Previous Section Back to Table of Contents Lords Hansard Home Page


Baroness Turner of Camden moved Amendment No. 2.


Page 1, line 11, after ("conditions") insert (", including a minimum level of employers' contributions,")

The noble Baroness said: I beg to move Amendment No. 2. Although this amendment is grouped with Amendment No. 10, I do not intend to speak to or move that amendment.

The Bill contains the provision that employers must facilitate access to stakeholder pension schemes. However, there is no requirement for employers to make any contributions themselves; they simply allow the providers of such schemes access to their staff. The object of the amendment is to provide for a minimum level of employers' contributions. We think that otherwise what the Government propose may not

24 Jun 1999 : Column 1094

increase or improve the general standard of pension provision. In fact it could accelerate a trend away from high-quality employer final salary schemes.

Employers may be tempted to review their schemes, possibly redirecting the lowest paid into the state second pension and possibly middle earners into stakeholder schemes; higher employer contributions could then be confined to higher graded staff. That is not a development that most of us would want to see.

A further point is that very few employees are likely to understand how much they may have to pay into a stakeholder scheme if they have to fund it entirely themselves. It has been estimated that a young person joining a scheme funded on a money purchase basis would need to accumulate a fund of around £200,000 by age 60 in order to receive a pension of about £10,000 a year--adequate maybe, but not exactly luxury. A sum of £200,000 seems impossible to most young people.

If stakeholder pensions are to fulfil the task envisaged by the Government of making retirement a pleasure rather than a time to be feared, employees will have to put aside a substantial sum at a time in life when many will be paying off mortgages and bringing up children. There seems no reason why employers should not be asked to bear some of this burden. That is the aim of this amendment.

Lord Higgins: This amendment brings out a very important point which the noble Baroness has rightly emphasised. At the moment, a number of employers have schemes--nowadays, generally speaking, they are of a money purchase kind rather than a final salary kind--where they make contributions towards them. It is likely to be the case that, since the stakeholder pension does not have that provision, the benefits on that existing scheme may well be superior to what will eventually emerge on a stakeholder scheme.

The noble Baroness paid tribute to occupational schemes. It is common ground that they have been a great success--no one is disputing that--but it may well be that to some extent there is an element of inertia in them. If suddenly employees, particularly perhaps of smaller firms, are told that the fashionable thing to do now is to have a stakeholder scheme in the terms set out very clearly on the face of the Bill, employers may well ask, "Why is it we are going ahead with the existing scheme rather than simply giving our employees a stakeholder scheme?" Because of the Government's-- I was about to say "propaganda"--position on this, they may consider that that is something which the Government regard as perfectly reasonable. In short they will say perhaps, "We are being excessively generous". In practice, employers are likely to close the existing scheme to new members and then introduce a stakeholder scheme.

A real danger of the stakeholder scheme is that this kind of situation to some extent adversely affects a number of people who continue to have the opportunity of being in an occupational scheme. Having said that, there are much wider issues about the extent to which employers should be compelled to provide contributions, which in effect is what I understand the

24 Jun 1999 : Column 1095

amendment to say. That raises other difficult questions. The trend, if I may put it that way, which I have just described and which I think the noble Baroness supports gives one some cause for concern.

Another concern is the extent to which one has to make contributions to ensure a worthwhile pension. That matter will arise more specifically on later amendments. There is obviously a danger--Mr Frank Field has expressed this in glowing terms which I will not repeat in this House--that people will decide they should spend the money rather than put it into a scheme from which, in the event, they may get no benefit because the level of the minimum income guarantee comes above the level of pension provided by the contributions they have made. I understand the concerns which the noble Baroness has expressed, although I think there may be real problems in going down the road she advocates.

5.30 p.m.

Lord Goodhart: We support very strongly the spirit behind the amendment moved by the noble Baroness, Lady Turner of Camden. My noble friend Lord Russell and I have tabled Amendment No. 19 which is intended to cover the same issue. In the draft grouping it was grouped with Amendment No. 2. I am not sure why it has been degrouped because it seems to me that this is the appropriate place at which to discuss this and one or two other closely related issues. I intend to save the time of the Committee by raising my points in this debate and not moving Amendment No. 19.

As I said in the debate on Amendment No. 1, we give broad support to the Government's proposals for the troika of basic pension, second state pension and a funded stakeholder pension as an alternative to the second state pension. However, we do not believe that stakeholder pensions will provide adequate pensions for employees unless three conditions are satisfied.

First, membership must be compulsory for those serving above a certain level unless they already belong to a contracted-out occupational scheme or another pension scheme to which the employer makes appropriate contributions. Secondly, employers as well as employees must contribute, as the amendment proposes. Thirdly, the minimum contributions from both employer and employee must be sufficient to build up an appropriate fund. Amendment No. 2 deals with the second point--that employers should contribute--but it does not propose that membership should be compulsory for employees. Without that requirement, I do not think it will work. For reasons to which I shall come in a moment, compulsory membership will be essential.

Perhaps I may go into a little more detail on those three points. First, I believe that membership should be compulsory. The second state pension is intended, as the Government have explained, to be a flat-rate pension. The level of that pension will be fixed so that those earning sums greater than £9,000 a year will in effect do better by switching to a stakeholder pension. It is perfectly legitimate to say that people can choose for

24 Jun 1999 : Column 1096

themselves whether to stay in the second state pension or shift to the stakeholder pension. But on that point I agree with what the noble Lord, Lord Peston, said in the earlier debate. Furthermore, inertia is a powerful force. The Government are in effect deliberately setting up a scheme which means that people on earnings of more than £9,000 a year will not get their money's worth if they stay in the second state pension. To rely on inertia to reduce the numbers opting out is something approaching mis-selling. The Government should lay down rules which provide that at some point people must switch to a stakeholder pension.

What is that point in terms of earnings? That is a matter of detail. I certainly think that £9,000 is too low. The incomes of many people will fluctuate to some extent. Someone's earnings may have gone up £9,500, but they may go down again next year, so that should not mean that at that point they are required to change. Since the value of the stakeholder pension is not wholly predictable, there is a need to leave a margin. We do not want people to be forced out of the second state pension only to find that they would have been better off to stay in it. I suggest that earnings of £12,000 might be the point at which people would be required to make the switch.

Secondly, employers as well as employees must contribute. Pensions are now recognised as a form of deferred earnings. In effect, therefore, they are part of pay. It is the duty of employers to contribute to the pensions of their employees. Many employers already recognise that duty either by providing occupational pension schemes of their own or by contributing to group personal pensions for the benefit of their employees. However, not all employers do so. It is not practicable for some employers, particularly small employers, to set up their own occupational schemes. It will become much easier for them to contribute to a stakeholder pension.

I therefore believe that employers should, if they are making no other adequate pension provision by means of their own contributions, contribute to stakeholder pension schemes. But the employer cannot contribute unless the employee is a member of that scheme. That reinforces the argument that membership must be compulsory above a certain salary level. There will be a problem if employers have to contribute whenever their employee is in the scheme but it is not made compulsory for the employee to join the scheme. If employee membership is not compulsory, employees will come under great pressure from their employers not to switch out of the state second pension because of the greater burden it will impose on the employer.

Finally, what is the appropriate level of contribution? The minimum needed is at least 10 per cent of current wages if the target is to provide a pension in due course of around half average wages. Some people say that that 10 per cent is not enough and that closer to 15 per cent is needed. However, it may be reasonable to say that it should not be as high as that and that the compulsory level of contribution should be 10 per cent of wages between the lower earnings limit and the upper earnings limit. That would be a reasonable level. I also suggest that two-thirds of those contributions should be paid by

24 Jun 1999 : Column 1097

employers and one-third by employees. That corresponds roughly to the proportions in which contributions to SERPS are made, as demonstrated by the current rates of rebate. It would be necessary to phase it in over a period of some years. The present contribution level via SERPS on personal pensions is about 5 per cent. Doubling that in one year could cause problems and certainly would be inflationary.

Compulsory membership of stakeholder pensions and compulsory contributions cannot take effect until the state second pension is in position. But when legislation for the state second pension is introduced, I hope that that legislation will also include provision for a compulsory switch to stakeholder pensions for those who have incomes from earnings significantly above £9,000 and for compulsory contributions by both employers and employees.


Next Section Back to Table of Contents Lords Hansard Home Page