should have the option of operating under the integrated tax regime for stakeholder pensions and personal pensions. This will, therefore, provide dual membership in respect of some occupational schemes.
§ Lord Higgins
My Lords, does it mean that now someone may have both a personal pension and an occupational pension?
§ Baroness Hollis of Heigham
My Lords, I want to be very careful in what I say. Perhaps the noble Lord will allow me to check the position. Our minds are not closed to the idea of allowing someone to hold a stakeholder pension alongside a final salary occupational pension, but we need to think carefully about the practicalities. The consultation paper invites proposals from the pensions industry as to how dual membership may be achieved without introducing excessive complications into the operation and policing of pension schemes and an excessive increase in the cost of tax relief.
I believe that these proposals go a long way to meet the concerns which underlie the amendments and reflect our determination to respond positively to the 103 industry's concerns. However, they are not issues for this Bill. It is normal and appropriate practice for the Inland Revenue to publish details of changes to tax regimes for pension schemes. Subject to further consultation, the proposals for a new integrated tax regime will be brought forward in a forthcoming Finance Bill which will be debated in another place in due course. I hope to provide the answer to the noble Lord's question, if not on this amendment perhaps on a later one.
None the less, in the light of the implications of the £3,600 limit, or alternatively the higher age and rebates, for personal pensions on the one hand and, on the other hand, the issue of concurrent membership of personal pensions and stakeholder pensions and membership of second pensions and occupational money purchase schemes, I hope that I have addressed your Lordships' questions. If we can find a way to do it we believe that it will be attractive, but at the moment the complexities seem to be very difficult to address. Obviously, we are still considering how to brigade this with a final salary scheme. We are not against it in principle, but at the moment the complexities appear to be overwhelming. We are seeking advice on this matter. We may be able to return to your Lordships' House in due course if we have a clearer mind on the matter. At the moment, the expectation is that final salary schemes will be excluded from this arrangement.
In the light of that, I hope that noble Lords will feel able to withdraw the amendment. I have taken some time to spell it out. I believe that the issue is pivotal to the whole Bill and, therefore, the amendments are extremely helpful.
§ 9 p.m.
§ Lord Higgins
My Lords, the noble Baroness is right to say that this is a pivotal issue. We all welcome the flexible attitude which the Government have adopted to the points raised by the noble Lord, Lord Goodhart, myself and others at an earlier stage. What she described as the "claret" document is in many ways an extremely good and helpful document, as have been her remarks today.
I do not expect an answer now on this point. However, the noble Baroness stressed the difficulty of integrating a stakeholder scheme with a defined benefit scheme. As she rightly says, the situation in each is very different. I am not sure whether it is a non-problem in the sense that up to the Revenue limits imposed I should be surprised if it were not the case that it is always better to put the money into a defined benefit scheme rather than into a stakeholder pension—I talk off the top of my head—not least because the defined benefit scheme would have a company contribution attached to it which the stakeholder pension will not. I am glad to have the support of the noble Baroness, Lady Castle. While it is worth examining this in depth, I am not sure that we do not have a non-problem on our hands on that aspect.
104 Other than that, I believe that we are making progress. It is to be welcomed.
§ Baroness Hollis of Heigham
My Lords, before the noble Lord sits down, I was hoping for a yes or no answer to his previous question. I am told it is not that sort of question. It is as well that I did not rely on body language from the Box.
On the combining of a personal pension with an occupational scheme—it is not at present straightforward—under current law one can belong to a contracted-in occupational scheme and have a personal pension which is used for contracting out only. One cannot contribute one's earnings to both schemes unless it is in respect of two or more different employments. The position for the future is outlined, apart from that, in the claret-coloured document. I hope that that clarifies the situation. At this stage we do not propose any change in the claret document on that point.
§ Lord Higgins
My Lords, I am grateful to the noble Baroness. It may have been a short question, but it was not simple. I shall read carefully what she said. I think that she accurately described the present position, which paragraph 18.1 makes clear. I am not clear—it is very complicated—whether any change is proposed. I ask the noble Baroness not to reply to that at this stage in the hope that we shall have a satisfactory answer at a later stage. Subject to that, I am happy to beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ [Amendments Nos. 20 and 21 not moved.]
§ Clause 2 [Registration of stakeholder pension schemes]:
Lord Higgins moved Amendment No. 22:
Page 2, line 30, at end insert—
§ The noble Lord said: My Lords, we have already touched on the subject matter of this amendment, which seeks to provide that the premiums received will ensure a pension in excess of that which will be received if an individual is entitled to a minimum pension guarantee. The noble Baroness has touched on this and produced some interesting arithmetic which suggests that that will always be the case. If it is not always so, it raises the question whether the person concerned is paying in money for which he or she will receive absolutely no benefit at the end of the day. If that is so, should we not make some arrangement to ensure that the premiums are refunded or something of that kind? It will not be a problem in the immediate future. It is a long way ahead. But the minimum pension guarantee is earnings related and may tend to increase more quickly than a stakeholder pension invested in a defined contribution scheme. Many years hence we may find a lot of disgruntled people saying that they have contributed all the way along for nothing.105
§ It is a concern which we should bear in mind to see whether there is any way of protecting people in those circumstances.
§ Baroness Hollis of Heigham
My Lords, the amendment is identical to one we discussed in Committee and adds an additional condition for the registration of stakeholder pension schemes. In order to he registered as a stakeholder scheme, the scheme's trustees or, where appropriate, other responsible individuals would have to declare that the contributions paid into the scheme would provide a pension in excess of the minimum income guarantee. I assume that the noble Lord is concerned about our expectations about the interplay between a state contributions and stakeholder scheme and the relationship to the existing benefit system.
As noble Lords are aware, the minimum income guarantee provides a vital safety-net for people who have been unable to make their own retirement provision. At current rates, it guarantees an income of at least £75 a week for a single pensioner and nearly £117 a week for a pensioner couple. We have said that, as resources allow, we will aim to uprate the minimum income guarantee over the long term in line with earnings, so that all pensioners can share in the increasing prosperity of the nation. The Chancellor announced in the last Budget that it would rise in line with earnings next year, reflecting our commitment to providing security for today's poorest pensioners—our immediate priority. As will arise under another amendment, we are also looking at ways to modify the rules on the treatment of capital, so as to reward savings.
The minimum income guarantee is intended as a fall-back for those who cannot afford to save for a decent pension. It gives much needed help to those who are the poorest. What we are seeking to do with our other reforms—the stakeholder pension in this Bill and I hope, should we get it, the state second pension in the next Bill in a few months' time—is to ensure that no one who works throughout his or her working life will need to rely on the guarantee. So, the new state second pension will give extra help to the lowest earners, who currently receive little or nothing from SERPS.
But moderate earners should be in a position to save more than the compulsory minimum which all employees must currently pay towards SERPS. Our proposals will give these people the opportunity to save in stakeholder pension schemes, enabling them to build funded pensions which can lift them above the level of the minimum income guarantee. This amendment would require stakeholder pension schemes to give an undertaking that they will provide a pension in excess of the minimum income guarantee.
There are a lot of difficulties with that approach. Schemes would be required to look into the future and give an undertaking that members will receive a pension in excess of the minimum guarantee. Although forecasts can be made, these are very different from giving a firm undertaking and taking on that liability. Investment returns are, of course, subject 106 to a degree of uncertainty and there may be other factors; for example, the level of the minimum income guarantee when the youngest members of stakeholder schemes reach retirement age, in around 40 years' time. So I do not think the phrasing of the amendment is reasonable or indeed feasible. I assume that the noble Lord is probing how we see the interaction of the levels of provision.
The amendment also raises the issue of liability should the scheme fail to deliver the promised pension. Most stakeholder pension schemes will either be set up directly by, or in partnership with, a commercial undertaking such as an insurance company. And it would, I fear, be unrealistic to expect such undertakings to make the open-ended commitment which this amendment requires.
Our overall aim for stakeholder schemes is to extend the opportunity for moderate earners to save in good value, funded pensions. We believe that the practical consequences of the amendment as phrased would restrict stakeholder schemes to the higher paid, as schemes would only accept higher earners who could afford to contribute considerable sums which could safely be expected to produce a pension in excess of the minimum income guarantee. In other words, it would be the equivalent of cherry picking on the part of the pension firm to make sure that it was never exposed to any possible risk for whatever reason.
Furthermore, the amendment does not take into account the existence of the basic state pension. Even a relatively small second-tier pension, whether state or funded, should be enough to lift most people above the minimum income guarantee when combined with the basic state pension. I say "most" rather than the noble Lord's "all" because that would depend on how many years you contributed and therefore what year you pull out. So, it would deny many moderate earners the chance to make their own private provision, undermining our objectives for stakeholder schemes.
However—and this was the information I was giving across the Dispatch Box earlier—it is worth reminding ourselves that a small contribution will over the whole period of a working life produce a valuable return. It will make certain assumptions for pensions; for example, that earnings will grow at 1.5 per cent faster than prices. If one assumed that the basic state pension rose in line with prices; that MIG rose in line with earnings; that the real rate of return on investments is 4 per cent; together with a full working life—fairly basic assumptions—it would mean that—and these figures are quite remarkable—a contribution of £15 a month, or £3.50 a week, over a full working life would produce a pension equal to the projected gap between the state pension and MIG if MIG were earnings related. A contribution of £50 a month would produce a pension of about £75 a week, or greater than the state pension and MIG currently combined.
Of course, that £50 a month, or £13 a week, is a gross figure; and, according to one's age and level of contributions, anywhere between 45 per cent of this, if one is on an income of £200 a week at the age of 30, 107 and 90 per cent at 50 could be coming from recycled rebates. So the net cost to the payer-in would probably be no more than half that £50 a month and could well be less. Over a full working life, it would still produce a pension of £75 a week to add to the basic state pension.
These sums are worth while. They are modest contributions. The crucial issue is the length of time involved in making the contributions. That is what makes it possible and that is why delays would be so unwise. Therefore, I understand the concerns which have prompted the amendment. We are determined that our reforms will enable as many as possible to retire on an income that exceeds the minimum income guarantee. But a contribution of £3.50 a week gross, and then at least half of that netted out for national insurance rebates, would float you above MIG level, which is what the noble Lord was asking. I repeat that £50 a month gross on these assumptions, and net only half of that or less, would float people on to a pension of about £75 a week in addition to their state pension.
However, the amendment seeks to impose a requirement on schemes which in my view would not only be unworkable but which also has serious implications for the successful delivery of our pension reforms. And it would impact on the stakeholder pensions alone. No similar requirement is proposed or needed for other pension schemes. No one ever mentions, for example, personal pensions—the last time I saw the statistics they showed that 60 per cent of those with a personal pension did nothing other than recycle their MIG rebates. As a result, most of them will still need income related benefits in their old age because there were no additional contributions.
The noble Lord is not making that requirement on personal pensions, which would have a more effective cutting edge, only on stakeholder pensions. On the assumption that the noble Lord was really asking me about the interplay between the two levels, I hope that he will feel that the information was useful and clarifies the situation and shows that over the long term this will prove a very good deal indeed for people on modest incomes putting in relatively modest sums. I hope that in the light of that the noble Lord will feel able to withdraw his amendment.
§ Lord Higgins
My Lords, the House will be grateful for the Minister's, as always, eloquent exposition. She described the amendment as not reasonable, not feasible, unrealistic and unworkable. One cannot help feeling that there must be something wrong with it somewhere! However, I was fascinated by what she said and believe that we should fax it immediately to Mr Frank Field, who may have different views on this aspect since in the past he used dramatic words about the likelihood of getting a benefit from contributions to some pension schemes. Subject to that, the Minister has given an interesting reply and I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.108
§ 9.15 p.m.
Baroness Turner of Camden moved Amendment No. 23:
Page 2, line 35, after ("scheme") insert ("or that the scheme was established to replace an occupational pension scheme").
§ The noble Baroness said: My Lords, Clause 2(3) of the Bill allows OPRA to refuse to register a stakeholder scheme which does not fulfil the conditions of Clause 1. This amendment gives a similar power to refuse registration to a stakeholder scheme if OPRA is satisfied on reasonable grounds that the intended scheme replaces an existing occupational scheme.
§ The Government have said on many occasions that they support occupational pension schemes. I believe that they have been a success story and I believe that my noble friend the Minister shares that view. Their growth in the UK was largely stimulated by the plan introduced by my noble friend Lady Castle of Blackburn in the mid-70s. In addition to providing earnings-related pensions to many who could never before have contemplated them—employees in small companies without pension schemes and so forth—by setting standards for contracting out, it improved existing schemes and actually resulted in the creation of a number of new schemes.
§ As a result, a generation of pensioners is now much better off than its predecessors—that is, the pensioners who had the opportunity to belong to occupational schemes arising during that period. The stakeholder concept may have—quite unwittingly—the opposite effect. The National Association of Pension Funds, whose meetings I attend fairly regularly, is very concerned that since the employer has an obligation to give access only to a provider, many will believe that that fulfils their obligation. Some employers may feel that having afforded access and agreed to deduct contributions from salaries, there is no need for them to do anything else. Their employees are in a scheme and they have nothing further to bother about; therefore the amount of pension that they receive is a matter for those individual employees.
§ There is really no substitute for a good occupational scheme. Stakeholder schemes must not be used to replace them. I am sure that that is not the Government's intention, but it may well be the ultimate result. In good occupational schemes the employer is always under an obligation to make a contribution, which is often far higher than the contribution rate paid by the employee. There are usually other benefits in the scheme as well. If stakeholder schemes are allowed to replace such very good provision on all sorts of perhaps spurious grounds advanced by providers, it will not be to the ultimate advantage of pensioners. I hope that the Government will be prepared to look favourably on the amendment which is intended to be helpful. I beg to move.
§ Lord Higgins
My Lords, I merely add to the noble Baroness's remarks that I share the fear she mentioned. There is some danger that because a company has an occupational scheme which involves 109 it in making contributions, it may somehow now regard a stakeholder scheme as the norm, or in some ways the Government's ideal, and will therefore no longer feel obliged to go beyond what it is currently doing. Alternatively, it may simply close the existing scheme to existing members and move over to stakeholder schemes for new joiners. There is a real danger here and I should be interested to hear the Government's response.
§ Baroness Hollis of Heigham
My Lords, Amendment No. 23 gives OPRA the power to refuse to register or, if it has already been registered, to remove from the register, a stakeholder pension scheme if it is satisfied that it was set up to replace an occupational scheme. Stakeholder pensions are aimed at those people who do not have access to an occupational pension. Membership of an occupational scheme is not an option for the 35 per cent of employees whose employers do not offer a scheme.
I hope that my noble friend will recognise that we share the same commitment to occupational schemes and that we therefore intend stakeholder pension schemes to be a supplement (for those 35 per cent of employees) rather than to replace occupational schemes, which currently cover more than half those in the labour market.
I do not believe that there is anything in our proposals which should lead employers to close existing occupational schemes when they would not otherwise have done so. Employers who now offer an occupational scheme to all employees will not be affected by the requirement to designate a stakeholder scheme. Where employers currently exclude some employees—such as part-timers—they will have the option of changing the occupational scheme rules so that they are included. Equally, I believe it right that we should expect other employers at least to provide access to a good value pension scheme.
I now turn to the particular amendment. I do not believe that, if adopted, it would do anything to protect overall pension provision. An employer with an occupational pension scheme will have to offer a stakeholder scheme only if the occupational scheme does not offer membership to all employees. Affected employers will have a choice: to offer a stakeholder scheme or to extend membership of the occupational pension to all employees. Both measures should increase overall membership.
Of course, as the noble Lord, Lord Higgins, suggested, the employer could simply close the occupational pension and merely offer access to the stakeholder scheme. I believe that that is the concern behind the amendment. We should, however, remember that no employer is compelled to offer an occupational scheme. For those who do offer such a scheme it would surely be perverse to cancel arrangements that are long-established and working well simply because provision has now to be made for all members of the workforce. It is not an onerous additional responsibility.
110 But even if we assumed, in the worst possible scenario, that an employer closed his scheme and went over either to a stakeholder or to a money purchase scheme or whatever, I do not believe that the amendment would help. There would be enormous practical difficulties in establishing that a stakeholder scheme had been set up expressly to replace an occupational pension scheme. Indeed, in many cases we expect stakeholder pension schemes to be set up to cater for groups of members spread across a range of employers. Even if it could be shown that the stakeholder pension scheme had been set up to replace an occupational pension scheme, refusal to register the replacement scheme could simply make it more difficult for the employer to comply with the employer access requirement. I cannot believe that that is what my noble friend intended.
Therefore, I hope that my noble friend will accept our commitment to occupational schemes. I hope that she will accept that we do not follow her reasoning on this—that employers will be motivated to close clown good occupational schemes and take up a stakeholder scheme where, for example, so far they have not moved from final salary to money purchase over the past few years. There has been virtually no movement on that front, or very little.
In the light of that explanation and the fact that, even were this amendment to be passed it would not offer any protection against what she most fears, I ask my noble friend to withdraw her amendment.
§ Baroness Turner of Camden
My Lords, I thank my noble friend for that explanation of the Government's position. Unfortunately I have some doubts about it because it seems to me that a number of employers might very well find that closing their scheme and opting for a stakeholder scheme is a cheaper option, a cheaper option that would enable them to fulfil their obligation as they see it and still provide access for their employees to some form of pension provision. I believe that that could be a very real danger with the proposition contained in this Bill. As I indicated earlier, I am not alone in that belief. That is the view of a number of quite large pension schemes represented in the NAPF. That view was advanced very strongly by the president of the NAPF at a meeting which I recently attended.
Therefore, a genuine fear exists among proponents of occupational schemes that this could have a weakening effect. One must remember, of course, that the number of new final salary schemes that have been opened in recent years is very small.
§ Baroness Turner of Camden
My Lords, the noble Lord, Lord Higgins, says that there is none. Yes, exactly, because employers regard it as an open-ended and expensive commitment and they may well regard the stakeholder provision as a very much cheaper option. That is one reason that I felt it was a good idea 111 to table this amendment. However, I do not intend to call a Division on this issue at this particular stage, and I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 3 [Duty of employers to facilitate access to stakeholder pension schemes]:
Lord Higgins moved Amendment No. 24:
Page 3, line 24, after the second ("of") insert ("10 or more").
The noble Lord said: My Lords, this amendment relates to whether individual companies should have an obligation to provide stakeholder schemes to their employees. The purpose of the amendment is to suggest that there should be some restraint on that inasmuch as very small firms may find that an onerous commitment. I notice with interest on a later amendment that the Government themselves are becoming rather worried about the way in which particular schemes may impose an obligation on employers. The amendment is seeking effectively to put that particular point to the Government. Having said that, I believe it ties in to some extent with the consultative documents. I believe I am right in saying that these are the Green and Orange ones now related to employers' access and the Government's proposals and to the question of clearing arrangements as regards contributions. Although it would not be right to act as consultees in this context—that has been happening outside this Chamber—the Government might wish to indicate the extent to which their proposals on those two documents have been favoured. I was struck by the reaction of the Institute of Directors to the brief on employees' access:
We reject the idea that employers should be required to provide access to stakeholder schemes through payroll deductions. An employer may choose to offer that facility, but that is the employer's decision. The proposal in this Brief is but the latest in a long line of examples of the Government asking employers to do extra work for no reward.
The institute also argues—and this is very relevant to the amendment—
If an access requirement is to be imposed on employers at all, there should certainly be an exemption for smaller employers. Office of National Statistics figures for September 1997 (the latest available) show that exempting firms with up to ten employees would exclude 83% of employers but only 20% of employees.
§ I wonder to what extent those points were reflected in other representations made to the Government, and in particular whether representations have been made on behalf of small firms that they should not have that additional burden placed upon them. I beg to move.
My Lords, my noble friend made a very valid point. The precedents to which he rightly referred are concerned with much simpler circumstances than will be established under the Bill. For each employer, in respect of each of his employees, to have to enter into the exceedingly complicated and sometimes obscure provisions that are to be applied under the new stakeholding scheme does not seem 112 reasonable. The precedents that my noble friend quoted make a strong case for his amendment. I hope that the Government will look at it sympathetically.
§ Lord Goodhart
My Lords, again I am unable to support the noble Lord, Lord Higgins. There is obviously an element of burden on small employers in particular. We certainly have concerns about that, and for that reason we joined the Conservatives and the noble Lord, Lord Higgins, in opposing the proposal that small employers should not be required to pay the working families tax credit through the payroll. That step placed a burden on employers without conferring any particular benefit on employees.
In this case, if employers with fewer than 10 employees are excluded, the effect will be that those employees will to a large extent be excluded from the benefits of stakeholder pensions. They will not get access to a designated pension through their employer, which we believe will be of real detriment to them. For that reason, while having some sympathy for the motives behind the amendment, we are unable to support it.
§ Baroness Hollis of Heigham
My Lords, Amendment No. 24 limits the application of the employer access requirement to those employers with 10 or more relevant employees—an issue raised in Committee. I said then that our purpose in introducing the requirement on employers to offer access is twofold. We want to be sure that stakeholder pension schemes can deliver better value for money and we want to encourage people to join them. We therefore need a scheme that is cost-effective and as simple as possible. We think it right that employers should play a part in helping to make that a reality for people who cannot join an occupational scheme.
§ 9.30 p.m.
§ The pensions Green Paper proposed that employers would have to designate and provide information about a stakeholder pension scheme for all those employees to whom the requirement applies. They would then allow scheme representatives access to those employees and offer payroll deductions for those who choose to join the scheme. Employers who already offer an occupational scheme to all employees will not be affected and other employers will be exempt in respect of any of their employees who could join an occupational scheme or those whose earnings fall below the LEL (lower earnings limit) for paying National Insurance contributions.
§ The Green Paper also sought views on whether the access requirement should be voluntary for particular groups of employers, reflecting our commitment to minimise the impact on business of this new requirement. After we debated this issue in Committee, we issued a further consultation paper setting out more detailed proposals. Some people have been disappointed that we did not propose an exemption based on the number of employees working 113 for an employer. There have been concerns that the additional burden and extra costs might be disproportionate for small businesses.
§ Perhaps I may expand a little on our thinking. We are concerned that prescribing an exemption at a specific level could itself have a distorting effect on business, by influencing employer decisions about staffing levels and whether to go above or below the specific level. This is an argument we had on the WFTC, as I am sure your Lordships will well recall. It could limit our ability to make stakeholder pension schemes widely available through the workplace. Only about 200,000 of over 1.2 million employers in this country have 10 or more employees.
§ Adopting this amendment would mean exempting around 84 per cent of all employers in this country from the scope of the Bill. Whereas a high proportion of larger employers already offer an occupational pension scheme, smaller employers are much less likely to do so. It is precisely among the smaller employers that the current problem exists of their employees not going into a scheme. If we followed the noble Lord, we would accentuate that problem. At the moment, less than one in five working companies of under 20 has an occupational pension scheme. The proportion would be even higher if it was under one in 10. However, nearly half of those in companies of under 20 are in an occupational scheme. That shows that the problem of employees not having access to a second private pension is most acute in the very small companies which the amendment of the noble Lord seeks to exclude, in which case, frankly, we do not need to bother.
§ At the moment we are not proposing an exemption for employers based on size alone. We are concerned, however, that our proposals strike the right balance between the need to ensure wider access to good value pension schemes and the impact upon small businesses. We recognise that our detailed proposals have prompted a great deal of debate. We are currently evaluating them in the light of the responses received and will be considering them further.
§ In any case, our detailed proposals will be set out in regulations. That will give us the flexibility to prescribe exceptions to the access requirement if it became clear that that was justified either in the light of consultation or through the experience of operating schemes. We believe that that is preferable to specifying any possible further exemptions in primary legislation.
§ Lord Higgins
My Lords, I thank the noble Baroness for giving way. One particular concern is that this would pose a burden if done through the payroll rather than by people who become members of a stakeholder scheme doing it by direct debit, which seems equally efficient. Would the noble Baroness be prepared to consider that the size of the firm is related to whether or not this has to be included in its payroll? This echoes the discussion we had on WFTC.
My Lords, before the noble Baroness replies, perhaps I may ask another question which is closely related and just as relevant. She has told us that 114 84 per cent of employers would be affected if the amendment is carried. However, the import ant point is, what percentage of employees would be affected? Does she have that figure?
§ Baroness Hollis of Heigham
My Lords, approximately 80 per cent of firms employ under 10 people, and approximately 75 per cent of employees work for larger firms. However, the point is that they work for firms where there is already an occupational pension scheme because such schemes are to be found in the larger firms. Therefore, our problem is that the people to whom we most want to offer stakeholder pensions are precisely those who would not or might not have access to any such scheme were the amendment tabled by the noble Lord to be carried.
I realise that this is Report stage and not Committee, but did I understand the noble Lord, Lord Higgins, to say that he accepted that employers should continue to be required to make available to employees information in relation to a registered stakeholder scheme, but that he felt that employers should not subsequently need to handle the payroll deductions? Is he making a distinction between the two processes?
§ Lord Higgins
My Lords, it is not quite the same. I was saying that even if one were to accept the argument of the noble Baroness—which is doubtful—perhaps one could make an exemption for small firms by way of saying that they do not have to collect the money.
§ Baroness Hollis of Heigham
My Lords, the noble Lord is saying that firms would still have a responsibility to make available a scheme without necessarily acting as the collection agency. That is one of the suggestions put to us by some of those commenting on the document.
I have some sympathy with that proposal. We are certainly considering that, and arrangements for suggestions in response to the consultation document. But we will not be doing anything which subverts or undermines the possibility of our encouraging people in the smallest firms (who are the ones least likely to have a second pension) not to join the stakeholder scheme. It is not impossible that the noble Lord's suggestion is one that we could actively follow, but I make no guarantees in that regard. We are still considering the matter in the light of the consultation exercise. We want to ensure that the employees of small firms have access to building up a decent occupational scheme and, in the absence of an occupational scheme, a stakeholder scheme.
§ Lord Higgins
My Lords, we are grateful for the comments of the noble Baroness. My point was that, even if the Government felt that they ought not, on the basis of sizes to exclude firms from informing employees about a scheme, none the less more and more burdens are being placed on them and there may be a case for exempting them from collecting the money week in week out, bearing in mind that employees probably turn over much more quickly in 115 small firms than in large firms. I shall be grateful if the noble Baroness will consider that alternative. Subject to that, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
Baroness Castle of Blackburn moved Amendment No. 25:
Page 3, line 31, at end insert ("other than those who prefer to acquire earnings-related pension rights under section 44(3)(b) of the Contributions and Benefits Act (SERPS).").
§ The noble Baroness said: Amendment No. 25 relates to a theme to which Lady Turner and I have often returned during debates; that is, the need to give people the freedom to choose. In this case it is the freedom to choose SERPS rather than any other government alternative. This amendment asks that people should not be compelled or induced to go into a stakeholder pension if they prefer to remain in SERPS. The Minister may be surprised how many people, according to my postbag, are deeply attached to SERPS and, given the option, would choose to remain in it.
My moving of this amendment gives the Minister an opportunity to answer two questions which she has so far avoided answering. First, is it not a fact that the manifesto on which this Government were elected contained the phrase,
Labour will retain SERPS as an option for those who wish to remain within it"?
Secondly, how does the Minister intend to embody that option in this part of the Bill? I beg to move.
§ Lord Goodhart
My Lords, at this point we come on to SERPS. Amendment No. 25 has been grouped with Amendment No. 54, which is a directly pro-SERPS amendment. We on these Benches are not enthusiasts for SERPS. With hindsight, we believe that the cost of SERPS benefits were seriously underestimated when SERPS was set up. One of the problems with such a scheme, where the contributions start immediately but the liability for payment does not mature for many decades to come, is that it is easy to create a lot of chickens and it takes those chickens a long time to come home to roost.
By the 1980s it was clear that either benefits had to be cut or national insurance contributions had to be increased to provide for SERPS. By going wholly for cuts, I have to say that the Conservatives took the wrong decision. But something had to be done. Therefore, in that respect, we believe that the scheme was flawed from the start. We also believe that the Government should provide a fixed-rate pension.
We accept that the second state pension and the basic pension will do a good deal better to provide a fixed-rate pension for many people, especially low-paid employees, than the basic pension alone. However, we do not think that the Government should provide earnings-related pensions. We believe that, for higher earners, they should be obliged to provide their own funded pensions to top-up state benefits and that the Government's financial contributions to those should be limited to tax relief.
116 Therefore, we believe that the Government are right to phase out SERPS. However, as we will explain more fully when we get to Amendment No. 31, we also believe that membership of a pension scheme, whether it be a stakeholder scheme, a personal scheme or an occupational scheme, on earnings up to the upper earnings limit should be compulsory as a replacement for SERPS for medium and higher earners. Be that as it may, we on these Benches are unable to support Amendments Nos. 25 and 54.
§ Lord Higgins
My Lords, I shall not detain the House for more than a few moments. We discussed these issues to some extent when dealing with the earlier amendment. We considered whether the substitution of the state second pension for SERPS would be to the advantage of individuals who might contribute to it. I raised a number of points to which the Minister gave fairly complicated answers. Therefore, I should like to take into account what she said by reading her response in Hansard before I take a firm view on the matter.
I have a simple question for the Minister. Despite the manifesto commitment—no doubt she will be able to remind the noble Baroness about that—she is asserting that the state second pension will actually be more advantageous than continuing SERPS. My simple question is this: does the Minister think that the new arrangement will be more or less expensive than retaining SERPS? Moreover, if there is no difference as far as concerns cost, is there any reason why individuals who want to remain in SERPS should not be allowed to do so if they so wish?
§ 9.45 p.m.
§ Baroness Hollis of Heigham
My Lords, as we have heard, these amendments seek to preserve the right of an individual to remain a member of the state earnings related pension scheme. Amendment No. 25 would exempt employers from designating a stakeholder pension scheme for any employees who opt to stay in SERPS. As I understand it, Amendment No. 54 would give employees a continuing option to remain in SERPS, which would also apply after the state second pension is introduced.
I understand the pride and belief in SERPS of my noble friend Lady Castle. However, time has moved on. Given the changes that have been made to SERPS over the years, in particular the hatchet job that was done in 1986, we believe that the time has come for its reform. We accept that the desirable option is for people to have a good, funded occupational scheme with a defined benefit or a defined contribution, according to the circumstances. However, we also believe that the state system has a vital role to play. Many people cannot afford to save enough themselves to provide a decent income in retirement. This includes not only very low earners but carers and disabled people who may never have the opportunity to build up a pension.
We considered these problems seriously in our pensions review and concluded that membership of SERPS was not the right answer. By its nature SERPS gives the lowest benefits to the lowest earners. It 117 currently gives nothing at all to those who do not earn anything. The new state second pension which will reform SERPS—with, I hope, the approval of Parliament—will ensure that those who need the most help (low earners, carers and disabled people with broken work records) will get higher pensions. I remind your Lordships that anyone in a state second pension between the lower earning level, which is about £3,500, and £9,000 will pay in pro rata but will get hack a pension, whatever their income—whether it is £3,600 or £6,000—as if they were paying in £9,000. It is a redistribution that SERPS did not even begin to contemplate. Therefore it will be worth far more for low earners than SERPS would ever provide. For example, as I mentioned earlier this evening, on a figure of £6,000 someone would receive nearly double the sum from the state second pension as he would from SERI'S for the same sum of money.
My noble friend pressed me on the manifesto commitment. SERPS is not being abandoned; it is being reformed in that the earnings related element which gives most to those who pay most and least to those who pay least is to be reformed through the introduction of a state second pension which, as I say, will give more help to low and moderate earners, carers and long-term disabled people with broken work records. But obviously people's accrued rights in the existing system will build up and continue in the new system.
The noble Lord, Lord Higgins, pressed me on the costs of the scheme. It will be much less than SERPS as originally envisaged. The original cost of SERPS would have been about £40 billion but eventually came down to about £12.5 billion as a result of removing the best 20 years, reducing the accrual rates and some of the other measures of 1986 and 1988. The scheme will cost much less than SERPS as originally envisaged; it will cost rather more than the current SERPS. That is because we are quite deliberately using the mechanism of the state second pension to give help for a decent pension to those who otherwise would not qualify to be lifted off means tested benefits. Without this, people who could not get much from SERPS would remain on means tested benefits. Because we are going for a state second pension which, frankly, is undisguisedly redistributive towards the poorest, those who cannot work, those who have been disabled and those who are carers, it will cost more. I am proud that we are introducing this. I think that it is one of the best measures that we are introducing at the moment.
We shall produce a state second pension which is SERPS without the earnings related element and reducing the threat of means testing in retirement. Any extra savings people manage to put by—they can be quite modest—will add to their retirement income rather than being eaten up by means tests. This must be considered in conjunction with what we discussed earlier; namely, the question of capital limits.
I return to the amendments themselves. By requiring employers to offer access to a stakeholder pension scheme we are not compelling employees to join that scheme. Membership of SERPS, and in due course the state second pension, which is the reformed SERPS, 118 will remain an option, as it is now. Amendment No. 25 as it stands would therefore add a rather unnecessary additional complication for employers and for the regulator seeking to check compliance by making the requirement on the employer dependent on whether individual employees elect to remain in SERPS.
The main effect of Amendment No. 54 would be to retain SERPS in the future alongside the state second pension. As I say, this misunderstands the state second pension. We do not propose to abolish SERPS and replace it with a new benefit. Rather, SERPS is to be reformed and enhanced by the introduction of the state second pension. When the state second pension is introduced most people will gain and no one will lose. Women will benefit in particular both as carers and as low earners, including many part-time workers.
I know that my noble friends may have concerns about stage two of the state second pension when benefits become flat rate—that is, for those over the £9,000 figure—but we have not set a date for this as it will be dependent on stakeholder pensions becoming successfully established in the market-place.
I believe that to follow my noble friends' amendment would produce confusion and complexity and, above all, it would not help those who most need help. No one will lose by the developments of the state second pension on the one hand and the stakeholder pension on the other. However, if employees were misguidedly to remain in SERPS unreformed, as opposed to the reformed SERPS, they could well be worse off under my noble friends' proposals than under ours. We are improving SERPS by ensuring that it delivers to the poorest, those who cannot afford to go into funded schemes.
I hope that with that explanation my noble friend will feel able to rejoice with me in the changes that will be introduced by the state second pension.
§ Baroness Castle of Blackburn
I cannot but admire the dexterity with which the Minister wriggles out of an earlier statement to the House in which she said at first that there was no manifesto commitment on SERPS. Now, when faced with the text of the manifesto, she has a new evasive technique, which is to say "Oh, but we are retaining SERPS. Mind you, we are altering its entire nature, but it is still SERPS". I know that the noble Lady is far too well informed not to be aware that the whole purpose behind the state earnings-related pension scheme was to give manual workers and blue-collar workers the same right to relate their retirement income to what they had earned when they were at work as middle-class and white-collar workers have enjoyed for years. That was the whole point of it.
I remember Dick Crossman introducing his national superannuation plan to our party conference years ago, saying that he was determined to end apartheid in old age. One of the deepest anxieties I have about this whole pension scheme—so far as it. has been unfolded to us; it has been a bit hit and miss—is that it wants to continue apartheid in old age by saying that one class of people is so poor that it must have a 119 flat-rate benefit and can never enjoy an earnings-related scheme. On the other hand, there is the curious ambivalence about the Government when they say "Oh, earnings-related schemes are terrible for the poor, but we intend to embody them in the stakeholder pension as one of the main planks". If earnings-related pensions are wrong, why is it that the Government's main policies are based on that?
As to what the Conservatives and Liberal Democrats offer, I must say that we had a remarkable demonstration by them in chorus this evening, paying obeisance to the nanny state. They said "Oh, but this House knows best. We all know best. We cannot allow these benighted people to be led astray into choosing a scheme—SERPS—which we know is not good for them".
I should point out that all that Amendment No. 25 asks for is choice. What has happened to our society that we can sit here dispensing our wisdom and denying people the right to judge for themselves whether the state earnings-related pension scheme suits them best or not? That is all I am asking. I am not saying we should force it on them. Obviously I have more faith in people's right to freedom and in their judgment than any of the noble Lords opposite and my noble friend the Minister.
This is a theme that my noble friend Lady Turner and I have pressed and will continue to press; namely, that people have a right to an informed choice. The more I hear of the Government's plans, the more imperative I think it is for that choice to be retained. There are so many loopholes in the Government's policies. Every time we ask one question the Minister gets up with the same outpourings of enthusiastic eulogies of what the Government will do. Why it is not embodied in the Bill I will never know; we will have to take it on trust.
I do not believe that half of it will work as the Minister said; that all these wonderful increases in pensions will accrue to people by such and such a date in the next century. I do not believe her, because when you break down her figures, you will find that the basic level depends on the basic state pension. The Government earlier rejected Lady Turner's and my plea that the basic state pension can continue to offer a fair share of rising national prosperity only if we restore the earnings rule introduced by the 1974 Labour Government for its annual uprating. Without that, it will shrivel.
I will say this for the previous Conservative government: at least they were honest. They said, "Oh yes, the basic state pension will wither on the vine". We do not say that. We imply that by a kind of miraculous transformation, it will actually flourish. However, as a percentage of earnings, it is destined to shrink. I believe that, by refusing to listen to those of us who have worked very hard on this subject for many years, this Government will suddenly find that their elaborate machinery will come unstuck. The Minister has a right to shake her head, but if she believes she is right, and I am wrong, why not give people the choice? That is all we ask.
120 All right, I know that she has so hypnotised this House that there is not much point in pressing this to a vote. I shall withdraw the amendment, but by heavens, I shall not give up the fight.
§ Amendment, by leave, withdrawn.
§ [Amendments Nos. 26 and 27 not moved.]
Lord McIntosh of Haringey moved Amendment No. 28:
Page 4, line 13, at end insert—
("( ) An employer is not, whether before designating a scheme for the purposes of subsection (2) or at any time while a scheme is designated by him for those purposes, under any duty—
§ The noble Lord said: My Lords, your Lordships will recall that we discussed this matter in Committee. There were concerns that an employer might be held liable by employees if the scheme designated under the employer access requirement performed badly, became insolvent, or met with other difficulties. Some of those commenting on the original proposals, including employer representatives, also expressed such concerns.
§ We said in Committee that we would look at this to see whether we could include a statement in the Bill which addressed the concerns. I am pleased to say that this has proved possible, hence Amendment No. 28.
§ Even as it stands, Clause 3 does not impose any duty on an employer to designate a scheme which performs to a particular standard. It has never been the intention that employers should have to do more than select a scheme from the register and offer access to it in the way set out in Clause 3. Nevertheless, we want to respond to the concerns that have been expressed and we accept that it is wise to include this extra safeguard to make certain that employers are adequately protected.
§ The amendment does not, of course, exempt employers from their normal duties towards their employees. For example, if they misinformed employees about the designated scheme, or misled them, a liability could arise under the general law of negligence.
§ Of course, we hope that employers will take some action if they discover a serious problem with a designated scheme. They could perhaps notify the Occupational Pensions Regulatory Authority or they might tell their own employees. Such actions would be both prudent and proper. But proper compliance with the requirements of this legislation should not, of itself, expose employers to risks of litigation. This amendment is intended to put that beyond doubt. The amendment explicitly protects an employer from 121 particular liabilities which might otherwise arise from choosing a designated stakeholder pension scheme under the employer access requirement.
§ I hope that your Lordships will feel that this amendment is in line with the spirit of our discussions in Committee, and will support it. I beg to move.
§ Lord Higgins
My Lords, the House is grateful to the noble Lord for tabling an amendment which, as he rightly said, arose from our discussions in Committee. I was somewhat surprised to see it set down in such stark terms, but I believe it is right that the position should be made clear. My understanding is that not only were representations made at the Committee stage but there were also some responses to the Government's consultation brief on employer access. For example, the Institute of Directors said that it was not good enough to say that it would be very unlikely that an employer would be regarded as negligent if a scheme designated in good faith subsequently performed poorly or experienced problems.
Unless I have misread the wording of the clause, it seems to me that the Government have gone beyond what was said earlier and that this positively clarifies the position with regard to the responsibilities, or perhaps I might more accurately say the non-responsibilities, of employers. However, there is one point about which I am not absolutely clear. The Institute of Directors argues that if a scheme is designated, inevitably in the nature of things employees will tend to say to the employer, "You are designating this, but is it or is it not a good thing?". If the employer responds, he will thereby be giving investment advice. This is not a question of whether the employer is being negligent with regard to the laws to which the noble Lord referred in his speech. My understanding is that it would be positively illegal for employers to give that advice unless they were registered as an appropriate financial adviser.
Therefore, I wish to ask the Minister a very simple question. Despite the wording of the amendment, which is intended to be helpful, what is the position if an employer, in the circumstances I have just described, feels that it is difficult not to give some advice to his employees and then finds that he may be responsible for or be held accountable for—put it how you will—the advice which he has given? At the moment it seems that the clause does not cover that point.
§ 10 p.m.
§ Lord McIntosh of Haringey
My Lords, all I can do is say that the amendment is very clear. It says that the employer is not under any duty to make any inquiries, or act on any information, about the points with which the amendment is concerned or under any duty to investigate or monitor, or make any judgment as to the past, present or future performance of the scheme. The noble Lord is asking me what would happen if an employer who recognises that he is not under any such duty goes ahead and gives advice. The only advice I can give to him is that he does so at his own risk, because employers are no more exempt from the 122 general law about financial advisers than anyone else in the country. If they purport to give financial advice, they must be subject to the general law. What we can do, and what we have done, is exempt them from any duty to put themselves at risk in this way.
§ Lord Higgins
My Lords, before the noble Lord sits down, it is true that the position is as he described. But many small employers may not realise that that is the position. Will the Government take steps to ensure that they are clear not only that they do not have a duty to give any such advice but that they are positively prohibited and that it is illegal for them to do so?
§ Lord McIntosh of Haringey
My Lords, I am sure that it will be necessary for there to be guidelines to employers on the implementation of the legislation. There will be regulations and there will be guidance notes for employers. I am sure that they will make the issue to which the noble Lord refers perfectly clear. But what we have done in the legislation is to put beyond any doubt the fact that employers are not under any duty to go further than is set out in the Bill as it will be amended. I beg to move.
Baroness Hollis of Heigham moved Amendments Nos. 29 and 30:
Page 4, line 14, at end insert—
(""employer" means any employer, whether or not resident or incorporated in any part of the United Kingdom;").
Page 4, line 21, leave out ("except those") and insert ("employed in Great Britain and also, in the case of an employer resident or incorporated in any part of Great Britain, all employees of his employed outside the United Kingdom, but with the exception, in the case of any employer, of any employees of his").
Baroness Turner of Camden moved Amendment No. 31:
Page 4, line 26, at end insert—
("( ) Regulations may prescribe that, when a designated scheme has been agreed, the employer and the employee members shall each have the obligation to make at least minimum payments into the scheme.").
§ The noble Baroness said: My Lords, with this amendment we return to an issue that was raised in Committee. The amendment I proposed then provided that the employer should have to make a contribution. This amendment includes both the employer and the employee in the scheme.
§ If stakeholder schemes are to play a major part in pension provision in the future, steps must be taken to ensure that they really do make adequate provision for pensioners in the next century. We do not want to repeat with this provision—as I am sure the Government do not—even in a minor way, the disaster that occurred with personal pensions.
§ The new stakeholder pension schemes will be on a money purchase basis, as has been explained on several occasions during earlier debates. In other words, the resulting pension will be based on what the investment of contributions has earned during the 123 working life of the pensioner. It is my experience that very few people understand what that could mean. Nor is it always realised just how much they may have to pay into a scheme in order to receive an adequate income on retirement if they are simply contributing by themselves. Many people will not see pension contributions as a priority, particularly at a time in their lives when they are paying off the mortgage and bringing up children.
§ A good occupational pension scheme—preferably one based on the final salary concept—is still the best way of securing a comfortable income in retirement. The Bill proposes that employers should have the obligation to make stakeholder access available to employees and thus introduce the concept of the designated scheme. But that does not carry with it an obligation on the part of the employer to make any payment into the scheme. The only obligation is for the pension provider to be given access to the employees, and of course the employer then has the obligation to deduct contributions. That approach has certain problems to which I have referred. There is a possibility that some employers may prefer a stakeholder scheme to a good occupational scheme. We have already discussed the issue in relation to previous amendments. I still feel that there is a problem in that respect. However, so far as concerns the amendment, many employers now see that if they have to make contributions they will have to have some care and interest in the kind of designated scheme that is on offer.
§ Incidentally, the NAPF research to which I referred earlier raised the very real possibility that some employers would be short-sighted enough to want to close their schemes and embark upon a stakeholder scheme. But if they have to pay into the stakeholder scheme, the temptation to do so is likely to be reduced.
§ Therefore, the concerns that I expressed in regard to the previous amendment could be laid to rest via the proposition advanced in this amendment; namely, that employers should have the obligation to make a contribution into a designated scheme, which would mean that they would then have an interest in that scheme and its success and in encouraging their employees to belong to the scheme. In other words, it would not exactly duplicate an occupational scheme but have certain features of an occupational scheme. In that respect, it would be an advance on what is presently proposed in the Bill. I beg to move.
§ Lord Goodhart
My Lords, the noble Baroness may have been disappointed in the extent to which she received, or did not receive, support from these Benches on the earlier amendments which she and the noble Baroness, Lady Castle, moved. On this occasion, however, we strongly support the amendment. We believe that the idea of compulsory contributions by employer and employee is essential if the stakeholder pension is to be the success that we hope it will be.
124 It is essential that people should be required to make reasonable provision for their old age. That involves the unfunded basic pension and the state second pension, which is also unfunded, for those on low earnings who cannot afford premiums to a stakeholder scheme. We also believe that those with higher earnings should be required, not just encouraged, to contribute to a funded pension. The provision for a funded retirement pension involves what is in effect a tripartite contract between employee, employer and the Government. The employee contributes part of his or her earnings. The employer also contributes, and in doing so recognises a social duty to provide for employees on retirement. The Government contribute by way of tax relief, because a funded pension relieves the Government of the burden of providing support in old age out of taxation.
If that scheme, that tripartite contract, is to work, employer participation is essential. We will not get good pensions for employees unless employers also contribute. We have already heard the figures: most large employers recognise this and provide occupational schemes for their employees, now widely recognised as deferred pay for doing the job.
Those who do not provide occupational pensions—many of them small employers who in practice cannot do so—should contribute to stakeholder pensions. But if it is compulsory for employers to contribute, it must also be compulsory for employees to join the scheme, because otherwise they will come under severe pressure from some of their employers not to join the scheme and to relieve the employers of the burden of contributing to it.
As we understand it, the ultimate government aim is to make it more beneficial for those earning more than £9,000 to opt out of the state second pension and into the stakeholder pension. It cannot be compulsory at the crossover level of about £9,000 because there are many people whose incomes will fluctuate around that level. But we believe it should be compulsory to join a stakeholder pension or an occupational pension once the employee's earnings exceed, let us say, £12,000 so that there is a substantial margin above the £9,000 crossover point. I shall not go into what the precise figure ought to be. That cannot be done before the second state pension is introduced and it should not include an obligation for people to join stakeholder pensions if they are at an age where they cannot build up a meaningful stakeholder pension before their retirement. But we believe that basically the scheme—which we think is in many ways a good one—will not work in anything like the way it should unless there is compulsory membership either of the stakeholder pension or an alternative occupational or pension scheme. We believe, therefore, that, as proposed in the amendment, powers to make this a compulsory requirement should be included in the Bill so that they can be exercised once the state second pension is up and running.
§ 10.15 p.m.
§ Baroness Hollis of Heigham
My Lords, Amendment No. 31 provides powers to require 125 employers and employees to contribute a minimum amount into the stakeholder pension scheme designated by the employer. This is a difficult point. Noble Lords will recall that we discussed the issue of compulsion in Committee and I explained then why the Government had decided not to increase the level of compulsory saving by individuals or to require a contribution by employers.
We also said in Committee that there is already an element of compulsion in the pension system. Everyone, apart from the lowest paid, must pay national insurance contributions, giving entitlement to the basic state retirement pension. For employees, national insurance contributions provide entitlement to the state earnings-related pension. Those employees who choose to make an equivalent arrangement through joining a contracted out occupational pension scheme or an appropriate pension scheme receive a rebate of their national insurance contributions or pay contributions at a lower rate to reflect the SERPS benefits they have given up.
I am sure that your Lordships would agree that the current compulsory pension system—that is, for those who are employees above LEL—has many strengths. But the fact remains that for a number of reasons it does not ensure a decent pension for all employees. The basic state pension has a lower value in real terms than when SERPS was introduced. SERPS has been cut back severely from its original design. Labour market changes mean that many people tend to contribute over shorter periods, and because it is earnings-related—a point discussed fully earlier this evening—SERPS gives the smallest benefits to the lowest earners. Therefore, they take the poverty of their working lives into their old age.
When we embarked on our review of the pensions system we seriously considered whether increasing the level of compulsory saving was the most appropriate response. We think now that it is not. To make the lowest paid save more will do little to improve their final pension and will place a considerable extra burden on their already stretched finances. To force moderate earners to save more in a pension would not necessarily lead them to save more overall; they would possibly save less in other forms.
Higher earners—those who are well up into the stakeholder range and beyond—already contribute enough into the state system to lift them well clear of the minimum income guarantee in retirement. Two-thirds of those earning over £15,000 a year already save an extra 5 per cent of earnings in occupational or personal pension arrangements without any additional compulsion; in other words, compulsion would be necessary precisely for those people who can least afford to make pension contributions. Compulsion is not a panacea.
Our new proposed framework, in particular the new state second pension, will ensure that the lowest earners receive much more help. We shall bring carers and some disabled people into the state second pension for the first time without any additional compulsion. We must also increase awareness of the need for 126 pensions. People need to understand what kind of retirement income they can expect and how any additional quite modest extra saving, provided it is begun sufficiently early in working life, can make a useful addition. That is why we propose that everyone should receive an annual statement of the pensions that they have currently accumulated, both state and private, and what those pensions are likely to be worth when they retire.
To return to the amendment, I understand the concerns behind my noble friend's proposal to increase the level of compulsory savings by stakeholder pension scheme members, but I also note that quizzical eyebrows have been raised by the noble Lord, Lord Goodhart. I am rather intrigued as to why my noble friend has not proposed that membership of the employers' designated scheme should be compulsory for employees. To impose a minimum level of contribution on those who have joined a scheme voluntarily may possibly be a strong incentive not to join the scheme at all. I am sure that that is not what my noble friend intends. However, I am sure that we share the same objectives. Where we differ is in the best way to achieve them. We believe that the state second pension, with as much attraction as possible of those currently not covered—the self-employed—into the stakeholder scheme, may be the best way to extend coverage, which is what this is all about.
The amendment also provides for a minimum payment from the employer. We have said before that we see an important role for employers in their employees' pension provision. Many firms, particularly larger ones, already make valuable contributions to occupational schemes and in some cases to group personal pensions. However, stakeholder pensions are aimed primarily at those who are not fortunate enough to have access to an employer's scheme. They are intended to help those on moderate earnings—those in the £9,000 or £10,000 to £20,000 range—build up a funded second-tier pension. If they are to succeed in meeting our objectives we need to make them attractive to employers as well as employees.
Clause 3 of this Bill will require employers to offer access to a stakeholder pension scheme for those employees who are not offered an occupational scheme. This will be an additional responsibility on employers but we believe that it is reasonable. As we have made clear, we shall take steps to minimise the burden of that responsibility. But to go further and require employers to contribute to their employees' stakeholder pension schemes would be unreasonable. There would be a significant extra new cost for employers and the benefits to lower paid employees—those most in need of help—would be small. They are the ones who would normally come within the state second pension. We do not believe that it is appropriate to require employers to contribute more than they already do via the national insurance system.
We shall evaluate the effect of our proposed reforms, but we are not convinced that additional compulsory saving by employees, or compulsion on employers to contribute, is the best way to address the 127 challenges that we face. Therefore, I hope that in the light of my response tonight my noble friend will feel able to withdraw her amendment.
§ Baroness Turner of Camden
My Lords, I thank the Minister for that contribution although I am not terribly happy with it. As she said earlier, the stakeholder scheme is intended for those situations in which the people concerned do not have access to an occupational scheme. That means that the employer is not at present making any payment to the scheme or pension provision of his employees.
The amendment was drafted specifically not to have immediate effect but to provide that,regulations may prescribe that, when a designated scheme has been agreed, the employer and the employee members shall each have the obligation to make at least minimum payments into the scheme".In other words, it was intended to indicate that when there was a scheme the employer would have in sight the possibility that when the regulations were in effect he would have to make some contribution towards it.
We are not just talking about the very low earners. I still believe that many people will not be willing necessarily to put aside enough money for a reasonable pension even if they are not earning at the lowest level. Often people are asked to contribute to a pension when there are other calls upon their income: they are bringing up children or paying off the mortgage, and so on. Pension contributions are usually the last thing they think about. I believe that some measure of compulsion on both sides will be necessary if the scheme is to work properly.
However, I suspect that it is not a good idea to call a vote on the issue at this time of the evening. I am not happy with the response received. I hope that as matters progress and, as indicated earlier, the Government have not entirely dismissed the notion of compulsion. As matters progress, it may become necessary for the Government to consider again the provisions made. In that case, perhaps they will again consider the possibility of compelling both sides in industry to make a contribution. In the circumstances, I shall not call a vote at this stage. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 4 [Obtaining information with respect to compliance with section 3]:
Lord McIntosh of Haringey moved Amendment No. 32:
Page 4, line 29, at end insert (", or
§ Clause 5 [Powers of inspection for securing compliance with section 3]:
Lord McIntosh of Haringey moved Amendment No. 33:
Page 5, line 3, after ("3") insert ("or corresponding Northern Ireland legislation"). On Question, amendment agreed to.
§ Schedule 1 [Application of 1993 and 1995 Acts to registered schemes]:
Lord McIntosh of Haringey moved Amendments Nos. 34 to 38:
Page 89, line 22, at end insert ("to (13)").
Page 89, line 25, at end insert ("except subsection (3)").
Page 89, line 28, leave out from ("91") to end of line and insert (", 92 and 94 (assignment and forfeiture etc.) except section 91(5)(d);").
Page 89, line 29, leave out ("96") and insert ("96(2)(c)").
Page 90, line 18, leave out from first ("to") to end of line 19 and insert (", or to any subsection of, section 1 or 2 includes a reference to any provision in force in Northern Ireland corresponding to that section or (as the case may be) that subsection; and the reference in sub-paragraph (1) to any pension scheme includes a personal pension scheme (as well as an occupational scheme) within the meaning of the Pension Schemes (Northern Ireland) Act 1993.").
§ Clause 7 [Reduced rates of contributions etc: power to specify different percentages]:
§ [Amendment No. 39 not moved.]
§ Clause 9 [Monitoring of employers' payments to personal pension schemes]:
Lord McIntosh of Haringey moved Amendment No. 40:
Page 11, line 10, at end insert—
("( ) References in this section to, or to any provision of, section 111A include references to corresponding provisions of Northern Ireland legislation; and in this section as it has effect in relation to those corresponding provisions, "employee" and "employer" have the meaning they have for the purposes of those provisions."").
Baroness Turner of Camden moved Amendment No. 41:
After Clause 10, insert the following new clause—