Clause
12
Review
of qualifying earnings
band
Andrew
Selous:
I beg to move amendment No. 20, in
clause 12, page 6, line 15, leave
out subsection
(2).
The
Chairman:
With this it will be convenient to discuss the
following amendments: No. 86, in
clause 12, page 6, line 15, leave
out from first ‘in’ to end of line 16 and insert
‘the value of the amounts
in—
(a) section 11(1)(a) are to be
assessed in a way that the Secretary of State finds appropriate and
which has been approved by resolution of both Houses of Parliament;
and
(b) section 11(1)(b) are to
be in line with
earnings’.
No.
21, in
clause 12, page 6, line 17, leave
out ‘may in particular’ and insert
‘shall’.
No.
73, in
clause 12, page 6, line 17, leave
out subsection
(3).
No. 74, in
clause 12, page 6, line 21, leave
out subsection
(4).
No. 75, in
clause 12, page 6, line 24, at
end add—
‘(4A) If the
average earnings index (including bonuses) for the whole economy for
September of a year is higher than the index for the previous
September, the Secretary of State shall as soon as practicable make an
order in relation to each amount mentioned in section 11(1)(a) and (b),
increasing each amount, if the new index is higher, by the same
percentage as the amount of the increase of the
index.’.
Andrew
Selous:
We move on to another important clause, which
covers the review of the qualifying earnings band, which we have just
agreed should be in the Bill by agreeing to clause 11. Of course, the
two figures—£5,035 for the lower limit and £33,540
for the upper limit—will not maintain their value due to the
ravages of inflation, so it is quite right that they should be
increased over time. Clause 12, however, gives the Secretary of State
almost complete carte-blanche to decide how the two bands will be
increased, so we seek greater clarity on how the uprating will be
undertaken. There is a precedent because the Employment Relations Act
2004 sets down a formula through which statutory redundancy pay is
uprated. I look forward to hearing the Minister’s intentions for
reviewing the qualifying earnings band in the years to
come.
Paul
Rowen:
I wish to speak about amendment No. 86 in
particular. The purpose of amendments Nos. 20 and 86 is to
probe the Government as to what methods they intend to use to ensure
that the values of the earnings limits are maintained. I know that the
EEF would like to see the qualifying band uprated in line with
earnings, rather than leaving it to the Secretary of State, as the Bill
proposes. That is not necessarily our view; we believe that the
Secretary of State should have discretion.
Amendment No. 86 would, however,
ensure that whatever discretion the Secretary of State used on
uprating, the limits would be reported to the House. That would be an
important safeguard to ensure that savings and the amounts paid keep
their value. I am not saying that a future Secretary of
State—whoever that might be—would not ensure that they
would maintain their value, but we believe there should be a mechanism
to ensure that Members are able to respond to the proposals put forward
by the Secretary of State. I look forward to hearing how Ministers will
ensure that Members are kept informed of the rates proposed
each
year.
Mr.
Plaskitt:
The reforms have been structured to enable a
median earner with solid state entitlement to achieve a replacement
rate in retirement of around 45 per cent., in line with the
Pensions Commission’s
recommendations.
The
limits of the qualifying earnings band—the lower limit of
£5,035 and the higher limit of £33,540, in terms of
2006-07 earnings—have been set in conjunction with the default
minimum contribution rate for defined contribution pension saving: 8
per cent. Having established a relationship between working-life income
and income in retirement, it is important to establish a mechanism to
maintain that, as the hon. Gentlemen said. That is right, and it is the
exact purpose of the
clause.
We plan to
review the limits of the qualifying earnings band once a year to
determine whether they have maintained their value, as the Bill says.
Our expectation is that future changes to the limits of the qualifying
earnings band will follow changes in the general level of earnings.
Tracking earnings is important for two reasons: first, to ensure that
the value of contributions going into money purchase schemes remains
stable in relation to earnings, which will help to maintain the balance
between working-life income and income in retirement; and, secondly, to
avoid enrolling even higher numbers of workers with low earnings for
whom state provision will already offer high income replacement
rates.
Pension reform
involves making policy for the long term, however. Average earnings
might not always be the only, or the most suitable, measure with which
the Government should assess whether the limits of the qualifying
earnings band have maintained their value. In the absence of complete
foresight, which no Government can have, we have taken the prudent step
of retaining some flexibility over the measures that the Government
must consider when assessing whether the limits of the qualifying
earnings band have maintained their
value.
All the
amendments would, in various ways, reduce that flexibility by removing
elements of the Secretary of State’s discretion in uprating the
lower and upper limits of the earnings band. Amendments Nos. 20 and 73
would remove the discretionary ability to uprate the earnings band
limits using a more appropriate measure than earnings, should the need
arise. Amendment No. 86 would require an assessment of the change in
the value of the band limits to take place by two separate methods: an
approach approved by Parliament for the
lower limit, and using average earnings for the upper limit. Amendment
No. 21 would make it mandatory to carry out a review of the qualifying
earnings band in line with rises in average earnings only, and
amendment No. 74 would remove the Secretary of State’s
discretionary ability to change the limits of the qualifying earnings
band, even when he judged that their value had not been maintained.
Amendment No. 75 would make it mandatory to review and revise
the qualifying earnings band limit in line with rises in average
earnings. In
all of their various ways, the amendments would curb the discretion of
the Secretary of State and reduce flexibility in the system. It is
clear that the real test of whether the bands have retained their
value, in terms of ultimate income in retirement, is value
vis-Ã -vis earnings. It would not be sensible to be
over-prescriptive about which measure of earnings could be used,
although it is perfectly clear which ones are used at present in
respect of other benefits that are earnings uprated. Given that the
provision will be in the Bill and that it is conceivable that, due to
statistical developments or changes in future Government policy, the
way of measuring earnings might change and new indices might evolve, it
would not be wise at this time to prescribe with great specificity the
index that should be used. We are establishing the principle that the
value is maintained in relation to earnings, and the appropriate
earnings index will be
used.
It is also
important to leave open the possibility—this is not
inconceivable—that earnings in any given year might not be the
right measure by which to assess value. There have been periods in
which prices have risen faster than earnings. We want to leave the
possibility open because the important thing, as the Bill says, is to
maintain the value of those bands. The objective is to ensure decent
levels of income in retirement and to maintain the balance of income
obtained through work and income derived in retirement as a result of
that work. That is the reason why the clause is drafted in such a way,
and why we would not want to see it restricted in any way. Given that,
I hope that the hon. Member for South-West Bedfordshire will withdraw
the
amendment.
2
pm
Andrew
Selous:
This was put down as a probing amendment, just
something to get down on the record as to the Minister’s
intentions. I listened carefully to what he said and I am reassured
that he has made the commitment to maintain the value of both figures
specified on the face of the Bill in relation to earnings. That is a
useful reassurance that can be reviewed in years to come by Members of
this House, should anything else be done by a Government at any future
time. So, having heard the Minister’s comments, I beg to ask
leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Clause
12 ordered to stand part of the
Bill.
Clause
13
Pay
reference period
Andrew
Selous:
I beg to move amendment No. 22, in
clause 13, page 6, line 27, leave
out from beginning to ‘twelve’ in line 28.
This amendment seeks to
elucidate from the Minister the Government’s intentions relating
to pay reference periods. The wording on the face of the Bill in clause
13 is quite open, and given the understandable concerns that employers
have about how they are going to make the calculations relating to
these payments, it would be useful to hear that the Government intended
to make their pay reference periods as simple and straightforward as
possible so as not to add to their administrative burdens in any
way.
I hope for the
vast majority of employers it will be quite clear and simple: either
their financial year or the tax year. But I wish to be reassured by the
Minister that the Government do not intend to impose on employers any
strange or unusual periods that would cause them any
difficulties.
Mr.
Plaskitt:
The hon. Member for South-West Bedfordshire
seeks my reassurance on this in respect of simplicity and I hope I will
be able to give that to him. Clause 13, an important clause in the
Bill, enables Government to set the period, or range of periods, during
which qualifying earnings are to be assessed for the purpose of
calculating contributions to workplace pension saving. Many headline
figures associated with these reforms are expressed in annual amounts:
the limits to the qualifying earnings bands, for example. That is why
the clause provides for a default pay reference period of 12 months, so
that those annual limits make
sense.
However,
as set out in clause 11(2), the annual limits of the earnings bands are
to be varied on a pro rata basis when qualifying earnings are being
assessed for a pay reference period that is more or less than 12
months. Therefore, in line with the preference of employer lobby
groups, especially the CBI and the Engineering Employers Federation, we
have included the flexibility to establish an array of pay reference
periods, so that the assessment of qualifying earnings and the
calculation of contributions for the purposes of workplace pension
saving may be aligned with the range of pay periods used by employers
today, which in some instances are weekly or monthly. In essence, we
are asking employers to do what they are already doing. That is the
common-sense
approach.
If
an employer pays its workers monthly, that is the period it should use
for the purposes of calculating pension contributions. The amendment,
however, would remove that flexibility by locking employers into a pay
reference period of 12 months—only 12 months—which would
delay the point at which some jobholders qualified to be automatically
enrolled. The flexibility to be able to prescribe pay reference periods
as a week or a month is important for another crucial reason: it
simplifies the administration for employers by making the calculation
and collection of contributions to pension saving part of those
companies’ normal pay cycles. Clearly, forcing companies into
administering that out of line with their ordinary pay cycle would be
an added burden. We will work with stakeholders to ensure that the
linkage between pay reference periods is tailored to achieve the best
fit for
employers.
The
measure brings forward the point of automatic enrolment, to the first
pay period for most workers, enabling them to save as they go and to
take advantage of compound investment returns. It avoids the need for
larger periodic or reconciliation payments, which would
affect affordability at the individual level and might deter people from
saving. Finally, and importantly, it enables temporary workers, who
move frequently between employers, to be able to take advantage of
workplace pension saving with an employer contribution, even if the
total earnings with that employer fall below the default annual
threshold—in other words, if they earn £3,000 for three
months’
work. I
hope that I have demonstrated the importance of retaining the
flexibility. The measure fits with employers’ current practices
and best serves the interests of the people that we anticipate will
come into the schemes. With those reassurances, I hope that the hon.
Gentleman will feel able to withdraw his
amendment.
Andrew
Selous:
Yes, I am reassured by the Minister, particularly
about the intention behind clause 13 to mirror the pay periods already
being used by employers. If the clause has been worded in that way at
the behest of the CBI and the Engineering Employers Federation and
others, I am doubly reassured by what I have heard. I beg to ask leave
to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Clause
13 ordered to stand part of the
Bill.
Clause
14
Qualifying
earnings
Andrew
Selous:
I beg to move amendment No. 2, in
clause 14, page 7, line 9, leave
out paragraph
(c).
This is another
probing amendment, to find out a little more about the current usage of
average salary benefits. Many of us are familiar with final salary
schemes. I am aware that there has been a significant demise in such
schemes for various reasons in recent years, but I am not aware how
widely average salary benefit schemes are being used. Therefore, I am
seeking some elucidation from the Minister on that point and, in
particular, on the likely impact—on the possible payments
received on retirement—for personal account holders of average
salary benefits being
used.
Mr.
O'Brien:
In answer to the hon. Gentleman’s
question, there are 9.6 million people active in occupational schemes,
of whom 8.5 million are in defined-benefit schemes, and 1.1 million are
in defined-contribution schemes. Around 200,000 people are in defined
benefit schemes where pension benefits are based on a fraction of the
individual’s average earnings across their career. These
earnings are generally uprated in line with prices. This seems to be a
probing amendment. Let me set out what we are seeking to
do.
Clause
14 is the first of a series of clauses that set out the minimum
standards for schemes to be used under the employer duties. This clause
introduces the concept of qualification. Qualifying schemes must be
occupational personal person schemes, tax registered under the Finance
Act 2004, and must meet the relevant quality criteria in relation to a
jobholder who joins the scheme. It is crucial to ensure that there is a
statutory duty for
schemes offered by employers to provide suitable contributions or
benefits to those who join them. This amendment would remove a key
element of the protection required to safeguard the quality of
qualifying and automatic-enrolment
schemes. Clause 14(2)
gives the Secretary of State the ability to disqualify, through
regulations, certain schemes that would otherwise meet the quality
requirement. That would allow regulations to disqualify schemes that
require prohibitively high member contributions—ones where the
employer will contribute so much, but the member must contribute a very
large amount—and those which levy excessive administrative
charges. It would also allow regulations to disqualify career-average
schemes of a certain type, as set out in paragraph (c).
I can reassure the ACA, and
others who have raised the issue, that we will allow career-average
schemes to discharge employer duties. We are aware that career-average
schemes are becoming increasingly popular, and provide a compromise for
employers who want to retain defined-benefit provision, but do not want
to do so through final salary schemes. Many career average
schemes provide generous benefits to members and help employers control
the cost of pension provision. We want to support and encourage such
schemes.
It is our
intention, however, to apply these regulations to career average
schemes that do not appropriately revalue the earnings on which the
pension is based. We have designed the quality requirements for defined
benefit schemes to be as easy as possible for employers to apply. The
intention is that this can be done by assessing the value of the
benefits payable at a particular point in time. Some schemes may meet
the quality requirement based on the value of benefits at that time,
but those may not maintain their value over time to retirement without
revaluation of earnings. I am sure Members will agree that, given the
risk that such schemes would lose their value over time, they should
not qualify to accept members under the statutory duty established by
the Bill.
We are
providing reassurance that we have the ability to prevent employers
using schemes that are not of the sort that Parliament intends: poor
schemes that will give poor value, or schemes that are intentionally
created to discourage people from joining them. That is the aim
of the powers we are taking in the Bill to bring forward regulations. I
hope on that basis that the hon. Gentleman will feel able to withdraw
his
amendment.
Andrew
Selous:
Certainly. I am grateful to the Minister for
setting out some of the figures that describe the different types of
pension saving that are going on at present. I am also grateful to him
for what he said about the capacity of this clause to deal with schemes
with extortionate costs, and schemes which would require an overly high
employee contribution. With that, I beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Clause
14
ordered to stand part of the
Bill
.
2.15
pm
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