 House of Commons |
Session 2007 - 08 Publications on the internet General Committee Debates Pensions Bill |
Pensions Bill |
The Committee consisted of the following Members:Mark Hutton, Committee
Clerk
† attended the
Committee
WitnessesStephen
Haddrill, Director General, Association of British
Insurers
Joanne
Segars, Chief Executive, National Association of Pension
Funds
Dick
Saunders, Chief Executive, Investment Management
Association
The
People’s Pension
Commission:
Christina
Barnes, Director of Pensions Policy, Equality and Human Rights
Commission
Sally West,
Policy Manager, Age
Concern
Nigel
Stanley, Head of Campaigns and Communications,
TUC
Mervyn
Kohler, Special Adviser, Help the
Aged
Doug
Taylor, Personal Finance Campaign Leader,
Which?
Public Bill CommitteeTuesday 15 January 2008(Afternoon)[Janet Anderson in the Chair]Pensions BillWritten Evidence to be reported to the HousePE 01
TUC
PE 02 Fidelity
International
PE 03
Which?
PE 04
AIFA
PE 05
AEGON
PE 06
IMA
PE 07
NAPF
PE 08 Equality and Human
Rights Commission
PE 09 Help
the Aged
PE 10
EEF
PE 11
ABI
PE 12 Age
Concern
PE 12a Age Concern
(Annex)
PE 13
ACA
PE 14 Legal and
General
PE 15
GMB
PE 16 International Finance
Data
Services
4
pm
The
Committee deliberated in
private.
4.3
pm
On
resuming—
The
Chairman:
Good afternoon. Welcome to this oral evidence
session on the Pensions Bill. May I welcome Mr. Stephen
Haddrill, director general of the Association of British Insurers,
Joanne Segars, chief executive of the National Association of Pension
Funds, and Mr. Dick Saunders, chief executive of the
Investment Management Association? I warn you that the session will
have to finish at 5.10 pm on the dot, but I will try not to cut any of
you off in mid-flow. I shall call the Minister
first.
Q
2929
The
Minister for Pensions Reform (Mr. Mike
O'Brien):
I welcome you to the Chair, Mrs.
Anderson. I will begin by asking Joanne Segars a question. How do we
ensure that automatic enrolment best targets those who are currently
without pension
provision?
Joanne
Segars:
One of the ways in which we can make sure
that personal accounts are adequately targeted is by ensuring that the
Bill is crystal clear on this point. One of the things that we would
like to see is an amendment to the Bill that, where we are talking
about the Personal Accounts Delivery Authority’s
principles, makes it absolutely clear that PADA is focusing personal
accounts on those who currently have no pension
provision.
Q
30
Mr.
O'Brien:
In terms of pension provision more broadly, the
aim, obviously, is that people should go to not just personal accounts,
but other types of pension schemes. The aim of
personal accounts is to complement, rather than to compete with,
existing pension provision. Therefore, how do we ensure that other
pension schemes, such as some of the ones that you represent, are able
to access those who are currently without
provision?
Joanne
Segars:
As you know, NAPF has been a strong supporter
of auto-enrolment. Many of our member schemes already adopt
auto-enrolment. Those that do not—75 per cent.—will need
to make changes as a result of auto-enrolment in the personal account
process. Schemes seem to be well geared up for that. We think that one
of the things that could make sure that those schemes are still around
in 2012 is pursuing the package of simplification and deregulation
measures that you have started to bring
forward.
Q
31
Mr.
Nigel Waterson (Eastbourne) (Con): May I just follow up
that question by putting a similar question to Stephen Haddrill? More
specifically, what kind of measures do you think should be in the Bill
to minimise the erosion of existing provision, particularly to avoid
the worst case scenario painted recently by the Pensions Policy
Institute about the levelling down of existing
provision?
Stephen
Haddrill:
First, on the point about levelling down,
there is going to be a risk of levelling down the more an employer has
to decide and the more complex that decision is. If employers face a
situation where, for instance, they are potentially going to end up
with an existing pension scheme and having to set up a personal
account, they are going to think quite hard about whether they want to
carry on with an existing pension scheme that has a higher level of
pension contribution from the employer than the personal account will
do. We think that that kind of simplicity will mean that employers will
keep their existing provision. At the moment, we have about 100,000
group personal pensions provided by the insurance industry, and the
average employer contribution into those schemes is 6 per cent. There
is £900 million going into those schemes every year, so that is
an awful lot to lose if it is levelled down to a 3 per cent. personal
account. That is very
important.
If you
will forgive me for going on for a second, the other issue is whether
the personal account system is going to remain targeted at the people
it is really designed for—those who do not have any pension
provision at the moment and are on low to middle incomes—or it
is going to draw in, as I am afraid that stakeholder did, a much
better-off and more affluent person? Money speaks, and we fear then
that personal accounts will get delivered for the people with more
money. That is why we do not like the idea of high levels of
contribution being allowed during the year—the Minister has
given assurances on that, but we do not see that £3,600 figure
on the cap actually on the face of the Bill. We would much prefer that
to be in the Bill.
We do not see anything about
transfers in from other schemes on the face of the Bill in terms of
them being stopped, which is what we would like to see. I think that we
should also be very cautious indeed about random lump-sum
contributions—in fact, not allow them—into these schemes,
because they will not be matched by an employer contribution and they
will not necessarily be the right thing to do. This is an advice-free
zone—rightly, we think, because of the cost—so people
will be making mistakes, and, in 20 years’ time, liabilities
will be laid at the door of the Government as a result. Rather a long
list, I am afraid, but the points are
important.
Q
32
Mr.
Waterson:
Can I just follow up on one point? Going back to
group personal pension schemes, what is your preferred solution to the
problem? Joanne and Dick might also want to have a go at this. What do
you think that we should do about what everyone acknowledges is a
problem because of European
legislation?
Stephen
Haddrill:
The problem arises from European
legislation—you are quite right. We think that the best
possible solution is to persuade the European
Commission and our partners in Europe to change the legislation. We
think that the Government should strenuously pursue that because the
European legislation was designed to promote a single
market—cross-border trade. This has nothing to do with
cross-border trade, and while the Government have a difficulty in that
probably no other member state has this problem, that should, I think,
be taken as an advantage, since no other member state would necessarily
oppose what we want to do here. I therefore think that vigorous pursuit
of that is very
important.
Beyond
that, the insurance industry does pursue what we call streamlined
joining—techniques to encourage people to join a group personal
pension through an e-joining mechanism, through face-to-face joining
being arranged by the provider, and so on—with simplified forms
and simplified letters. We get a high level of take-up when that is
done by the companies, so we feel that streamlined joining should be
allowed. Where that is taking place, the employer should have an
exemption from having to set up a personal account, which would bring
in complexity and the likelihood of levelling
down.
Joanne
Segars:
We do. We agree with the ABI and, I think,
with the Investment Management Association, that the preferred
solution would be to sort this problem out through a change in European
legislation. In the absence of that, we take a different view from the
ABI. Our preferred solution is that auto-enrolment
should, as nearly as possible, apply to group personal pensions and
workplace personal pensions. We do not believe there should be an
exemption for workplace personal pensions—we believe that that
would undermine the principle of auto-enrolment that is at the heart of
these reforms, and on which the success of personal accounts really
depends. It would create an uneven regulatory and cost playing field
between occupational pensions—whether defined-benefit or
defined-contribution pensions—and workplace personal pensions.
The cost of auto-enrolment to occupational pension schemes is between
£1 billion and £2 billion a year.
We are also slightly unclear as
to how some of the solutions around streamlined joining—which,
as I understand it, is by no means universally applied by the insurance
companies—would work in practice combined with targets. We
believe a better solution lies in requiring employers to auto-enrol in
workplace personal pensions through a system of master trusts. We
believe that that is feasible, affordable and
workable.
Dick
Saunders:
I would support what Stephen has said on
this. Clearly, the best solution would be to negotiate an acceptable
outcome in Brussels. This is, quite clearly, an unintended consequence
of the directive. Between the two alternatives, I think it is very easy
to underestimate the cost to the financial services industry of
imposing a so-called master trust system. I think that that would need
to be thought through very carefully indeed. It is not just the life
insurance industry that would face those costs, but the fund management
industry as well. Bear in mind that what we have here is, in essence, a
transitional problem. It will not be a problem for anybody joining a
scheme after 2012 because it will be impossible to incorporate it into
their contract of employment. Assuming we cannot negotiate a solution
in Europe, I would suggest that some kind of short-term, flexible,
transitional remedy, perhaps based around streamlined joining, would be
the way
forward.
Q
34
Ms
Dawn Butler (Brent, South) (Lab): Could you explain
whether your industry would benefit from auto-enrolment, and how can we
build confidence in
investment?
Dick
Saunders:
The principal beneficiaries from
auto-enrolment will be the individuals who find themselves building
significant pension pots over time. Clearly, the investment management
industry will have a role in managing those assets, but relative to
their existing
business—
The
Chairman:
There is a Division in the Chamber. I will
suspend the sitting for 15 minutes to enable Members to vote. We do not
regain that time, so we will still need to finish this session at 5.10
pm.
4.14
pm
Sitting
suspended for a Division in the
House.
4.29
pm
On
resuming—
The
Chairman:
Mr. Saunders, our apologies for that
interruption. Would you like to complete your
answer?
Dick
Saunders:
The question was whether the industry would
benefit from the provisions in the
Bill.
Clearly the
investment management industry, or a part of the investment management
industry, would get the job of managing the money here, but in terms of
its significance to the industry as a whole, it would be pretty small
in relation to the fact that the UK asset management industry now looks
after £3,000 billion. This would be nothing like that amount,
and what is more—and rightly—the management fees on the
mandates to look after the personal accounts money would be very modest
indeed. Indeed, that is one of the
purposes of personal accounts. So while business for the investment
management industry would come out of this scheme, it would certainly
not be something of huge significance to the
industry.
Q
35
Mr.
Jackson:
May I bring up an issue that I
raised in the previous evidence session and which relates to clause 10
and employers duties? With regard to the significant increase in the
current regulatory impact assessment costs from last year’s,
have you been involved in the development of cost projections in those
latest impact assessment and are you confident that the
Government’s latest cost projections are
accurate?
4.30
pm
Stephen
Haddrill:
We have not been involved in the latest
cost projections, particularly in relation to the costs falling on the
employer. We have had discussions with the Department about some of the
costs that we have just talked about, such as the costs of converting a
group personal pension into something else, which we regard as
significant. Earlier, we were heavily involved in trying to assess what
was an acceptable cost for a personal account to be charged out at, but
that has been the limit of our
involvement.
Joanne
Segars:
We have not been involved in those
discussions on cost
projections.
Q
36
Andrew
Selous (South-West Bedfordshire) (Con):
May I ask what your views are on the issue of possible future legal
liability in relation to generic financial advice? We have obviously
just been through the saga of the 125,000 to 140,000 people whose
occupational schemes collapsed, and prior to that there were various
legal challenges about how much they were able to rely on information
put out at the time about those pension schemes. What is your view on
the possibility of problems in that area, should people save and
believe that the generic financial advice that they were given was
wrong, perhaps because they do not benefit through the loss of other
means-tested
benefits?
Dick
Saunders:
I am not in a position to comment on the
issue of legal liability. However, the issue of means testing is an
important one, but one that needs to be kept in
perspective. When you hear some commentators on the Bill, you would get
the impression that anyone going into the scheme would be no better
off, and indeed possibly would be worse off, as a result. All the
analysis that has been done suggests that that is far from the case. I
shall just give one example: on Second Reading, the question was asked,
“Would you advise someone earning £16,000 a year to save
in this scheme?” If you look at the numbers, someone earning
£16,000 a year would have to pay £8.46 a week of their
own money into the scheme. If they did that for 40 years at that level,
they would end up with a pension pot of around £100,000, which
would pay for an income for life of about £100 a week and which
I would suggest is not a bad return for £8 a week.
Having said that, there are
clearly some areas where the interaction between means-tested state
benefits and personal accounts or any other form of savings is more
complex. I believe that there are relatively limited areas, but think
it is important that more analysis should be done by the Department
about where those problems are going to arise. If problems do arise,
the way to fix
them is through the benefits system. To postpone or abandon personal
accounts as a result of those kind of problems would be a
mistake.
Joanne
Segars:
From NAPF’s perspective, we very much
agree that the issue of generic financial advice and the ability of
consumers to depend on that links closely to the issue of means-tested
benefits. I agree with Dick that it is important to get some
perspective. There are clearly many millions of people who will benefit
from the introduction of personal accounts, and we really should not
lose sight of that in our very important discussions on means-tested
benefits. It is important that we use the time between now and 2012 to
look for a solution to means-tested benefits and ensure that we
minimise—we will never be able eradicate the
problem—those who will potentially lose out, through
means-tested benefits, by saving in a personal account. There are a lot
of interesting options on the table, and we need to work to explore
some of them and work with Government and across all parties to find
solutions to the
problems.
Stephen
Haddrill:
I think that the best
protection against legal liability is to keep the scheme simple, so
that people really know what they are getting into. That is why, as I
was saying earlier, I feel that it is absolutely important that any
contribution that is allowed in can be matched by an employer
contribution. That should make it suitable for most people. If you
allow in other, random, lump-sum contributions, they will not
necessarily be suitable and people will possibly have cause for
argument down the track. Whatever you manage to put in the Bill and in
law, we know that if things go wrong, you get political pressure and
liability on the Government for a non-legal reason at the end of the
day.
Q
37
Paul
Rowen (Rochdale) (LD): Will the group expand a little on
some of the submissions that you have made on the effects of personal
accounts on existing pension schemes? I know that concerns have been
raised about the proposed contribution limit and whether things can
transfer, and whether that will lead to a levelling down of existing
pension schemes. What evidence do you have that that is likely to
occur?
Stephen
Haddrill:
We think that there is a risk of that,
because if the employer is forced into a position of having to reassess
its existing situation, a number of things will happen. First,
employers will not want to overcomplicate their lives, so they will not
want to run an extra, new personal account alongside an existing thing.
The chances are that in those circumstances they will go for a personal
account, and personal accounts have an employer contribution of half
what is typical in insured systems. There is a big risk
there.
We also
dispute some of the Department for Work and Pensions
evidence on levelling down. My understanding is that, when employers
were polled on that subject, the polling was directed at human
resources departments. Our anecdotal evidence is that if you ask the
finance director, you get a rather different answer about how they
might look to the
future.
Joanne
Segars:
We undertook some analysis in 2006 that has
since been corroborated by the Pensions Policy Institute. It showed
that the effect of levelling down could be quite significant in the
occupational pension scheme sector. Where that bites is on
auto-enrolment. The costs to employers who sponsor occupational
pension schemes of auto-enrolling employees into them at existing rates
would be, as I said, between £1 billion and £2 billion a
year.
It is
important to recognise that auto-enrolment remains a minority sport in
occupational pension provision, so the number of employers that will
have to amend their schemes to accept auto-enrolment is quite
significant. The costs associated with that, for having additional
people coming in with additional contributions—the typical
employer contribution to a defined benefit scheme is 16 per
cent.—are quite significant. At that point, employers may say,
“Well, this is all a bit too rich for our blood.” It is
therefore important that, as well as designing personal accounts and
the auto-enrolment process, you ensure that there are protections on
transfers, although we take a slightly more flexible position than the
ABI, and on low contribution ceilings. There must also be incentives
for employers to keep their existing occupational pension schemes going
with the package of deregulation measures that is also in the
Bill.
Dick
Saunders:
It is very important to keep this one in
perspective. Very interesting charts and numbers were produced by the
Department for Work and Pensions in its 2006 White Paper, which
examined the 18.6 million employees in the private sector. Of those
18.6 million, 12.4 million—about two thirds—are in no
occupational pension scheme, and would therefore benefit from levelling
up under personal accounts. Another 1.9 million are in schemes, but the
employer contribution is less than 3 per cent., so those 1.9 million
would also benefit from levelling up under personal accounts. It is
only the balance—4.3 million, less than 25 per cent. of private
sector employees—who are currently in a scheme in which the
employer pays more than 3 per cent. contributions and are therefore at
risk from the sort of levelling down that has been discussed. While I
think that with such schemes one should avoid levelling down at all
costs, if possible, let us not forget that the vast majority of people
will benefit from
this.
Q
38
Mr.
Jim Cunningham (Coventry, South) (Lab): For clarification,
do you support the Bill? If so, why?
Stephen
Haddrill:
We do support the Bill, and we think that
the basic proposal from the Pensions Commission and the way in which
the Government have taken it forward deserves support. At heart, it
produces a simple pension scheme that everyone should reasonably be
able to understand. It brings money into pension saving, where there is
an enormous great hole at the moment, as Dick’s numbers have
shown. It is a way of energising pension saving in this country. Where
we do not support the Bill is at the interface with the existing
provision, which is very important—that has to be got
right—and, related to that, if there is a temptation to
overcomplicate it, because that is where things will start to fall
apart.
Joanne
Segars:
Again, the NAPF has been a strong
supporter of the pensions reform process. We think
that the building blocks of auto enrolment with mandatory employer
contributions are the right framework, coupled with low-cost personal
accounts. We hope it will be the start of a continuing process of
deregulation for existing workplace pension provision, and we think
that the package is quite a powerful one, which should see a
real
step change in pensions saving and the number of people retiring with
good workplace pensions in the
UK.
Dick
Saunders:
We have supported the proposals from the
beginning. The reason is that people have become
increasingly cynical about whether they can look to the state to
provide for their long-term retirement provision. We are seeing a trend
of large companies and employers quite properly, under forces coming
from the market, backing away from occupational pension provision.
People will increasingly have to be helped to make their own provision
for retirement and the Bill is an important first step in that
process.
Q
39
Miss
Julie Kirkbride (Bromsgrove) (Con): Mr.
Haddrill, you said that you were less supportive of the Bill because
you were frightened of it being overcomplicated. Will you give us an
idea of what you have in
mind?
Stephen
Haddrill:
It is things like being able to put in
extra contributions above what is matched by your employer. If that
does not earn a satisfactory return for you, as you see it, in the
future, that sort of thing will lead to potential reputational damage.
The other point is one that we have already talked about: it has to be
as clear as possible where people stand on the interface with means
testing. If that is not reasonably clear, and word on the street gets
out—however fair or unfair—that it is not a good bet,
people will not go near it. We need clarity, we need a simple offer and
it needs to do what it says on the tin.
Q
40
Miss
Kirkbride:
The interface with the benefits system is
another point that I was going to pick up. While I completely agree
with all three of you that that issue can be overestimated, many
millions of people would benefit from this. However, as we all know in
politics, it is the ones who do not benefit who complain. There clearly
will be a group of people, Mr. Saunders, because 40 years is
a long time. In the mean time, many people with a working life span of
10 or 15 years could find themselves paying in and not receiving what
they consider to be a benefit because of the interaction with the
benefit system. Ms Segars mentioned that there are schemes that could
right that potential wrong. Can you give us a bit more of a flavour of
what they might be and whether they should be in the Bill before it
proceeds, or whether this issue could be dealt with afterwards by the
Department for Work and Pensions fiddling with benefit requirement
levels?
4.45
pm
Joanne
Segars:
Some examples are the
PPI’s suggestion of a disregard for the first £12,000,
the suggestions about trivial commutation, the Swedish system, in which
pension income is disregarded when setting eligibility for means-tested
benefits, and the suggestion about the refund of contributions. They
all need examining, and whatever the solution, they need to apply
across the piece to pensions, not just to personal accounts, which
clearly carries a cost. All the issues need to be looked at and
thoroughly analysed. We have great respect for our colleagues in the
DWP, and we work closely with them, but it would be a tall order to
expect the work to be done before the Bill’s conclusion. I am
not sure that if
we rush into decisions, it will benefit any of us, least of all those
under discussion. We must work through solutions very
carefully.
Dick
Saunders:
I very much agree. The issues are of such
complexity that they cannot be dealt with under the timetable for the
Bill. What is more, there is time. Although the scheme does not start
until 2012, it will probably be another five years before anyone has
built up significant pots to trouble the triggers in the benefits
system, so there is time to work the proposals through. That work must
start now, but it cannot be concluded now.
On the point about 40 years,
if somebody has 40 years ahead of them and you advise them that it
might not be in their interest to save in a personal account because
they might be worse off, you are asking them to make two assumptions.
The first assumption is that their life chances do not work out, they
do not pursue a full career, they are unemployed and end up on housing
benefit—there might be reason to think that that will happen to
them, I do not know. The second assumption, which I suggest is a real
gamble, is that they need to take a bet that the benefits system in 40
years’ time will look like it does today. Set against those two
huge uncertainties, I should think that for somebody with 40 years
ahead of them, the prospect of saving with an employer’s
contribution matching theirs pound for pound, when you include the tax
relief, is far and away the better bet.
Stephen
Haddrill:
If Parliament passes those measures, it is,
in a way, implicitly accepting that means-testing and benefits will
have to be kept in a framework so that the money people put into the
system, in good faith, comes out as they expect. If it does not, there
will be a thumping great row, so the issue should be explicit. All
parts of the House must recognise that that would happen, so we ought
to sign up to that idea. If we do, people will be given
confidence.
Q
42
Mr.
O'Brien:
Joanne, you went through the
options for dealing with the issue of pays to save. There are people
today who have saved for a second pension, and the pot is not large
enough and they are on pension credit. One option that has been floated
is that such people who end up on pension credit should get back all
their contribution. What would your industry’s reaction be if it
had to repay anyone who went on to pension credit, and provide, in
effect, a guaranteed investment?
Joanne
Segars:
Sorry, were you asking
me?
Joanne
Segars:
That is one reason why all the issues must be
considered, not just from the perspective of the potential recipient of
means-tested benefits, but from the perspective of
workability—whether it is possible to unwind the contributions
of somebody who has saved for 40 years in a defined-benefit pension
scheme and might still be on means-tested benefits. There are a number
of people like that.
Q
43
Mr.
O'Brien:
With respect, that is not the question I am
asking. I understand that point. You have made it very well and I agree
with the point you have made. I am asking what the likely reaction is
of people in your industry to the suggestion that the contribution that
people have made would have to be repaid from the pension fund. What
effect would that have on the pension funds that you
operate?
Dick
Saunders:
We would need to look at that rather more
closely, but an immediate reaction is that it would introduce a
liability to the fund that would need to be hedged in some way, and a
cost would be attached to doing that hedging. If one is looking at a
return of contributions over a long period, because the risk of having
lost money over that period would be so small, the cost of the hedge
would, I guess, be quite low. If you are looking at it over a shorter
period, the cost of the hedge might be a bit higher, but we would need
to see slightly more detailed proposals and be able to analyse them a
little before I could give you a definitive
answer.
Stephen
Haddrill:
I do not think that paying money back is a
very happy way forward, frankly. If we can find a better solution, we
should.
Q
44
Mr.
John Greenway (Ryedale) (Con): You gave us sums relating
to the number of people in the private sector who are in
schemes—6.2 million. How many of those people—you might
not have the figure, but it would be useful if you did—are in
workplace group personal pension schemes? Do you have that
figure?
Dick
Saunders:
I do not, but as they are Department for
Work and Pensions figures, the Minister might have his
sources.
Q
45
Mr.
Greenway:
I just wondered how big a problem that was,
because the question that I really wanted to ask you was this. In terms
of discouraging levelling down and encouraging employers to continue
with arrangements that they have, resolving this issue is a major
challenge. A number of the memorandums that we have received have
talked about potentially resolving it through a master trust. It would
be helpful to the Committee—it would certainly be helpful to
me—if someone could explain how that would work and how we would
need to amend the Bill to make that possible.
Stephen
Haddrill:
We do not think it does work. In our group
personal pensions, we have about 2.6 million
employees.
Joanne
Segars:
I would be very happy to submit the
memorandum that we have prepared on this specific issue to the
Committee.
Q
46
Mr.
Greenway:
I think that we have to finish this Committee
stage with some clear idea of how we resolve the issue. There is
agreement across the Committee that it is a problem that needs to be
solved. If we can solve it, we remove one of the temptations for
employers suddenly to say, “Well, if I’ve got to change
anyway, why don’t I give them all 3 per cent.?” Do you
all perceive that to be the case?
Dick
Saunders:
As I understand it, and I look to Stephen
for confirmation here, the master trust is something that would sit
inside the pension provider—the life company or
whoever—and its existence would not have a major impact one way
or another on the
employer.
Joanne
Segars:
That is right. I will happily send the
Committee the memorandum that we have prepared, but from the
employer’s perspective, they simply pay the money over to the
insurer, so from their perspective and, indeed, from the
member’s perspective, there is really no
difference—[Interruption.] Or the fund manager’s
perspective. There is really not a huge amount of difference. It is a
legal entity that sits within the insurance company. Insurance
companies have run master trusts in the past. Many of them still have
master trusts. They might not be actively selling the products, but
they still exist within insurance
companies.
Stephen
Haddrill:
We do believe it is seen
by the employer and, indeed, by the employee. Apart from anything else,
a trust-based scheme is regulated by a different regulator from a
contract-based scheme. That means that things like the letters that go
out are written in a different way. That also applies to the
information that is provided and so on. There are a number of visible
differences. We also have different IT platforms for different sorts of
provision, so there are costs involved in that. Given that we are
talking about 100,000 schemes, you only need it to cost £1,000
per scheme to do the conversion and you are starting to rack up quite a
lot of money across the industry as a
whole.
Q
47
The
Parliamentary Under-Secretary of State for Work and Pensions
(Mr. James Plaskitt):
You have all spoken about
the potential for millions of people to gain from these personal
schemes. What key factors do you each think have to be in place to
ensure maximum consumer confidence in pension schemes that have a
statutory
foundation?
Dick
Saunders:
The first one is independent governance. It
has to be seen that the trust board is running the schemes not at the
behest of the Government or any other state institution, but
independently, in the interests of members. I think that that is the
fundamental safeguard for
members.
Joanne
Segars:
I very much agree with Dick on the point
about independent governance and something that is, or is seen to be,
at arm’s length from Government. Also, simplicity is absolutely
key so that people know that they are paying in their money, get a very
clear statement, and—we have talked about means-tested
benefits—can get some clear messages that it is actually going
to pay to
save.
Stephen
Haddrill:
That is absolutely right. The level of
financial literacy is important—that is another underpinning
factor—and, wherever possible, if we can achieve it, a positive
endorsement from the employer would be very good
news.
Q
48
Nick
Ainger (Carmarthen, West and South Pembrokeshire) (Lab):
Coming back to the point that John Greenway made, I, and I am sure
other members of the Committee, would welcome any thoughts that you
have on how the unintended consequence of the
schemes—the risk of the schemes—could be reduced.
Mr. Haddrill referred to the risk of the levelling down of
the schemes that currently cover 4.2 million people. You will never get
rid of the risk, but you can certainly reduce
it.
Can I ask you
some questions about the self-employed? They will not be covered by the
scheme, but they will be able to opt in. You are part of an industry
that is famed for its marketing. If you have not been able to encourage
somebody who is self-employed—not necessarily on a particularly
high income—to take out a personal pension plan, how do you
think that the opt-in will work? Do you know how many self-employed
people do not have a personal pension
plan?
Stephen
Haddrill:
I do not know that figure. I actually do
not think that this is going to work for the self-employed. Without a
clear employer contribution sitting alongside it, I think that it is
going to be quite hard to convince people that it is what they should
do. I also think that the self-employed tend to think of their business
as their pension, so there is a big cultural thing to get over there,
but perhaps I am being
pessimistic.
Joanne
Segars:
I tend to agree with you. I think that
pension provision for the self-employed has been a concern for many
years. I am not sure that personal accounts will address that in quite
the way they will for employees. I think that perhaps there are
different routes into tackling pension provision among the
self-employed than through personal accounts. Perhaps Her
Majesty’s Revenue and Customs, the Small Business Service and
other routes through which the Government reach the self-employed could
be one of the solutions. It is a very difficult problem that has been
wrestled with for many
years.
Dick
Saunders:
I
agree.
Q
49
Nick
Ainger:
Have you any idea of how many people we are
talking about—those who are self-employed and have not got a
pension plan? As you say, they might be dependent on selling their
business on when they want to retire and on that providing them with a
pot for their
pension.
Joanne
Segars:
There are figures available, but I am afraid
that I cannot remember them off the top of my
head.
Q
50
Andrew
Selous:
Two brief questions, if I may. First, I would be
interested in your estimates of the additional amount of net pension
saving that we will have overall as a result of personal
accounts—if you are prepared to hazard a figure, even a ballpark
one would be
useful.
Secondly, can
I take you back to the point about the European Union and workplace and
personal pensions? You said that this was an issue that applied to only
the UK. Are there examples in the recent past where the Government have
gone into battle with the EU, perhaps on some issue of City regulation,
and have come back with a result? You seem to be indicating that
perhaps with a bit of oomph the Government might be able to achieve a
result here? Would that be a fair summary of your views?
Stephen
Haddrill:
Yes. I think that, unfortunately, quite a
lot of the examples where the Government have achieved things against
the flow, so to speak, are where
they have stopped something rather than initiating something. I agree
that that is a bit more difficult. We have spoken to the European
Commission, which feels that the Government’s interpretation of
the existing directive is correct. From what I have heard, the
Commission would not necessarily be in a great rush to take us to court
if we took a more liberal definition.
The real risk is that an
individual will take the Government or somebody to court, and whatever
the Government want to do, they cannot protect against that, so we
could end up in the European Court of Justice anyway, which we want to
avoid. That is why we must try to get the Commission to do something,
rather than just doing a sort of Italian job on
this.
5
pm
Dick
Saunders:
May I respond to Mr. Selous
first? Our central estimate is that about £10 billion a year
will go into this scheme, which sounds a lot of money but to put it
into perspective it is about what will be invested in retail mutual
funds this year. There may be some offset to that number from levelling
down, but my guess is that it would be a lot less than £10
billion, so there will be a net gain. I do not know whether Joanne
would agree with that.
Joanne
Segars:
There will undoubtedly be a net gain. There
will be some levelling down; the challenge is to keep that at the
margins and to make sure that there is not a flood of employers exiting
from good, workplace personal pension provision or from good
occupational pension provision.
Mr.
Waterson:
One of the themes that comes through strongly in
most of the submissions from the industry is the concern about a level
playing field and the lack of public subsidy for the personal accounts
system. Do any or all of you want to expand a bit on the sort of things
you have in mind that you have spotted in the Bill so far on this
issue?
Stephen
Haddrill:
The primary one that concerns me is that
there is a power in the Bill for the Secretary of State to make loans
to the personal accounts system and to do so without necessarily
charging any interest and I cannot see why that should be the
case.
It is very
important that the system and the consumers of it—the people who
go into it—absorb the costs of it just as people who are in
other pension schemes have to absorb the costs of those pension
schemes; they get charged out. Why should someone who is in a personal
account get a taxpayer subsidy other than the basic pension subsidy
when somebody in another scheme does not? We should look all the way
through and ensure that there is no scope for that subsidy. I was
alarmed when I saw that the clause had been written in that way and I
could not understand why that was the
case.
Dick
Saunders:
Having said that, there will be a need for
finance in this scheme. We tend to talk about charges as a percentage
of funds under management, but a lot of the administration costs are
fixed; they are £10 per account or whatever. There is no
question but that in the early years, if we have the sort of low
charges that we all want to see, the scheme will be
loss-making until those funds build up and the management fees are big
enough to cover the cost and the
borrowings.
There
will be a need for the scheme to borrow in the early years to beat that
J-curve, which any business plan has. Obviously, that borrowing should
be on arm’s-length terms; I am sure the Treasury will not want
to lend to it
interest-free.
Mr.
O'Brien:
Both Stephen’s and Joanne’s
organisations have schemes that sell to employers and through them to
employees. We have discussed the issue of “it pays to
save”. What sort of information or advice do you give to
those who may buy the sort of pension scheme that is being sold
by your organisations?
Stephen
Haddrill:
It depends exactly how it is arranged, and
it will vary company by company. Certainly with a GPP, very often the
provider goes into the workplace to explain what it will involve. There
is an enormous volume of regulation, which requires a great deal of
advice to be given every year to the person in the scheme about how it
is performing and whether they are should go back into the state second
pension and so
on.
Joanne
Segars:
We have 800 member scheme sponsors sponsoring
over 1,000 workplace pension arrangements. That varies from scheme to
scheme. However, an increasing number of employers are actively engaged
in what we might call generic financial advice. Clearly in regulatory
terms that is much easier to do in the occupational pensions scheme
setting at the moment than in the contract-based setting in which
Stephen’s members operate. Our members are more engaged,
particularly where there are final contribution schemes, in offering
information to their members. They are very cautious in what they say
about state pension provision. The contributions are often much, much
higher than is available under personal accounts, which is a helpful
factor.
Q
51
Mr.
O'Brien:
Of the people with whom both your organisations
will deal, most will benefit while some will end up having to claim
pension credit. Therefore the advice they are given at the start of
that process, if it comes from your organisations, is not independent.
You are obviously regulated. Do you think that a requirement, which
might attach to personal accounts and therefore would probably have to
attach to any other pension scheme that is created, would need to be
much more developed than it is now or do you think that the current
level of regulation gives people sufficient understanding of what they
are buying to enable them to make a judgment about whether they should
invest?
Stephen
Haddrill:
Quite the contrary really. We would not
wish for the level of regulation that we have on personal accounts.
That would lead to a high level of costs, which would be unnecessary
provided the scheme is kept
simple.
Joanne
Segars:
There is a link across here to the work that
Otto Thoresen is leading on generic financial advice and the sort of
regulatory regime that he might suggest for generic financial advice
and generic financial advisers. That will be an important part of the
personal account
jigsaw.
Q
52
Mr.
Greenway:
Thank you, Chairman. This was really on the
theme that Mr. O’Brien raised. Perhaps I could just
address the issue the other way around. In fairness we all have high
hopes of the Thoresen results. In another Committee Room this morning
the Financial Services Agency told the all-party insurance group that
its retail distribution review will be leisurely in order to take
account of that. There will be an opportunity for us to look at
this.
Should not the
question that Mr. O’Brien put be the other way
around? Is there a fear from the point of view of the existing industry
that personal accounts, with their lower regulatory regime, much lower
costs and quite a number of investment vehicle opportunities—we
were told this morning by the Personal Accounts Delivery Authority that
it would be perhaps as many as a dozen or 20—will make the
existing contract-based pension products look increasingly
uncompetitive? We may be looking five or 10 years down the track, but
if that is an issue should not we address it now and is this one of the
reasons why everyone seems to be so opposed from within the industry to
additional contributions being permitted for personal account
holders?
Stephen
Haddrill:
The real reason why we do not like
additional contributions is because we think it complicates matters. We
think it will be taking money out of financial pots where people have
had advice and where they have got good investments and are putting
them in something on which they will have no advice. Can we compete is
the question. We think we have a good product. We think its features
will appeal to many people. It often has higher levels of contribution,
as I have already mentioned, and it may come with life insurance
protection of one sort or another. It is potentially a more
sophisticated product, a better product, and we are confident about it
competing.
The other
factor is that, yes, personal accounts will be low cost. Talking to
PADA recently, I think that it is coming to the view that this 0.3
mantra is the one that is going to be delivered. We always felt that it
would be closer to 0.5 or 0.6. The numbers will come out when the
numbers come out, but from our experience of running these things that
is where we think it will end up. That is where the larger GPPs come
out already, so we do not think that the gap is as great as all
that. But what we do feel is, if there is a level playing field
with no taxpayer subsidy, that we will take on the competition. That is
the sort of industry it is.
The
Chairman:
I am afraid that we now have to move on to the
next evidence session. If the witnesses want to add anything we would
welcome them writing to the Committee. Thank you very much to all three
for your evidence.
We now come
to the next oral evidence session. I welcome our five witnesses who
together make up the people’s pension commission. They are
Christina Barnes, director of pensions policy at the Commission for
Equality and Human Rights; Sally West, policy manager of Age Concern;
Nigel Stanley, head of campaigns and communications at the TUC; Mervyn
Kohler, a special
adviser at Help the Aged; and Doug Taylor, personal finance campaign
leader for Which? I warn you that there may be another Division in the
Chamber; if so, I shall suspend the sitting for 15
minutes.
Q
53
Mr.
O'Brien:
Thank you all for coming here today. May I ask
each of you briefly to say why you think it important, as you have
indicated, that the legislation is
passed?
Christina
Barnes:
The Equality and Human Rights Commission is
very supportive of the personal accounts initiative and the measures
contained in the Bill. We believe that personal accounts are vitally
important, particularly for the lower and median earners and those with
broken working lives who have not been served so far by the private and
occupational pensions industry. We think that personal accounts offer
an opportunity for the first time for those individuals to be able to
save in a low-cost employer-supported environment in a simple scheme.
That is why we support personal accounts.
Sally
West:
At Age Concern, we see many older people who do
not have a decent income in retirement who are in poverty; and we think
it really important to give younger people better opportunities to save
for retirement. We think that the principle of auto-enrolment into
personal accounts or another occupational pension scheme, and the new
personal accounts, will provide real opportunities for many people to
save for the future—and people who do not have those
opportunities at the present time.
Nigel
Stanley:
There has been a big retreat by employers
from providing good pension schemes. Big employers have become smaller
and new employers have not set up pension schemes. There has been a
market failure in terms of the industry being able to provide pensions
products to employees and savers. There is a huge pensions gap and the
Bill does a lot to close
it.
5.15
pm
Mervyn
Kohler:
A variation on a theme. People tend to
postpone thinking about their older age until it is desperately too
late to do anything helpful about it. The only good reason for doing
anything about it is if you look at the wreckage of pension schemes in
the recent past and say, “I don’t want to go
there”. This is a one-off opportunity actually to bring some
confidence back into the pension-building
industry.
Doug
Taylor:
At Which? we have for some
time recognised the need for individuals to make a higher level of
saving for their future. The difficulty was, particularly for people on
low to medium earnings, finding a vehicle that was able to deliver
that. We have been keen to see a vehicle that puts the consumer at the
heart of the decisions that it would take, that has a low charging
structure and that will deliver the highest possible benefit to them
for their contributions. We believe that the personal accounts system
could deliver
that.
Q
54
Mr.
O'Brien:
In terms of your answers, some of you have
indicated the importance of automatic enrolment. If there was an
exemption for insurance-based schemes on automatic enrolment, what
would be your view?
Nigel
Stanley:
We see that as a pretty fundamental breach
of the auto-enrolment principle, which we see as very central to the
post-Turner commission consensus. It breaks the need to keep it simple,
which I think is a good mantra from the earlier evidence session, and
makes things more complicated. Even if the vast majority of employers
operated another system in good faith, it would provide opportunities
for abuse. A threshold system would delay things as well because there
would be a time period during which the tests were being applied
regarding whether recruitment was sufficient to meet the threshold. We
are also concerned that putting a percentage as some kind of test fails
to reflect that work forces are different—80 per cent. might be
an appropriate figure for one work force, but not for somewhere else.
We see all kinds of objections to that and, like everyone else, we
rather hope that Europe can ride to the rescue and make auto-enrolment
much
easier.
Doug
Taylor:
We would concur with the position of the TUC.
On a level playing field, auto-enrolment is a key
feature for ensuring that there is a high participation rate. Indeed,
in earlier days we would have argued for compulsion rather than
auto-enrolment, but we accept that auto-enrolment is the pragmatic way
to move forward on this issue. Like the TUC, we would be concerned if
there was a different set of arrangements for GPPs from the set of
arrangements for personal
accounts.
Sally
West:
This is also about the sort
of the information we give out to people. It is going to be very
important that people understand how pensions work and that there is a
clear message that we can give to say that if you are employees in
these circumstances, you will be automatically enrolled into a pension
scheme, and it is then up to you decide whether you want to opt
out.
Christina
Barnes:
We would agree with that. I also believe that
there is evidence from the 401(k) plans in the States that
auto-enrolment can have a greater impact for women and black and
minority ethnic communities. So, losing that auto-enrolment principle
could have differential equality
impacts.
Q
55
Mr.
Waterson:
May I ask how concerned your various
organisations are about the at-risk groups identified in the work done
by the Pensions Policy Institute? What do you think should be done to
minimise the disadvantages caused to people who are auto-enrolled, but
might have been better advised to have not been
enrolled?
Mervyn
Kohler:
I strongly believe that we have got to rely
on information and advice here. It seems to me that to make assumptions
about the circumstances of different individuals is actually a cop out
when we ought to be seeking to educate individuals about their options
and making them understand a bit more about the pensions regime. I
understand the thrust of the question because I can see that there are
going to be quite a lot of people who are in perhaps the last 10 years
of their working life and have not put aside any pension funds so far.
For them, it is probably not going to be a brilliant idea actually to
go for enrolment into the new personal account scheme, but I would
rather explain that than have them exempted
unilaterally.
Sally
West:
The pay-as-you-save issue has
been coming up time and time again. It is a really important issue. We
certainly do not want people on low incomes paying into pension schemes
and then finding that they are little better off in retirement.
Similarly, we do not want some of the many people who will benefit from
paying into private pensions to be deterred because they hear some of
the debates, or because their neighbour says that it is not worth
saving. We are concerned about that because we do not want people not
to benefit from the new
scheme.
The issue is
difficult. I have spent an awful lot of time looking at it, and you
might have seen the paper that we produced with help from colleagues
here. It is one of those issues that the more they are looked at and
the more one understands how means-tested benefits work and
people’s circumstances differ, the harder it sometimes is to
think of the answer. There is not just a single answer.
I support some of the things
that previous witnesses have said, and we need a detailed debate. We
have had some discussions with DWP analysts and the Pensions Policy
Institute. Both have done a lot of work, which is a good starting
point, but we want to explore what more can be done and what modelling
can be done so that we know exactly who these people are not only at
retirement, but earlier. We would also like a detailed analysis of the
different policy options and looking at changes to means-tested
benefits, trivial commutation, and the range of things that could be
done. We need those options to be worked out with the pros and cons
because there will be trade-offs. For example, there could be a system
whereby everyone benefited from saving involving means-tested benefits,
but that might make more people reliant on means-tested benefits.
Helping the system in one way might mean that we do not achieve another
policy aim.
We have
discussed the matter with the Minister and officials, and I am
encouraged that there will be a way forward in setting up some sort of
detailed programme of looking at all the issues. We would like to be
involved in that debate, and hope that Opposition MPs want to be
involved. It is good to have a shared agenda on
this.
Q
56
Mr.
David S. Borrow (South Ribble) (Lab): It
has been suggested that we could amend the scheme to allow some
variation in the level of contributions from both employers and
employees in a risk-sharing system. I am interested in your views on
those proposals and whether there is any merit in exploring them
further.
Nigel
Stanley:
If you are referring to the proposals
that emanate mainly from the Association of
Consulting Actuaries on introducing an amendment to make it easier to
introduce a particular form of risk-sharing pension, I can respond. We
are not against risk-sharing pensions. It seems to me that there is
room for creativity, although sometimes the more creative the scheme,
the more complicated it is, so the principle of pension simplicity goes
straight out of the window. However, we are not convinced that that is
the one proposal that should have the privilege of an amendment. If
there is to be a discussion about what legislative blocks there
are to risk sharing—we are not convinced that there are
many—we think it should be a longer-term process with a much
wider debate.
The
proposal is interesting, but there is no need to have an amendment
favouring that scheme, which we think has some problems. It may be not
so much risk-sharing as risk-avoidance by employers, sometime with
employers making the judgment. We are not happy that the balance is
quite
right.
We
do not think there is an argument for the amendment at this time,
although I suspect that the issue will not go away. We are happy to
contribute to a longer-term discussion about risk-sharing, hybrid
schemes and other ways of giving employers who want to do more than DC
the opportunity to be more responsible without providing an easy way
for employers with good DB to level down to something so complicated
that staff do not understand what is happening to
them.
Mervyn
Kohler:
I agree with what Nigel has just said. The
ACA’s proposal is about trying to reduce the costs of DB schemes
by introducing the conditionally indexed pension in the same way as the
Government’s proposal in their own Bill on looking at the
indexation of deferred pensions is aimed at reducing the cost of DB
schemes. Help the Aged is far from convinced that the jury is in or out
about the future of DB schemes, based on their cost. One might even be
able to say, if the good work that will be unrolled eventually from
Otto Thoresen and others raises the awareness of pensions around the
workplace, that employers will actually up their game and offer better
pensions. To start legislating as this stage, either with the clause
that is in the Bill or with this proposal for conditionally indexed
pensions, to cut the benefits of DB schemes does not seem to me to be
the right starting place for this particular debate.
Nigel
Stanley:
There are two technical points, also. If you
have schemes like this, how will they fit into the PPF regime and how
will you work out the transfer values? These are quite complicated
issues and until we know the answers to them, I think it would be
unwise to proceed in a way that encourages
them.
Q
57
Mr.
Borrow:
Would it be correct to say that your view is that
we should introduce these schemes and get things bedded down, and that
if seven years down the track people want to discuss risk sharing and
other areas, we could look at it again once we know how the proposed
new system is actually
working?
Mervyn
Kohler:
There will always been room for invention in
this industry. The first thing that we are trying to do with these new
personal accounts is to restore the sense that it does pay to save. To
start offering people pensions where the benefits are potentially not
going to show that it has paid them to save is counterintuitive, is it
not?
Q
58
Mr.
O'Brien:
May I ask those who have not spoken on the new
risk-sharing proposal to indicate their views? Do you agree with the
TUC line on that?
Doug
Taylor:
We have done no specific research on this
issue, but it strikes me that the position that was outlined by Nigel
on behalf of the TUC seems quite sensible. While I think that we should
look at all the issues and the points that people are making, I am not
convinced that this is an area for a specific amendment.
Christina
Barnes:
I would agree with Doug and Nigel on
that.
Q
59
Mr.
Jackson:
May I ask a brief question of
everyone, although perhaps I will start by asking you, Mr.
Taylor, a specific question? Do you think that the arrangements for
consumer consultation proposed in the Bill are sufficient? That is the
first question; the next one is for all of you. Concerning the
methodology in respect of administration costs, have you been involved
in preparing projections for the administration costs of this
scheme?
Doug
Taylor:
Perhaps I can start by saying that, in terms
of the general consultation that has taken place post-Turner with
groups and consumer groups specifically, which I will refer to, I think
that the Department for Work and Pensions has been open and able to
encourage contributions to the debate so that our voice has been heard.
We have been keen for consumer representation, and with PADA there is a
consumer panel, which I think is an important feature. Moving forward,
in terms of future consumer representation in the actual trustee
co-operation, there are some issues where we would like to see debate
around specifics. If you refer to the Financial Services and Market Act
2000 or the Legal Services Act 2007, there are some specific areas that
are set up for consumer representation, including the right to
research, the right to publish and the right to have payment of members
who are on panels. It might be helpful to include some detail in the
Bill.
Moving forward
on being involved in any detailed administrative costings, we have not
been involved in the details of costings, but perhaps I should refer to
one specific issue: the charging regime that might exist for consumers.
Debate is taking place about whether there should be an annual
management charge or an upfront contribution charge. Our own view has
historically been an annual management charge, although we would be
open to consideration if it was demonstrated that other systems would
be more cost-effective for the consumer. That has been the one area
that we have expressed opinions on to date.
Q
60
Mr.
Jackson:
May I pin you down on a specific issue? You say
that you are not involved in the cost projections of administrative
costs, or have not been. Can I infer from that that you might have some
doubt as to whether the Government’s projections are accurate,
or would that not be the
case?
Doug
Taylor:
No. We started off, in a sense, from a
consumer aspiration that the costs should be kept as low as possible.
Therefore, the administration needs to be as effective and as efficient
as possible to deliver that. At the end of the day, any costs will
effectively be borne by members of the
scheme.
5.30
pm
Q
61
Mr.
Wayne David (Caerphilly) (Lab): May I refer to the issue
of compliance? It is anticipated that most employers will co-operate
fully with the scheme and great difficulties are not envisaged.
However, it is feared that a minority of employers will not be inclined
to co-operate. Therefore, we have to address the issue of how to put
that right. There are issues not only of
publicity and how to raise awareness but one of enforcement as well.
What views do you have of the pensions regulator and how we can ensure
that that body is able to fulfil its new enhanced role
successfully?
Nigel
Stanley:
Clearly, there was a debate in Government
about which was the best agency to enforce the scheme. Some argued that
it should be Her Majesty’s Revenue and Customs, and some that it
should be the Pensions Regulator. The arguments were finely balanced,
and reopening them does not seem to be terribly helpful. What is more
important is whether TPR has the resources and powers to do it properly
and whether individual employees have the rights that they need for
their own protection. The resource level is not an issue for the Bill,
but it is something that will arise. We are convinced that there is a
pretty effective compliance regime in the Bill. Obviously, we would
like it to go further in some regards, but we do not want people to
think that we do not believe that it is going to be effective.
Certainly, the proactive nature of the TPR and its ability to deal with
errant employers is important, as is the fact that all employers will
have to register their pension arrangements. The fact that people who
opt out will do so directly to PADA and not via their employer is also
very important, and the employment rights in the Bill are drawn from
equivalent employment legislation and protection, and that generally
works fairly well. Therefore, our tests will be in how it is applied.
Will TPR have enough resources and will it be proactive enough? It is a
big change in role. At the moment, it is dealing with what you might
call the responsible good employers who already have pension schemes.
Things may go badly wrong in one or two of them from time to time, and
it will have to deal with that. Indeed, we think that it does a pretty
good job at the moment. The Tennant case, which is live at the moment,
is a good example of it acting well and efficiently. The TPR will now
have to deal with many more employers, some that are at the opposite
end of the responsibility scale and some that are just a bit
disorganised. They are not evil, but just do not get round to doing
things properly and do not understand their obligations. Therefore, it
will be a test. However, that is a question of resources. I do not
think that there is a problem with the powers in the
act.
Q
62
Paul
Rowen:
I would like to ask a couple of questions. The
first is about people who are on low incomes, or means-tested benefits
or perhaps have several jobs. Several of you have raised concerns about
that. What changes would you like to see that would enable those people
on the margins to benefit from personal
pensions?
Christina
Barnes:
We have real concerns about people with
multiple jobs, and not just those with multiple jobs that do not get
over the £5,000 threshold but also those with perhaps one job
that is slightly over the threshold and one under, or those people with
two jobs that are both over the threshold. Because of the way that the
lower earnings band works, people only pay their contributions in on
their earnings that are over that £5,000 limit. We would really
like to see that issue explored further. An individual could perhaps
opt to pay in their contributions on their full earnings, and
so go right down to zero pounds under that £5,000 threshold. If
an individual opts to do that, their employer should have to match
them, which would help not just the multiple jobs issue but also those
people with a single job who are on very low earnings of up to about
£7,000 and who will only be putting in very small levels of
contributions.
Nigel
Stanley:
We agree with that. It seems to us wrong
that someone who has multiple part-time jobs with a particular income
should be treated differently for their pension arrangements from
someone with a full-time job with the same income. That is
discriminatory against part-time workers, who are mainly women. There
is a problem there. We understand that it is technically very
difficult. It is difficult to have auto-enrolment for such people, as
one employer will not know about their situation. However, the basic
problem that someone can be treated differently if their equivalent
income comes from two or three part-time jobs is wrong, and we need to
find a solution to it.
Mervyn
Kohler:
We would be looking for a tad more
flexibility in the contribution regime. In the last evidence session,
you heard a strong argument for not having flexibility, but for people
who live untidy lives, in and out of a variety of different jobs and
such things, the opportunity to put in different sums of money on a
more irregular basis when the opportunity presents itself, is
important. I know that there will be a review on that for 2017, but
that seems a long time to wait for a review of something that could
make a great deal of difference to people’s lives.
Doug
Taylor:
If I could just add, with regard to
flexibility, that when we did research with the target group, we found
that 70 per cent. of consumers felt that there should be flexibility
about how much they paid into their personal account. For us, that
raises the issue of lump-sum contributions, and the extent to which
they would or would not be permissible. In previous evidence, we heard
reasons for why they should not be permissible, but we find that
people’s lives are not linear, there are changing circumstances
and sometimes people will be in better paid jobs than at other times,
they may receive inheritances, and certainly, in so far as it is
practical, they want to amalgamate their pensions in one place. Levels
of flexibility is an issue that should be
considered.
Q
63
Nick
Ainger:
I ask this question first to Nigel
Stanley. In the previous evidence-taking session,
Stephen Haddrill, the director general of the Association of British
Insurers said that in his opinion, for the 4.3 million people currently
in occupational pensions whose employers contribute more than 3 per
cent., there was a real risk that some of those employers could start
to level down their schemes. I would guess that a significant
proportion of those 4.3 million people are represented by trade unions
in the TUC. Your paper does not touch on that issue——the
potential unintended consequence of the new schemes. Does that mean
that you do not share Mr. Haddrill’s fears, or that
you were not really aware of the matter?
Nigel
Stanley:
It was more that we did not feel able to
submit every single bit of pensions policy that we had to the
Committee, and we wanted to deal with the live issues that were causing
controversy at the time. To
address the remarks on levelling down, I think that we must accept that
one cannot introduce a new pension system without employers noticing
it. If employers are made to think about pensions, they might make
decisions about the kind of pension that they offer. There is no
technical way to stop employers levelling down if they decide to try to
do that. Frankly, the best way of stopping that was referred to in your
question, and it is to have good, strong trade union organisation in
the work place concerned. Perhaps the Committee would like to consider
that—I suspect that it may be outside the long title of the
Bill, but it is a matter of work place
power.
Mervyn earlier made the point
that we also hope that making pensions more prominent and important
will lead those good employers, who want to be employers of choice and
differentiate themselves from other employers, to value the pension
contribution. Staff will be more aware of the fact that they do this,
and we hope that there is a market incentive that goes the other way as
well. Will there be some levelling down? Of course there will be. Will
there be huge benefits for everyone who does not have access to a
pension scheme at the moment? Yes, there will. We think that the
equation is positive overall. We are very wary of those arguments that
say that you have to make personal accounts really awful to stop
employers levelling down, as that seems to be punishing the vast bulk
of people in the work force who have to rely on personal accounts. We
are wary of those arguments, although we accept the compromises that
are currently in the Bill around that point. Too many of the arguments
about levelling down seek to make personal accounts really
unattractive, so that not even miserable employers will level down to
them. That is false logic.
Q
64
Nick
Ainger:
I would not suggest that in a
million years. Surely the experience of the last few years has been
that employers that were recognised as good, including in the public
sector, have changed their pension schemes and have, in many cases,
ended final salary schemes because of the cost involved. Unfortunately,
the evidence so far is that irrespective of whether employers are good
or bad, given certain circumstances, they are likely to seek to reduce
the costs of their contributions to a scheme. Do you have any ideas
other than increasing the power of trade unions in the work place?
Other than that, are there any technical things that you think could be
introduced in the Bill to try to reduce the risk of this levelling down
threat?
Nigel
Stanley:
We have gone through a deregulatory review
and some of the proposals from that review are included in the Bill.
There are other things that I believe that the Government will do that
they do not need primary legislation for, so some technical fixes can
do this. But if employers make a business decision meaning that they
can reduce the cost of their pension scheme and not suffer any ill
consequences from that, they are quite likely to do that. So it is much
more a case of making employees value pensions more and making
employers want to differentiate themselves from other employers by
making good pension provision an important tool not just for recruiting
staff, but perhaps more importantly for retaining staff. That is the
way in which you are more likely to do
it.
Looking for
technical fixes here is a bit beside the point. There are some things
that one can do to help
and a deregulation review has looked at those, but there have been other
measures before and employers have made that calculation. One reason
why we are all sitting here today looking at a completely new
system with auto-enrolment and contingent employer contributions
is that an enormous number of employers have already levelled down or
never levelled up in the first place by starting and never offering a
good
pension.
Mervyn
Kohler:
Can I follow Nigel’s point? Long
before personal accounts were a dream in anybody’s eye,
employers were trimming their pension obligations. It is not as if
people necessarily will downsize their existing pension schemes because
there is an offer of an apparently cheaper alternative; it is probably
much more to do with a sort of yo-yo prediction of life expectancy: the
way in which FRS 17 required companies to declare their pension
obligations in a different form. If one is looking for technical fixes,
this is the area in which to look for it. If we had had a little bit
more consistency across the piece at that stage, it might not have
provided the same sort of shocks that employers respond to then
suddenly say, “I must actually downsize my pension
scheme.”
Doug
Taylor:
I should like to echo some of the points that
have been made. Clearly, there has been a levelling down from defined
benefit to defined contribution and a reduction in employer
contributions over recent years. I was struck by a survey recently on
why firms provide employees with pensions, which ranked these things in
order: first, we consider our responsibility as a good employer to make
adequate arrangements; secondly, the scheme helps us to build our image
as a caring employer; and thirdly, the scheme helps us to compete in
the labour market. In a sense, from the supply side, there is an issue
there. From the employee consumer side, there needs to be more
awareness that those things are key features when choosing an employer
and maybe that has not always been the case in the past. But I suspect
that, as pensions become a more important, significant part of the
planning process for consumers, the good employers that offer the best
schemes will have a competitive advantage in the market as far as
recruitment and retention is
concerned.
Q
65
Andrew
Selous:
I have two points to make. It would be possible at
the moment for an employer to offer a financial inducement to their
employees not to be auto-enrolled, because they might want to save
their costs. The Bill is silent on this subject at the moment. Were
that to be the case, there would not be a level playing field as far as
employers were concerned, in that the cost-base of some employers could
be significantly lower than others. Do any of you have views on that?
Is that perhaps an area that the Committee needs to examine going
forward?
Also, in
point 7.4 of the TUC contribution, there is a suggestion that
“modest pension income and lump
sums are disregarded”
as
far as means-tested benefit rules are concerned. I wonder whether Nigel
Stanley or perhaps any of our five witnesses, or even all of them,
might be prepared to put some possible figures to those two
suggestions, even if they were tentative ones at this
stage.
5.45
pm
Nigel
Stanley:
To answer the first question, about
compliance, as we understand it, the Bill will not stop an employer
offering a financial inducement to a member of staff to opt out, but
there would be nothing to stop the member of staff taking the
inducement and then not opting out, because that deal would not be
enforceable. So, “roll on the employers who want to try it
on” would be my line, because we would certainly be there
saying, “Take the money and don’t run.” I think we
are fairly satisfied on
that.
Q
66
Andrew
Selous:
May I just come back to that subject? Perhaps you
might get a savvy employee who might do that and more power to him or
her were that to be the case, but there might be others who just take
the money without really understanding the issue and think that they
have got a good deal up front, and actually they would lose out in a
significant way. Then that employer has a lower cost base and can go in
and undercut other good employers in the area. So I take your point,
but there is a serious point to my
question.
Sally
West:
That was something that we
have concerns about, because it does seem slightly odd that financial
incentives are not prohibited but they cannot be enforced. It is okay
if you have got a trade union and you have got Nigel there telling you
that, but there will be an awful lot of employees who, if their
employer says, “Oh, you know, if you opt out I will give you an
extra £500”, they will not have read the detail of the
legislation that says that that deal is not enforceable. It is really
important that information goes to both employees and employers about
rights and responsibilities in terms of the new pension provision, and
I think that it is a big challenge as to how you ensure that employees
realise their rights in that
respect.
Christina
Barnes:
It also points out the
importance of a good monitoring regime to look at opt-out rates as part
of that compliance regime, to see where there are patterns of opt-out
rates that are higher than expected and to see if you can identify
where there is a bigger risk.
Nigel
Stanley:
To give a more serious answer, the point
that I would make is that, if there was a way of introducing that into
the Bill, I think that we would support it. Our legal people seemed to
think that making such terms contractually null and void was the best
way of doing it.
I
think that I am more worried not by employers financially inducing
people, or trying to bribe them out of it, but more by a general type
of propaganda saying, “This isn’t a good idea. You
don’t want to do that. It doesn’t make sense.
Here’s a cutting from such and such newspaper that says
they’re a bad deal.” Again, outlawing that type of
propaganda is very hard, but I would hope that the regulator would have
a view about that and some codes of practice for that kind of thing;
that might be a way round that. I am more worried about the canteen
culture encouraging that propaganda than I think that I am about
obvious bribes, because clearly there is a kind of risk to the employer
in doing that if the staff find out what they are doing, and then the
employer would lose out. It is more that type of murmur and rumour
stuff that I think is the problem. It is very hard to outlaw
rumour-mongering.
Nigel
Stanley:
On the second question—no, we have
not. We were trying to do some creative thinking about where a
discussion might start about how you would do that and a number of
suggestions have been made about trivial commutation limits, which
would be particularly useful perhaps for older workers joining who did
not have the chance to build up enough to buy a significant annuity,
but who built up enough to take them perhaps just a little over the
trivial commutation limit. Perhaps there are some ways of allowing
income from pensions not to count against some of the means-tested
benefits, particularly housing benefit, which is always the one that
seems to cause the most difficulties. Indeed, people can be in
perfectly good DB schemes and lose out because of the interaction with
housing benefits at the moment, although no one uses the argument that
they have been mis-sold. So these are issues that go much wider than
personal accounts. We would welcome a longer term discussion of the
attempt to reach consensus between the approaches, which has been the
hallmark of the debate since Turner. We welcome that and would like to
participate in it. This is not easy, it is technical, and there will be
trade-offs and difficulties. To at least share a menu with prices would
be a good step, rather than rushing into anything in the
Bill.
Christina
Barnes:
That idea of trying to get a menu with prices
is an important one. As the Equal Opportunities Commission, we did work
on trivial commutation and suggested various raises to that limit. The
work of the Pensions Policy Institute on income disregards has looked
at about £12 per week. Those were the suggested figures and we
need to play with those figures and look at the outcomes and impacts,
which will give us that intensity of modelling that can help to bring
this debate on the potential options
alive.
Mervyn
Kohler:
As far as the Bill is concerned, while the
debate is still slightly on about showing that it pays to save, it
would be unfortunate if the Bill did anything to make it difficult to
have another look at changing the trivial commutation arrangements,
such as an income disregard within the means tested benefits system. We
will have to come back to these issues at more leisure than you have
had in taking the Bill through the immediate parliamentary
stages.
Sally
West:
I wish that we could say that Age Concern
thinks that there should be a disregard of something and put forward a
specific proposal that you could try to rally support to. However, as
colleagues say, it is a more complicated issue than that. On the
timescales, I do not think that by the time the Bill has gone through,
there will have been time to look at all of the options and consider
them. I hope that we get a strong commitment from the Minister that we
are going to have a really good look and that anybody who wishes to be
involved can feed into it so that we come up with something that we all
feel comfortable is the best way
forward.
Doug
Taylor:
I echo the views of my colleagues. Issues in
this area are wider than just the personal accounts regime and go into
the entire pensions landscape. The ability for us to have a longer and
more considered discussion of these issues would be helpful.
Q
68
Ms
Butler:
I would like to talk about the employers who
before even offering an incentive will try to screen out individuals
who they think might want to save for a pension. There is a
consideration of putting in the legislation a pre-employment
prohibition. What are the panel’s views on
that?
Nigel
Stanley:
We are glad that the Bill will outlaw people
asking such questions in interviews or in job references. We think that
that is an important advance. We would like to have seen the Bill go
further and introduce that pre-employment right, so that, effectively,
employers could not discriminate against job applicants on the basis of
their pre-existing pension history. We understand the argument that
pre-employment rights are rather unusual in British employment law, but
our argument is that they are not that unusual. In some ways, it is
analogous to the trade union membership right: employers cannot
discriminate against you on the basis of your pre-existing membership
of a trade union. I am not sure that that many employers will do so or
whether it will be a huge issue. The clear outlawing of asking such
questions is very important, but we would have liked to have seen that
pre-employment right in the Bill and were disappointed not
to.
Q
69
Mr.
Greenway:
I would like to take you back to the
conversation that you had with Mr. O’Brien about the
review of defined benefits. We need to be absolutely clear what you are
saying. In an answer a moment ago, Mr. Taylor said that
there has been a levelling down from defined benefits. I thought that I
detected in Mr. Stanley’s initial answer a sense that
there is an issue here of the contraction of the number of defined
benefit schemes or of the number who are in such schemes, but that you
were not quite convinced with the ACA proposal. Perhaps it needs to be
explored more, and so on. We need to provide some impetus for the kind
of review that you talked about. If we tried to include in the Bill a
clause that might not be as prescriptive and specific as the ACA
proposal, but that provided impetus for a review, would you go so far
as to support
that?
Nigel
Stanley:
We would have to look at the clause, rather
than give that kind of blanket approval or not. There are a number of
issues. To what extent does the law currently stop risk-sharing
schemes? The view of the deregulatory review was that the law allows
quite a lot of risk sharing, so the first question is whether there is
a need for legal changes in the first place. The second question is: if
you are going to have changes in the law, what kinds of risk sharing
should they encourage? There are other ways in which employers can
reduce the cost of DB schemes. Moving to career averages over final
salary, for example, is one that unions have negotiated and, indeed,
can be an egalitarian measure in many
workplaces.
Nigel
Stanley:
Exactly. We are not suggesting the ACA
scheme is without merit; we are saying it is one possible way of
looking at things. We have some problems with it. My impression is that
the Government have already said they are open to a discussion on risk
sharing in their response to the deregulatory review. Whether an
amendment is needed to the Bill saying the Government shall conduct a
review of this, I do not know. It is probably unnecessary to write that
into legislation, but if the Government are saying there should be a
discussion about risk sharing and other ways of—I would like to
see it more as improving DC schemes than reducing the quality of DB
schemes—
Nigel
Stanley:
There is certainly a range of options that
we would like to explore, but we do not see any need in this Bill for
what has been described. I do not think this will be the last Pensions
Bill that Parliament has before it for five years or so. There will be
other opportunities, one
suspects.
Q
71
Mr.
Greenway:
They come at a pretty alarming rate. I want to
move on to a couple of other points in the TUC memorandum, which I have
to say was one of the better reads among the papers that we were sent.
The first issue is payment of arrears. We are talking about employers
simply not enrolling people when they should or not making the
contributions when they should. Is it your view that the employer
should be responsible for the loss of investment return that the
individual member suffers by those contributions not being paid? It
could be quite
considerable.
Nigel
Stanley:
It could be, though it could of course be at
a time when the funds went down as well. Our view is slightly more
simple than that. We think that if it is the employer’s fault
that contributions are delayed, there will come a point when, if the
employee has to pay the back contributions, they become such a size
they may even become an incentive to opt out so the employee does not
have to find that amount of money, which would be unfortunate. If it is
the fault of the employer that contributions are not made or someone is
not auto-enrolled, obviously there needs to be some administrative
measure. Three months is a figure that has been talked about as a
recent compromise for this, but beyond that it seems to us to be the
responsibility of the employer to put right what the employer should
have
done.
Nigel
Stanley:
With interest. Frankly, I think tying it to
the performance of funds under management might be a bit complicated,
but—
Q
73
Mr.
Greenway:
But that is why we need to explore
it—that is the joy of this afternoon’s sitting. In
paragraph 5.7 of your report, you make a point that I have not read
anywhere else. It is an issue that I can tell you has cropped
up before, not in pension
discussions—
5.59
pm
Sitting
suspended for a Division in the
House.
6.14
pm
On
resuming—
Q
74
Mr.
Greenway:
The point that I was just about to make to
Mr. Stanley concerns paragraph 5.7 of the memorandum. It
reflects on the fact that our general understanding is that personal
accounts will not be suitable in the Government’s view for
transfers in and
out, even of fairly small amounts. As a result of the Bill, we are
increasingly likely to see migrant workers, who might be in this
country for two or three years—some for a longer time, some for
a shorter time—who, because of the level of earnings and the
fact that they now have such an opportunity, will build up personal
accounts and have a fair amount of accrued benefit in
them.
However, if the
migrants leave the country and never come back, the question arises
whether there should not be a mechanism to provide for that. What
underpins the matter is a growing sense in European institutions that,
if the individuals are making contributions in host countries, they
should receive the benefits for which those contributions provide. Is
that the scenario you envisaged when you made the suggestion in the
memorandum? Do you think that there ought perhaps to be at the least
clarification of what regulation-making powers will be in the Bill to
cope with such matters, if they became a problem in the
future?
6.15
pm
Nigel
Stanley:
We think that that is a good point and agree
with the premise behind your question. We understand that part of the
consensus is a desire to stop there being big transfers in and out of
personal accounts and between other personal accounts. That is
understood, but we were concerned that we could end up with a lot of
very small pension pots in personal accounts. That is not good for the
person with the small pot or for those with personal accounts because
they are expensive to run. It is more complicated than that, but
essentially there is a fixed cost per account rather than a cost that
goes with the size of the account. In particular, if we then talked to
a worker who had gone home to Gdansk, but has a small pension pot stuck
in personal accounts in Britain, it just seems that that person should
not be a victim of the consensus that people have not thought about or
the exceptions to
it.
Our reading of
the Bill suggests that regulation-making powers would allow that, but
it might be useful for hon. Members in Committee to probe the
Government about whether they think that such a provision would be a
suitable exemption to the general consensus, which people generally
understand and sign up to. After all, there will be an exemption in the
general sense that there will not be transfers in that will cover
people who have not yet been vested in employer schemes. For example,
such people have been members of a scheme, but the employer only puts
it into the DB scheme if they have been working for two years. If they
leave just before the two years is up, they would normally get back
their money and be allowed to put it into personal accounts in one
lump. That is obviously a sensible thing to do. The migrant worker
argument and other such arguments are similar exemptions to the
transfer-out side.
Q
75
Mr.
Greenway:
I want to be serious for one second longer. I am
also concerned about the same issue, but the other way round. Let us
suppose that the migrant worker thinks, “Well, I might not be
here for
too long, so therefore I shall opt out. I would rather have the money
and send it home”. The employer might then think that that is a
good idea because he saves money. There might be a general environment,
culture or climate in which migrant workers think that such matters are
not for them, whereas in reality about 25, 30 or 40 years later some of
them might still be here and, if they have not taken the opportunity to
invest in personal accounts, we will end up with a whopping great
pension deficiency in respect of those workers. If we could clarify
matters in Committee, it might be particularly helpful in explaining to
a growing number of people—the number of whom is likely to
increase by 2012—why it is a good idea for them to take
part.
Mervyn
Kohler:
I think that you are absolutely right to
identify such matters as being a problem. A working party has been
functioning in Brussels on the portability of pensions in Europe for
the past 18 years without actually reaching a conclusion. An answer
must be found in respect of that particular agenda. As for the labour
market, you rightly say that we are all living in a global
market.
Q
76
Mr.
Greenway:
We have not spent 18 years on this
matter in the Council of Europe, but the council has
made it absolutely clear that people have a human right to get the
benefit for which they have paid. The mechanism for doing that is not
with the Council of Europe, but with the European Union. We will
pursue
it.
Q
77
Miss
Kirkbride:
That is a particularly vexing point of the
proposed legislation because clearly we have many potentially migrant
workers; albeit my hon. Friend the Member for Ryedale said that not all
of them might back to their own countries. If, however, we did allow
transfer out, would it have to be a transfer out to another pension
scheme in their own country even though it is a very small
amount?
Presumably,
there is also a scenario whereby people who are born in Britain and who
are not migrant workers here go and live abroad, and we cannot
distinguish between British people going and living in Spain and Polish
people coming and working here for a period of time and returning to
wherever they want, which might or might not be Poland. Is that another
issue on how we differentiate between migrant workers and someone who
was born in Britain, and should we therefore insist that it has to go
into a scheme in order to stop British people going abroad and just
taking out the money that they put in? Should there be a limit on how
much could be in the fund before that would be allowed, or do all of
those issues simply not have
answers?
Nigel
Stanley:
Clearly, it is not a simple question. With
regard to the first point, I think that generally everyone accepts that
transfers out of a pension scheme can only be into another pension
scheme, as anything other than that would open another completely
different set of issues. It would therefore have to be transferred into
another pension scheme. I think that, as you suggest, the test will
probably end up being about a reasonably small pension pot to which no
one has contributed for a period of time, so that you are generally
dealing with the problem of small orphan pension pots, rather than a
migrant worker issue. That might be the way into that
argument.
When we were writing the brief,
it just seemed that the migrant worker can rather graphically
illustrated what is possibly the most extreme case of that. It might be
an issue for others as well, but transfers should certainly only be
between pension funds. I think we are moving towards more EU
understanding on that, and am sure that there is a suitable definition
of a pension fund in most other EU countries, although I must admit
that I am not an expert on the Polish pension
system.
Nigel
Stanley:
This is thinking off the top of my head, but
that could possibly be one way of doing it. I would like to get it
flagged up at this stage as an issue and am sure that good minds can
come up with a solution to the problem. The idea that there can never
be a transfer out under any circumstances will give rise to problems,
and one can understand why it has happened and support the compromises
and trade-offs that were behind it. Will it, however, have unintended
consequences? Yes it will. That is a point that we are trying to make
at this
stage.
Q
79
Mr.
Borrow:
I want to come back to the issue of flexibility. I
think that most people would instinctively feel that
we should have the maximum amount of flexibility, whether that is a
matter of people with multiple jobs being able to put income from all
of those jobs into one pot or people who have money left to them being
able to put that into a personal account, or a whole range of other
things that we have just talked about.
One of the things that I
picked up on during this morning’s evidence session with PADA
was that they were still working and acquiring information in this
country and overseas on both the administrative and policy problems.
Would you agree with me that one of the important things for the
Committee as we deal with the detail of the Bill is to ensure that
there is sufficient scope for regulations to be laid at some point in
the future to allow the issues of flexibility to be addressed when
administrative and cost problems are met?
I think that we would all
recognise that greater flexibility brings administrative difficulties
and has cost implications. What we do not know at the moment is how
great those will be. The key thing is that the Bill has to have enough
flexibility through future regulation to ensure that, if things work,
we can bring in flexibility in due course. Is that the way you see that
going
ahead?
Nigel
Stanley:
We would agree with that. Clearly, no one
has built personal accounts before and I think that it should not
require PADA and its successor to discover a big problem that comes
back and then requires primary legislation, when really a more flexible
regulation-making power would deal with that.
Our general perception of the
Bill is that it is fairly flexible. There are lots of regulation-making
powers. Sometimes people object to that in primary legislation, but I
do not think anyone should in this, because there will be a need for
some flexibility and for learning from experience. No one should
underestimate what a difficult administrative task it is setting up
personal accounts. There will undoubtedly be some lessons from
that, and I would think that the more flexibility that there is in the
system the better. We have used, for example, unforeseen outcomes
already quite a lot. There may even be others—actually, we have
tried to foresee them, but I am sure that there will be others that we
have not foreseen yet. Having regulation-making powers will be helpful
in dealing with
that.
Sally
West:
One of those issues, which has been raised at
times, is the potential of the modest lifetime sum. The Bill gives the
power for that to be introduced. All the organisations here think that
is a good idea. Your previous witnesses were all rather against it, but
that is something that needs further
explanation.
Christina
Barnes:
In terms of the administrative costs of some
of these flexibilities, we are all open to additional charges for some
of the more complex flexibility that could be introduced—not
trying to put those costs on to people who are just using it in the
most basic
way.
Doug
Taylor:
It is a sensible approach, but one other
thing that we would like to see in the Bill is that PADA has an
overriding responsibility to exercise its duty in the best interests of
future members. There are a series of principles there. They currently
do not appear as a principle. If it were a principle in the design of
the scheme, then in terms of future flexibility it would be informed by
that drive to make future members the key issue for PADA in the way
that it puts this
together.
Christina
Barnes:
One issue that it would be good to address in
the 2017 review of personal accounts that has been proposed is that of
flexibility and whether there is enough flexibility in personal
accounts, as first established, to meet the need of the target
market.
Mervyn
Kohler:
Everyone involved in this Public Bill
Committee should remember as well that this legislation is designed to
try and help people who by and large are living slightly untidy,
disorganised and forgetful lives. I think that there has got to be the
flexibility to understand that this is the kind of target group that
one is predominantly aiming for and that one needs to make sure that
the system that we set up at the end of all this is one that takes
account of allowing people to have second thoughts and slightly change
their order of priorities and things like
that.
Mr.
O'Brien:
One of the things that Sally mentioned is that
someone should be able to make a lifetime payment in—from a
legacy or something like that, into personal accounts. What is your
view of the other suggestion about payments in, which is that at the
creation of a personal account someone should be able to pay in a lump
sum, such as
£10,000?
Christina
Barnes:
The idea of having that initial, extra
contribution limit in the first year is a really good one and the more
that we can do to encourage people to save and to save more within
their personal accounts the
better.
Sally
West:
It would help; otherwise there might be a
danger of people thinking, “Well, I would like to start saving,
but I will wait until 2012”, so that people could be encouraged
to save maybe in an ISA and then transfer that to the personal
accounts, if that seemed appropriate when the system was introduced. I
think it would be a positive start to the system if we were able to
have that additional contribution in the first year.
Mervyn
Kohler:
It might actually help some of the financing
headaches that PADA are wrestling with about their own operation as
well.
Nigel
Stanley:
We strongly agree with that. It seems to us
that too much is made of the dangers of putting in lump sum
investments. I have an AVC that goes alongside my—I am one of
the lucky ones—DB scheme. No one said that I should take advice
before I put extra money into my AVC, and I think that there should be
the ability to put extra money, within reasonable limits, into lump sum
payments—particularly the kind of lump sum payments from the
target group, which would not be enough to interest a commercial
pensions company. The odd £5,000 here does not make much sense
to invest in a personal pension pot with an insurance company, but it
might make quite a big difference to someone who suddenly comes into
that amount and wants to do the responsible thing with it, which is to
put it into their pension. Simply adding it to their personal account
is a straightforward and simple thing to do. One suspects that if they
cannot do that, they might not put it into their pension at all, and
might spend it in some other way, which would not suit public policy
quite so
well.
6.30
pm
Doug
Taylor:
I would concur with my colleagues. One issue
that we considered was whether there could be any transfer from the
savings gateway. I know that we are talking about more modest amounts
of money, but we looked at transferring money through from the savings
gateway into someone’s personal
account.
Q
80
Andrew
Selous:
I want to return, if I may, to the
interesting discussion that was prompted by the questions asked by my
hon. Friends the Member for Ryedale and for Bromsgrove on the issue of
migrant workers. In some parts of the country and in some industries,
there are firms staffed entirely by migrant workers. I am concerned
that if none of those migrant workers auto-enrolled, because they were
here for just six months, a year or a couple of years, that business
would have a significant competitive advantage over other businesses in
the area. That is an observation as much as a question, but I would be
interested if you had any comments on it.
Is there a case for generic
financial advice being directed specifically at migrant workers who are
going to be in the country for short periods of time, advising them
whether there are transfer possibilities to send money back to Poland
or whether it will be tied up in the UK until they are 60 or 65? I can
see the matter being a real problem by creating a competitive advantage
in local economies up and down the country, and I would be interested
in your comments on
that.
Nigel
Stanley:
That is an interesting point. One is in
danger of making a lot of assumptions without
researching to what extent that is a problem. Competitor companies may
tend to employ a lot of part-time workers on the minimum wage who would
not be best advised to have a personal account anyway, so one does not
know whether there would be much of a competitive advantage. It will
certainly be a problem—whether a big problem, I do not
know.
There is
certainly a case for providing information and advice to migrant
workers on a range of their rights in this country, including
employment rights.
Some employers of migrant workers exploit the fact that they do not know
their employment rights, cannot speak English and do not know how to do
it, just as there are also exemplary employers of migrant workers.
There is a case for ensuring that migrant workers are helped to
understand the work environment that they find themselves in and given
generic or particular advice on whether they should opt in or out of
personal accounts. That certainly does apply, and you have raised an
interesting
issue.
Christina
Barnes:
It also raises a wider issue about the
targeting of generic financial advice to different groups. There are
other groups to whom that will also apply. I am thinking about women
who have had career breaks or are post-divorce, certain black and
minority ethnic communities and communities that need
different generic advice to suit their
circumstances.
Q
81
Miss
Kirkbride:
I must say that I have not read all the
briefings that have come through, so this point may well be in them.
While you were talking, the question crossed my mind whether there is
any assurance provision attached. In most private pension schemes, if
one snuffs it, the family gets something out of it. In some cases, you
can pass on your pension contribution to someone else. It stays in the
scheme, and they get many more years’ benefit as a result of
your early demise. Do you have any views on whether something could be
done on that, as an incentive for some people to take out pensions in
the first
place?
Christina
Barnes:
My understanding is that it is a standard
defined contribution scheme, so it is an inheritable pot before
retirement. That also leads on to an important debate on what happens
once you have withdrawn the income from your pension scheme and chosen
which annuity to buy. People’s information and advice needs when
choosing an annuity are vital, particularly on choosing a single-life
or joint-life annuity. It is vital to ensure that individuals and
couples make the correct choice about what annuity is right for them in
their circumstances, with regard to providing a survivor income or a
guarantee on their annuity income should they
die.
Mervyn
Kohler:
I would urge caution about allowing a system
to develop with too many extra bells and whistles. It will be a hard
enough task explaining to people the basic principles of pension saving
and how to turn it into an annuity without their getting muddled up
with life insurance and extra entitlements to Nectar points and things
of that
nature.
Doug
Taylor:
I do think that one key thing is that any
individual is making contributions so that, if they were unfortunate
enough to die before getting to the point at which they could convert
the pension into an annuity, their estate would inherit the sum. It
would not be lost money, so to
speak.
The
Chairman:
Thank you very much. If there are no further
questions, I thank you all very much indeed for giving up the time to
come before the Committee. It has been very useful.
Further consideration
adjourned.—[Mr.
David.]
Adjourned
accordingly at twenty-four minutes to Seven o’clock till
Thursday 17 January at Nine
o’clock.
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